Nigeria’s economic managers who failed to diversify away from oil revenues during the boom times are scrambling to respond to twin monetary and fiscal crises amid the collapse of crude prices.
Oil’s 42 percent slide since its peak in June has led to a brutal sell – off in Nigerian assets, as investor’s flee what they perceive to be weak responses to an emerging crises made worse by economic mismanagement and corruption.
While almost all global oil producers grew their dollar reserves during the past four years as oil prices averaged above $100 per barrel (Angola for example almost doubled its reserves to $28 billion), Nigerian FX reserves actually fell for the period.
Compounding the negative effects of inexplicable fiscal leakages is a sense that the policy response to the current crisis has been amateurish and incapable of boosting investor confidence.
“Right now,Nigeria’s economic outlook is bleak. Not so much because of the twin global shocks, as sensible policy responses can mitigate the adverse effects of these, but much more because of the mediocre dual policy response,” said Ayo Teriba, an economist and CEO of Economic Associates, a research firm.
“Reducing government spending after all segments of the economy have suffered income losses is hardly positive for the outlook. Hiking the policy rate in that situation could only be a grave policy error on the part of the CBN,” Teriba said.
The finance ministry has proposed austerity measures for 2015, while the CBN has hiked its benchmark interest rate to 13 percent.
BusinessDay calculates that the sell-off in the NSE – All share index since its July peak has wiped off nearly N4.1 trillion in market capitalisation, equivalent to 89 percent of the 2014 Federal budget, leading to a negative wealth effect on household consumer spending.
One of the twin shocks mentioned by Teriba is foreign capital outflows by offshore investors.
Foreign outflow of funds from the NSE which eclipsed inflows in seven out of 10 months between January and October, reached a high of N101.22 billion in October 2014, more than double the October 2013 levels, data from the bourse show.
Standard Chartered estimates that foreign holdings of Nigerian T-bills and bonds are now below $6bn, down from $8.5bn in October 2014 and a high of $11.7bn in September 2013.
“Offshore bond investors are now largely underweight Nigerian bonds in their GBI-EM, while diversified portfolios have generally reduced exposure to duration in recent weeks or exited the market altogether,” Samir Gadio, Head of Standard Chartered Africa Strategy and FICC Research said in a December 08 note.
The Nigerian stock market has lost -24.84 percent this year, the naira is down -11 percent versus the green back, Nigerian dollar bonds have sold off with yields on Eurobond’s due July 2023 rising to a nine – month high of 6.13 percent on December 1, while the Finance Ministry cut growth outlook in 2015 by a percentage point.
Brent for January settlement slid $1.02, or 1.6 percent, to $62.66 a barrel on the London-based ICE Futures Europe exchange on Friday, the lowest since July 2009 trading, below Finance Minister Ngozi Okonjo – Iweala’s proposed $65 per barrel benchmark for the 2015 budget.
The non – passage of the Petroleum Industry Bill (PIB), despite the president’s party having a majority in congress, continued rolling blackouts after power privatisation, tough business environment, congested ports and stalled reforms mean there is no incentive for investors to return in the medium term.
The lack of fiscal buffers as a result of mismanagement, also mean that oil prices are having an outsized impact on an economy in which the non-oil GDP of N70 trillion made up 87 percent of total economic output of N80.9 trillion.
“Nigeria’s FX reserves are 97 percent of short term liabilities, compared to about 300 percent for EM peers,” said Bismarck Rewane, CEO of Financial Derivatives at a recent BusinessDay conference
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