A couple of noteworthy events of economic or business relevance occurred during the 1st half of this year. We believe that they are noteworthy because they have been vital in determining the economic direction of the country, may play a significant role in where the country ends up at the end of the year.
Some of them have been engendered by good policies, some by bad ones, and some were just stumbled upon. Here is a summary of the key event we think you should be aware of.
1. Oil sector resurgence and the quest for exchange rate parity
Nigeria had a fair amount of good luck in the first half of the year. Towards the end of 2016, and into 2017, oil prices strengthened, and production levels have surpassed 2 million bpd following the bargaining made by Ag President Osinbajo in the Niger Delta. This stability in oil sector production was instrumental to the CBN’s ability to ceaselessly intervene in the FX market. Armed with oil proceeds, the CBN by sheer force of will, dragged down the exchange rate from about N520 to the current N360 levels.
In a quest to bring down the rate at the parallel market, it force-fed Dollars to the market, ensuring that absolutely everyone that needed FX could get it. Even though this move was down to some good timing by oil prices, it was nonetheless critical to turning around the crisis situation in the country. It eradicated the anxiety and panic in the country by constantly reassuring everyone that they would get FX. This was key in stopping the Dollar hoard and reducing speculative Dollar purchases.
The CBN infused more than $7 billion into the economy. The BDC segment alone received $3.9 billion in the first two quarters of 2017 alone compared to only $58 million in the whole of 2016. The parallel market rate reduced drastically, and fell in sync with other markets.
2. The Investor and Export FX window
In April, 2017, the Central Bank of Nigeria launched the Investors’ and Exporters’ FX window. The establishment of this market was in response to calls for the CBN to liberalize the FX market and float the currency. The CBN, considering other factors including the feed-through of a weak exchange rate to inflation – which would have had severe effects on Nigeria’s import-dependent economy –, opted to liberalize a portion of the market while maintaining control of the other segments.
This would ensure that major parts of the economy are insulated from exchange-rate-related disruptions. Prices in the I&E window are market determined. We believed that this compromise by the CBN to market forces was highly commendable and timely in facilitating the gradual return of confidence to Nigeria’s FX market and financial system as a whole. It sets a foundation on which more robust economic recovery can be made. Investors and other bulk FX users are now better able to access FX for transactions such as capital, profit and dividend repatriations.
Businesses can now also make their foreign loan and interest repayments, and other trade-related payment obligations. The good thing about this market is that it has now snowballed in to a nearly $4billion market, after being midwifed by the CBN. Participants now trade with each other, as the CBN reduces its activities in the market. Due to the new-found confidence brought about by this market, MSCI (Morgan Stanley Capital International), decided to leave the country in its frontier index until at least November.
An exist from this market would have been bad future FX inflows, considering that Nigeria had already been exited from JP Morgan & Chase’s Government Bond Index for Emerging Markets (GBI-EM) in September 2015, and Barclays emerging markets local currency government bond benchmark in February 2016.
3. The 2017 budget
The National Assembly passed the 2017 budget on Thursday May 11 after a lot of drama, as usual. The budget of N7.44 trillion is the highest ever by any Nigerian government, and was premised under the assumptions of oil price at $44.5 a barrel production 2.2mbpd. This budget, which is meant to be reflationary is supposed to be the means through which President Buhari’s ambitious economic recovery plan will be executed. Despite the good intentions articulated in the Economic plan and the budget, there are serious concerns.
The first of this is Revenues. It is almost impossible for Nigeria to attain its ambitious revenue targets, if precedents are anything to go by. Non oil revenues will crawl up at snail’s pace, while oil revenues are constantly being threatened by low global prices and threats of production disruption from the Niger Delta.
The Nigerian economy is heading out of the woods, mostly because of the peace brokered by Ag President Osinbajo. But this peace is increasingly fragile as the government continues to delay on implementing its promises to the Niger Delta region.
