LBS Alumni DayNigerian Economy in Perspective 2019 –

Dysfunctional Policies & Structural Rigidities

By Bismarck Rewane

November 15th, 2018

Outline

Diagnosis & Challenges

Prognosis & Recovery

2

Latent & Specific Opportunities

Conclusion

Policies & Impact

Downside Risks & Economic Down Syndrome

HOW DID WE GET HERE

3

6.21

6.546.23

5.94

3.96

2.35

2.84

2.11

-0.67 -1.49

-2.34

-1.73

-0.91

0.72

1.4

2.11.9

-3

-2

-1

0

1

2

3

4

5

6

7

Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 *2018

% The Boom Period

Slowdown Recession Early Stages of

Recovery

Source: NBS, *: EIU, FDC Think Tank

2014 2015

2016

2017/18

Nigeria’s Growth Tra jectory

Boom (2014)

•Average Growth rate: 6.22%

•High oil prices at an average of $99.26pb

•Peak of $116pb before closing the year at $56pb

•Stable production: avg. of 1.91mbpd

•Start of a commodity shock (oil) mid 2014

Slowdown (2015)

• 2015 growth rate: 2.79%

• Commodity shock in full swing

• Average oil prices dropped to $53pb

• Closed the year at $36pb

• Production relatively stable at an avg. of 1.86mbpd

• On set of a currency crisis

• Capital controls introduced- ban on 41 items

• Nigeria removed from JP Morgan & Barclays’ EM indexes

• 27 state governments insolvent and with salary arrears

Recession (2016)

• 4 quarters of negative growth

• FY’ 16 growth rate: -1.58%

• Incessant attacks on pipelines – sharp drop in oil production: 1.6mbpd (avg.)

• Avg. oil prices: $45pb

• FY’17 low: $27pb

• Full blown currency shock and economic crisis

• Naira was adjusted twice

• N199-N280-N305/$

• External reserves dropped to $23.9bn

• Inflation rose to 18.55% (Dec’16)

• Fitch downgrades sovereign debt rating to B+

Recovery (2017/18)

• FY’17 growth: 0.83%

• Q2’18: 1.5%

• Gradual but uneven recovery

• Oil prices touched almost 5 year high of $86pb in Oct’18

• Currently trading at $69.43pb

• Stable oil production: 1.75mbpd (Sept’18)

• Sustained depletion of external reserves

• Now at $41.74bn

• Inflation down up 11.28% (Sept’18)

Slowdown -> Deterior ation -> Recov ery

DIAGNOSIS &

CHALLENGES

6

Growth ProblemGrowth has underperformed the global and regional average for 3 years

Average GDP growth in 5years = 2%

Average population growth rate = 3%

GDP –Population = -1%

Income inequality compounded by opportunity inequality

Gini coefficient =43

5% of the population have approximately 40% of GDP7

3.73.11.9

-2

-1

0

1

2

3

4

5

6

7

2014 2015 2016 2017 2018

Global SSA Nigeria

Investment Problem

Source: EIU8

Y = C + I + G + X - M

Investment

Foreign Portfolio Investment (FPI)

Foreign Direct Investment (FDI)

Pension FundsStock Market Capitalization

Gross Capital Formation

National Savings

Nigeria’s investment is suboptimal

RoI Cost of debt servicing

I = Io – Ir + Iy

Io = autonomous investment; r = interest rate; y = income

$61

Debt Problem

Debt crisis

10% growth in total debt

Increase in non-contractual debt to $28.1bn

Debt-to-GDP ratio of 21%

60% of independent revenue of FGN used for

debt service

52.6% export to debt ratio9

Income Inequality Problem

Poverty – Poverty crisis

42.4% of the population in abject

poverty

Nigeria now poverty capital of the

world

Lack of investment in education

continues to widen the Gini-

coefficient

Poverty map of Nigeria

10

Education rate (School Attendance)

