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Global Falling Oil Prices and Nigeria’s Fiscal Monetary Policy Measures

The plummeting price of oil in the international market is causing havoc on oil-producing countries like Russia and Venezuela, Iran, Saudi Arabia, the US and Nigeria. This is because oil accounts for about 45 per cent of Russia’s government budget therefore the sharp fall on oil prices has been very devastating for it. Russia is ... Continue Reading

The plummeting price of oil in the international market is causing havoc on oil-producing countries like Russia and Venezuela, Iran, Saudi Arabia, the US and Nigeria. This is because oil accounts for about 45 per cent of Russia’s government budget therefore the sharp fall on oil prices has been very devastating for it. Russia is highly dependent on oil and gas. It is projected that Russia’s economy is likely to shrink 4.5 per cent in 2015 if oil stays at about $60 per barrel.

Similarly, the falling price of oil has also caused the value of its currency – the ruble to collapse, thereby leading to panic inside Russia and a rise in inflation, as imports become drastically more expensive. Many Russians, worried that their savings may disappear, are rushing out to buy cars and washing machines — anything that has more lasting value than currency.

So far, Russia’s central bank has been struggling to deal with this crisis. On December 15, the country suddenly hiked interest rates from 10.5 per cent to 17 per cent in an attempt to stop people from selling off rubles. But the ruble kept declining anyway and the rate hikes are likely to slow the country’s economy down even further.

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The same can be said for Iran, Venezuela and Saudi Arabia while the unfolding scenario has mixed impacts for the US economy, which is the largest consumer of world oil. For some people, it will offer a nice economic boost: cheaper oil means lower gasoline prices — which have fallen to $2.47 per gallon, the lowest since 2009.

For instance, the International Energy Agency (IEA) forecasts US drivers will spend about $550 less on gasoline in 2015 than they did in 2014, assuming prices stay low, a development which will give consumers more money to spend on other things — a nice economic boost.

However, it’s not all good news. Oil-producing states like Texas and North Dakota are likely to see a drop in revenues and economic activity while the falling price of oil is also putting severe pressure on Alaska’s state budget. Also, the economic turmoil around the world is making the US credit markets jittery.

More also, the drop in oil price could spur people to start using more oil. For instance recent years, high gasoline prices have spurred many Americans to buy smaller, more efficient cars. But if gasoline prices fall, bigger cars and SUVs could make a comeback.

Locally, the situation is different in Nigeria. Oil receipts account for 75 per cent of its foreign exchange earnings and just like Russia, the falling oil prices is causing economic turmoil, a development which has made it to devalue its national currency officially from N155 to $1 to N168 to one dollar.

It has also cut its oil benchmark from about $75 to $65 per barrel in the proposed 2015 federal budget besides other fiscal and monetary measures it has put in place to salvage the economy.

From the foregoing, therefore there are indications that the Nigeria’s economy will be characterised by ups and downs in 2015 because of the adverse effect it will likely have on federal, states as well as local government revenues. The situation will be aggravated by the general elections which will be coming up early in the year, a development which may starve the economy of long-term investments by local and foreign investors as discerning investors will likely wait for the outcome of the elections before making investment decisions.

Already, the International Monetary Fund (IMF) has warned Nigeria against low fiscal and external buffers, which unfortunately continue to dwindle in the face of falling oil prices.

The IMF warns that buffers remain a necessity for addressing future shocks and is particularly concerned that in the face of the low fiscal and external buffers, there is less policy space for manoeuvring, compared to the onset of the 2008-09 financial crisis – when the Excess Crude Account (ECA) in 2008 was $21 billion for instance compared to $3 billion now.

Gross international reserves was $52 billion then but hovers around $37 billion and is projected to fall further to about $35 billion at end of 2014, supporting only 5.6 months of imports of goods and services in an import-dependent nation.

In its report on 2014 Article IV mission to Nigeria, the IMF said that Nigeria remains vulnerable to oil price volatility and global financial developments, but was, however, comfortable with measures already taken by the authorities, which it said demonstrate their commitment to macroeconomic stability.

But Nigeria’s economy has continued to grow strongly in 2014, it observed as it lowered projections to 5 per cent for 2015.

“We have held very useful and frank discussions with the authorities. Nigeria, like other oil-exporting countries, is facing a sharp fall in the price of oil (a primary source of foreign exchange and fiscal revenue) and increased risk aversion by international investors, who remain uncertain about the future of oil prices. “Rebuilding buffers, especially the ECA, is a necessity for addressing future shocks. Capital outflows have continued and, with lower oil receipts, have led to sustained pressure on the naira,” the IMF observed, noting also that the “authorities have reaffirmed their willingness to implement appropriate measures to manage risks.”

Another concern of the global institution is that despite the tightly managed official exchange rate, the inter-bank foreign exchange market and bureau de change rates have been trading at significant premia over the official Dutch auction rate, producing market distortions and contributing to inflation.

The IMF is, however, comfortable that the Nigerian authorities fully recognise the implications of this exogenous shock and have already taken bold measures to counteract lower oil receipts, pressure on the naira, and a fall in reserves, and expressed their intent to pursue macroeconomic stability, based on assessments of credible scenarios that reflect downside risks.

The fiscal authorities have tabled a tighter budget for 2015, revising the 2015−17 Medium Term Expenditure Framework (MTEF) to better reflect the latest developments in oil prices and proposing measures to increase non-oil revenue.

The monetary authorities have also been complementary with the Monetary Policy Committee adjusting the exchange rate by -8 per cent (from N155/$ to N168/$), as well as widening the currency band, and increased the monetary policy rate by 100 basis points and the cash reserve requirement on private sector deposits from 15 per cent to 20 per cent.

