Multiple Levels of Uncertainty

The policy highpoint of 2013 was substantial privatization of the unbundled PHCN entities by the federal government with only three outstanding transactions-Sapele and Afam Gencos and the Kaduna Disco. Outside the power sector, the other area of progress remains continuing reforms in agriculture. GDP growth in the third quarter at 6.8% suggests that full year output will grow within our target band of 6.5-7% for 2013. Some sectors appear to be doing quite well-retail; hotels and restaurants, and indeed the wider entertainment sector; electronic payments and e-commerce, driven by improvements in the financial sector with regard to the payments system, and continuing telecommunications sector growth over 30%. The CBN has succeeded in managing inflation, bringing it down in the last three months (8.2%, 8.0%, and 7.8%) consecutively. There has been some progress too in financial and capital markets-apparently stable deposit money banks; rising capital markets with 2013 YTD growth around 35%; efforts at financial deepening and increased trading sophistication through the creation of two new over-the-counter exchanges for unlisted PLCs (NASD) and bonds, derivatives and other money market instruments (FMDQ); and growing international interest in our bond markets with J.P Morgan, Barclays and the IMF/World Bank all taking interest in Nigerian bonds. The government has conducted sensible foreign relations and recorded significant achievements in global football-winning the African Nations Cup and FIFA Under-17 World Cup, and qualifying for the 2014 World Cup in Brazil. Less positively, the government continues to grossly mismanage the oil sector-the Petroleum Industry Bill remains stuck in parliament; oil theft and piracy are rampant in the Niger-Delta costing the federation billions of dollars (and challenging federal and state budgets!); and under-investment and divestment by the international oil majors continues unabated. To compound our domestic oil sector incompetence, the outlook for global oil market fundamentals does not appear robust especially into the medium and long term. In this context, the CBN pursues its emotional defense of the Naira at current levels while the markets appear to have assumed depreciation is inevitable sooner or later, and the later it is, the more likely it would be devaluation! Not surprisingly, the spread between the CBN’s official dollars and autonomous market rates is widening. Meanwhile at the cost of scarce foreign reserves, we continue to subsidize imported consumption, capital repatriation, foreign education, holidays and some limited manufacturing! University students remain at home, five months after ASUU declared a strike, which appears motivated by a desire to inflict political costs! In all this, the social context remains bleak-significant levels of corruption; massive poverty and unemployment; the collapse of public services; high levels of crime and insecurity; and a continuing “civil war” against “Boko Haram” in the North-East region which remains under emergency rule. In addition, ethnic cleavages and religious polarization are increasing and the 2015 elections appear certain to widen those divides. In 2014, we would enter into the full political season as most of the electioneering campaigns will happen early; and we may have a “national conference” to discuss fundamentals of our union. The consequence is that in 2014, we will pay more attention to politics, rather than policy and economy, and political risk may be elevated. We should however complete outstanding PHCN privatisations, carry out the NIPP version and may also sell off the four government-owned refineries. A new CBN governor should be appointed and some monetary policy directions may change, although the incumbent may yet shape the financial markets for most of next year. 2014-2015 may also test our vulnerability to oil markets around multiple indices-oil prices; revenue and budgets; exchange rates; and inflation. It is possible that attention may also shift to stimulating investments in the solid minerals sector, but FDI may fall in 2013-2015 as investors adjust to perceptions of higher political risk. If CBN goes ahead to increase CRR on public sector deposits, we may see some financial sector “blues” in terms of constrained liquidity within segments of the industry, but probably not of cataclysmic proportions. And if PIB remains unpassed in 2013/H1 2014, it may be sensible to consider an unbundled PIB which allows us pass less controversial elements in smaller pieces of legislation. In my view, the top three risks for 2014 will be political; oil sector vulnerabilities; and exchange rates with upside possibilities from privatization of additional power assets and refineries. Overall I see 2014 as a year with multiple levels of uncertainty-around politics and complex national scenarios, with a determined opposition ranged against a president who wants a second term and is strengthening his hold on the tools to accomplish that desire, within the context of an election that may accentuate regional and religious fault lines; continuing insecurity and sectarian violence; sustained global economic risks including low growth, unemployment, uncertain oil markets, and discussions of US tapering of quantitative easing from Q2 2014 (though it now seems clear Janet Yellin will not be aggressive in that regard); multiple domestic economic concerns around exchange rates, interest rates, inflation (in the context of increased political spending, though official budgets may be lower) and the impact of higher CRR and MPR on financial sector liquidity. GDP growth is likely to stay broadly around current levels or slightly lower.