Nigeria Growth Forecast

Economics 6 March 2009

Nigeria: Annual economic outlook The need to diversify the export base away from oil

Victor Munyama

Despite Nigeria’ s domestic economic challenges (the unrest in the oil-

second half of 2008, the average crude oil production declined

producing Niger Delta region, poor electricity supply and major

averaged 1.90 mbd. During 2008, crude oil production declined from a

infrastructural

growth

high of 2 mbd in March to 1.85 mbd in December. The bonny light spot

momentum in 2008. The country continues to show signs of a pro-

price averaged about US$87.4 per barrel in the second half of 2008.

reform, pro-investment environment, which attracted a lot of interest

The poor performance of the oil sector also led Angola to surpass

from the regional and international investor community. The policy

Nigeria as the leading oil producer in Africa during April 2008. Overall,

framework continues to improve. Despite being an emerging economy

the Nigerian economy was left to depend on the performance of the

characterised by traditional sectors such as agriculture, manufacturing

non-oil sector as the oil sector continued to contract.

constraints),

the

economy maintained

its

and trade, the country is still seen through its oil sector (being the

Figure 1: Real GDP growth (%)

largest oil producing nation in Sub-Saharan Africa – SSA), with an estimated 32 billion barrels of oil reserves located along the coast and shores of the Niger River Delta. It is also estimated that the country has about 100 million cubic feet of natural gas reserves. However, the nonoil sector (agriculture, services, telecommunications and construction) has been the primary driver of growth, following a continued contraction in the oil sector in the past few years.

Projections for 2009: •

Real GDP growth is expected to slow down to 3%

•

Oil production is expected to average 1.89 million barrels per day

30 25 20 15 10 5 0 -5 -10 2003

Oil GDP

Naira exchange rate should depreciate to an annual average of NGN151.50/USD

•

Average annual inflation to increase to 13%

•

Current account deficit expected to be 0.2% of GDP

•

Fiscal deficit expected to be 3% of GDP

Recent trends Production The unrest in the Niger Delta region, which intensified in the first half of 2008, disrupted crude oil production throughout 2008. Including condensates, crude oil production declined by 0.2 million barrels per day (mbd) to average 1.94 mbd in the first half of 2008 compared with the same period in the previous year. Over the same period, the

2005

2006

Non-oil GDP

2007

2008e

Real GDP

Source: National Bureau of Statistics

(mbd) •

2004

It was still evident in 2008 that the non-oil sector, which contributes about 80% to total GDP, remains the overall driver of growth in the Nigerian economy. In the first half of 2008, real GDP growth slowed to an average of 6.1% from an average of 7.2% in the second half of 2007. The growth in the non-oil sector also softened to 8.7% in the first half of 2008 compared with 10.3% in the second half of 2007. The oil sector continued to disappoint as it contracted by 3.3% in the first half of 2008 compared with a 4.7% contraction in the second half of 2007. Overall, the economy is estimated to have grown by 6.8% y/y in 2008 compared with 6.2% y/y in 2007. The non-oil sector (particularly agriculture) is estimated to have grown by 9.5% y/y in 2008 while the oil sector contracted by 4.5% y/y over the same period.

Nigerian reference spot price for crude (Bonny light) averaged US$114

Even though the agriculture sector (which constituted about 42% of

per barrel compared with an average of about US$70 per barrel. In the

GDP in 2007 and accounted for over 60% of employment) remains

the dominant sector in terms of its contribution to non-oil GDP, real

infrastructure, and low water level at the hydro power stations

growth was more broad-based in the first half of 2008. The agriculture

severely affected electricity generation. Also, high power outages and

sector grew by 6.3% in the first half of 2008, accounting for about

emergency load shedding led to significant decline in electricity

39.8% of GDP. Other sectors, building and construction, wholesale

consumption to about 1,900 Mw/h in the first half of 2008. This was a

and retail trade, and services, grew by 13.1%, 12%, and 10.3%,

10.4% decline compared with the first half of 2007.

respectively. Industrial output (which constituted about 22.1% of non-

Nigeria’ s crude oil production continues on its declining path since a

oil GDP) declined by 1.9% in the first half of 2008 mostly due to poor

production peak of 2.5 mbd recorded in 2005. In the first half of 2008

infrastructure, especially poor electricity supply.

production averaged 1.98 mbd compared with an average of 2.16 mbd in the second half of 2007.

Figure 2: Gross domestic product by activity (2007)

Figure 3: Oil production and price

Telecommu nication, 2.3 Manufacturi ng, 4.0 Wholesale & retail trade, 16.2

Finance & insurance, 3.9

Others, 10.3

Building & construction, 1.7

Agriculture, 42.0

million bpd

3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

Oil & gas, 19.6

2005

Source: National Bureau of Statistics

US$/barrel

2006 Total production

2007

160 140 120 100 80 60 40 20

2008

Bonny Light spot price (RHS)

The slowdown in the agriculture sector was due to, among other factors, poor infrastructure, the global food crisis, and increases in