In the same vein, Fitch Ratings Limited has said growth will slow in Nigeria, Angola and Gabon in 2015 because of sliding oil prices and tighter policy, the company affirmed in its latest Sub-Saharan Africa, SSA Credit Overview.

The global rating agency revised Nigeria’s growth down from 6.4 per cent to 5.2 per cent for 2015. “This will be offset by an uptick in South Africa’s growth, although challenges in the electricity sector may see growth under perform. Oil importers and countries with the fiscal space to invest will continue to grow robustly,” it said.

Fitch says lower oil prices will dampen growth in Angola, Nigeria and Gabon, which will also see external and fiscal balances worsen.

However, it affirmed that it expects average GDP growth of 5 per cent in 2015 for the 18 countries it rated, up from 4.5 per cent in 2014.

According to the rating agency, growth will not be evenly spread across the region but should be resilient to lower oil prices. “Countries’ ability to grow will be impacted by their degree of commodity dependence, exposure to China, domestic challenges and capacity to invest,’’ it added.

Authorities in Nigeria recently proposed an austere measure for next year by cutting its spending and devaluing its local currency, the naira amid falling external reserves.

On November 25, the Central Bank of Nigeria, CBN devalued the naira by 8 per cent to N168 to a US dollar.

The CBN also raised interest rates to 13 per cent by 100 basis points in a view to check losses to its foreign reserves from defending the currency against weaker oil prices.

The CBN said Nigeria’s external reserves fell to $35.8 billion on December 9, down 19.5 per cent from $44.5 billion recorded same date last year.

In late November, Nigeria’s foreign reserves were reported to have fallen to a five-month low of $37.1 billion, according to the CBN.

The apex bank reported that reserves decreased by $2 billion in one month, from $39.1 billion on October 21, 2014 to $27.1 billion on November 21, 2014.

However, despite the gloomy situation, some stakeholders in the Nigerian economy are of the view that the capital market in 2015 will be on a positive side, considering that the macro economy factors affecting the market in 2014 would have been allayed.

According to a stockbroker with Calyex Securities Limited, Mr Tunde Oyediran, the stock market direction tends to be positive. The fears we are experiencing now would have been allayed.

“There is an empirical evidence that supports that the year following devaluation of a country’s currency, would experience upswing in their capital market. The banking sector, which has been battered will lead the recovery. They often give over 8 per cent dividend yield hence they will attract more patronage in the first quarter,” Oyediran said.

Speaking on market direction in 2015, the chief operating officer, Investdata Limited, Mr Ambrose Omodion said “the market in 2015 look very dicey as factors militating on the market now will likely remain in the new year as the bottom of the oil price remains out of sight for now, coupled with the lack of positive economic numbers in the hit of political uncertainty as the general elections draw nearer and the celebrations are around the corner, the market has continued to give in to sells pressure as many players exit the market to hold cash even at the wrong time.”

He pointed, “the recent austerity is just a sign of what should be expected in 2015 as the nation’s major export product has lost value in price which is likely to keep our reserve down even after the election but all hope is not lost as foreign investors are sitting on fence now waiting for the outcome of the election to jump back into the market as devaluation has made our market more attractive to them because with small dollar they will continue to control the market transaction.”

According to him, investors should invest in companies that depend less on imported material, the companies that had done backward integration.

Sectors to watch out for in 2015, he pointed out that investors should look at financial sector targeting the ones with less off shore borrowing, hospitality industry, building industry, construction, healthcare and consumer goods.

He noted that Seven Up, Mobil, CCNN, Transcorp, Forte Oil, Stanbic IBTC, ETI, Zenith, GTBank, Fidson, Nigerian Breweries, and Dangote Sugar would post strong earnings in 2015, going by their earnings.

However, the general secretary of Shareholders Association of Nigeria, Mr Adeleke Adebayo said that the stock market will stabilise in second quarter 2015.

“There are three issues affecting the market, the election which at the end of first quarter 2015 would have been resolved. Also, the falling price of the crude oil in the international market and by March 2015, the price would stabilise with the budget of 2015 which will be presented based on the bench mark price of oil.

“Lastly with the expectation of end year results of companies if turned positive, would boost market performance in 2015,” he said, adding that these three factors will bring stability to the market in 2015.

The director-general of Lagos Chamber of Commerce and Industry (LCCI), Mr Muda Yusuf said, “We should face up to the reality of a weak currency and begin appropriate adjustments in both public and private sectors. This is the time to be more focused on substituting imports with local alternatives in production or service value chains across sectors. This would enhance competitiveness and sustainability of enterprises. This should happen in production, services and consumption.

“It is important to caution that 2015 is not a time for government or its agencies to impose new burdens on the private sector in the form of taxes, fees and charges.”

He called on governments at all levels to demonstrate greater fiscal discipline at this time.

“Issues of transparency in government transactions, value for money and outright corruption should be more rigorously addressed. Fiscal leakages should be blocked at all levels of government and the general cost of governance needs to be drastically reduced as the current governance cost is not sustainable,” Muda said.

He added that the current exchange rate condition offers some advantage to industries with high local value addition, saying that it makes such industries more competitive than their foreign or import dependent counterparts. The current situation is therefore a good opportunity to encourage industries and investors, to look inwards for products and services that are hitherto imported.

From the foregoing, we therefore expect a chequered economy that will be characterised by high and low, high cost of imports, massive unemployment in both public and private sectors of the economy, mergers and acquisitions among others. We therefore urge the managers of the economy to rise up to the challenge and minimise its adverse effects on the citizenry.(Leadership News)

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