US debt deal buys Nigeria’s reform managers time The resolution of the United States’ debt ceiling impasse may mean Nigeria’s economic managers have perhaps a two-year window to reform the structure of the economy before the next US recession causes a drop in global economic output and forces a naira crisis. The $16 trillion US economy which remains the global growth engine may keep expanding for a year or two, and analysts see the Federal Reserve not rolling back stimulus until late 2014, on the back of political dysfunction in Washington. Analysts say that should help emerging markets (EM) such as Nigeria, adding that the current economic expansion in the US which began in 2009 is running long in the tooth. “We’re assuming a US recession comes in 2016 (perhaps earlier) – because it always does come by that point in business cycle. If you go back to 1873, GDP on average contracts every 5.5 years in the US,” Charles Robertson, global chief economist at Renaissance Capital, said in a note released October 7. According to analysts, while Nigeria is still peripheral to the emerging markets world, that might change by 2016 when it may emerge as Africa’s largest economy following a rebasing of GDP numbers expected by next month. If African financial markets continue to develop at the pace seen over the past decade, they will continue to draw investor inflows, with Nigeria in the lead over the next decade. “Nigeria is likely to join South Africa as sub-Saharan Africa’s second emerging market,” says David Cowan, Africa economist at Citigroup, adding that the next emerging market crisis may then hit Nigeria hard. “Rising demand for imports in a rapidly growing economy risks pushing the current account into deficit,” Cowan says. He adds that rising demand for foreign exchange and lack of adjustment in the naira may eventually “catch up and is the start of a more significant economic blow-up” which will make nervous investors withdraw their funds. “The outcome: the naira crisis,” he says. The naira bucked the recent sell-off in emerging markets currencies as liquidity tightening measures and dollar sales by the Central Bank of Nigeria (CBN) helped to shield the local currency from portfolio outflows. The country is, however, more vulnerable today to a global shock than it was in 2009. The CBN has relied more on portfolio inflows to Nigeria’s capital markets to maintain naira stability, while economic buffers are thin to non-existent. The naira (NGN) is down 1.6 percent per dollar on the interbank market this year. Foreign reserves which rose steadily in early 2013 have been falling since May due to reduced oil output, prompting excess crude account (ECA) drawdown to $5 billion from $20 billion in 2009. Dollar reserves stood at $45 billion (Oct. 17), and are down 4.2 percent in three months. “Nigeria’s ratings remain constrained by weak governance, low per capita income and vulnerability to oil price volatility,” said Fitch Ratings in a note released last week. Crude oil sales fund up to 70 percent of Nigeria’s budget and 90 percent of total dollar earnings. Continuing structural reforms that brought faster, more diverse and inclusive growth and higher employment and per capita incomes, a longer track record of low single-digit inflation, and improved external buffers, either in the ECA or the new Sovereign Wealth Fund, are reform areas that the government should pursue, according to Fitch. Strong vested interests have, however, made structural reform a continual struggle in Nigeria. The Petroleum Industry Bill (PIB) remains stalled in the National Assembly, while large scale oil theft is costing the Nigerian treasury up to $8 billion a year. Nigeria’s GDP growth declined to 6.18 percent in the second quarter (Q2) of 2013, the fifth consecutive quarter of sub-7 percent growth. The Medium Term Expenditure Framework (MTEF) 2014-16 also shows a major shift towards recurrent expenditure (74 percent) away from capital votes (26 percent), a reversal of the gains made in the 2013 budget.
Posted on: Mon, 21 Oct 2013 11:24:17 +0000
Trending Topics
Recently Viewed Topics
© 2015