Post on 30-May-2018
transcript
8/14/2019 Nigeria growth forecast
1/12
Economics
Nigeria: Annual economic outlookThe need to diversify the export base away from oil
6 March 2009
Victor Munyama
Despite Nigerias domestic economic challenges (the unrest in the oil-
producing Niger Delta region, poor electricity supply and major
infrastructural constraints), the economy maintained its growth
momentum in 2008. The country continues to show signs of a pro-
reform, pro-investment environment, which attracted a lot of interest
from the regional and international investor community. The policy
framework continues to improve. Despite being an emerging economy
characterised by traditional sectors such as agriculture, manufacturing
and trade, the country is still seen through its oil sector (being the
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 non-
oil 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
(mbd)
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
Nigerian reference spot price for crude (Bonny light) averaged US$114
per barrel compared with an average of about US$70 per barrel. In the
second half of 2008, the average crude oil production declined
averaged 1.90 mbd. During 2008, crude oil production declined from a
high of 2 mbd in March to 1.85 mbd in December. The bonny light spot
price averaged about US$87.4 per barrel in the second half of 2008.
The poor performance of the oil sector also led Angola to surpass
Nigeria as the leading oil producer in Africa during April 2008. Overall,
the Nigerian economy was left to depend on the performance of the
non-oil sector as the oil sector continued to contract.
Figure 1: Real GDP growth (%)
Source: National Bureau of Statistics
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 slowedto 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.
Even though the agriculture sector (which constituted about 42% of
GDP in 2007 and accounted for over 60% of employment) remains
-10
-5
0
5
1015
20
25
30
2003 2004 2005 2006 2007 2008e
Oil GDP Non-oil GDP Real GDP
8/14/2019 Nigeria growth forecast
2/12
2
the dominant sector in terms of its contribution to non-oil GDP, real
growth was more broad-based in the first half of 2008. The agriculture
sector grew by 6.3% in the first half of 2008, accounting for about
39.8% of GDP. Other sectors, building and construction, wholesale
and retail trade, and services, grew by 13.1%, 12%, and 10.3%,
respectively. Industrial output (which constituted about 22.1% of non-
oil GDP) declined by 1.9% in the first half of 2008 mostly due to poor
infrastructure, especially poor electricity supply.
Figure 2: Gross domestic product by activity (2007)
Source: National Bureau of Statistics
The slowdown in the agriculture sector was due to, among other
factors, poor infrastructure, the global food crisis, and increases in
prices. Responding to the crisis, the government undertook certain
measures aimed at boosting either production or supply of agricultural
products. Some measures included: approving a tax holiday for
importers of rice between May and October 2008, approving the
rehabilitation of dilapidated irrigation infrastructure and expansion of
the irrigation schemes, and also constructing 25 new silos to improve
the storage capacity of the National Food Reserve. The government
also implemented the Guaranteed Minimum Price for the buyer of last
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.
Even though the agricultural output was slower in the first half of 2008
compared with the second half of 2007, growth was still recorded
across all sub-sectors. Average world prices of Nigerias major
agricultural export commodities at the London Commodities Market
(cocoa, coffee, cotton, palm oil, copra, and soya bean) also trended
upwards, increasing by 18.8% in the first half of 2008 compared with
36.1% in the corresponding period in 2007. This was mainly due to
supply shortages in the international markets.
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
and electricity consumption. Performance in manufacturing production
continued to be constrained by poor infrastructure, especially poor
electricity supply, poor road networks, and a high pump price of
diesel. Also, most locally produced goods continued to fare poorly
due to unfair competition from imported finished products.
In the first half of 2008 electricity generation fell by 8.1% to about
2,600 mega-watts per hour (MW/h) compared with the corresponding
period in 2007. The continued disruption of gas supply, attacks on
infrastructure, and low water level at the hydro power stations
severely affected electricity generation. Also, high power outages and
emergency load shedding led to significant decline in electricity
consumption to about 1,900 Mw/h in the first half of 2008. This was a
10.4% decline compared with the first half of 2007.
Nigerias crude oil production continues on its declining path since a
production peak of 2.5 mbd recorded in 2005. In the first half of 2008
production averaged 1.98 mbd compared with an average of 2.16
mbd in the second half of 2007.
Figure 3: Oil production and price
Source: Central Bank of Nigeria
The continued decline in production was due to instability in the Niger
Delta region. Oil exports averaged about 1.49 mbd in the first half of
2008 compared with 1.71 mbd in the second half of 2007. However,
owing to the rise in the gas/oil ratio in the wells, gas production
increased by 17.1% to an estimated 30.09 million cubic metres
(MMm3) in the first half of 2008 from 25.70 MMm
3in the second half
of 2007. Of the total gas produced, only 67.7% was utilised while
32.3% was flared.
