It’s a brand-new year, as entrepreneurs and household money managers we want to know what will happen in money terms in 2017, but no analyst can predict the future, we can only identify economic triggers and attempt to estimate their impact.
In this article, we have identified six of such triggers we should watch carefully as they will have substantial impact.
However, where do we stand coming into 2016?
- Economy in recession, GDP growth negative all year.
- Inflation continues to rise, now double digit, destroying savings
- Unemployment up
- 2017 FGN budget submitted, spending up, revenue sources not firm.
- Chatter of $29.9b loan grows, will NASS approve?
- Interbank market distorted: with DSS “intervention” the ability of the parallel market to perform “price discovery” evaporates
This is not an economy that fills anyone with confidence, capital controls are literally starved the economy to death. So back to 2017, what triggers should we track?.
- Donald Trump energy plan & OPEC decision on production quotas.
- FGN Deficit financing
- Central Bank of Nigeria forex policy
- Escravos Pipeline integrity
- Harvest and delivery to markets of local food
- China buying of commodities
Donald Trump’s energy plan emphasizes maximizing internal American hydrocarbon sources. If America drills more oil and even exports, then oil prices will remain low, thus severely increase Nigeria budget deficit. OPEC has agreed a significant output cut (Nigeria secured an exception), should this cut be carried out, then output fall and oil prices will rise, increasing Nigeria forex earnings which will be positive.
Deficit Financing, how the Federal Government will finance its 2017 budget deficit will largely drive interest rate direction. If the foreign loan component to fund the budget is rejected, the local borrowing will go up and will be more expensive, affecting SMEs in America. Should the US Federal Reserve also raise interest rates, then foreign borrowing component will also rise also increasing the deficit.
CBN Forex Policy points to tighter control over supply of forex to fund the CBN interbank market. If the interbank market works as envisaged, and supply of forex improves, then manufacturers and importers get foreign currency on time and in sufficient quantities. A market driven forex regime is also key to the subsidy regime for imported petrol.
The Escravos to Lagos Gas pipeline supplies gas to power the gas fired power plants in Nigeria’s manufacturing base in the South West. This is key, no pipeline integrity means no electricity causing economic output and thus GDP to fall, increasing unemployment. So watch if the integrity of the pipeline will be maintained.
Food Harvests: Food comprises a key component in the computation of the CPI figure for inflation. If food harvest and distribution to key markets improve, it contributes to regression of inflation in the economy. So its not just harvests, but storing and transporting that harvest to market.
China Commodity buying, China has been a buyer of commodities, minerals, and energy from Nigeria. These trade flow with China has boosted our export revenues, boosting local currency values and consumption. Should the Chinese buying slowdown, our export earnings will fall, creating holes in budget funding.
Best Case scenario
American domestic energy plan does not kick in as expected, leading to stable demand for crude oil. Parrell to that is OPEC agreement on output, leading to oil prices north of $60 stabilizing Federation forex revenues.
Stable forex flows, should make a better case for foreign loan which take pressure off local bond markets allowing greater flexibility in CBN funding of interbank market. Attacks on gas pipelines diminish, leading to vastly improved power in the SW, creating more jobs, growing fiscal revenues. Food prices fall, as harvests are processed with greater efficiency.
Worse Case Scenario
OPEC fails to implement production cuts, America ramps up renewables and domestic Shale drilling, depressing oil prices to below $50. This fall in crude oil prices increase pressure on the fiscal deficit, leading to higher borrowing and a crowding out of private credit and pushes interest rates above 20%, killing SMEs
Fiscal deficit forces CBN to tighten forex availability, killing off imports, crashing the productive base. Fuel imports cannot be funded, attacks on gas pipes continues, snuffing out local production, increasing unemployment, deepening stagflation.
What can we do?
- Remove capital controls, aggressively seek Investments and Remittances
- Refocus on rural roads, to increase food supply to towns reduce food wastage by increasing local processing.
- Ensure ‘peace” with Niger Delta agitators, pass PIGB, ensure gas flows.
- Boost household incomes, if incomes don’t rise consumptions won’t restart, economy won’t restart
- Pursue import substitution especially for imported food