FG SEEKS TO REVIVE FAILING ECONOMY LATE

After months of being in total denial about the precarious state of the Nigerian economy, the Federal Government has begun to talk up the economy even as offshore portfolio investors continue to shun government fixed income securities.
The economy witnessed significant stress in the first year of the Muhammadu Buhari administration, as per capita income dropped, oil prices and output fell and foreign portfolio investors retreated.

Nigeria’s Gross Domestic Product (GDP) will decline in 2016, the first time since 1991, according to International Monetary Fund estimates.
The Vice President, Yemi Osinbajo, however said at the weekend that reforms embarked on by the government such as the increase in fuel prices and the new foreign exchange (FX) policy that allows banks to quote and trade FX freely, should re-assure investors and boost growth.
“The flexible FX regime will encourage foreign investors and ensure that foreign direct investments (FDI), come in,” Osinbajo said.
“We are seeing signs of investments coming into Nigeria. General Electric (GE) is about to announce a significant investment in the country.”
Osinbajo added that Nigeria will spend N100 billion ($312.50 million) on capital projects in the coming days as part of the 2016 budget, in a bid to revive growth.
Government capital spending so far has reached N332 billion, said Osinbajo.
Analysts say yields investors demand on a planned $1 billion Eurobond Nigeria intends to offer this year, will give clarity on investor confidence in government plans to revive the economy.
“The planned Eurobond will help establish the level of confidence investors have in the Nigerian economy. Our current Eurobonds are trading sub 7 percent,” Oluwatosin Ojo, head of research at investment firm, Cardinal Stone Partners, said.
The ability to ramp up capital spending in the next four months, and offshore portfolio investor’s appetite for Nigerian sovereign debt will also provide clues on the state of the Nigerian economy and whether government plans to lift the economy are credible, analysts say.
For now, offshore investors are shunning Naira assets despite Osinbajo’s optimism, and favourable global risk conditions that fuelled a rally in emerging-markets (like South Africa’s) traded assets in recent weeks, including FX, local rates and Eurobonds.
“Nigeria has yet to benefit from renewed portfolio flows into local debt. Foreign investors are waiting for FX liquidity to improve further and may still be worried about convertibility risk amid low oil prices,” Samir Gadio, the head of Africa Strategy FICC Research at Standard Chartered Bank, told Businessday.
Brent crude, the global oil benchmark, peaked at nearly $53 a barrel in early June. Since then, prices have declined about $10 a barrel as the outlook for the global economy soured and OPEC boosted production.
The naira closed at an all time low of N332 per dollar on Friday despite increasing trading volumes, data from the FMDQ OTC securities exchange show.
“The Central Bank of Nigeria (CBN) is no longer intervening like before and has largely withdrawn from the spot market, with volumes now mostly generated from other sources,” Dipo Odeyemi, senior Vice President, Market Operations and Technology, FMDQ said.
Foreign Exchange trading volumes have risen to about $280 million a week, Odeyemi said.
Analysts say investors are still relatively cautious about investing in Nigerian Treasury-bills, as long as there are daily headlines about pipeline attacks and potential further shortfalls in oil output and FX earnings, even if yields are now seen to be more attractive.
Twelve month T-bills traded at a yield of 21.3 percent in the secondary market on Friday, according to data from the FMDQ website.
Investors will also observe exactly where the naira is likely to stabilise, before they commit themselves to new T-bill investments, analysts say.
Budget implementation should, other things being equal, be positive for growth, especially if capital expenditure gets underway, according to Razia Khan, Africa chief economist at Standard Chartered Bank.
“However, this is only likely to happen with some lag – so the Nigerian economy may not see much of the benefit for a few months still,” Khan said, in response to questions.
Nigeria’s Misery Index (unemployment plus inflation) is now at an all time high of 47.7 percent, threatening political stability and social cohesion, according to Bismarck Rewane of economic consulting firm Financial Derivatives Company (FDC).
Nigeria is at a crucial junction where government clearly needs to spend to take the economy out of a recession, according to Ojo of Cardinal Stone Partners.
“The announced capital spend by the Vice President should have commenced already. Hopefully, if disbursements are expedited, we will likely see marginal economic growth in Q3 and maybe much more substantial growth by Q4. We project 0.3% and 1.1% real GDP growths in Q3 and Q4 respectively,” Ojo said.

Source: BusinessDay