State of the Nation

In May, global economic uncertainty returned. The Economist wrote about the “return of fear” and the words “double-dip recession” began to feature on economic analysts’ lexicon. There were multiple worries-will there be war between the two Koreas? Will Spain, Portugal and other European nations follow the Greek precedent? Will the crisis snowball into a wider European financial crisis? What will become of the Euro? There were also wider worries over global economic recovery. Will the Chinese asset price bubble burst or will the authorities succeed in carefully controlling or deflating property values? How will Europe cope with low growth and high sovereign debt levels? As stimulus spending wears out in America, is private demand strong enough to take its place? How will governments manage the challenge of fiscal deficits, austerity, unemployment and financial sector reform?
The MSCI index of global stocks fell over 15 percent between mid-April and end of May. After breaching the $80 per barrel threshold and actually testing $85, oil prices have fallen to around $70. At some point in April, the price actually fell to $66.84 reminding Nigerian budget planners and legislators that oil is a commodity whose price rises and falls! Government has wisely (as this columnist and my firm, Resources and Trust Company has advocated) decided to review downwards the imprudent assumptions contained in the 2010 budget. The budget had been predicated on aggressive price ($67 per barrel) and production (2.5million barrels per day) targets. The downward review will restore fiscal responsibility and slow the rate of foreign exchange reserves depletion. It may also moderate inflation even though other actions (such as gas, electricity and petrol price hikes) may work in the opposite direction.
In the political environment, President Jonathan may be succeeding in persuading several key constituencies to support his possible run in 2011. While we don’t expect agitation over adherence to the ruling PDP’s zoning formula (which its proponents argue mandates a candidate from Northern Nigeria) to disappear, there is an increasing probability of a consensus around the pragmatic recognition of the reality of Jonathan’s incumbency. His choice of Namadi Sambo (a professional architect and erstwhile Kaduna State Governor who is not a core politician) as Vice-President may be a pointer to the fact that Jonathan may indeed run as he has selected someone who is unlikely to threaten his position in that event. The President’s easy and consensual style may also help defuse opposition to his candidacy, even though the risk is that it may also be perceived as a sign of weakness. The choice of Professor Attahiru Jega as INEC Chair has also won the regime credibility domestically and internationally.
Policy preferences appear to be concretizing around Niger-Delta development, fair elections (though not radical electoral reform), power and energy sector reform, anti-corruption and security. The government is sensibly fast-tracking implementation of the Electric Power Sector Reform Act 2005 and has raised gas and electricity tariffs to attract private investment. There is a possibility of petroleum subsidy removal as well. The government is expected to amend the draft Petroleum Industry Bill to take into account the concerns of the international oil majors and privatisation may be back on the policy agenda. It is likely that a higher minimum wage may be allowed especially for public sector workers. Inflation has averaged over 12.2 percent in the last six months confirming our firm’s view that inflation in 2010 may hover between 12 and 15 percent.
While capital market fundamentals are reasonably attractive, sustained price rises may not happen as traumatised investors take out profits intermittently and a new regulatory environment rattles operators and investors. The CBN’s Monetary Policy Committee (MPC) meeting of May 10 and 11, 2010 in its communiqué claimed that “domestic financial markets have recovered remarkably faster than expected…” The committee did not offer any evidence in support of this assertion. Rather the available data (from MPC itself!) confirms the continuation of adverse credit and monetary aggregates indicative of a credit crunch. Broad money is below target by over 20 percent; net aggregate domestic credit is below target by 31percent; and net credit to the private sector is below target by over 38 percent. The only sector receiving credit is government which grew by an annualised 113.6 percent indicative (as MPC admitted) of a crowding out of the private sector by government borrowing. The definitive confirmation that financial market conditions remain sub-normal is the extension of CBN guarantees of inter-bank transactions, foreign credit lines and pension fund placements with banks till June 2011!
Overall domestic political risk has continued to abate as President Goodluck Jonathan consolidates, but significant risks remain around the Jos crisis and the 2011 nominations and elections. The policy posture of government is however more rational and the prospect of advancement of macroeconomic reforms which were basically suspended for three years is better. The government’s decision to fast-track EPSRA implementation is most welcome. The budget review will re-instate more rational fiscal assumptions and fiscal stability. It would be helpful also if the hopes for a sovereign wealth fund are accomplished. However financial sector stabilisation and an exit plan from the eight banks under CBN control remain key imperatives.