Subsidy Problem

Subsidy – Petroleum problem

Under-recovery skyrockets

Budget target for subsidy = $3.85bn in 2018

Subsidy in April when price was

April $70pb = $215mn = N1.4trn, 13.35% of budget

August $77pb = $245mn per month

September $85pb = $270mn per month

The double edged sword 11

Energy Problem

FGN needs $1trn to upgrade energy infrastructure

Nigeria’s thermal power stations remain underutilised due to uncompleted

plants and gas constraints

Financial sector exposure to oil and gas averaged 30.6% in 2018

Average exposure to the power sector– 4.8%

These sectors remain major drivers of banks’ impairments (35%)

The strict policy environment will weigh on the risk appetite of most banks

Due to the implementation of IFRS 9

12

Addressing Structural rigidities & Deficiencies

Increase National Savings (NS)

NS = Investment

Intensify fiscal consolidation efforts

Sign Africa Continental Free Trade Agreement (AfCTA)

Free subsidy quickly

Cost reflective tariff

Sell refineries

Allow currency float-convertible currency

IMF BOP support programme 13

KEY ECONOMIC INDICATORS &

OUTLOOK

14

LEI H1’18 H2’18 % Change Impact

GDP Growth

(%)

1.95

(Q1’18)

1.5 (Q2’18) -0.45 • Lower GDP reflects reduction in economic activities

• Could result in lower labour demand

Oil Price ($pb;

avg)

71.16 76.71 7.80 • Higher oil prices is positive for FAAC, external reserves

Oil Production

(mbpd) (avg)

1.73 1.71 1.16 • Oil production below the budget benchmark of 2.3mbpd

• Could limit the benefits of rising oil prices

Average power

output (MW)

3,856 3,661 -5.06 • A decline in power output would increase demand for

alternative sources of energy such as diesel

• Increasing operating costs of firms with a likely reduction

in net profit margins

PMI (end period) FBN:

49.8

CBN: 57

FBN: 53.6 (Sept)

CBN: 56.2

(Sept)

FBN: 7.63

CBN: -1.4

• Higher PMI suggests an expansion in manufacturing sector

activities

Unemployment

rate (%)

16.2

(Q2’17)

18.8(Q3’17) 2.6 • An increase in unemployment rate weighs on misery index

Source: CBN,NBS, EIU, FDC Think Tank

Key Economic Indicators

LEI H1’18 H2’18 % Change Impact

External Reserves ($bn)

(end-period)

47.79 41.79 -12.55 • Sustained depletion of the reserves limits the CBN’s

ability to support the naira

Exchange rate – Parallel

Market (N/$; end period)

362 363 -0.28 •Relative calm in the forex market positive for market

confidence

Money supply (N’trn) (end

period)

24.81 24.86 0.2 •Remained relatively flat compared to CBN benchmark of

10.98%

Inflation (end-period; %) 11.23 11.28 0.05 •Inflation declined for 18 consecutive months before

reaching and inflection point in July

T/Bills (91 days; end-

period) – Primary

11.00 10.50 -0.5 • Reduction in yield of fixed income securities

Stock Market (N’trn)-end 11.96 11.83 -1.09 •Exodus of hot money (FPI) weighed on the bourse

Key Economic Indicators

Source: CBN,NBS, EIU, FDC Think Tank

Mixed Bag of Economic Indicators

Impact

Economic challenges persist

External imbalances are growing

Vulnerabilities are rising

Risks are elevated

4

7

1

Positive Negative Neutral

MACROECONOMIC INDICATORS OUTLOOK

GDP Growth to advance to 2.1% in 2019 FY’18 GDP growth - 1.9%

FY’19 - 2.1%

Driven by:

Higher oil prices & stable oil production

Improvement in agric sector

performance

Risks to growth in 2019 include:

Disruptions to 2019 election

-0.91

0.72

1.4

2.11 1.951.5

1.7 1.82.1

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

GDP growth (%)

Source: NBS, FDC Think Tank

Oil Market Outlook

Nigeria is more oil production sensitive than price

sensitive

Oil production expected to remain stable 2018/2019

Oil prices will remain above budget benchmark

Supported by

Robust demand amid US sanctions on Iran

Stable domestic oil production (~1.7mbpd)

Escravos, forcados and other pipelines will be protected and

force majeure minimised

Source: OPEC, Bloomberg, FDC Think Tank

69.13 71.5876 78

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1.85

0

10

20

30

40

50

60

70

80

90

Jan

'18

Fe

b'1

8

Ma

r'1

8

Ap

r'1

8

Ma

y'1

8

Jun

'18

Jul'