Figure 4: Gas production and utilisation (million cubic metres)
Source: Central Bank of Nigeria
Monetary policy
Owing to mounting international and domestic pressures, headline
inflation, which had remained subdued and in the single digits since
June 2006, surged into double digits beginning June 2008. A
combination of high food and energy prices and fiscal expansion saw
inflation increasing significantly from 6.6% y/y in December 2007 to
Agriculture,42.0
Oil & gas,19.6
Building &construction,
1.7
Finance &insurance,
3.9
Wholesale &retail trade,
16.2
Manufacturing, 4.0
Telecommunication, 2.3 Others, 10.3
20
4060
80
100
120
140
160
-
0.51.0
1.5
2.0
2.5
3.0
3.5
2005 2006 2007 2008
US$/barrelmillion bpd
Total production Bonny Light spot price (RHS)
0
5
10
15
20
25
30
35
1H2006 2H2006 1H2007 2H2007 1H2008
Gas produced Gas utilised Gas flared
8/14/2019 Nigeria growth forecast
3/12
3
9.7% y/y in May 2008. Overall, headline inflation averaged 11.5% in
2008 compared with 5.4% in 2007. Even though the energy prices,
which constitute about 18.1% of the consumer price index (CPI) basket,
averaged 6.2% in 2008 compared with 10.2% in 2007, the second
round effect of high energy prices in the first half of 2008 became more
evident throughout the year. That is, despite being Africas largest oil
producer, the country continues to import about 90% of its petrol
requirements because of a lack of sufficient refinery capacity. The
energy prices increased from an average low of 1.7% y/y in May to
average 11.7% y/y in December 2008.
Figure 5: CPI inflation (%)
Source: National Bureau of Statistics
Food prices were the primary driver of inflation in 2008. The global
shortages of food drove the food component (which constitutes about
64% of the CPI basket) into double digits throughout 2008. Food
inflation increased from an average of 8.7% y/y in February to an
average of 17.9% y/y in December 2008 also due to high importation
costs. Food imports constitute about 5% of GDP. Overall, food inflation
averaged 15.8% in 2008 compared with 1.9% in 2007. Despite controls
on domestic fuel and electricity prices aimed at insulating the core
inflation (headline inflation excluding food), non-food inflation increased
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
compared with 9.4% in 2007.
Figure 6: CPI weights
Source: National Bureau of Statistics
The broad-based increase in prices was also evident in the increase inheadline inflation excluding energy and food, which increased from an
average low of negative 1.3% y/y in March to an average of 15.3% y/y
in December 2008. Most of the increase in these core measures of
inflation was also the result of expansionary fiscal policy and high
export revenues that drove up domestic liquidity in most of 2008. The
disbursement of about US$8.2 billion from the Excess Crude Account
(to be disbursed in naira) in 2008 and a further allocation of US$10.24
billion to address the major shortfall in the energy sector led to
significant increase in domestic liquidity, thereby also exerting high
inflationary pressures.
The continued rise in headline inflation during 2008 can also be
attributed to a significant increase in money supply growth. Higher fiscal
expenditure in the budget as the country continued to tackle its
infrastructure deficits, and the disbursements of oil savings from the
Excess Crude Account to state governments led to a significant
increase in domestic money supply. Broad money supply (M2) recorded
some of its highest levels ever, increasing by 100.1% y/y in March
2008. However, following the increased global financial crisis, broadmoney 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
2008 compared with an average of 87.4% in the first half. Overall, M2
increased by an average of 71.6% in 2008 compared with an average
of 33.7% in 2007.
Figure 7: Money supply and credit growth (%)
Source: Central Bank of Nigeria
The surge in broad money growth was due to significant increase in
domestic credit and net foreign assets of the banking sector. The
banking sector reforms coupled with the positive business environment
and sharp decline in credit extended to government led to an increase
in private sector credit lending. Credit extended to the private sector
(PSCE) reached record levels, increasing by as much as 103.7% in
April 2008. The global financial crisis led to credit contraction globally as
financial institutions tightened their lending criteria. The banking sector
came under severe pressure as confidence in the financial markets took
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.
Net foreign assets increased by an average of 13% in 2008 compared
with an average of 30.7% in 2007.
-10
0
10
20
30
40
50
2005 2006 2007 2008 2009
CPI inflation Food Non-food
64%
18% 4%
4%
3%
2%
5%
Food & non-alcoholic bev. Hse water, elec, gas & other fuel
Transport Furn & hshld equip maint
Clothing & footwear Alcohol, tobacco & kola
Other
-20
0
20
4060
80
100
120
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
M2 Private sector credit extension
8/14/2019 Nigeria growth forecast
4/12
4
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
and energy prices, excess liquidity due to high oil prices, and fiscal
expansion. As the stable inflation environment evident in 2007 began to
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%.
Following the worsening state of global financial markets, the CBN
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
MPR by 50 basis points from 10.25% to 9.75%. The Cash Reserve
Requirement (CRR), having been increased from 3% to 4% in June
2008, was reduced from 4% to 2%. Liquidity requirement for banks was
reduced from 40% to 20%. The CBNs lending facilities to the banks
was expanded from overnight to 360 days. These measures injected a
significant amount of liquidity into the system.
