2013 FY ended with the following occurrences in the Nigerian economy;
- Food prices pressure drove headline inflation a tad upwards, although inflation rate still remains at its 7 year lowest at 7.9%
- The Naira closed December 2013 1.3% weaker amid US Federal Reserve decision to scale back its monthly LASP (Large Scale Asset Purchase) program
- The weak trend was also felt by most Emerging Market (EM) currencies with Ghana suffering a loss of 25%, South Africa a loss of 24%, India 14% and Indonesia 24%.
- Also Turkey and Thailand suffered currency loss of 6% and 3% respectively largely due to recent political upheavals.
- In response also to the US Fed decision on tapering of expected bond yields, yields rose as market speculators appear to have their concerns domiciled on the short term end
- Brent Crude Oil prices rose by 1% as supply concerns over Libya persist and political unrest in South-Sudan (a major exporter in Sub-Saharan Africa) among others.
The on-going reforms in the various sectors of the Nigerian economy are gradually yielding positive results. This has manifested in the country being classified among the fastest growing economies in the world and a middle income country. In addition to the robust growth largely driven by the non-oil sector, the stance of monetary policy has helped to significantly rein in inflationary pressures. The moderation in consumer price inflation reflected a trend which began in the fourth quarter of 2012. However, the threat of a spending blow-out in the run-up to the 2015 elections poses potential risks to inflation.
In addition, the conducive investment climate brought about by predictable macroeconomic environment has continued to ensure sustained inflow of foreign capital into the economy. For instance, the aggregate foreign capital inflows stood at US$7.79 billion at the end of second quarter 2013 compared with US$4.53 billion in second quarter, 2012. Of this, the foreign direct investment inflow was US$1.47 billion or 18.9% while portfolio investment inflow accounted for US$6.52 billion or 81.1%.
The financial sector has continued to play a critical role in the development of the economy by mobilizing resources for productive investment.
The capital market continued its rally with the equities market providing the lead. The All-Share Index (ASI) increased by 47.19% from 28,078.81 on December 31, 2012 to 41,329.19 on December 31, 2013. Market Capitalization (MC) increased by 44.66% from N8.97 trillion to N13.23 trillion in the review period. Improved earnings and investor confidence in macroeconomic management and substantial portfolio inflows (as foreign investors took advantage of the favourable domestic economic environment) accounted for the upswing in capital market activities.
The performance of the financial sector was as a result of the continuous implementation of the financial sector reforms that have strengthened the sectors’ financial intermediation process engendered by improved interventions in relevant and critical sectors of the economy, stronger regulation and supervision through better disclosures by financial institutions, improved corporate governance, and capital market development. Other measures include improved cost structure of banks, enhanced financial inclusion, and improving financial infrastructures. There have also been numerous programmes and projects to improve the payments system.
While Federal Government spending overall in 2013 has not been significantly higher than in 2012, oil revenues have continued to decline in spite of the relative stability in oil price when compared with preceding years. As a result, Excess Crude savings have fallen from about $11.5b at year-end 2012 to less than $3b on December 2013. External Reserves have remained in excess of $43billion only because of a massive inflow in portfolio funds. The implication of this is that financial markets are susceptible to external shocks.
THE OUTLOOK FOR 2014
Following the economic performance in 2013, the Nigerian economy is expected to grow strongly in 2014 with the growth to be driven by high oil prices and robust domestic demand. In addition, the several reforms initiated and pursued by government and her agencies in 2013 are expected to impact the economy positively in 2014. These include:
- Government efforts to improve transportation network and port reform to strengthen economic linkages between sectors, cities and regions and make growth more inclusive,
- The expected passage of the Petroleum Industry Bill (PIB), which is expected to improve local content, ensure technology transfer and job creation;
- The modernization of agriculture through improved seedling and value chain initiatives which will likely increase agricultural output;
- Financial sector reform through financial inclusion which is expected to further enhance economic growth and job creation through access to financial products and services by a large segment of the informal sector of the economy.
