In this financial market turbulence there is a temptation to look at Russia and fear the worst for Nigeria. We have not succumbed. The central bank in Moscow hiked its policy rate by 650 basis points just after midnight last Monday (15 December). Yet the rouble tanked the following day before the government unveiled a package of measures targeted on the financial sector and restored some market stability. The central bank has deployed US$10bn this month, and an estimated US$75bn this year in foreign reserves in an attempt to cushion the decline. This leaves about US$410bn in the kitty.
The Russian public has indulged in panic buy insulting in the stores ahead of the expected price increases, and, for the lucky minority, in converting roubles into US dollars. Some casual parallels are being drawn with 17 August, 1998 when Russia defaulted on its local currency government debt and devalued the rouble. (We remember the day well, being in the market at the time, and because it coincided with an important birthday in the family.)
There are obvious parallels between the two oil-driven economies. Export earnings and government fiscal receipts are dominated by the oil industry in both cases. Officials have sought to blame dark forces for exchange rate pressures. President Vladimir Putin spoke last week of enemies of Russia and hinted menacingly that he knew their identity. The CBN governor, Godwin Emefiele, told Reuters on Thursday that “we do not want speculators in this market any longer”. In case his message was not understood, he added that “the banks are not supposed to hold any funds of their own”. Russia has abandoned its management of the exchange rate (outside trying to maintain an orderly market) while Nigeria has not.
On the surface at least, both central banks are powerless in the face of global pressures beyond their control. In Nigeria’s favour, however, is the fact that it is within the global village yet a little removed from it. There are some advantages in not sitting at high table in college. By this cute phrase we mean that a frontier market such as Nigeria has not been fully discovered by the outside world, and that its own banks and corporates have not always grasped the advantages that that world offers.
Data from the Bank for International Settlements in Basle put the claims of its reporting banks on Nigeria at US$19bn at end-June 2014. This will not be the comprehensive figure but it does cover deposits with other banks, loans to non-banks and banks, and holdings of debt securities (such as the Eurobond issues of the Nigerian banks). This estimate of the stock of Nigerian external debt pales into insignificance alongside the debt service said to exceed US$100bn due from Russian borrowers in 2015. International sanctions prevent a rollover of loans to most of those borrowers. Fortunately, Nigeria has not embarked on any controversial foreign policy adventures.
Of course, foreign investors have not overlooked the credit story in Nigeria. The offshore portfolio community had exposure of about US$20bn in Nigerian local currency securities (including equities) after the inclusion of three FGN bonds in the JP Morgan indices for government debt with effect from October 2012. That exposure could well have halved in the flight since mid-year but we are probably close to the point where the rump consists of long-term investors.
Those investors like the story despite the oil price crash, for which the FGN was no better prepared than last time around (in Q4 2008). We also like the story, and see the crash as an opportunity for policymakers to accelerate reforms once the electoral process is concluded.
There is now the perfect backdrop for the removal of fuel subsidies. If the FGN deregulated today, the consumer would theoretically find the price at the pump lower than the set retail cost of N97/l. This statement takes account of the charges on top of the landing cost. The positives are well documented: new jobs, competition between suppliers and, in time, savings on the balance of payments and in the public finances.
Still on the fiscal side, the FGN’s initial 2015 budget proposals show its resolve to compensate for the hit from the oil price slump. There are luxury taxes on yachts, jets, champagne and mansions valued at more than N300m, along with a review of the many exemptions and waivers (granted by the Federal Ministry of Finance). They do not cover the likely revenue shortfall in full, and would probably be bolder at a less critical point in the electoral cycle.
Once we have passed this point, we would hope that the new administration boosts non-oil taxation, and not just by more efficient collection. The standard VAT rate of 5 percent, as the CME has noted, is among the lowest globally. The Petroleum Industry Bill, whenever passed and in whatever version, should boost oil taxation on top of the automatic increase in naira revenues resulting from the devaluation/deprecation.
Nigeria has lived often with low oil prices, and not disintegrated. It is a pity that the authorities were not prepared for the latest collapse. However, they now have an opportunity to introduce substantial reforms, some stalled and some new. Encouragingly, this time around, they can build on some existing momentum.
GREGORY KRONSTEN Head, Macro Economic and Fixed Income Research, FBN Capital