Figure 8: Interest rate (%)
Source: Central Bank of Nigeria
The commercial banks average prime lending rate, which had declined
to 13.5% in December 2007, increased to 16.1% in December 2008.
The prime lending rate averaged 16% in 2008 compared with an
average of 15.7% in 2007. The 91-day Treasury bill (T-bill) rate, which
remains the reference rate on which other rates are based, declined
from a high of 9.2% in July to 6.9% in December 2008. We expect
monetary policy to remain accommodative in 2009. The CBN will have
to balance the challenges posed by excess liquidity in a high interest
rate environment and fighting double-digit inflation.
As Nigeria is a highly import-dependent country, the naira exchange
rate remains a yardstick by which Nigerians measure the standard of
living. Also, the Nigerians continue to measure governments
performance in terms of the currencys performance in the international
markets. Thus, maintaining a stable exchange rate is not just important
for preserving the purchasing power of the naira but it is also part of the
monetary policy strategy. One of the CBNs statutory mandates is to
safeguard the international value of the legal tender currency. The
execution of this mandate has been evident in the sustained stability of
the naira exchange rate, which has fluctuated around the budget set
exchange rate in the past two years. In the first half of 2008, the naira
exchange rate averaged NGN117.55/USD.
Figure 9: Exchange rate
Source: Bloomberg and the Federal Ministry of Finance
The sustained stability of the naira exchange rate waned in the second
half of 2008 mainly due to further negative developments in the global
economy. The decline in the private capital inflows, and continueddecline in the oil prices led to a significant increase in the demand for
foreign exchange in the Wholesale Dutch Auction System (WDAS),
beginning October 2008. In the second half of 2008 the naira exchange
rate averaged NGN120.07/USD, having depreciated by about 18%
between November and December 2008. The CBNs intervention in the
foreign exchange (forex) market did not stop the nairas depreciation as
the currency depreciated to about NGN156/USD at some point in
January 2009. Heavy intervention also led to a significant decline in the
countrys foreign exchange reserves, which declined from about US$64
billion in October 2008 to about US$52 billion in December 2008.
Various measures were undertaken in an attempt to arrest the negativedevelopments around the naira exchange rate.
Financial markets
Even with the evidence of the Nigerian financial market rapidly
integrating into the global markets and high growth performance, the
financial sector remains relatively shallow by international standards.
Foreign investors interest in naira assets amid strong global liquidity
and the continued search for yield in global markets experienced in
2007 seems to have disappeared in the first half of 2008. The Nigerian
Stock Exchange (NSE) experienced some bearish performance in the
first half of 2008. Activities in both the primary and secondary market
declined. The market capitalisation of all listed securities declined by
9% in the first half of 2008 compared with the second half of 2007. The
NSE All-Share Index declined by 3.5% at end-June 2008 compared to
end-December 2007.
The declining trend in the stock exchange continued during 2008 mostly
due to the global financial crisis. The meltdown in the world financial
systems and continued negative sentiments and lack of confidence in
the banking sector led to sharp drop in the NSE All-Share Index that is
heavily dominated by the banking stocks. The NSE All-Share Index was
also affected by significant outflow of portfolio as foreign investors seek
safe haven for their investment. The NSE All-Share Index declined by
0
4
8
12
16
20
2005 2006 2007 2008
Policy rate Prime 91-day TB
115
120
125
130
135140
145
150
155
160
2006 2007 2008 2009
Naira/US$ Budget exchange rate (Naira/US$)
8/14/2019 Nigeria growth forecast
5/12
5
about 66% from a high of 65,000 points in February 2008 to 21,000
points in January 2009.
Figure 10: Nigeria stock exchange
Source: Bloomberg
External sector
Even with the strong performance of the non-energy sector and
governments efforts to diversify away from the oil, the countrys
external sector performance continues to rely heavily on the oil sector.
Crude oil exports account for about 90% of the total exports volume
while generating about 95% of export earnings. Significant disruption in
oil production was well compensated for by the high oil price such that
the country continued to record a strong current account surplus. During
the first half of 2008, Nigeria recorded a balance of payments surplus of
N999.0 billion (US$8.5 billion), which was slightly lower than the
N1,073.3 billion (US$9.2 billion) surplus recorded in the second half of
2007. This positive development continued to show a favourable trade
balance, which was mainly driven by high crude oil prices, significant
inflows of foreign direct and portfolio investments, and high capital
inflows in the form of remittances.
