Global ratings agency Standard and Poor’s held its annual Nigerian ratings and capital markets conference on Thursday. Here are four things we learnt at the event which held at the Wheatbaker hotel Ikoyi.
What Buhari’s probable second term could mean for economy.
President Muhammadu Buhari has overwhelmingly disappointed some Nigerians, with his administration growing a penchant for dragging on badly-needed economic reforms to lift inclusive growth.
It took the 74-year old leader six months to appoint cabinet ministers and another 16 months to keep the naira from weakening in vain.
His supporters point to achievements in taming the Islamist terrorist group, Boko Haram, who have killed thousands in the country’s northern region.
The pace of reforms will not change if he successfully grabs a second term at next year’s polls, according to Frank Aigbogun, who shared insights on the political risks that stare the country in the face ahead of 2019.
“There isn’t anything on the horizon to suggest that reforms will move at a faster pace,” Aigbogun said.
Reforms are badly needed particularly in the oil and gas sector, as well as power sector, where investor-friendly policies and market tariffs are non-existent.
Downstream oil companies have had to stick to a retail petrol price pegged at N145 per litre ($0.48), when the rally in oil prices alone has shut up landing costs. Consensus estimates point to a landing cost per litre of N180.
Buhari has resisted raising fuel prices, given that many Nigerians see cheap fuel as one of the few benefits they get from the government.
Increasing pump prices ,could also dent the central bank’s efforts to curb inflation which slowed to 13.34 percent for the fourteenth successive month in March. It remains above the target range of 6-9 percent.
Despite being an OPEC member and Africa’s biggest oil producer, Nigeria imports nearly all its fuel because of the decrepit state of its refineries.
Most oil producing nations, including Saudi Arabia, are all in the middle of a planned increase in petrol prices, amid efforts to cut down on spending and diversify their revenue source.
CBN in no hurry to divorce multiple exchange rates
After the 2014 crash in oil prices that triggered acute dollar shortages in Africa’s largest oil producer, the central bank turned to a system of multiple exchange rates; each designed to meet separate dollar needs depending on who is buying and why they are buying.
S & P’s short term outlook on the practice, which some foreign investors and the International Monetary Fund (IMF) have since urged the country to scrap, may squash any hopes for a rate convergence any time soon.
“The sense we are getting from the CBN is that there would be no adjustment anytime soon, to the multiple exchange rate practice,” said Gardner Rusike, S & P Global ratings Associate Director.
“For stability and predictability, it is important to have a single exchange rate,” Rusike said. “Hopefully, the current practice will be adjusted in the near future”
There’s the long-standing official CBN rate of N305 per US dollar. It was at this rate that the recent currency swap deal entered with China for some $2.5 billion was implemented.
There’s also the interbank rate of N330 per dollar, which the commercial banks carry on their books and is used by the central bank as a guide to sell dollars to banks during weekly auctions.
Airline operators also enjoy a custom made rate of N360 per dollar.
Then there is the N360 NAFEX rate introduced April 2017 to serve the dollar needs of investors and exporters. The NAFEX rate is a short crawl away from the black market rate of N361 per dollar.
Some may argue that the practice has delivered gains in boosting dollar liquidity, stabilising the exchange rate and clearing a demand backlog that choked the economy and put pressure on external reserves.
As of May 9,external reserves touched an 18-month high of $47 billion.
Critics say the system encourages round tripping, with beneficiaries of subsidised rates taking advantage of the huge differential and can get a little confusing for investors.
In explaining the reserve accretion, they are careful to point the impact of higher oil prices and the government’s external debt issuances of about $6.8 billion in the past two years.
Naira faces election pressure
The general consensus among panel guests (which included Bismarck Rewane, MD of Financial Derivatives Company, Friday Idise- the Group head at Guaranty Trust bank, Sam Ocheho- Head of global markets at Stanbic IBTC and Omega Collocot- Director of S & P global ratings) was that the naira may weaken marginally on the back of portfolio flows reversal which is typical of election years.
Rewane sees an 8 percent decline in exchange rates to N390 per dollar from N360 at the Investors and Exporters window- which foreign portfolio investors rely on to get dollars.
“If you discount possible capital reversals and a possible election spend of 1 percent of the country’s $420 billion GDP ($4 billion), the impact of the upcoming election on reserves could be huge,” Rewane said.
“Given the current level of reserves ($47 billion), that may not significantly dampen investor confidence,” Rewane added.
Ochecho of Stanbic IBTC expects a 10 percent decline as the rate hikes in the United States forces capital reversals from emerging and frontier markets.
“Some portfolio investors with maturities at the end of the year are likely to exit, to leverage the decline in government bond yields which have collapsed from 22 percent to under 10 percent this year,” Ochecho said.
The naira exchanged for N360 per dollar at the I & E window Thursday, as has been the case for months now.
Per capita GDP is going nowhere
Despite exiting a five-quarter recession in the second quarter, GDP growth rate of 0.8 percent for the full year 2017 period hasn’t moved the needle for many households and businesses.
Average per capita income has retreated for four straight years and unemployment has ballooned to a six-year high of 14 percent. Youth unemployment is over 40 percent.
Rather than government reforms, it has been the recovery in oil sector that has lifted the economy out of recession. The same thing that got it into one in the first place.
The decline in global oil prices was complemented by a poorly-timed production shortfall, after a militant group (Niger-Delta Avengers), clamouring for a larger share of the oil revenue extracted from their region,damaged oil pipelines.
That created a perfect storm for Nigeria, battling with decade low oil revenues and a need to boost infrastructure spend to provide a stimulus for the economy stuck in the middle of its worst recession in 25 years.
Oil prices and production have since rallied this year on the back of OPEC’s supply cut and a relative calm in the Niger-delta.
The oil rally has improved investor sentiment about Nigeria, but worries remain if the Niger-Delta militants will return.
Brent crude prices traded at $74 per barrel on Thursday, almost double the price in 2016.
LOLADE AKINMURELE