Source: Central Bank of Nigeria

prices. Responding to the crisis, the government undertook certain The continued decline in production was due to instability in the Niger

measures aimed at boosting either production or supply of agricultural

Delta region. Oil exports averaged about 1.49 mbd in the first half of

products. Some measures included: approving a tax holiday for

2008 compared with 1.71 mbd in the second half of 2007. However,

importers of rice between May and October 2008, approving the

owing to the rise in the gas/oil ratio in the wells, gas production

rehabilitation of dilapidated irrigation infrastructure and expansion of

increased by 17.1% to an estimated 30.09 million cubic metres

the irrigation schemes, and also constructing 25 new silos to improve

3

3

(MMm ) in the first half of 2008 from 25.70 MMm in the second half

the storage capacity of the National Food Reserve. The government

of 2007. Of the total gas produced, only 67.7% was utilised while

also implemented the Guaranteed Minimum Price for the buyer of last

32.3% was flared.

resort scheme. Overall, the agricultural production index slowed down to 4.8% in the first half of 2008 from 7.4% in the second half of 2007.

Figure 4: Gas production and utilisation (million cubic metres)

Even though the agricultural output was slower in the first half of 2008

35

compared with the second half of 2007, growth was still recorded

30

across all sub-sectors. Average world prices of Nigeria’ s major

25

agricultural export commodities at the London Commodities Market

20

(cocoa, coffee, cotton, palm oil, copra, and soya bean) also trended

15

upwards, increasing by 18.8% in the first half of 2008 compared with

10

36.1% in the corresponding period in 2007. This was mainly due to

5

supply shortages in the international markets.

0 1H2006

The decline in the index for industrial production by 1.6% in the first half of 2008 was due to a decline in both manufacturing production

2H2006

Gas produced

and electricity consumption. Performance in manufacturing production

1H2007 Gas utilised

2H2007

1H2008

Gas flared

Source: Central Bank of Nigeria

continued to be constrained by poor infrastructure, especially poor electricity supply, poor road networks, and a high pump price of

Monetary policy

diesel. Also, most locally produced goods continued to fare poorly Owing to mounting international and domestic pressures, headline

due to unfair competition from imported finished products.

inflation, which had remained subdued and in the single digits since In the first half of 2008 electricity generation fell by 8.1% to about

June 2006, surged into double digits beginning June 2008. A

2,600 mega-watts per hour (MW/h) compared with the corresponding

combination of high food and energy prices and fiscal expansion saw

period in 2007. The continued disruption of gas supply, attacks on

inflation increasing significantly from 6.6% y/y in December 2007 to 2

9.7% y/y in May 2008. Overall, headline inflation averaged 11.5% in

average low of negative 1.3% y/y in March to an average of 15.3% y/y

2008 compared with 5.4% in 2007. Even though the energy prices,

in December 2008. Most of the increase in these ‘ core’measures of

which constitute about 18.1% of the consumer price index (CPI) basket,

inflation was also the result of expansionary fiscal policy and high

averaged 6.2% in 2008 compared with 10.2% in 2007, the second

export revenues that drove up domestic liquidity in most of 2008. The

round effect of high energy prices in the first half of 2008 became more

disbursement of about US$8.2 billion from the Excess Crude Account

evident throughout the year. That is, despite being Africa’ s largest oil

(to be disbursed in naira) in 2008 and a further allocation of US$10.24

producer, the country continues to import about 90% of its petrol

billion to address the major shortfall in the energy sector led to

requirements because of a lack of sufficient refinery capacity. The

significant increase in domestic liquidity, thereby also exerting high

energy prices increased from an average low of 1.7% y/y in May to

inflationary pressures.

average 11.7% y/y in December 2008.

The continued rise in headline inflation during 2008 can also be attributed to a significant increase in money supply growth. Higher fiscal

Figure 5: CPI inflation (%)

expenditure in the budget as the country continued to tackle its

50

infrastructure deficits, and the disbursements of oil savings from the

40

Excess Crude Account to state governments led to a significant

30

increase in domestic money supply. Broad money supply (M2) recorded

20

some of its highest levels ever, increasing by 100.1% y/y in March

10

2008. However, following the increased global financial crisis, broad

0

money growth began slowing down in the second half of 2008. On average, M2 increased by an average of 55.7% in the second half of

-10 2005

2006

2007

CPI inflation

2008 Food

2008 compared with an average of 87.4% in the first half. Overall, M2

2009

increased by an average of 71.6% in 2008 compared with an average

Non-food

of 33.7% in 2007.

Source: National Bureau of Statistics

Figure 7: Money supply and credit growth (%)

Food prices were the primary driver of inflation in 2008. The global

120

shortages of food drove the food component (which constitutes about

100

64% of the CPI basket) into double digits throughout 2008. Food

80

inflation increased from an average of 8.7% y/y in February to an

60

average of 17.9% y/y in December 2008 also due to high importation

40

costs. Food imports constitute about 5% of GDP. Overall, food inflation

20

averaged 15.8% in 2008 compared with 1.9% in 2007. Despite controls

0

on domestic fuel and electricity prices aimed at insulating the core

-20 Jan-03

inflation (headline inflation excluding food), non-food inflation increased

Jan-04

Jan-05

M2

from an average low of 0.5% y/y in March to an average of 10.4% y/y in December 2008. Overall, core inflation averaged 5.6% in 2008

