Economists forecast better 2017 on back of oil price

Some of Nigeria’s brightest economists have painted a vastly improved picture for the economy this year, should oil price hold at above $55 a barrel and oil production not fall below the two million barrels a day mark.

Brent oil, which is mostly used in forecasts about Nigeria, closed 2016 with the single largest annual price gain and is currently trading at above $56 a barrel.

Using well tested economic models, the economists, some simulating various scenarios, said they believe that with oil price at current levels and with production levels holding steady, Nigeria’s beleaguered economy will experience significant improvement in terms of GDP growth, foreign exchange supplies, government revenues, infrastructure spending, as well as a boost in consumer spending, as subnational governments resume regular payment of salaries and debts owed to contractors.

Their key numbers include positive GDP growth rate of between 1.5 and 2%, $432bn GDP size, export earnings rising to $46.2 bn from 2016 level of $34.7bn, government revenues rising by 34% year on year, fiscal deficit shrinking by $10bn to $9.1bn in 2017 or 2.1% as a proportion of the GDP, a 50% improvement in balance of trade and also with labour productivity growth closing at -1.5% up from last year’s level of -4%

The economists include Bismarck Rewane, CEO of Financial Derivatives Company, Cambridge trained Ayo Teriba, CEO at Economic Associates and others who chose not to be named.

In detailed reports specially prepared for BusinessDay, they were asked to simulate the possible impact of a $55 a barrel price and two million barrels daily oil production on the Nigerian economy in 2017, especially relating to GDP, FX supplies and rates, as well for government revenues.

The economists were unanimous in projecting (using the variables) that Nigeria will see itself out of recession in 2017, with a GDP growth in the range of 1.5% to 2% by the close of the year.

According to Rewane, there will be a good chance of government revenues jumping by 33% to $14.8bn this year, from the $11.1bn recorded in 2016.

Teriba who closely follows the revenue profile of subnational governments and once lectured at the Lagos Business School, said “average oil price of $53 and daily output of two million barrels a day, should see an improvement in foreign exchange supply and government revenues to 2015 levels, stem the decline in GDP and restore moderate growth and stabilise the exchange rate in 2017.”

The government plans a $1bn Eurobond facility in the first quarter of this year and this, added to the disbursement of the balance AfDB’s approved $1bn facility, should significantly supplement reserve holdings.

One of the economists spoke of a likely improvement in capital importation. According to him, “an improved oil price and production would mean enhanced portfolio investor confidence about the state of Nigeria’s fiscal and external balances, an incentive for portfolio investors with moderate-to-high risk appetite, even if the chopped foreign exchange market remains a concern.”

There was however a caveat – developed market interests rates are rising and equities markets remain at post US election highs, both of which could moderate investor appetite for emerging and frontier markets like Nigeria.

The picture gets even better. According to one of the economists taking part in BusinessDay’s 2017 outlook project, “fiscal reflation could help boost such sectors as construction as well, given planned capital expenditure outlays. The draft 2017 budget earmarks N529billion in capital expenditure to the Works, Power and Housing Ministry. We might also expect some boost to consumer spending as subnational governments resume payment of civil servants’ salaries and payments to contractors, the latter of which would trickle into consume wallets.”

Another caveat added by the economists is that power supply will rise to 5,000MW this year, following last year’s chaotic position which meant that firms and homes were needing to buy more diesel at an unprecedented prices because of the near collapse in public power supply.

It is the view of the economists that the Central Bank will try to hold the official interbank rate at N305, because this was the level used for the 2017 federal budget but they expect a best case scenario of “improved autonomous supplies that may see to a moderate narrowing of the premia between the Official/Interbank/NIFEX corridor and the BDC/Parallel markets, though it is difficult to say by how much.”

By Our Reporters