The current account surplus narrowed slightly to N2,355.9 billion
(US$20.1 billion) in the first half of 2008 compared with N2,371.4 billion
(US$20.3 billion) in the second half of 2007. The first half of 2008 also
saw pressures on the capital and financial account moderating as the
deficit narrowed by 70.1% to N153.3 billion (US$1.3 billion), which was
1.1% of GDP, from N512.7 billion (US$4.4 billion) in the second half of
2007. High crude oil prices also led to a significant increase in the
external reserves, which increased to an average of about US$58 billion
(about 16.6 months of import cover) in the first half of 2008 comparedwith an average of US$48 billion (about 15.2 months of import cover) in
the second half of 2007. By the third quarter of 2008, gross external
reserves had increased to about US$64 billion (about 17.3 months of
import cover).
Figure 11: Foreign exchange reserves (US$ million)
Source: Bloomberg
Owing to the high levels of imports, the first half of 2008 saw the trade
balance decline by 25.6% to N1,552.0 billion (US$13.3 billion)
compared with the second half of 2007. The continued disruptions in oil
production in the Niger Delta region led to a decline in oil exports (which
accounted for about 99% of the total exports in the first half of 2008).Due to the high cost of the business environment caused by poor
infrastructure, non-oil exports (accounting for about 1% of total exports)
declined by 57.2% in the first half of 2008 compared with the second
half of 2007. Of the non-oil exports, agricultural produce constituted
about 66% of the total in the first half of 2008 while minerals, semi-
manufactured, manufactured, and others constituted about 9.6%,
12.1%, 11.5%, and 0.2% over the same period, respectively. Overall,
aggregate exports declined by 10.7% in the first half of 2008 compared
with the second half of 2007.
Figure 12: International trade (US$ billion)
Source: Central Bank of Nigeria
The import bill continued to rise as import increased by an average of
1.8% in the first half of 2008 compared with the second half of 2007.
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 Nigerias total exports. We expect import growth to
have slowed in the second half of 2008 due to slowdown in domestic
10000
20000
30000
40000
50000
60000
70000
2003 2004 2005 2006 2007 2008 2009
All share index
0
10000
20000
30000
40000
50000
60000
70000
2003 2004 2005 2006 2007 2008
-30
-20
-10
0
10
20
30
40
50
1H2007 2H2007 1H2008
Exports Imports Trade balance
8/14/2019 Nigeria growth forecast
6/12
6
demand. Overall, the falling import costs coupled with a weak naira
should help Nigeria sustain a small current account surplus.
Public finances
The fiscal responsibility bill continues to be the cornerstone of
governments fiscal management. The federal government has also
shown its commitment to prudent fiscal management by adhering to the
medium-term expenditure framework (MTEF) aimed at maintaining
prudent and responsible expenditure processes. In preparing the 2008
budget, the medium-term fiscal strategy (MTFS) 2008-2010 acted as
governments positioning system. The budget was aimed at addressing
the need to accelerate physical and human infrastructure for wealth
and poverty reduction. The 2008 budget was also aimed at creating an
enabling environment for the private sector.
Table 1: Budget assumptions
Source: Federal Ministry of Finance
An assessment of the 2008 budget performance reveals mixed results.
The major drawback was the late passage of the budget that rendered
completion of some major projects difficult. Also, the government did not
fully realise the benefits of record-high international oil prices as
domestic oil production was characterised by frequent disruptions
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.
Overall, the oil revenue, which constitutes about 85% of the total
government revenue and about 90% of the total foreign exchange
earnings, has been disappointing.
Figure 13: Federal Government revenue (Naira billion)
Source: Federal Ministry of Finance
During the first half of 2008, a total of N3,723.8 billion (US$31.8 billion) in
federal government revenue was collected. This was 24.4% higher than
the budget estimate. Though government showed some improvement in
non-oil revenue receipts, it was the sustained increase in the
international oil price that averaged US$114 per barrel in the first half of
2008 that bolstered the increase in revenue. Total government
expenditure (N1,380.58 billion or US$11.8 billion) was 0.5% higher than
the budget estimate (N1,374.01 billion or US$11.7 billion) in the first half
of 2008. This resulted in an overall notional deficit of N9 billion (US$0.1
billion), which amounted to 0.1% of GDP. Of the total government
expenditure in the first half of 2008, recurrent expenditure was 68.4%
while the rest was transfers (5.1%) and capital expenditure and net
lending (26.5%).
Figure 14: Government finances (% of GDP)
Source: Federal Ministry of Finance
Debt profile
During 2008, the countrys total debt profile continued to increase. By the
end of June 2008, the total government debt was estimated at
N2,781.4 billion (US$23.8 billion), which represented about 23% of GDP.
Of the total debt, 84% (N2,339.0 billion or US$20 billion) was domestic
debt while the balance (N442.4 billion or US$3.7 billion) was external
debt.