Jan-06

Jan-07

Jan-08

Private sector credit extension Source: Central Bank of Nigeria

compared with 9.4% in 2007. The surge in broad money growth was due to significant increase in Figure 6: CPI weights

domestic credit and net foreign assets of the banking sector. The banking sector reforms coupled with the positive business environment 18%

and sharp decline in credit extended to government led to an increase

4%

in private sector credit lending. Credit extended to the private sector

4%

(PSCE) reached record levels, increasing by as much as 103.7% in

64% 3%

April 2008. The global financial crisis led to credit contraction globally as

2%

financial institutions tightened their lending criteria. The banking sector

5%

came under severe pressure as confidence in the financial markets took Food & non-alcoholic bev. Transport Clothing & footwear Other

Hse water, elec, gas & other fuel Furn & hshld equip maint Alcohol, tobacco & kola

its toll. Banks were forced to stop or reduce lending and also recalled some of their loans. PSCE grew by 70.4% in the second half compared with 100.1% in the first half of 2008. Overall, PSCE increased by an average of 85.2% in 2008 compared with an average of 59.2% in 2007.

Source: National Bureau of Statistics

Net foreign assets increased by an average of 13% in 2008 compared The broad-based increase in prices was also evident in the increase in

with an average of 30.7% in 2007.

headline inflation excluding energy and food, which increased from an

3

Figure 9: Exchange rate

In the first half of 2008, the Central Bank of Nigeria (CBN) came under pressure to fight the looming inflation stemming from high global food

160 155

and energy prices, excess liquidity due to high oil prices, and fiscal expansion. As the stable inflation environment evident in 2007 began to

150 145 140

show signs of dissipating, the CBN was forced to tighten monetary policy in the first half of 2008. By June 2008, the Monetary Policy Rate (MPR) had been increased by 75 basis points from 9.5% to 10.25%.

135 130

Following the worsening state of global financial markets, the CBN

125 120 115

instituted several measures in an attempt to address the liquidity pressures in the system. In an emergency Monetary Policy Committee (MPC) meeting on 18 September 2008, the MPC decided to reduce the

2006

MPR by 50 basis points from 10.25% to 9.75%. The Cash Reserve

2007 Naira/US$

Requirement (CRR), having been increased from 3% to 4% in June

2008 2009 Budget exchange rate (Naira/US$)

2008, was reduced from 4% to 2%. Liquidity requirement for banks was

Source: Bloomberg and the Federal Ministry of Finance

reduced from 40% to 20%. The CBN’ s lending facilities to the banks

The sustained stability of the naira exchange rate waned in the second

was expanded from overnight to 360 days. These measures injected a

half of 2008 mainly due to further negative developments in the global

significant amount of liquidity into the system.

economy. The decline in the private capital inflows, and continued

Figure 8: Interest rate (%)

decline in the oil prices led to a significant increase in the demand for foreign exchange in the Wholesale Dutch Auction System (WDAS),

20

beginning October 2008. In the second half of 2008 the naira exchange

16

rate averaged NGN120.07/USD, having depreciated by about 18% between November and December 2008. The CBN’ s intervention in the

12

foreign exchange (forex) market did not stop the naira’ s depreciation as

8

the currency depreciated to about NGN156/USD at some point in

4

January 2009. Heavy intervention also led to a significant decline in the country’ s foreign exchange reserves, which declined from about US$64

0 2005

2006 Policy rate

2007 Prime

billion in October 2008 to about US$52 billion in December 2008.

2008

Various measures were undertaken in an attempt to arrest the negative

91-day TB

developments around the naira exchange rate.

Source: Central Bank of Nigeria Financial markets The commercial bank’ s average prime lending rate, which had declined Even with the evidence of the Nigerian financial market rapidly

to 13.5% in December 2007, increased to 16.1% in December 2008.

integrating into the global markets and high growth performance, the

The prime lending rate averaged 16% in 2008 compared with an

financial sector remains relatively shallow by international standards.

average of 15.7% in 2007. The 91-day Treasury bill (T-bill) rate, which

Foreign investors’interest in naira assets amid strong global liquidity

remains the reference rate on which other rates are based, declined

and the continued search for yield in global markets experienced in

from a high of 9.2% in July to 6.9% in December 2008. We expect

2007 seems to have disappeared in the first half of 2008. The Nigerian

monetary policy to remain accommodative in 2009. The CBN will have

Stock Exchange (NSE) experienced some bearish performance in the

to balance the challenges posed by excess liquidity in a high interest

first half of 2008. Activities in both the primary and secondary market

rate environment and fighting double-digit inflation.

declined. The market capitalisation of all listed securities declined by As Nigeria is a highly import-dependent country, the naira exchange

9% in the first half of 2008 compared with the second half of 2007. The

rate remains a yardstick by which Nigerians measure the standard of

NSE All-Share Index declined by 3.5% at end-June 2008 compared to

living.

end-December 2007.