Another worrying trend regarding the Budget is the amount set aside for debt servicing – a precarious N1.84 trillion, 24.7% of the total budget and 36.3% of revenue projections for the year. N2.18 trillion was set for capital expenditure, which although is small. However, it will do some good if the government actually implements it. Speaking of capital expenditure implementation, Minister Fashola’s idea of focusing capex on a few projects to achieve 100% completion rather than frittering it on hundreds of tiny projects that will not be completed sounds like a noble idea. It is our wish that the NASS gives him a chance.
4. Nigeria taps international debt markets, launches first diaspora bond, looks forward to sukuk bond
Nigeria successfully raised $300 million in its first ever diaspora bond at a coupon rate of 5.6% for a tenor of five years. The bond was over-subscribed at 130%. It earlier $1.5 billion Eurobond this year ($1 billion and $500 million separately). Both issues were vastly oversubscribed.
Since there was a high level of demand Nigeria’s debt, we kinda feel that the government should have taken the opportunity to raise more money from this market – given the fact that its interest rate was low– to replace the locally sourced loans for which it pays up to 16%. This would have helped to taper the rising debt service costs and freed up local funds to finance Nigeria’s real sector.
5. Executive Order galore
Acting President Yemi Osinbajo signed 4 Executive Orders in a bid to fast track reforms. They are:
• Executive Order On the Voluntary Assets and Income Declaration Scheme (VAIDS). VAIDS is a nine (9) month window of opportunity to allow taxpayers who are owing taxes to voluntarily declare their Asset and Income and pay the taxes due on them. In return for this, they get a pardon and wont pay the interest.
• Executive Order on Budgets which mandates MDAs to prepare and submit their schedule of revenue and expenditure estimates for the next three financial years on or before the end of May every year, to the Minister of Finance and the Minister of Budget and National Planning
• Executive Order On Support for Local Content in Public Procurement by the Federal Government
• Executive Order On the Promotion of Transparency and Efficiency in the Business Environment.
The Executive Orders convey the feeling that the Ag President is serious and wants to be speedy in the achievement of reforms. This is very commendable, however, a key concern is if these orders will be adhered to.
While their aims are noble, and while the affected MDAs may want to comply, we feel that there may be systemic issues that need to be addressed if the EOs will yield result. In many cases, organizational structures of the MDAs will need to be tweaked significantly for compliance with the EOs to be complete.
This will take considerable time. Further more, the rocky relationship between the Executive and the Legislature may prove to be an adverse factor for the achievement of the Ag President’s wider reform goals.
6. The Etisalat Saga
Another event that made the headlines in the first half of 2017 is the incredible fall of Etisalat Nigeria. The Telco giant fell into a debt crisis, owing $1.2 billion to 13 Nigeria banks. Etisalat eventually defaulted on its loans, leading the banks to consider calling in their collateral which unfortunately includes seizing the assets of the company, including its shares.
The parent company – Etisalat UAE pulled out completely from the Nigerian unit, while regulators replaced the company’s key officials with CBN administrators. The now former Parent company has said that its brand name should seize being used in Nigeria, as it has terminated its management agreement with the Nigerian business.
Three weeks have been given before the brand is completely phased out in Nigeria. Etisalat Nigeria’s story throws up several lessons: it is a lesson in how a bad macro-environment can be caustic to business; it is also a lesson on how sub-par management can bring down an industry giant.
The regulators are now designating Etisalat as a systemically important telecommunications company with over 20 million subscribers and 4,000 staff, stating that if the Etisalat situation is not well handled, the banking system itself may be severely affected. This regulatory decision by CBN is a bit unorthodox.You could have seen that in the way it handled the FX crises. But what will this precedence give rise to in the future?
Will another industry giant in the future, who owes the banking system billions of Dollars/Naira and employs thousands of staff seek to be bailed out after recklessly managing its business? Will the moral hazard problem ever be solved? Will capitalism in Nigeria ever work for everyone, if businesses keep getting bailed out?
Why is it that the gains of corporations are shared privately, but its losses are socialized? Either way, we will miss our dear 0-8-0-9ja-4-Life.