Table 2: Total debt stock (% of GDP)
End-June2007
End-December
2007
End-June2008
Total debt 25.9 23.5 23.0Domestic debt 21.4 19.6 19.3External debt 4.4 3.9 3.7Total debtservice 1.9 1.3 1.2
Source: Central Bank of Nigeria
Between June 2007 and June 2008, the outstanding domestic debt
increased by 13.7% as the Federal Government increased its borrowing
to meet its financial needs. Federal government bonds amounting to
N175.1 billion (US$1.5 billion) were issued over the same period. About
76% of the total outstanding domestic debt, which amounted to 170.5%
of the governments total retained revenue, was held by the banking
sector. About 84% of the total external debt stock was owed to themultilateral creditors. Owing to the oil revenue windfall, the government
0
1000
2000
3000
4000
1H2004 1H2005 1H2006 1H2007 1H2008Oil Revenue Non-oil Revenue
-10
0
10
20
30
2003 2004 2005 2006 2007 2008e
Overall balance (cash basis) Revenue Expenditure
2008 Budget assumptions
Crude oil production 2.45 million bpd
Benchmark oil price US$59 per barrel
GDP growth rate 11.0%
Inflation 8.5%
Exchange rate NGN117.00/US$
Total revenue N1.986 trillion
Expenditure N2.47 trillion
Joint venture cash call US$4.97 billion
Deficit N0.56 trillion
% of GDP 2.5
8/14/2019 Nigeria growth forecast
7/12
7
was able to improve its external debt sustainability position as reflected
by continued improvement in the total external debt stock as a
percentage of total export earnings. This ratio improved to 10.8% in the
first half of 2008 compared with 12% in the first half of 2007.
National policy assumptions and the international
environmentThe country remains politically stable. However, President Umaru
YarAduas administration faces some difficult challenges going forward.
The impact of the global financial crisis compounded by the sharp
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
Strategy (NEEDS), NEEDSII, and the presidents Seven-Point Agenda,
which are rooted in the pillars of poverty reduction, wealth creation and
employment generation through the development of an enabling
environment for growth. These frameworks have been laid out to guide
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
have to not only expedite reforms but also improve the domestic
economic performance.
The current global economic recession, coupled with the low oil price,
poses challenges that directly affect the implementation of government
policies. The governments guiding vision, which is captured by the
presidents Seven-Point Agenda, focuses on the following aspects:
investing in the energy and power infrastructure that will enhance both
generation and distribution of electricity; diversifying the economy by
enhancing the non-oil sectors such as agriculture and manufacturing;
improving the transport infrastructure; contributing to more sustainable
and enduring economic growth and performance that will increase
employment opportunities; investing in human capital development
through better education and health systems; investing in and improving
national security, especially in response to the Niger Delta unrest; and
addressing the issue of land ownership.
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 medium-term fiscal strategy but also in ensuring that a fiscal rule is adopted that
will force government to save the oil revenues. The US$45 per barrel
benchmark oil price and the forecasted oil production of 2.292 mbd for
2009 might be optimistic, such that realised revenues might be lower
than forecast. Despite a significant slowdown in oil revenue,
infrastructure spending will remain governments 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,
the CBN adopted the following (temporary?) measures (on 14 January
2009) aimed at stabilising the currency:
The Retail Dutch Auction system (currently using the Wholesale
Dutch Auction System) should be reintroduced with effect from 19
January 2009.
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
inter-bank foreign exchange market.
Authorised dealers should return unused funds to the central
bank within five business days.
Foreign exchange Net Open Position of banks will be reduced
from 10% to 5% from 19 January 2009.
Further signs of strong forex demand and the CBNs failure to meet
market demand continued to render the currency weak. In an attempt to
continue to address the currency weakness, the MPC decided on 9
February 2009 to:
Continue managing the exchange rate within a band of +-3% until
further notice; and
Maintain the difference between the CBN buying and selling rates
within one per cent, and that of the banks within one per cent.
On the international front, the global economic outlook for 2009 has
weakened and this should negatively impact Nigerias government
programmes. The world economy is now expected to grow by a mere
0.5%, which is the slowest growth recorded in the recent past. The Sub-
Saharan Africa is also expected to grow by about 3.7% in 2009 from an
estimated 5.5% in 2008. We expect the oil price to average US$45 per
barrel in 2009 before rising again to about US$65 per barrel in 2010.
The slowdown in oil prices and other commodities and the overall slump
in global demand for commodities should negatively impact Nigerias
fiscal space.
Table 3: Global economic outlook
Real GDP growth (year-on-year)
2006 2007 2008F 2009F
World 5.1 5.0 3.3 0.5AdvancedEconomies 3.0 2.6 1.4 -0.8
United States 2.8 2.0 1.2 -1.0
Euro-zone 2.8 2.6 1.0 -1.5
United Kingdom 2.8 3.0 0.8 -1.8
Japan 2.4 2.1 0.3 -0.5Emergingeconomies 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
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 9.9 10.0 8.4 5.0Source: IMF (2008), Bloomberg, Standard Bank est.