Also, the Nigerians

continue to measure

government’ s

performance in terms of the currency’ s performance in the international The declining trend in the stock exchange continued during 2008 mostly

markets. Thus, maintaining a stable exchange rate is not just important

due to the global financial crisis. The meltdown in the world financial

for preserving the purchasing power of the naira but it is also part of the

systems and continued negative sentiments and lack of confidence in

monetary policy strategy. One of the CBN’ s statutory mandates is to

the banking sector led to sharp drop in the NSE All-Share Index that is

“safeguard the international value of the legal tender currency”. The

heavily dominated by the banking stocks. The NSE All-Share Index was

execution of this mandate has been evident in the sustained stability of

also affected by significant outflow of portfolio as foreign investors seek

the naira exchange rate, which has fluctuated around the budget set

safe haven for their investment. The NSE All-Share Index declined by

exchange rate in the past two years. In the first half of 2008, the naira exchange rate averaged NGN117.55/USD. 4

Figure 11: Foreign exchange reserves (US$ million)

about 66% from a high of 65,000 points in February 2008 to 21,000 points in January 2009.

70000 60000

Figure 10: Nigeria stock exchange

50000 40000

All share index

70000

30000

60000

20000

50000

10000 0

40000

2003

30000

2004

2005

2006

2007

20000

2008

Source: Bloomberg

10000 2003

2004

2005

2006

2009

Owing to the high levels of imports, the first half of 2008 saw the trade

Source: Bloomberg

balance decline by 25.6% to N1,552.0 billion (US$13.3 billion)

2007

2008

compared with the second half of 2007. The continued disruptions in oil

External sector

production in the Niger Delta region led to a decline in oil exports (which

Even with the strong performance of the non-energy sector and

accounted for about 99% of the total exports in the first half of 2008).

government’ s efforts to diversify away from the oil, the country’ s

Due to the high cost of the business environment caused by poor

external sector performance continues to rely heavily on the oil sector.

infrastructure, non-oil exports (accounting for about 1% of total exports)

Crude oil exports account for about 90% of the total exports volume

declined by 57.2% in the first half of 2008 compared with the second

while generating about 95% of export earnings. Significant disruption in

half of 2007. Of the non-oil exports, agricultural produce constituted

oil production was well compensated for by the high oil price such that

about 66% of the total in the first half of 2008 while minerals, semi-

the country continued to record a strong current account surplus. During

manufactured, manufactured, and others constituted about 9.6%,

the first half of 2008, Nigeria recorded a balance of payments surplus of

12.1%, 11.5%, and 0.2% over the same period, respectively. Overall,

N999.0 billion (US$8.5 billion), which was slightly lower than the

aggregate exports declined by 10.7% in the first half of 2008 compared

N1,073.3 billion (US$9.2 billion) surplus recorded in the second half of

with the second half of 2007.

2007. This positive development continued to show a favourable trade

Figure 12: International trade (US$ billion)

balance, which was mainly driven by high crude oil prices, significant inflows of foreign direct and portfolio investments, and high capital

50

inflows in the form of remittances.

40 30

The current account surplus narrowed slightly to N2,355.9 billion

20

(US$20.1 billion) in the first half of 2008 compared with N2,371.4 billion

10

(US$20.3 billion) in the second half of 2007. The first half of 2008 also

0

saw pressures on the capital and financial account moderating as the

-10

deficit narrowed by 70.1% to N153.3 billion (US$1.3 billion), which was

-20

1.1% of GDP, from N512.7 billion (US$4.4 billion) in the second half of

-30

2007. High crude oil prices also led to a significant increase in the

1H2007

external reserves, which increased to an average of about US$58 billion

Exports

2H2007 Imports

1H2008 Trade balance

(about 16.6 months of import cover) in the first half of 2008 compared with an average of US$48 billion (about 15.2 months of import cover) in

Source: Central Bank of Nigeria

the second half of 2007. By the third quarter of 2008, gross external

The import bill continued to rise as import increased by an average of

reserves had increased to about US$64 billion (about 17.3 months of

1.8% in the first half of 2008 compared with the second half of 2007.

import cover).

Non-oil imports constituted about 81.2% while oil imports constituted about 18.8% of the total imports. Of the non-oil imports, the industrial sector accounted for about 41.1% of the total imports. Finished goods (food and manufactured goods), transport, minerals, agriculture, and others accounted for 36.6%, 6.1%, 0.9%, 1%, and 14.3% of the total import, respectively. The slump in the oil price in the second half of 2008 is expected to have significantly reduced Nigeria’ s total exports. We expect import growth to have slowed in the second half of 2008 due to slowdown in domestic 5

demand. Overall, the falling import costs coupled with a weak naira

During the first half of 2008, a total of N3,723.8 billion (US$31.8 billion) in

should help Nigeria sustain a small current account surplus.

federal government revenue was collected. This was 24.4% higher than the budget estimate. Though government showed some improvement in

Public finances

non-oil revenue receipts, it was the sustained increase in the The fiscal responsibility bill continues to be the cornerstone of

international oil price that averaged US$114 per barrel in the first half of

government’ s fiscal management. The federal government has also

2008 that bolstered the increase in revenue. Total government

shown its commitment to prudent fiscal management by adhering to the

expenditure (N1,380.58 billion or US$11.8 billion) was 0.5% higher than

medium-term expenditure framework (MTEF) aimed at maintaining

the budget estimate (N1,374.01 billion or US$11.7 billion) in the first half

prudent and responsible expenditure processes. In preparing the 2008

of 2008. This resulted in an overall notional deficit of N9 billion (US$0.1

budget, the medium-term fiscal strategy (MTFS) 2008-2010 acted as

billion), which amounted to 0.1% of GDP. Of the total government

government’ s positioning system. The budget was aimed at addressing

expenditure in the first half of 2008, recurrent expenditure was 68.4%

the “need to accelerate physical and human infrastructure for wealth

while the rest was transfers (5.1%) and capital expenditure and net

and poverty reduction”. The 2008 budget was also aimed at creating an

lending (26.5%).

