Economy: Nigeria on a Rough Road to Recovery

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LUKMAN OTUNUGA
LUKMAN OTUNUGA
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By Lukman Otunuga

Research Analyst at FXTM, Lukman Otunuga, writes on the Nigeria’s tedious task of economic recovery.

The rising confidence in the recovery of Nigeria’s economy was dealt a heavy blow in May following reports of the nation’s first quarter GDP growth for 2017 contracting by 0.52%.

Sentiment towards the nation is likely to turn bearish in the short term as investors become defensive and reassess if economic growth will follow a negative trajectory this year.

While the current contraction is nothing to celebrate, it should be kept in mind that it remains the best performance seen in four quarters.

With many sectors of the Nigerian economy already roaring back to life this year, bullish impacts are likely to be seen in the second and third quarter of 2017.

Investors must keep in mind that Nigeria has been exposed to downside shocks since the sharp depreciation of oil with rising inflation, tepid economic growth, and a foreign exchange dilemma all adding to the pressure.

External risks such as oil price volatility and a potential U.S interest rate increase remain causes for concern in the short term that could create fresh tremors. Despite all the difficulties laid-out, the longer-term outlook for Nigeria remains bright, especially when considering how inflation is stabilizing and non-oil sectors such as manufacturing, agriculture and transportation are building momentum.

Consumer prices in Nigeria declined for the third consecutive month in April at 17.25%, which is very encouraging.

The visible display of price stability will most likely boost investor confidence towards the nation further and ultimately support growth. With April’s solid Purchasing Manager Index of 58.9 also highlighting a strong rebound in business activity as the nation stabilizes, the long-term bullish sentiment should remain supported.

The Nigerian parliament has already approved the government’s seven trillion budget to revive the economy, which may prove to break the nation away from recent recessionary chains.

Focusing on the foreign exchange outlook, the Central Bank of Nigeria has repeatedly intervened this year with a recent injection of $225 million easing some pressure on the Naira.

While the injection of cash may continue to support the Naira on the parallel markets, questions should be asked over its sustain ability. With the nation’s foreign exchange reserves dropping to $30.78 billion as the CBN defends the local currency, the central bank must look to alternative methods to stabilize prices.

For Nigeria to truly evolve and transition into a heavyweight in the global arena, the multiple exchanges should be eliminated with supply and demand determining the real value of the Naira.

From a technical standpoint, a vulnerable Dollar created from uncertainties surrounding Trump’s presidency has the ability to support the Nigerian Naira in the parallel exchange, with traders observing how prices react to 350.

Despite efforts to reduce its economy’s reliance on oil, Nigeria continues to be exposed to external risks due to oil market volatility. With OPEC potentially asking Nigeria to cut oil output in the pending OPEC meeting on May 25, the country’s 2017 budget which has been benchmarked against an oil production of 2.2 million barrels per day could be threatened.

The outlook for oil still remains bearish despite the probable nine-month extension to the supply cut deal with markets heavily focusing on how U.S Shale responds. If oil prices find comfort below $40 this year and Nigeria is forced to cut production following the OPEC meeting, this will impact government revenues and slightly obstruct the road to recovery.

2017 will be a critical test for Nigeria with foreign investors heavily scrutinizing economic data and central bank policies to gauge the health of the economy.

It is common knowledge that the largest economy in Africa needs to achieve a stable macroeconomic climate, heavily reinvest in agriculture when diversifying, and boost infrastructure to generate sustainable economic growth.

The subtle signs of stability remain visible with Nigeria’s stock exchange edging higher amid the improving sentiment while the one billion Federal Government Euro bond on the NSE continues to verify how confident foreign investors have become with regards to Nigeria’s future.

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