8/14/2019 Nigeria growth forecast
8/12
8
Forecast summary
Production
There has not been any positive solution to the Niger Delta unrest,
which continues to disrupt crude oil production. As the rebel militias
continue to target oil production facilities, we expect these disruptions tocontinue hampering oil production in 2009 such that the country might
not achieve its full production capability. The depressed international
price of oil has also led the Organisation for the Petroleum Exporting
Countries (OPEC) to reduce Nigeria oil quota to about 1.6 mbd. Thus,
Nigerias oil production will be hampered throughout the forecast period
and growth will continue to be driven by the non-oil sector (e.g.
agriculture, manufacturing, construction, and telecommunications).
Growth in the non-oil sector has been driven by strong gross fixed
capital formation as government continued with its infrastructure
investment drive. However, the slump in international oil price will put a
severe strain on government fiscal space such that infrastructurespending should slow down in 2009.
Figure 15: Total oil production (million barrels per day)
Source: Central Bank of Nigeria & Standard Bank est.
Nigeria will also face tighter international credit conditions that will limit
access to finance. During 2007, Nigerias foreign direct investment
(FDI) inflows amounted to about US$12.5 billion (6.6% of GDP). The
bulk of these inflows targeted the oil and gas sector. However, the
current global financial crisis will dictate that FDI inflows should slow
down in 2009. We are forecasting a global growth of about 0,5% in
2009. Gross fixed capital formation should only grow by an estimated
2.2% in 2009 compared with an estimated growth of 12.3% in 2008.
Figure 16: Real GDP growth (%)
Source: National Bureau of Statistics & Standard Bank est.
Consumer demand should weaken in 2009. Nigerias public sector
accounts for about 50% of the national economy. In the recent past,
government fiscal expansion led to an increase in government
employees salaries (both federal and state). That led to buoyant
activities in the consumer market. However, high interest rates coupled
with double-digit inflation and a weaker exchange rate should dampen
activities in the consumer markets. Thus, we expect final consumption
expenditure by household to slow down to 3.2% in 2009 compared with
an estimated real growth of 6.5% in 2008.
Monetary Policy
As the global economy continues to slow down, we expect credit
conditions to be tighter. Domestic banks might find it difficult to renew or
extend credit lines and this should also impact negatively on domestic
private sector credit extension. In the recent past, the banking sector
reforms and a positive business environment contributed significantly to
a rapid increase in credit lending, which led to strong surge in broad
money supply. We expect the tighter market conditions to weigh heavily
on the domestic banks ability to lend to the private sector. Thus, private
sector credit extension should decline significantly, which should also
lead to a slowdown in broad money growth throughout the forecast
period. We expect M2 to increase by an average of 5% in 2009
compared with an average of 71.6% in 2008.
The slowdown in broad money growth (M2) should be positive for
inflation in the medium term. However, food prices should continue to
exert upward pressure on headline inflation. Thus, headline inflation
should average 13% in 2009 but decline gradually to single digits during
the forecast period. Monetary policy should stay accommodative in2009. 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
borrow domestically to fund infrastructure investment. This should drive
yields higher in 2009. We do not expect government borrowing to
crowd-out the private sector as there is no vibrant corporate bond
market. The recent shortage of T-bill notes lead to a significant collapse
of the rates. However, this is not sustainable in the long term, such that
T-bill rates should start increasing to around 8% by the end of 2009.
Figure 17: CPI inflation (%)
Source: National Bureau of Statistics & Standard Bank est.
These measures taken to stabilise the naira exchange rate have not
only paralysed the foreign exchange market but have also reversed
some of the exchange rate liberalisation the country has implemented
-
0.50
1.00
1.50
2.00
2.50
3.00
2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f
6.0 6.2
6.8
3.0
5.96.3
6.9
5.8
0
2
4
6
8
2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
0
2
4
6
8
10
12
14
2006 2007 2008 2009f 2010f 2011f 2012f 2013f
8/14/2019 Nigeria growth forecast
9/12
9
since the mid-1990s. For example, the measure that funds purchased
at the Auction cannot be sold on the inter-bank market effectively shuts
down the inter-bank market and runs the risk of encouraging a parallel
and illegal exchange rate market. Depending on the recovery of the oil
prices, we expect these measures to be in place throughout 2009 and
into 2010. The sign of a reversal of a market-determined exchange rate
might also dampen the confidence gained with the international
investors since the liberalisation of the exchange rate. We expect the
naira to continue trading at around its current levels in the short term.
Thus, the naira should average NGN151.5 per US dollar in 2009.