- Power sector reform that will reduce cost of doing business and attract local and foreign investors into the industrial and manufacturing sectors of the economy and open job opportunities.
- The licensing of private refineries will boost job creation and stem petroleum product importation and conserve foreign exchange outflow.
- In the real sector, it is projected that real output growth will reach 7.3 per cent. On its part, the IMF has projected an output growth of 7.4 percent. The forecast for inflation shows that the rate will remain within the single digit band through to 2014, despite the pre-election spending that might threaten price stability.
- The full effects of Federal Government and CBN interventions in the real sector such as Power and Airlines Intervention Fund, the Nigeria Incentive – based Risk Sharing System for Agricultural Lending (NIRSAL), the Entrepreneurship Development Centres (EDCs) and other complementary projects of the government will improve the growth prospects in 2014.
- The conclusion of the privatization of the power sector is expected to have positive impact on output growth and employment generation as activities in the formal and informal sector are expected to pick up.
- The developments in the external sector are expected to be favourable as the increase in oil price in the global commodity market are projected to be sustained. This is expected as the performance of the economies of the advanced and emerging economies gradually improve. Consequently, robust external reserves and external debt will remain within the sustainable thresholds.
-Most importantly, Nigeria will have competitive edge in the international capital market in 2014, owning to robust growth, high reserves level, stable exchange rate and clement investment climate. The interest rate differential between Nigeria and most developed countries will continue to be a source of attraction for global capital flows to Nigeria.
- The retention of the BB- rating for Nigeria by Fitch and Standard and Poor’s rating agencies is an indication of the conduciveness of the country as an attractive investment destination. Nigeria is also expected to remain a low-risk debtor country which is an indication of its credit worthiness.
-In the fiscal space, the outlook in 2014 remains bright, as oil prices are expected to maintain their high levels given the gradual recovery of major oil consumers like the United States and China from the impact of the recent global financial crisis, thereby pushing up crude oil demand. Though the discovery of shale oil in the US may adversely affect Nigeria’s crude oil demand, the impact may not significantly reduce oil demand for now. However, given that 2014 is an election year, government spending is expected to rise due to the financing of election activities which may expectedly worsen the liquidity conditions in the system leading to inflationary pressures.
- The outlook for the financial sector in 2014 is bright. With the commitment of the CBN to macroeconomic and financial system stability, Nigeria is likely to evolve as a preferred destination of choice for investment in 2014. In addition, the CBN’s commitment to the pursuit of financial inclusion is expected to broaden the deposit base of deposit money banks (DMBs). Financial system stability will be strengthened in 2014 with sustained macroeconomic stability, and consolidation of the on-going reforms in the financial system. The positive ratings of Nigerian banks by international rating agencies are evidence of their soundness and will continue to enhance the inflow of capital into the banking sector.
The outlook for 2014, however, portends some potential headwinds that may lead to further tightening in monetary conditions. It is expected that 2014 will be the year for QE- tapering in the US and interest rate rises in Europe, both of which will lead to some pressure on the exchange rate and stock prices due to the impact on capital flows. It is also the year in which election spending is likely to take place domestically, thus bringing more pressure to bear from the fiscal side. As a result, there may be need to continue the current monetary tightening mode in response to these eventualities in 2014.
Let me conclude by stating that while the overall economic outlook for 2014 appears mixed, there is need to sustain and consolidate current efforts to address the lingering challenges of insecurity, infrastructural deficits as well as the threats to oil production such as pipeline vandalism, crude oil theft, etc. There is also the need to give greater attention to the diversification of the Nigerian economy away from the current over-dependence on Oil export in order to avoid the vagaries in the international oil market and their attendant adverse effects on the domestic economy.
While I check for accuracy and invest time in research, I am not liable for any misinformation. The details here should be construed as my investment view and any use of same is at owners risk.