enabling environment for the private sector. Figure 14: Government finances (% of GDP) Table 1: Budget assumptions

30

2008 Budget assumptions

Crude oil production

2.45 million bpd

Benchmark oil price

US$59 per barrel

GDP growth rate

20 10 0

11.0%

Inflation

8.5%

Exchange rate

NGN117.00/US$

Total revenue

N1.986 trillion

Expenditure

N2.47 trillion

Joint venture cash call

-10 2003

2004

Overall balance (cash basis)

Revenue

2007

2008e

Expenditure

Debt profile

N0.56 trillion

% of GDP

2006

Source: Federal Ministry of Finance

US$4.97 billion

Deficit

2005

2.5

During 2008, the country’ s total debt profile continued to increase. By the

Source: Federal Ministry of Finance

end of June 2008, the total government debt was estimated at

An assessment of the 2008 budget performance reveals mixed results.

N2,781.4 billion (US$23.8 billion), which represented about 23% of GDP.

The major drawback was the late passage of the budget that rendered

Of the total debt, 84% (N2,339.0 billion or US$20 billion) was domestic

completion of some major projects difficult. Also, the government did not

debt while the balance (N442.4 billion or US$3.7 billion) was external

fully realise the benefits of record-high international oil prices as

debt.

domestic oil production was characterised by frequent disruptions

Table 2: Total debt stock (% of GDP)

throughout 2008. Crude oil production averaged 1.92 million barrels per day (bpd) in 2008 against a budget set assumption of 2.45 million bpd.

End-June 2007

EndDecember 2007

End-June 2008

25.9 21.4 4.4

23.5 19.6 3.9

23.0 19.3 3.7

Overall, the oil revenue, which constitutes about 85% of the total government revenue and about 90% of the total foreign exchange

Total debt Domestic debt External debt Total debt service

earnings, has been disappointing. Figure 13: Federal Government revenue (Naira billion) 4000

1.9

1.3 1.2 Source: Central Bank of Nigeria

3000

Between June 2007 and June 2008, the outstanding domestic debt

2000

increased by 13.7% as the Federal Government increased its borrowing to meet its financial needs. Federal government bonds amounting to

1000

N175.1 billion (US$1.5 billion) were issued over the same period. About

0

76% of the total outstanding domestic debt, which amounted to 170.5% 1H2004

1H2005 Oil Revenue

1H2006 1H2007 Non-oil Revenue

1H2008

of the government’ s total retained revenue, was held by the banking sector. About 84% of the total external debt stock was owed to the multilateral creditors. Owing to the oil revenue windfall, the government

Source: Federal Ministry of Finance

6

•

was able to improve its external debt sustainability position as reflected

The Retail Dutch Auction system (currently using the Wholesale

by continued improvement in the total external debt stock as a

Dutch Auction System) should be reintroduced with effect from 19

percentage of total export earnings. This ratio improved to 10.8% in the

January 2009.

first half of 2008 compared with 12% in the first half of 2007.

National policy assumptions and the international environment

•

Bids for purchase of foreign exchange must be cash based.

•

Funds purchased by banks at the Auction should be used for eligible transactions only and may not be transferred into the

The country remains politically stable. However, President Umaru

inter-bank foreign exchange market.

Yar’ Adua’ s administration faces some difficult challenges going forward. •

The impact of the global financial crisis compounded by the sharp

Authorised dealers should return unused funds to the central bank within five business days.

decline in the oil price will make it difficult for the administration to fully meet its commitments as laid out in the ‘ home-grown’ national

•

strategies, the National Economic Empowerment and Development

Foreign exchange Net Open Position of banks will be reduced from 10% to 5% from 19 January 2009.

Strategy (NEEDS), NEEDSII, and the president’ s Seven-Point Agenda, Further signs of strong forex demand and the CBN’ s failure to meet

which are rooted in the pillars of poverty reduction, wealth creation and

market demand continued to render the currency weak. In an attempt to

employment generation through the development of an enabling

continue to address the currency weakness, the MPC decided on 9

environment for growth. These frameworks have been laid out to guide

February 2009 to:

the government in its task of aligning public policy with the basic needs

•

of the economy. Thus, in a country with relatively high levels of poverty and a diverse ethnic and religious mix, the present administration will

Continue managing the exchange rate within a band of +-3% until further notice; and

have to not only expedite reforms but also improve the domestic

•

economic performance.

Maintain the difference between the CBN buying and selling rates within one per cent, and that of the banks within one per cent.