Figure 18: Naira/USD exchange rate
Source: Bloomberg
External sector
The decline in the price of Brent crude oil should affect the countrys
external sector performance. Crude oil exports account for about 90%
of the countrys total exports. Continued unrest in the Niger Delta region
and OPEC oil production cuts should severely impact Nigerias current
account balance. Thus, we expect total exports to decline from an
estimated US$95.2 billion in 2008 to US$48.7 billion in 2009. However,
as new oil fields come online in 2009, we expect a slight increase in oil
exports volume. Despite the country being Sub-Saharan Africas
largest oil producer, Nigeria still imports about 90% of its petrol
requirements because of a lack of refining capabilities. We expect the
import costs to decline significantly following the sharp drop in the
international price of oil. The recent currency depreciation should also
lead to a significant drop in imports. As the economy slows down
certain sectors might reduce their imports of raw materials. Therefore,
imports should decline in nominal terms from an estimated US$48.7
billion in 2008 to US$35.5 billion. Thus, the trade balance is forecast to
decline from US$46.5 billion in 2008 to US$3.5 billion in 2009 (2% of
GDP)
The decline in oil prices coupled with lower profit remittances from oil
companies operating in Nigeria should lead to shrinkage of the income
deficit of the services and income accounts. However, we expect the
income and services accounts to remain in deficit. The slowdown in
global economic growth should put a dent in the inflows of remittances
from Nigerian diaspora. Thus, private capital inflows should decline.
However, the current transfer account should remain in surplus.
Therefore, we forecast a slight deficit of 0.2% of GDP in the current
account in 2009. The current account balance should return to surplus
in 2010 and throughout the rest of the forecast period as oil prices
recover.
Figure 19: Current account balance (% of GDP)
Source: Central Bank of Nigeria & Standard Bank est.
Public Finances
The depressed international price of oil should put severe pressure on
government fiscal space in 2009 and this should lead to significant
expenditure cuts. The projected aggregate expenditure in the 2009
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,
revenue collection will decline significantly and that should dampen
overall government consumption expenditure, which should record a
real growth of 2.9% in 2009 compared with an estimated real growth of
10.5% in 2008.
The 2009 budget was also based on the conservative benchmark oil
price of US$45 per barrel compared with the US$69 per barrel initially
proposed. Oil production is estimated at 2.3 million barrels per day. This
appears too optimistic as further attacks on oil facilities and
infrastructure would disrupt oil production. Thus, budget deficit is
estimated at NGN757 billion ((US$5.1 billion). That is 3% of GDP.
Figure 20: Non-oil primary balance (% of GDP)
Source: Federal Ministry of Finance & Standard Bank est.
We expect fiscal policy to remain expansionary during 2009. The 2009
budget is aimed at delivering the presidents Seven-Point Agenda by
enhancing investment in physical infrastructure and human capital
development, implementing socio-economic reforms and consolidatingdemocracy. Depressed oil prices pose a significant challenge to
110
120
130
140
150
160
2006 2007 2008 2009f 2010f 2011f 2012f 2013f
-5
0
5
10
15
20
25
2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
-35
-30
-25
-20
-15
-10
-5
0
2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
8/14/2019 Nigeria growth forecast
10/12
10
governments 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 countrys outlook going forward. If oil prices remain at these
depressed levels, we expect government revenue to decline. This
should negatively impact governments infrastructure spending, whichhas 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. Governments 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.
8/14/2019 Nigeria growth forecast
11/12
11
Nigeria
Standard Bank forecasts of selected indicators
2006 2007 2008 2009 2010 2011 2012 2013
National Accounts
Gross Domestic Product (USD billion) 146.5 155.6 166.2 171.2 181.2 192.7 206.0 218.0Real GDP growth (%) 6.0 6.2 6.8 3.0 5.9 6.3 6.9 5.8
Final Consumption Expenditure of
Households (NGN billion) 425.7 459.3 489.2 504.9 525.1 552.9 588.3 622.4
% change 7.6 7.9 6.5 3.2 4.0 5.3 6.4 5.8
Final Consumption Expenditure of
Government (NGN billion) 12.3 13.3 14.7 15.1 15.7 16.5 17.8 19.1
% change 7.7 8.1 10.5 2.9 3.8 5.0 7.8 7.2
Gross Fixed Capital Formation (NGNbillion) 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 3.5 4.7 8.1 8.5 9.1 9.9 10.9 12.1
% change 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
Inflation (%) 8.4 5.4 11.5 13.0 11.5 10.3 9.8 8.5
External sector
Exports: goods and services (USD
billion) 62.51 63.12 95.26 40.71 65.35 70.33 85.14 93.45% change 1.0 50.9 -57.3 60.5 7.6 21.1 9.8
Imports: goods and services (USDbillion) 30.91 38.89 48.73 37.21 38.81 41.34 45.78 49.37
% change 25.82 25.30 -23.64 4.30 6.52 10.74 7.84
Trade balance (USD billion) 31.60 24.23 46.53 3.5 26.54 29.00 39.36 44.08
% of GDP 21.6 15.6 28.0 2.0 14.7 15.1 19.1 20.2
Current account (% of GDP) 10.0 1.6 9.9 -0.2 5.2 10.3 19.8 18.5Foreign exchange reserves (USD) endperiod 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 solvencyindicators