18

Au

g'1

8

Se

p'1

8

Oc

t'1

8*

No

v'1

8*

De

c'1

8*

Average oil prices ($pb)

Average oil production (mbpd)

20

Inflation Outlook

Source: NBS, FDC Think Tank

15.1314.33

13.3412.48

11.61 11.23 11.14 11.2311.2811.5011.9012.50

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Inflation (%)

21

The increasing inflation trend

expected to persist in 2019

2018 (end): 12.50%

2019 (end): 13.0%

Boost in liquidity stemming from:

Minimum wage review

Campaign spending

Increased FAAC disbursement

External Reserves Outlook Gross external reserves is a victim of hot money

exodus

CBN has prioritised Naira stability over reserves

accretion

Projected to hover around $40bn by 2018-end

External reserves depletion to continue into 2019

Despite proceeds from Eurobond

External reserves to external debt ratio will

deteriorate

Source: CBN, FDC Think Tank

40.69

42.49

46.26

47.4947.79

47.12

45.84

44.3143.44

42

40

36

38

40

42

44

46

48

50

Jan

'18

Fe

b'1

8

Ma

r'1

8

Ap

r'1

8

Ma

y'1

8

Jun

'18

Jul'

18

Au

g'1

8

Se

p'1

8

Oc

t'1

8

No

v'1

8*

De

c'1

8*

22

Interest Rate Outlook

Source: CBN, FDC Think Tank

0

5

10

15

91-day 182-day 364-day

Interest rate environment will remain high

Buoyed by the government’s debt acquisition

Banking industry will remain lending averse

Due to the implementation of IFRS 9

Treasury Bills (% pa)

23

POLICIES &

IMPACT

24

Minimum Wage Review

Proposed minimum wage is 67% higher at N30,000

Minimum Wage Asset Under Management

Money Supply Inflation

Promissory Notes

Securitization of contractor and oil marketers debt by the DMO

Contractors: N483bn (10-year)

Oil marketers: N288bn (10-year)

The promissory notes would be cashed out at a discounted rate

Redeemed notes increased naira liquidity heightened

inflationary pressure

However, transmission effect of increased money supply remains minimal

Monetary Policy Responses

The MPC meeting is scheduled to hold on Nov 19/20

Key considerations would be:

US Fed rate hike in December and its impact on capital flows

The resurgence of inflationary pressures

Increased liquidity from pre-election spending and FAAC distributions that

are rising in tandem with increase in oil receipts

External reserves depletion

Likely policy direction: increase MPR to 14.5%, CRR: 22.5%, LR: 30%,

Asymmetric corridor: +2%/-5%

Impact

Curtail inflationary pressures

Reduce capital reversal

Weigh on credit to the

private sector

Constraining economic

growth

Positive Negative

PROGNOSIS &

RECOVERY

29

Scenario – Normal

Assumptions

Oil Price: $68pb – 13.3% higher than the budget

benchmark price of $60pb

Oil production: 1.75-1.77mbpd

Forex market structure to remain the same

No IMF support (home-grown solution)

