Nigeria’s economy Outlook bright

Analysts and economists speak glowingly about the nation’s economy at a roundtable held in Lagos

BY CLEMENT ORILOYE

It is another new year and expectedly, analysts and experts have been reviewing the eonomy in 2012 and making projections for this year. To this end, a roundtable on the national economy was organised for financial journalists on 11 January. The event, which held at Sheraton Hotel and Towers, Ikeja, Lagos and attracted respected economists, had the theme: “Monetary Policy and Economic Growth 2012 Outcomes and Prospects 2013.”

Professor Akpan Ekpo, Director-General, West African Institute for Financial and Economic Manageemnt, WAITEM, said last year was very bleak due to the global financial meltdown of 2007 to 2009. The year witnessed loss of jobs, cut in government spending and slow recovery just as unemployment rate remained high at 24 per cent.

Akpan noted that this year is pregnant with implications and options for Nigeria. He expects the sluggish recovery to continue and a decrease in portfolio investment. But investment in oil and gas, he said, will continue because of the associated high returns.

Ekpo wants the government to diversify the economy and even the oil sector (that is, to refine crude locally for export and stop oil importation) in order to grow the economy. He also wants the government to strive to provide jobs for the youths and force down lending rates.

Mr. Bismarck Rewane, Managing Director/Chief Executive Officer, Financial Derivatives Company, posited that last year, the Central Bank of Nigeria, CBN, adopted a contraction monetary policy stance at 12 per cent, while cash reserve ratio, CRR, was raised from 8 per cent to 12 per cent just as net open position was reduced from 3 per cent to one percent. Liquidity ratio was retained at 30 per cent.

On exchange rate management, the economist said the naira was one of the best performing currencies in 2012, a development that reduced the pressure on external reserves, which grew to $45 million. A breakdown of this amount indicated that $10 million (22 per cent) is hot money, while 60 per cent came via oil receipts and 18 per cent or $6 million was from investment.

Rewane expects a high potential of recovery in major sectors after the slow output of 2012. The variables he expects to raise the GDP growth rate this year are improved power output due to completion of the sector’s privatisation process, expected passage of Petroleum Industry Bill, PIB; increased agricultural output, stable oil production, expectations of expansionary monetary policy and effective fiscal policy.

On inflation, Rewane said: “A single digit inflation rate is expected. Food prices to trend downwards due to improved agricultural output, while core inflation is expected to moderate relatively below food inflation. Drivers of core inflation are unlikely to rise significantly. However, prices may occasionally spike due to unexpected events, subsidy removal and low agricultural output. Also, security threats during harvest seasons may influence prices negatively.”

Rewane expects a declining interest rate environment, as interest rates will continue to be market-driven.

Rewane expects a reduction in interest rates on account of CBN’s adjustments of the MPR. According to him, MPR is likely to be reduced from the current level of 12 per cent in view of lower inflationary threats.

Sectors tipped by Rewane to excel are power, banking and construction. The power sector, he reckons, will be boosted by existence of a strong policy framework and multilateral agency support for the reform process and review of tariff structure that will ensure an efficient price discovery system.

Banking sector, which accounts for 31 per cent of the Nigerian Stock Exchange market capitalisation, is expected to witness some robustness because of the ongoing sanitisation process. The sector also has buying opportunity at PB ratio of 0.93x and dividend yield of 5.88 per cent and PE ratio of 5.92.

The construction sector is projected to grow by 17 per cent, boosted by substantial growth in earnings from increased infrastructure spend and capacity increase of major players.

Rewane projected that Nigeria’s nominal GDP may reach $300 billion this year without rebasing. Rebasing, he noted, has the impact to move Nigeria into middle-income status. When a country rebases, its real GDP will reduce. Countries rebase because they want to reduce the political mileage. The last rebasing carried out by Nigeria was in 1990.

On an expenditure basis, private consumption will rebound in line with a favourable outlook for economic growth while robust oil prices will allow for government expansion in infrastructure development. Rewane expects oil prices to average between $103 per barrel – $110 per barrel, with new fields from Saudi Arabia coming on stream. However, he reckons that the PIB will be subject to further adjustments before passage.

Rewane also foresees a single digit inflation rate of 9.24 per cent, a declining interest rate environment with an anticipated rate cut of 25 – 50 basis points in the first half of the year and 1 – 2 per cent depreciation in the exchange rate to allow the naira find its true value. He remarked that the interest rate is not as important as its direction.

Mr. Sewa Wusu, Head of Research, Sterling Capital Markets Limited, predicts a continuation of the recovery being witnessed at the capital market.“As against the pessimism that sufficed in the early part of  2012, the Nigerian stock market closed the year with a return of 35.45 per cent. Market capitalisation rose by 37.37 per cent from N6.53 trillion at the beginning of the year to N8.974 trillion. This performance was an improvement over the lull experienced in 2011 when the market witnessed a negative return of -17.42 per cent,” he said.

The analyst attributed the growth to renewed investors’ confidence buoyed by improved macroeconomic fundamentals supported by the release of impressive corporate performance by blue chip companies, attractive valuations relative to other emerging markets, stable financial system enhanced by recent regulatory reforms and supervision by the CBN, the Securities and Exchange Commission, SEC, and the NSE. Others are policy measures to deepen the market and restore investor confidence (introduction of market making programme by the NSE; two way quotes, 35 stocks on the list of market making; maximum price movement band raised from 5 per cent to 10 per cent, reduction in market transaction fees – stamp duties and VAT – and forbearance package for stockbrokers). The last of these is yet to take-off.

Wusu expects the capital market to witness another impressive performance this year given the level of performance in 2012. The performance, Wusu noted, will be driven more by strong macroeconomic environment, good corporate performance and companies fundamentals. He also reckons that the expected monetary policy easing this year should induce investment switch to favour the stock market just as the market expects continuous bond issuance by sub-nationals.

But there are issues in the capital market. Foreign participation accounted for over 65 per cent of total volume of trade. To this end, Wusu urges a need to stimulate domestic participation via collective investment schemes and increase equality allocation of Pension Fund Administrators, PFAs.

On liquidity and market depth, the analyst wants the government to create a pool of special fund at compelling rates for market makers, and the SEC and NSE to promote more listing in oil and gas sector, telecoms, power companies and other privatised entities, increase activities of sub-national and municipals in the bond market.

Wusu wants the NSE to promote more product offerings especially derivative instruments like the Exchange Traded Funds, ETFs, index-linked funds, future and options, among others. He also advocates a more entrenched risk-based corporate governance, tough stance against market infractions and implementation of International Financial Reporting Standard, IFRS, on disclosure issues.

Wusu wants regulators – the SEC and NSE – to step up investor’s education effort. He wants regulators to engage in more road shows to educate Nigerian public, publications and increased promotion of collective investment schemes to expand retail base.

However, the sectors to watch this year are banking, building materials and breweries stocks, Wusu remarked.

.This article originally appeared in TheNEWS magazine of 28 January 2013