Coming out of recession, the Nigerian economy performed well in the first half of 2018 as economic indicators indicate as the country benefited from a rising oil price and increased production amongst other factors. ANTHONY AWUNOR, OLUSHOLA BELLO, ZAKA KHALIQ, JIDE FABAMISE, FIDELIS UGBOMEH, and BUKOLA IDOWU.
For the first six months of 2018, the Nigerian economy recorded improvements that were engendered by increasing business activities, rising oil prices in the global market, increased oil output by the country, declining inflation and increased inflow of foreign exchange.
Economic indicators have remained positive since the beginning of the year except for the equities market which saw a lot of volatility but still closed slightly positive, and the manufacturing sector which continued to complain of the lack of access to cheap finance.
The late signing of the budget had slowed down activities as the annual Gross Domestic Product (GDP) growth rate had slowedfrom 2.11 per cent in the last quarter of 2017 to 1.94 per cent in the first quarter of the year. Purchasing Managers Index (PMI) which measures business activity in the country has been expanding faster hovering between 56 and 57 index points since the beginning of the year.
Investor optimism over the recovery of Nigeria’s economy skyrocketed during the early parts of 2018 after the nation pulled itself out of recession.
Naira Appreciates, Inflation Eases
The flow of dollars and the stability of the naira as well as the Bilateral Currency Swap Agreement which Nigeria signed with China have been a major boost for the economy. Whilst inflow of foreign exchange through the Investors’ and Exporters’ window have been stable, the Central Bank of Nigeria maintained its regular interventions through dollar sales.
Earlier in the year, the CBN and the Peoples Bank of China (PBoC) had signed a currency swap agreement that is aimed at promoting bilateral trade between the two countries and reduce the dollar pressure on the naira. The value of the naira at the I&E window had appreciated from N362 to hover around N360 whilst it sold at N359 at both the bureau de change and parallel market.
FXTM analyst, Lukman Otunuga noted that the healthy combination of easing inflationary pressures, foreign exchange stability and rising commodity prices stabilized Nigeria’s macro fundamentals. With domestic conditions clearly improving and foreign investor appetite increasing, expectations were elevated over the CBN cutting interest rates to stimulate further growth.
“The outlook for Nigeria looked highly encouraging up until mid Q2 when economic growth slowed for the first time since the end of the recession. Sentiment was dented further by the repeated delay of the 2018 budget which was finally passed in June 2018. Although Nigeria managed to hold its ground during the first half of 2018, it must be kept in mind that the nation remains vulnerable to external shocks – namely oil price volatility and an appreciating Dollar”, he stated.
The country’s debt level also increased alongside the improving economic indicators with the foreign and local obligations of the country rising to N22.7 trillion. Also the burden of domestic debt service continues to mount. In the 2017 calendar year it reached N1.48 trillion, and the 2018 budget projects a total of N2.01 trillion for domestic and external obligations combined but excluding sinking fund contributions for the settlement of arrears to contractors and other private-sector creditors.
ASI Gains 0.09 % In 6 Months
At the equity market the first half of year despite a volatile performance closed with a marginal gain of 0.09 per cent on a continued selloff and profit booking that wiped off the unprecedented rally recorded in January as the bullish ascendancy in 2017 extended into 2018.
The Nigerian Stock Exchange All Share Index (NSEASI), which measures the performance of the equity market, appreciated by 0.09 points to close at 38,278.55 on June 29, from 38,243.19 at which it opened for the year. Similarly, market capitalisation gained N257 billion, from N13.609 trillion at which it opened trading on January 2, 2017 to close at N13.866 trillion for the half year.
The stocks market which started the year on a strong bid with 15.95 per cent growth. Took a reverse from the month of February to May with 2.28 per cent, 9.55 per cent, 0.57 per cent and 7.67 per cent loss respectively, while the market gained 0.46 per cent in June. The last week in the month of June gain pushed the first half of the year back to positive with a year-to-date gain of 0.09 per cent.
The volatility in the stocks market according to analysts was largely hinged on investors’ negative sentiments, as well as the rise in US Treasury yields, which averted foreign inflows from risky assets in emerging markets, including Nigeria to the more attractive risk-less US treasuries.
They noted that this led investors to ignore the notable positives in the Nigerian economy, continued GDP growth, although at a slower pace, accretion to the foreign reserves and stability of the naira, supported by increased oil prices and stable production, continued decline in monthly inflation, 15th consecutive decline to 12.48 per cent in April, and expansion of the Nigerian PMI (Manufacturing and non-Manufacturing sectors).
