Vanguard Markets | Monday, November 10, 2014 | Issue 018
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Volatility ahead The Nigerian economy is sailing dangerously close to a perfect storm. The price of oil, the country’s main export, has fallen sharply in recent weeks wreaking havoc on exchange rates with no end in sight as Saudi authorities play a game of chicken with shale producers in the United States. Add to that fears of fiscal indiscipline motivated by the political business cycle leading to elections in February 2015. Top it all off with an expanding terrorism-fuelled insurgency in the north-eastern part of the country. Totalled up it has led to nervousness among the large cohort of foreign portfolio managers on the Nigerian Stock Exchange, a pause on new investment, and general seat-belt buckling in preparation for a rough ride in 2015.
The country is like a household. There may be periods that your income may shrink because of some unforeseen circumstances and you must adjust. – Dr. Ngozi Okonjo-Iweala, coordinating minister of the economy
‘I can explain’. Ngozi Okonjo-Iweala, primus inter pares in the Federal Executive Council, stressing a point.
Turbulence! Fasten seat belt sign on IGERIA’S POLICY makers are battening the hatches. Two weeks ago, the Central Bank of Nigeria expressed its concern over ‘the growth in foreign currency borrowings of banks through foreign lines of credit and issuance of foreign currency denominated bonds (Eurobonds).’ Figures released by Afrinvest, an investment bank, show that this year alone, the country’s banks led by Zenith Bank, First Bank, Diamond Bank, and FCMB, have raised about $2 billion through this means, and $4
N
billion since 2011. Sterling Bank has joined the queue with plans to issue up to $200 million in Eurobonds in 2015. These figures have sparked anxiety among the country’s economic managers that the end of quantitative easing by the US Federal Reserve could cause a hike in rates with domino effects on borrowers’ balance sheets. To protect the banking sector, the CBN lowered the ceiling on foreign currency borrowing by financial institutions to 75 percent of shareholders’ funds. Under the previous rule, Section 6 of the Guidelines for Foreign Borrowing for on-Lend-
ing by Nigerian Banks issued in November 2001, they were allowed to borrow up to 200 per cent of shareholders’ funds in foreign currency. According to a report by Reuters, the CBN is also seeking ‘to ease pressure on the naira as banks borrow more dollars to cover interest payments offshore and as demand for imported goods stays high at 80 percent of all non-food consumption.’
Austerity syrup one drop at a time Last week the apex bank issued a circular wherein it stated that ‘in order to maintain the existing stability of the for-
eign exchange market and to further strengthen the various policy measures initiated by the Central Bank of Nigeria’ it would henceforth exclude certain consumer-focused items from the Retail Dutch Auction System (RDAS). Affected were generators, finished products, information technology, telecoms equipment, and invisible transactions. These account for up to 50 percent of forex demand at the auction. Importers who deal in these items would now have to source funds from the interbank foreign exchange market. The action provoked acute volatility in the interbank market causing the naira to
shed N2.75, falling to a low of N170.10 to the dollar. The CBN’s latest move is a policy admission that the federal government can no longer bear the burden of meeting forex demands in the face of dwindling foreign earnings as oil prices continue their downward spiral. Oil prices have fallen more than 40 per cent from a peak of $115 a barrel in July to a 5-year low of $82 per barrel this month. Crude oil sales account for 80 per cent of the country’s fiscal revenue and about 95 percent of foreign exchange earnings, writes Ayodeji Ebo of Afrinvest. By itself, the list of excluded items would not seem a big deal when misjudged as a oneoff act. It is not. On deeper reading, it marks a big shift that going forward the belt hole is going to be clasped a couple of notches tighter.
It’s the elections, schtupid The RDAS exclusion circular is the first salvo in a long overdue restructuring of the Nigerian economy postponed
since the January 2012 fuel subsidy removal stalemate. The federal government backed down then due to political considerations in recognition of President Jonathan’s delicate mandate despite winning elections months earlier. The drop in oil prices presents the perfect excuse for a ‘shock therapy program’ most likely to be launched no later than the middle of next year. It would include the removal of the subsidy on fuel, the devaluation of the naira, possibly a reset on the sharing formula of the excess crude account (ECA) between the federal government and state governments, and a slew of austerity measures. President Goodluck Jonathan and the People’s Democratic Party need to win and win convincingly big too at the legislature and state levels to assure the political legitimacy required to carry out the wholesale reforms being pressed by international financial institutions.
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FIXED INCOME & FOREX
Source: FMDQ