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
Non-oil Primary balance (% of GDP) -26.5 -24.5 -30.6 -21.7 -27.5 -29.3 -26.5 -28.7
8/14/2019 Nigeria growth forecast
12/12
12
Group Economics
Goolam Ballim Group Economist
+27-11-636-2910 goolam.ballim@standardbank.co.za
South Africa
Johan Botha Shireen Darmalingam Jeremy Stevens Danelee van Dyk
+27-11-636-2463 +27-11-636-2905 +27-11-631-7855 +27-11-636-6242
Johan.botha@standardbank.co.za Shireen.darmalingam@standardbank.co.za Jeremy.Stevens@standardbank.co.za Danelee.vanDyk@standardbank.co.za
Rest of Africa
Jan Duvenage Anita Last Yvonne Mhango Victor Munyama
+27-11-636-4557 +27-11-631-5990 +27-11-631-2190 +27 11-631-1279
Jan.duvenage@standardbank.co.za Anita.last@standardbank.co.za Yvonne.Mhango@standardbank.co.za Victor.Munyama@standardbank.co.za
Botswana
Lesotho
Namibia
Swaziland
Angola
Ghana
Malawi
Mauritius
Kenya
Mozambique
Uganda
Zambia
DRC
Nigeria
Tanzania
Zimbabwe
All current research is available on the Standard Bank Group Economics home page. In order to receive Group Economics research via email, allclients (new and existing) are required to register and select publications on the website. Click onhttp://ws9.standardbank.co.za/sbrp/LatestResearch.do, selectRegisterand enter your email address. A username and password will then be emailedto you.
Analyst certificationThe authors certify that: 1) all recommendations and views detailed in this document reflect his/her personal opinion of the financial instrument or market class discussed;and 2) no part of his/her compensation was, is, nor will be, directly (nor indirectly) related to opinion(s) or recommendation(s) expressed in this documentDisclaimerThis document does not constitute an offer, or the solicitation of an offer for the sale or purchase of any investment or security. This is a commercial communication. Ifyou are in any doubt about the contents of this document or the investment to which this document relates you should consult a person who specialises in advising on theacquisition of such securities. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given andno responsibility or liability is accepted by the Standard Bank Group Limited, its subsidiaries, holding companies or affiliates as to the accuracy or completeness of theinformation contained herein. All opinions and estimates contained in this report may be changed after publication at any time without not ice. Members of the StandardBank Group Limited, their directors, officers and employees may have a long or short position in currencies or securities mentioned in this report or related investments,and may add to, dispose of or effect transactions in such currencies, securities or investments for their own account and may perform or seek to perform advisory orbanking services in relation thereto. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. This document is notintended for the use of private customers. This document must not be acted on or relied on by persons who are private customers. Any investment or investment activityto which this document relates is only available to persons other than private customers and will be engaged in only with such persons. In European Union countries thisdocument has been issued to persons who are investment professionals (or equivalent) in their home jurisdictions. Neither this document nor any copy of it nor anystatement herein may be taken or transmitted into the United States or distributed, directly or indirectly, in the United States or to any U.S. person except where those U.S.persons are, or are believed to be, qualified institutions acting in their capacity as holders of fiduciary accounts for the benefit or account of non U.S. persons; Thedistribution of this document and the offering, sale and delivery of securities in certain jurisdictions may be restricted by law. Persons into whose possession thisdocument comes are required by the Standard Bank Group Limited to inform themselves about and to observe any such restrictions. You are to rely on your own
independent appraisal of and investigations into (a) the condition, creditworthiness, affairs, status and nature of any issuer or obligor referred to and (b) all other mattersand things contemplated by this document. This document has been sent to you for your information and may not be reproduced or redistributed to any other person. Byaccepting this document, you agree to be bound by the foregoing limitations. Unauthorised use or disclosure of this document is strictly prohibited. Copyright 2004Standard Bank Group. All rights reserved.
mailto:goolam.ballim@standardbank.co.zamailto:Johan.botha@standardbank.co.zamailto:Shireen.darmalingam@standardbank.co.zamailto:Jeremy.Stevens@standardbank.co.zamailto:Danelee.vanDyk@standardbank.co.zamailto:Jan.duvenage@standardbank.co.zamailto:Anita.last@standardbank.co.zamailto:Yvonne.Mhango@standardbank.co.zamailto:Victor.Munyama@standardbank.co.zahttp://ws9.standardbank.co.za/sbrp/LatestResearch.dohttp://ws9.standardbank.co.za/sbrp/LatestResearch.domailto:Victor.Munyama@standardbank.co.zamailto:Yvonne.Mhango@standardbank.co.zamailto:Anita.last@standardbank.co.zamailto:Jan.duvenage@standardbank.co.zamailto:Danelee.vanDyk@standardbank.co.zamailto:Jeremy.Stevens@standardbank.co.zamailto:Shireen.darmalingam@standardbank.co.zamailto:Johan.botha@standardbank.co.zamailto:goolam.ballim@standardbank.co.za