Head, Equities of FBNQuest Capital, Bunmi Asaolu, said, “our view is that the macro outlook is still supportive, with oil prices remaining firm, and that this should offset potential uncertainty stemming from political risk going into H2 2018. Although we do not expect consensus earnings estimates to see significant upwards revisions through the rest of the year, valuations are yet to fully capture earnings outlook expectations, especially among the tier one banks. As such, we expect the index to recover lost ground, with a minimum of 10 per cent gain by the end of the year.”
Chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion said that stocks equity market in the first half of year had a volatile performance, a situation that can be blamed primarily on a lack of economic direction and weak economic activities capable of boosting investor confidence.
He also added that the absence of a budget until the twilight of the first half, when the President grudgingly assented to budget that spent over six months within the chambers of the National Assembly in an election year, when politicking is known to take precedence over governance, as politicians jostle for elective positions.
He however noted that market fundamentals remained strong and share prices of many blue chip companies were trading below their intrinsic values, urging investors to take advantage of the cheap prices to increase their stakes in the quoted companies.
Microinsurance Guideline Takes Off
The federal government through the National Insurance Commission (NAICOM) had in the first half of the year launched a revised Microinsurance Guideline to cater for about 80 million low income earners in the country. With the new guideline, microinsurers are expected to simplify insurance policies, make it affordable for low income earners and the poor, thus, deepening insurance acceptance in the country.
The new move is expected to increase insurance penetration from 0.6 per cent it is currently to over two per cent in the near future, as well as increase the annual premium income of insurance industry to N1 trillion by Year 2020.
The Monetary Policy Committee of the Central Bank of Nigeria (CBN) had left benchmark lending rates unchanged at 14 per cent whilst actual lending rates by banks hovered around 27 and 30 per cent, a rate manufacturers say is too high to support local production.
According to the President of the Lagos Chamber of Commerce and Industry (LCCI), Babatunde Ruwase, with commercial bank lending rate at between 20-35 per cent, depending on the borrower and other factors such as acceptability of collateral, it is very difficult to successfully access fund by the private sector especially the SMEs in the first quarter.
Ruwase said “we note the efforts of government through CBN and the Bank of Industry (BOI) to extend intervention funds to operators. However, the range of beneficiaries and economic wide impact of government intervention funds remain very limited. Investors in many sectors cannot finance projects profitably at an interest rate above 10 per cent. These sectors are majorly agriculture, real estate, solid minerals among others.”
Asides the financing challenges that plagued the manufacturing sector, operators also lamented the effects of several government policies on the sector. President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Iyalode Alaba Lawson, said utilisation of local raw materials in the country has steadily increased over the past three years, hitting 63.21 percent in 2017, due to increasing government support for backward integration.
She noted that despite the increased in government support for the backward integration, “there is still consecutive decline in inflation rate alongside a positive growth in the economy, the inflation rate remains high and steps must be taken to redress the imbalance, especially for a country like Nigeria.
Also speaking, the President, Manufacturers Association of Nigeria (MAN) Dr. Frank Jacobs, stated that the rise in inventory is attributable to low purchasing power of consumers. According to him, even though access to foreign exchange has improved, there is a gap that is still void, adding that local producers have a huge inventory of unsold stocks lying in their warehouses.
“If local manufacturers produce and cannot sell, there is nothing that can be done. The disposable income of the average Nigerian has been eroded. We are trusting that government will continue to work on reducing inflation and making forex available while policies to ease business dealings in Nigeria are effectively implemented,” he added.
Jacobs, however, urged government to offer effective and beneficial stimulus to interest rate sensitive sectors to further propel growth as the economy is still largely static and fragile and urgently requires stimulus within the remaining quarter.
He added that efforts should be made to consult with the Monetary Policy Committee to find ways and means of lowering interest rate to prevent the economy from being chocked and the rate of recovery being slowed down.
Similarly, the LCCI noted that Nigeria’s gas pricing policy and high logistics cost have continued to negatively impact on production costs in the nation’s manufacturing sector. On gas pricing, Ruwase explained that the pricing policy have been imposing a lot of burden on the manufacturing sector.
In the aviation sector, the first half of 2018 has been very rewarding with a positive outlook. At the beginning of the year, Nigeria recorded a successful C-check on a Boeing 737 aircraft. The achievement was made when Aero Contractors Airlines in its recently approved Maintenance, Repair and Overhaul (MRO) facility at the Muritala Mohammed Airport (MMA), Lagos carried out the maintenance check on one of the aircraft in its fleet, Boeing 737 classics with the registration number 5N-BLG. This is coming 14 years after the liquidation of the former national carrier, Nigeria Airways.