Impact on Indicators

2019

GDP Growth (%) 1.9-2.0

Inflation (%) 13

Money Supply (M2) Growth (%) 4.3

Net FDI ($’bn) 2.5

External Reserves ($’bn) 43

Exchange Rate (N/$, IEFX) 369-375

Fiscal deficit (N’trn) -2.1

Balance of Trade ($’bn) 19.8

Scenario – Shock

Assumptions

Oil production shut-ins from renewed

militancy – down to 1.4mbpd

OPEC cut lowers Nigeria’s quota

US shale resurgence leading to a global oil

supply glut

Oil prices down to $40pb

Impact on Indicators

2019

GDP Growth (%) -0.9

Inflation (%) 15.9

Money Supply (M2) Growth (%) 2.1

Net FDI ($’bn) 2

External Reserves ($’bn) 30

Exchange Rate (N/$, IEFX) 410-430

Fiscal deficit (N’trn) -2.1

Balance of Trade ($’bn) -8.5

DOWNSIDE RISKS

Crit

ica

lM

ajo

rM

ild

Unlikely Possible Probable

Downside Risk In the event of a rigged election

Oil below

$40pb

Wage increase

in the face of

Oil Revenue

Slump

Exchange

rate Crisis

Debt service

to export

revenue

>70%

Fall in oil

production

Post-election

political crisis

and violence

Higher than

expected

Fed rate

hike

Farmers-

Herdsmen

Crisis

Hard Brexit

Escalated

Trade Wars

Debt Crisis

Slowdown in

global growth

Reduction in

oil output

Quota

LATENT & SPECIFIC OPPORTUNITIES

Trade

FY’18/19

-2.57 -2.14 -1.9

2.02.01.5

1.8 1.9

-4

-3

-2

-1

0

1

2

3

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*

Trade (%) GDP Growth (%)

Highly fragmented market

Constitutes 16.45% of GDP

2nd highest employer after Agric.

Sector grew by (-2.14%) in Q2’18

Sector’s growth projected to move towards

positive territory, driven by

Boost in demand arising from

minimum wage review

Stable FX rate

Logistic concerns remain key constraints

Agriculture

FY’18/19

3.00

1.19

1.6

3.0

2.0

1.51.8 1.9

-2

-1

0

1

2

3

4

5

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*

Agriculture (%) GDP Growth (%)

Highly fragmented market

Contributed 22.86% of GDP (Q2’18)

Sector grew by 1.19% in Q2’18

Projected to grow by 3.0% in 2019

On the back of

Continuous government interventions

through the CBN, FMARD, BOI

FX earnings potentials of the sector

To benefit from robust payment systems

FY’18/19

3.67

0.68

3.1

3.6

2.0

1.51.8 1.9

-4

-3

-2

-1

0

1

2

3

4

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*

Manufacturing (%) GDP Growth (%)

Manufacturing Dominated by few players

Sector growth rate of 0.68% (Q2’18)

Contribution to GDP: 9.29% (Q2’18)

Average lending rates – 20%

Benefiting from improved FX liquidity

Improved internal efficiency

Payment of salary arrears and wage

increment

Stable FX rate

ICT

FY’18/19

1.58

11.81

7.5

10.0

2.0 1.5 1.8 1.9

-6

-4

-2

0

2

4

6

8

10

12

14

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*

ICT (%) GDP Growth (%)

Oligopolistic Market

Sector growth rate of 11.81% (Q2’18)

Contribution to GDP of 13.63% (Q2’18)

Policy environment unfavorable to key players

Growth will be driven by:

Increased investments into the sector

Injection of funds into Telcos (fintech –

Mobile payments)

Improved internet penetration (to 30% from

22%)

Banking

FY’18/19

12.58

0.81

7.0

3.02.0 1.5 1.8 1.9

-10

-5

0

5

10

15

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*

Banking (%) GDP Growth (%)

Key dominant players

Sector growth rate of 0.81% (Q2’18)

Contribution to GDP of 2.78% (Q2’18)

Financial system remains robust

Going forward

Banking earnings will be more reflective of realities

From the gradual implementation of IFRS 9

Waning interest income from high yield government

securities

Non-interest income will continue to gain traction

Implication of Mobile Banking

Nigeria’s Payment System

Barter Gold Paper Electronic

Payments

Mobile

PaymentsCommodity

Money

Mobile banking payments will reduce transaction cost significantly

Increasing the speed of velocity of circulation

Margins of most players in the formal banking system will be narrow

Emphasizing the need to collaborate with Telcos

Conclusion

Conclusion

Nigeria will remain commodity dependent and policy reliant

Economic growth story will remain intact except there is a steep decline in oil price

No matter the political outcome, it will be positive

More positive if we go for free markets but modestly positive if we have a mixed

economy

Challenges remain but the democratic process is becoming more and more

representative because of technology

In the mean time, emphasis will be on investment by both the government and

private sector, proper governance and rule of law

Conclusion

Business success will depend on how efficient the business model is – economies of

scale and cost optimization

We should be gasping by Christmas 2019

But again we could be smiling Xmas 2020

44