Nigeria plays ostrich on tough decisions as oil slump intensifies

Nigeria’s economic and political managers are delaying making tough economic decisions to restore confidence and growth, in essence refusing to see the danger of potential stagnation as the slump in oil prices intensifies.

Brent futures fell by about 2 percent to as low as $36.05 per barrel on Monday, their weakest since July 2004 putting further pressures on the Nigerian economy which is facing its biggest turmoil since 1999.

Morgan Stanley in a note yesintensifiesterday said that “the hope for a rebalancing of the oil market in 2016 continues to suffer serious setbacks”. It cited U.S. output being “more resilient than most models originally indicated”.

While the price of oil is largely outside the control of the government analysts say it could be doing more to increase growth, boost confidence and signal the markets that it understands the seriousness of what is at stake.

Other oil producers have already taken action in reaction to the present realities, even as Nigeria continues to delay reforms.

Last week top OPEC exporter Saudi Arabia, Kuwait and Bahrain raised interest rates to protect their currencies.

Yesterday, Iraq devalued its currency, the dinar, to offset the impact of lower oil prices, while Azerbaijan ditched its currency peg after burning through more than half its foreign exchange reserves this year.

In Nigeria, the authorities have chosen to delay the necessary adjustments, and in some cases pursue unorthodox economic responses, such as cutting interest rates and holding on to an unsustainable dollar peg, which are largely out of favour globally and may be causing more harm to an economy growing anemic at best.

“We accept that today there is no immediate sign of the Nigerian authorities being prepared to accept the need for a weaker currency – so we should assume continued declines in per capita GDP,” Charles Robertson, global chief economist at investment firm, Renaissance Capital, said.

Interest rates (due to Central Bank rate cuts) is adding to weakening naira pressure in the informal market, due to the excess liquidity and lack of an incentive to hold naira denominated assets. The capital controls imposed by the Central Bank have instead
led to a slowdown in growth and a much wider differential between the official and black market naira/dollar rates where it sells for close to N290/$1.

Failure to remove scam ridden fuel subsidies, despite the government not being able to afford the near $5 billion annual cost, has led to fuel shortages in Nigeria’s major cities, and the reappearance of fuel queues and black market dealers on major streets, reminiscent of the bad days under ex military dictator, Sani Abacha.

Nigerian stocks have collapsed by 23.4 percent losing over N2 trillion ($10 billion) in market capitalisation this year alone, meanwhile GDP growth has slowed to about 3 percent half of its former trend which is negative for consumer spending.#

Nigerian unemployment jumped to 9.9 percent in 3Q15 from 8.2 percent in 2Q15 – due in part to a massive 2 million (2.5%) rise quarter on quarter, in the labour force.

Meanwhile, the country’s small but growing private sector has had to deal with increased regulatory actions and huge fines imposed on firms such as MTN Nigeria ($5.2 billion), Stanbic IBTC (N1 billion), FBN Holdings (N1.87 billion), UBA (N2.9 billion ), and Skye Bank (N4 billion). Guinness Nigeria, (N1 billion), that risks sending the wrong signal to investors.

“The outsized fine on MTN is unlikely to do anything to boost Nigeria’s image as a place to do business. Combined with an already-slowing economy and difficulties sourcing FX, it could serve to discourage more FDI to Nigeria, ultimately costing the economy much more than USD 5.2bn in growth and job opportunities forgone,” Razia Khan, Standard Chartered Bank’s chief economist, and head of Africa global research told BusinessDay.

Nigeria’s exports fell by 50.3 percent in the third quarter, from a year ago, and imports declined 7.3 percent, the National Bureau
of Statistics (NBS) said in a report last week. The fall in crude oil exports, which accounted for 70 percent of total domestic exports
this year, hit the economy the most.

“The sharp decline in exports and slight decrease in imports contributed to a continued fall in the country’s trade balance, by 32 percent,” the NBS said in a report.

As the Nigerian economy faces more headwinds in 2016 from the U.S. congress lifting a 40-year-old restriction on crude exports, and expectations that the Federal Reserve will increase rates by another 100 basis points in 2016, analysts expect the markets to eventually force the government’s hands on reforms.

“Perhaps the government will begin to retrace its steps when it sees the futility of its policies, especially on fuel subsidy and the naira, especially if oil prices continue to fall towards $20,” an investment bank source speaking anonymously, said.