Before now, Nigeria airlines have been carrying out major checks on their aircraft outside the country which costs an airlines at least $1 million (about N365m) to carry out a comprehensive check on their aircraft. With the successful verification of C-check on a Boeing 737 classics by the airline, such checks would now be carried out in the country while capital flight would also reduce.
The period under review was a time when the preparation for a national carrier gained serious momentum. So far, the honourable minister of state, Aviation has declared December 24th, 2018 as the take-off date for the new national carrier. To ensure that the date is feasible, Sirika had set up a 9-man committee to midwife and see that the airline starts operations unfailingly in five months’ time.
Removal of VAT from Local Airlines
In the first half of 2018, the federal government also issued an Executive Order for the removal of Value Added Tax (VAT) from “All Forms of Shared Transportation”, including the airlines.
Commending the federal government on such step taken, Chairman of Airline Operators of Nigeria (AON), Sir Nogie Meggison said “the recent decision by the federal government to remove VAT from Domestic Air Transportation will go a long way to bring succor to groaning Nigerian travelers to be able to afford to travel by air and the growth in demand for domestic air travel will lead to the creation of jobs by the whole air transport service chain (airlines, airports, ground handlers and catering companies) as well as increase revenues for government.
Such waiver, Megisson pointed is expected to turn around the airlines to be able to grow the economy and contribute positively to the GDP and create more jobs for our Nigerian youths. Despite these giants feats achieved within the period, airlines have continued to face the challenges of high cost of Jet A1 known as aviation fuel, unresolved challenges associated with visa free movement, uneven taxation & multiple charges, non-availability of electricity supply amongst others.
Another major event that marked the first half of the year is the indefinite suspension of the Air Operators Certificate (AOC) of First Nations Airways on May 13th, 2018 by the Nigerian Civil Aviation Authority (NCAA).
According to the aviation regulatory body, the suspension was due to the flagrant and continuous violation of the terms and conditions of issuance of its AOC by the airline thereby carrying out unauthorised and illegal operations.
Rail Lines Improvements
The Nigerian Railway Corporation has in the last six months of this year recorded improvement as regards the ongoing construction of Lagos to Ibadan Standard gauge railway line, although the locomotive engines currently used in operating the narrow gauge railway line breakdown at regular intervals thus eroding the confidence of importers and oil marketers to use the rail mode to move their consignments.
While significant progress has been made concerning civil work on the construction of Lagos to Ibadan Standard gauge railway line, only few kilometers of tracks has so far been laid. Minister of Transport Rt. Hon Rotimi Amaechi had during the monthly inspection of the project recently attributed slow pace of laying tracks to the raining season.
The federal government also imported two locomotive engines and coaches to provide passenger service from Abuja to Kaduna and back. According to the managing director passengers plying the Abuja-Kaduna axis are beginning to appreciate the value of using train service as a better alternative. He disclosed that having completed laying of track from Warri to Itakpe, there would be a test run on the track this week before commencement of passenger train service in that axis next month.
Similarly, the federal government signed a contract with China Engineering and Construction Company (CCECC) for the construction of the second phase of Standard gauge railway line from Ibadan to Ilorin. Besides, another contract was signed in the United States with General Electric for concession of the Corporation to General Electric. Based on the one year interim agreement, 200 wagons and 20 locomotive engines are expected to be supplied for the provision of freight service.
Looking ahead into the second half of 2018, analysts posited that Nigeria’s recovery remains threatened by external risks. Otunuga noted that an appreciating dollar has punished emerging market currencies while prospects of higher US interest rates continue to trigger capital outflows. Although the naira has witnessed stability despite an aggressively appreciating dollar, the CBN can only intervene so much before the local currency weakens like many other emerging market currencies.
“A global trade war presents a significant risk to Nigeria, especially when considering how the United States and China remain its biggest trading partners. If a trade war negatively impacts global growth and demand for commodities, this could spell trouble for Nigeria which remains heavily dependent on earnings from oil exports. There is scope for the CBN to cut interest rates in H2 but this remains heavily dependent on easing inflationary pressures and steady economic growth.
While the outlook for Nigeria this year is more positive than negative, the nation must continue its quest of diversifying by deriving economic growth from other sustainable sources.
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