The current global economic recession, coupled with the low oil price, On the international front, the global economic outlook for 2009 has

poses challenges that directly affect the implementation of government

weakened and this should negatively impact Nigeria’ s government

policies. The government’ s guiding vision, which is captured by the

programmes. The world economy is now expected to grow by a mere

president’ s Seven-Point Agenda, focuses on the following aspects:

0.5%, which is the slowest growth recorded in the recent past. The Sub-

investing in the energy and power infrastructure that will enhance both

Saharan Africa is also expected to grow by about 3.7% in 2009 from an

generation and distribution of electricity; diversifying the economy by

estimated 5.5% in 2008. We expect the oil price to average US$45 per

enhancing the non-oil sectors such as agriculture and manufacturing;

barrel in 2009 before rising again to about US$65 per barrel in 2010.

improving the transport infrastructure; contributing to more sustainable

The slowdown in oil prices and other commodities and the overall slump

and enduring economic growth and performance that will increase

in global demand for commodities should negatively impact Nigeria’ s

employment opportunities; investing in human capital development

fiscal space.

through better education and health systems; investing in and improving national security, especially in response to the Niger Delta unrest; and

Table 3: Global economic outlook

addressing the issue of land ownership. Real GDP growth (year-on-year) The Seven-Point Agenda has provided a foundation upon which both monetary and fiscal policies are advanced. The adoption of the fiscal responsibility bill has helped not only in stipulating that the budget should be accompanied by a three-year plan that outlines the mediumterm fiscal strategy but also in ensuring that a fiscal rule is adopted that

2006

2007

2008F

2009F

5.1

5.0

3.3

0.5

World Advanced Economies

3.0

2.6

1.4

-0.8

United States

2.8

2.0

1.2

-1.0 -1.5

Euro-zone

2.8

2.6

1.0

will force government to save the oil revenues. The US$45 per barrel

United Kingdom

2.8

3.0

0.8

-1.8

benchmark oil price and the forecasted oil production of 2.292 mbd for

Japan Emerging economies

2.4

2.1

0.3

-0.5

7.9

8.0

6.6

4.0

China

11.6

13.0

9.6

7.0

India

9.8

9.3

6.5

3.5

2009 might be optimistic, such that realised revenues might be lower than forecast. Despite a significant slowdown in oil revenue, infrastructure spending will remain government’ s main area of focus. Monetary policy challenges remain that of managing excess liquidity in a high interest rate environment. We expect monetary policy stance to be accommodative in 2009. In addressing the negative developments in the naira exchange rate,

Brazil

3.8

5.4

5.0

2.0

Russia

7.4

8.1

7.0

3.0

Africa

6.1

6.3

5.2

3.6

Sub-Saharan Africa

6.6

6.9

5.5

3.7

Developing Asia

the CBN adopted the following (temporary?) measures (on 14 January 2009) aimed at stabilising the currency: 7

9.9 10.0 8.4 5.0 Source: IMF (2008), Bloomberg, Standard Bank est.

Consumer demand should weaken in 2009. Nigeria’ s public sector

Forecast summary

accounts for about 50% of the national economy. In the recent past, Production

government fiscal expansion led to an increase in government

There has not been any positive solution to the Niger Delta unrest,

employees’ salaries (both federal and state). That led to buoyant

which continues to disrupt crude oil production. As the rebel militias

activities in the consumer market. However, high interest rates coupled

continue to target oil production facilities, we expect these disruptions to

with double-digit inflation and a weaker exchange rate should dampen

continue hampering oil production in 2009 such that the country might

activities in the consumer markets. Thus, we expect final consumption

not achieve its full production capability. The depressed international

expenditure by household to slow down to 3.2% in 2009 compared with

price of oil has also led the Organisation for the Petroleum Exporting

an estimated real growth of 6.5% in 2008.

Countries (OPEC) to reduce Nigeria oil quota to about 1.6 mbd. Thus,

Monetary Policy

Nigeria’ s oil production will be hampered throughout the forecast period As the global economy continues to slow down, we expect credit

and growth will continue to be driven by the non-oil sector (e.g.

conditions to be tighter. Domestic banks might find it difficult to renew or

agriculture, manufacturing, construction, and telecommunications).

extend credit lines and this should also impact negatively on domestic

Growth in the non-oil sector has been driven by strong gross fixed

private sector credit extension. In the recent past, the banking sector

capital formation as government continued with its infrastructure

reforms and a positive business environment contributed significantly to

investment drive. However, the slump in international oil price will put a

a rapid increase in credit lending, which led to strong surge in broad

severe strain on government fiscal space such that infrastructure

money supply. We expect the tighter market conditions to weigh heavily

spending should slow down in 2009.

on the domestic banks’ability to lend to the private sector. Thus, private Figure 15: Total oil production (million barrels per day)

sector credit extension should decline significantly, which should also

3.00

lead to a slowdown in broad money growth throughout the forecast

2.50

period. We expect M2 to increase by an average of 5% in 2009 compared with an average of 71.6% in 2008.

