In the New Year, investors, both domestic and foreign are optimistic that the global economic transition will be boosted by the recent rising price of crude oil in the international market to help many countries especially the oil producing solidified their diversification drive.
The global economy is however likely to remain unstable despite the expected increase in crude oil price with implementation of the agreement reached by the Organisation of Petroleum Exporting Country (OPEC) kicking off this January, just as the Britain exit from EU economic bloc is still ongoing. There are also the likely policy changes in U.S. with President-elect Donald Trump taking office on January 20, the new government may redirect flow of funds.
Meanwhile, China, the second world’s largest economy is already putting plans in place to manage outflow of funds from its system, which may present yet another challenge as most advanced economies continue to confront significant economic slack and a weak inflation that may further the downside risks in more uncertain environments.
But with the combination of near-term demand support and structural reforms, reinvigorating medium term growth would go a long way in sharping the global economy.
Coming back home, the nation’s economy in 2017 looks promising and has potential to recover from the lingering recession, if only there will be changes or reversals in some policies that would take advantage of expected oil price rally considering that Nigeria was among the few nations exempted from the quota cut by OPEC; just as progress made in securing the nation; investment in agriculture to solidified the drive for economy diversification and growing the internally generated revenue drive of the government, which must never be to the detriment of the economy. There is also the faithful implementation of the Federal Government’s huge budget of N7.3 trillion for year that is expected to further help the economy out of its parlous state.
And It is expected by now, with the spirit of delivering expected changes this year, the Muhammadu Buhari administration should have holistically carried out an appraisal of its almost 20 months foray in office to know which of its policies needs adjustment and those members of the cabinet that can faithfully implement this next stage to ensure that such policies impact on the people and economy.
We acknowledge the peace moves by the government to address the issue of the Niger Delta militants, but effective policy actions are needed to achieve the projected output of 2.6 million barrels per day of crude oil, a quick cost benefit analysis would show that expected gains from resolving the lingering issues far outweigh the costs.
Unfortunately, the government’s track record with regards to its policy implementation style since inception has been mixed, but with the sharp contraction of the economy, changes in some policies and implementation style we expect a turnaround this year.
Also, there is the need to sustain some policies, especially the import substitution, to encourage local production and reduce the extent of reliance on imported products. Already, this policy had facilitated development in key sectors such as cement, rice, paints, tomato paste production and others.
Considering the many policy implemented so far by the government, their effect have been mixed, especially with some sectors suffering and others flourishing, due to the lack of clear roadmap, existing companies or manufacturers are dying because government and its agencies are focusing more on some sectors at the expenses of others.
The manufacturing sector is foot dragging as government seems strictly focused on the agricultural sector, a situation that has affected the level of confidence in government by Nigerians and foreigners alike.
But with expectation in the New Year, since the government is likely to be reshuffled its cabinet, we hope the new ministers would help shape government programmes and policy direction for the economy, thereby improving confidence level and providing an appropriate foundation for investors to plan.
The GDP quarterly growth figure for 2016 has been in the negative and we do not anticipate a significant change in the fourth quarter figures for last year, meaning that the full GDP number for 2016 is estimated to be in red at the range of negative 1.65 to 1.85%, helped by the non-oil sector, particularly agriculture. The challenges in the Niger Delta region and low oil price have significantly affected government’s overall revenue.
Our outlook for 2017 are premised on various expectations for key sectors, including oil, agriculture, industry, services, finance and insurance, manufacturing, mining and quarrying, and communication.
Our projection for the oil sector is based on the realty of expected continued rally in prices and stability in oil production output, as well as an estimated benchmark of $42.50 for the year budget.
We expect that companies in the real sector will still struggle as government policy has not favoured manufacturers or sufficiently encouraged local production of goods to create employment, the potential of profit margin improvement is slim due to the Naira devaluation, but the improving external reserves will on the long-run boost the Naira’s value.
The outlook for oil receipt is bright in the light of OPEC agreeing to cut supply to stabilise price and the improving production volumes as the government engage the Niger Delta militants in peace talks to sustain the improving output.
Since the OPEC production cut did not affect Nigeria, the estimated daily production of 2.6m bpd in the 2017 fiscal year should be a realty, all things be equal.
The funding of the budget is of serious concern, but the government plans to sources funds through oil sales, recovered looted funds, international bond issuance, domestic borrowing and bonus from the budget benchmark oil price. Add revenue from these sources to that expected from internally generated revenue and there is a whole lot of promise, assuming all crystalises as planned.
Specifically, we have some concern about the chance of success of the international debt offering in today’s unstable global financial markets. The government has in recent years grown its domestic debt profile significantly, and in a year where the prospects of liquidity in the financial system are high with government borrowing to meet infrastructure development financing needs.
Inflation has remained in the double digit range of 18.48% as at November 2016 going by data from the National Bureau of Statistics (NBS), driven initially by the hike in pump price of fuel, rising energy and food costs. Our outlook is a continuous increase in inflationary level with the depreciating Naira negating any positive effort that may have accrued from the falling agriculture products/food cost. The rising cost of imported goods and services will create additional upward pressure on price levels. We also believe that government’s budget deficit will further aid a build-up in inflationary pressure.
We expect that the depreciation of the naira against other major currencies mid last year will be sustained this year, with the CBN seemingly in a tight corner amidst the continued short supply of these foreign currencies that has kept the Naira’s exchange rate against the US$ and other currencies under pressure.
Also the multiple exchange rate in the system is not helping matters, with the multiple exchange rates like manufacturer’s rate, interbank rate, fuel importer rate and Christian/ Muslim pilgrimage rate, all of which have ensured that Nigeria has a flourishing black market. This has in turn impacted negatively on the economy.
The US$ exchange rate which stood at N305/$1 interbank rate at the end of 2016, is expected to appreciate further in 2017 on the back of rising crude oil prices, improved oil production output and rising foreign reserve level.
Also if the CBN increases options to boost the nation’s reserves, more foreign funds would be attracted through investment inflow, which would help the apex bank meet demand and further boost the naira’s value.
After a rough and turbulent 2016 that ensured three years of cumulative down market, the first in the history of Nigeria, we expect some level of stability and more importantly, confidence to return to the market in phases.
This is especially so, now that the nation’s foreign reserve is looking up gradually, oil price in the international is rising and at a time the Federal Government has put forward a plan to spend N7.3 trillion this year are expected to influence the market positively all thing be equal. We expect the market to move up and down in the first quarter of the year as the investing community trades and invest for the earnings season billed to kick off in next month with the non-banking stocks among the early fliers submitting their scorecards for the year ended 2016.
Also, we believe the recovery of the economy will support the stock market as confidence in the whole system will boost savings and investment that will sustain the recovery process. There is need to reduce interest rate as the constant hike before now has not helped the management of inflation and exchange rate that kept moving up in 2016. Interest cut will boost the real sector and the market to drive productivity and growth.
We also expect that developmental and social projects of the government to continue drive economic diversification will boost liquidity and better the purchasing power of many poor Nigerians.
We expect improvement in new listing and more market developmental strategies from the regulators to continue boost confidence in the system. As we see more bull market in the new year.