Skip to main content

Building on a Shaky Foundation




Dear Speculators,

The value of Naira has changed, the price of crude oil has appreciated significantly from January last year but nothing really has changed in the way Nigerian government carelessly plans and budget for the year ahead. 

A budget is too important to be built on a shaky foundation. The 2017 budget is far too important considering the current economic recession in Nigeria. Keynes strategy of an expansive fiscal policy during economic slowdowns seems to be the country's favoured approach to pulling the economy out of recession. It's a goldilocks strategy considering it pushes Nigeria further into debt at a time when the cost of borrowing in the country is too high but the benefit of increased spending in the country is too important to ignore.

Budget estimates for 2017 will see Nigeria spending beyond N7.4 trillion, a 21 percent increase to last year record spending which was still unable to prevent the country from entering a recession. Crude oil price benchmark is $44.50 but today's crude oil price is only $49, leaving very little safety room for the country in a situation where new information about an oil glut causes an oil price shock which pushes crude oil price below $45. Remember crude oil revenue accounts for over 70 percent of federal government revenue, so any price shock that causes oil price to drop to $44 or below will force Nigeria to accrue more debt to fund its record budget.

Another discomfort is why the country is always over ambitious when estimating its proposed daily crude oil production as 2.2 million barrels per day when it only averaged daily production of 1.9 million bpd in the past year. Wishful estimates won't get us far. It is better to underestimate and end up with savings than to overestimate and end up with debt. 

Finally, we wrote a piece earlier this year about the potential confusion Central Bank can create by allowing multiple exchange rates in a country which is now materializing. Nigeria is proposing to apply an exchange rate figure of 305 N/$ which is almost a 20 percent discount of the rate CBN is selling dollar to Nigerian banks. Whether the budget will be used to subsidize the dollar further or the wealth of Nigeria will be thrown out the window using accounting tricks is yet to be seen. The exchange rate should be more reflective of the NAFEX price and not the inter-bank rate since Nigeria does not in anyway appear to be a bank.

Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

Comments

Post a Comment

Popular posts from this blog

ECOWAS: The Silent Opportunity of a Weaker Naira

Dear Speculators, The catastrophic collapse in the value of Naira in 2016 has brought more bad news than good news to Nigeria. This has come at a time when currency manipulation in Japan, China and Switzerland to purposely erode the value of their currency in order to gain trade advantages has angered many foreign governments especially America. Britain was lucky to have had the Pound devalued by the financial markets in the aftermath of the Brexit to the delight of the Bank of England whom like many other Central Banks in the western world are now inflation seekers. But not Nigeria, we don't need a weaker Naira, at least not now. Unfortunately, the drastic fall in the oil price, current account deficit, lower foreign external reserves and withdrawal of foreign investments from Nigeria has dragged the Naira about 58% lower since its January levels at the interbank market. This has almost doubled the rate of inflation in the last one year as imported products make up a si...
Post a Comment
Read more

The Wrong Forecaster

Dear Speculators, The gloominess of the Nigerian economic outlook has significantly knocked down the prices of some financial assets but the real value of some of these assets have been mildly affected. While recounting the economic misfortune that has befallen the country in the last two years is inevitable, dwelling on the past is a perfect time wasting activity. Luckily, investment is forward looking and not regressive thinking. The past is a great indication of the future but not a mirror for prediction. The randomness of the world ensures that yesterday looks at least slightly different from tomorrow. And if we have learnt anything from the history books, it is that good things do not last forever and bad times always have an end. Life is by definition cyclical. The key questions to ask before buying or selling any financial asset is; will the current economic situation last forever? Will the inflation rate remain in double digits over the next 5 years? Will the Nai...
Post a Comment
Read more

Everything is Going Down in Nigeria Except Inflation

Dear Speculators, The wait is over, we anticipated bad news and we got it. Our fears have become reality, the economy has continued to back slide and Nigeria has officially tipped into a recession. Not that this surprises anyone though. Falling oil prices, dollar scarcity, exploding oil pipelines, massive labour retrenchment and import restrictions have all contributed their fair share to weaken growth in Nigeria's economy. However, the stock market arguably has had it worse than the general economy this year as the market is currently down about 3.8 percent against an economy contraction of 2.06 percent in the second quarter. A closer analysis of the stock market brings to light some intriguing statistics. The largest 49 companies in the stock market account for 97% of the total stock market capitalization. 41 companies of the 49 sell at an average of 22x earnings. Only 49 companies out of a total of 171 companies trading on the Nigerian Stock Exchange are valued above ...
Post a Comment
Read more