2.00 1.50

The slowdown in broad money growth (M2) should be positive for

1.00

inflation in the medium term. However, food prices should continue to exert upward pressure on headline inflation. Thus, headline inflation

0.50

should average 13% in 2009 but decline gradually to single digits during

-

the forecast period. Monetary policy should stay accommodative in

2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f

2009. Thus, we expect the MPR to be 9.5% by the end of 2009. However, due to declining oil revenue, government might be forced to

Source: Central Bank of Nigeria & Standard Bank est.

borrow domestically to fund infrastructure investment. This should drive

Nigeria will also face tighter international credit conditions that will limit

yields higher in 2009. We do not expect government borrowing to

access to finance. During 2007, Nigeria’ s foreign direct investment

crowd-out the private sector as there is no vibrant corporate bond

(FDI) inflows amounted to about US$12.5 billion (6.6% of GDP). The

market. The recent shortage of T-bill notes lead to a significant collapse

bulk of these inflows targeted the oil and gas sector. However, the

of the rates. However, this is not sustainable in the long term, such that

current global financial crisis will dictate that FDI inflows should slow

T-bill rates should start increasing to around 8% by the end of 2009.

down in 2009. We are forecasting a global growth of about 0,5% in

Figure 17: CPI inflation (%)

2009. Gross fixed capital formation should only grow by an estimated 14

2.2% in 2009 compared with an estimated growth of 12.3% in 2008.

12 Figure 16: Real GDP growth (%) 8 6

10

6.8 6.0

5.9

6.2

6.3

8

6.9

6

5.8

4

4

2

3.0

0

2

2006

0

2007

2008

2009f

2010f 2011f 2012f

2013f

Source: National Bureau of Statistics & Standard Bank est. 2006

2007 2008e 2009f 2010f 2011f 2012f 2013f

These measures taken to stabilise the naira exchange rate have not only paralysed the foreign exchange market but have also reversed

Source: National Bureau of Statistics & Standard Bank est.

some of the exchange rate liberalisation the country has implemented 8

since the mid-1990s. For example, the measure that funds purchased

in 2010 and throughout the rest of the forecast period as oil prices

at the Auction cannot be sold on the inter-bank market effectively shuts

recover.

down the inter-bank market and runs the risk of encouraging a parallel

Figure 19: Current account balance (% of GDP)

and illegal exchange rate market. Depending on the recovery of the oil prices, we expect these measures to be in place throughout 2009 and

25

into 2010. The sign of a reversal of a market-determined exchange rate

20

might also dampen the confidence gained with the international investors since the liberalisation of the exchange rate. We expect the

15

naira to continue trading at around its current levels in the short term.

10

Thus, the naira should average NGN151.5 per US dollar in 2009.

5

Figure 18: Naira/USD exchange rate

0

160

-5 2006

150

2007

2008e 2009f

2010f

2011f

2012f

2013f

Source: Central Bank of Nigeria & Standard Bank est.

140 Public Finances

130

The depressed international price of oil should put severe pressure on

120

government fiscal space in 2009 and this should lead to significant

110

expenditure cuts. The projected aggregate expenditure in the 2009 2006

2007

2008 2009f 2010f 2011f 2012f 2013f

budget is 2.87 trillion naira compared with 3.3 trillion naira in 2008. We expect the crude oil price to average US$45 per barrel in 2009. Thus,

Source: Bloomberg

revenue collection will decline significantly and that should dampen

External sector

overall government consumption expenditure, which should record a real growth of 2.9% in 2009 compared with an estimated real growth of

The decline in the price of Brent crude oil should affect the country’ s

10.5% in 2008.

external sector performance. Crude oil exports account for about 90% of the country’ s total exports. Continued unrest in the Niger Delta region

The 2009 budget was also based on the conservative benchmark oil

and OPEC oil production cuts should severely impact Nigeria’ s current

price of US$45 per barrel compared with the US$69 per barrel initially

account balance. Thus, we expect total exports to decline from an

proposed. Oil production is estimated at 2.3 million barrels per day. This

estimated US$95.2 billion in 2008 to US$48.7 billion in 2009. However,

appears too optimistic as further attacks on oil facilities and

as new oil fields come online in 2009, we expect a slight increase in oil

infrastructure would disrupt oil production. Thus, budget deficit is

exports’ volume. Despite the country being Sub-Saharan Africa’ s

estimated at NGN757 billion ((US$5.1 billion). That is 3% of GDP.

largest oil producer, Nigeria still imports about 90% of its petrol

Figure 20: Non-oil primary balance (% of GDP)

requirements because of a lack of refining capabilities. We expect the

0

import costs to decline significantly following the sharp drop in the international price of oil. The recent currency depreciation should also

-5

lead to a significant drop in imports. As the economy slows down

-10

certain sectors might reduce their imports of raw materials. Therefore,

-15

imports should decline in nominal terms from an estimated US$48.7

-20

billion in 2008 to US$35.5 billion. Thus, the trade balance is forecast to

-25

decline from US$46.5 billion in 2008 to US$3.5 billion in 2009 (2% of

-30

GDP)

-35 2006

The decline in oil prices coupled with lower profit remittances from oil

2007 2008e 2009f 2010f 2011f 2012f 2013f

companies operating in Nigeria should lead to shrinkage of the income Source: Federal Ministry of Finance & Standard Bank est.

deficit of the services and income accounts. However, we expect the income and services accounts to remain in deficit. The slowdown in

We expect fiscal policy to remain expansionary during 2009. The 2009

global economic growth should put a dent in the inflows of remittances

budget is aimed at delivering the president’ s Seven-Point Agenda by

from Nigerian diaspora. Thus, private capital inflows should decline.

“enhancing investment in physical infrastructure and human capital

However, the current transfer account should remain in surplus.

development, implementing socio-economic reforms and consolidating

Therefore, we forecast a slight deficit of 0.2% of GDP in the current

democracy”. Depressed oil prices pose a significant challenge to

account in 2009. The current account balance should return to surplus 9

government’ s ability to meet its revenue target for 2009. Thus, government might be forced to increase its domestic borrowing to cover the shortfall in revenues. As the yields in domestic bonds increased in 2008, domestic borrowing should be expensive. The continued depressed state of the international financial markets will also make it difficult for the country to borrow internationally. For these reasons, government might be forced to tap into the Excess Crude Account to cover for the revenue shortfall. Another major threat to stable government finances is the disruptions in crude oil production. The referenced 2009 budget oil production of 2.292 mbd might still be difficult to achieve as the country struggled to produce 2.0 mbd in 2008.

Economic outlook The weak global economy and developments in the oil markets will dictate the country’ s outlook going forward. If oil prices remain at these depressed levels, we expect government revenue to decline. This should negatively impact government’ s infrastructure spending, which has been driving growth in the non-oil sector. Thus, growth should slow down significantly. The unresolved political instability around the Niger Delta region might also continue to disrupt oil production, thereby further impacting negatively on real economic growth in the medium term. Government’ s commitment to prudent macroeconomic policies should boost real growth. The current economic conditions pose a significant challenge for government to further diversify its export base away from oil and into other sectors of the economy.

10

Nigeria Standard Bank forecasts of selected indicators 2006

2007

2008

2009

2010

2011

2012

2013

146.5

155.6

166.2

171.2

181.2

192.7

206.0

218.0

6.0

6.2

6.8

3.0

5.9

6.3

6.9

5.8

425.7

459.3

489.2

504.9

525.1

552.9

588.3

622.4

7.6

7.9

6.5

3.2

4.0

5.3

6.4

5.8

12.3

13.3

14.7

15.1

15.7

16.5

17.8

19.1

7.7

8.1

10.5

2.9

3.8

5.0

7.8

7.2

National Accounts Gross Domestic Product (USD billion) Real GDP growth (%) Final Consumption Expenditure of Households (NGN billion) % change Final Consumption Expenditure of Government (NGN billion) % change Gross Fixed Capital Formation (NGN billion)

114.0

131.3

147.5

150.7

159.6

171.1

184.6

198.5

% change

17.9

15.2

12.3

2.2

5.9

7.2

7.9

7.5

Oil production (million barrels per day)

2.22

2.12

1.92

1.89

1.9

2.2

2.3

2.4

Monetary sector Money supply (M2) NGN trillion % change

3.5

4.7

8.1

8.5

9.1

9.9

10.9

12.1

34.9

34.3

71.6

5.0

7.8

8.5

10.1

11.0

Policy interest rate (%) end period

14.00

9.50

9.75

9.50

10.00

9.75

9.00

8.5

Exchange rate (NGN/USD) average

128.5

125.7

119.0

151.5

140.3

135.6

130.3

125.2

8.4

5.4

11.5

13.0

11.5

10.3

9.8

8.5

62.51

63.12

95.26

40.71

65.35

70.33

85.14

93.45

1.0

50.9

-57.3

60.5

7.6

21.1

9.8

Inflation (%) External sector Exports: goods and services (USD billion) % change Imports: goods and services (USD billion)

30.91

% change Trade balance (USD billion)

38.89

48.73

37.21

38.81

41.34

45.78

49.37

25.82

25.30

-23.64

4.30

6.52

10.74

7.84 44.08

31.60

24.23

46.53

3.5

26.54

29.00

39.36

% of GDP

21.6

15.6

28.0

2.0

14.7

15.1

19.1

20.2

Current account (% of GDP) Foreign exchange reserves (USD) end period

10.0

1.6

9.9

-0.2

5.2

10.3

19.8

18.5

42.3

52.0

68.1

50.0

75.2

80.5

83.7

87.6

Import cover (months) end period

16.4

15.9

18.3

16.8

18.5

19.0

19.6

19.9

Public and external solvency indicators Gross external debt (USD billion)

5.1

3.7

4.1

4.8

3.6

4.2

4.2

5.7

% of GDP

3.5

2.3

2.5

2.8

2.0

2.2

2.0

2.6

-26.5

-24.5

-30.6

-21.7

-27.5

-29.3

-26.5

-28.7

Non-oil Primary balance (% of GDP)

11

Group Economics Goolam Ballim – Group Economist +27-11-636-2910 [email protected] South Africa Johan Botha +27-11-636-2463 [email protected]

Shireen Darmalingam +27-11-636-2905 [email protected]

Jeremy Stevens +27-11-631-7855 [email protected]

Danelee van Dyk +27-11-636-6242 [email protected]

Anita Last +27-11-631-5990 [email protected] Angola Ghana Malawi Mauritius

Yvonne Mhango +27-11-631-2190 [email protected] Kenya Mozambique Uganda Zambia

Victor Munyama +27 11-631-1279 [email protected] DRC Nigeria Tanzania Zimbabwe

Rest of Africa Jan Duvenage +27-11-636-4557 [email protected] Botswana Lesotho Namibia Swaziland

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