13 signs Nigeria’s economy is on the brink of collapse

Last week, the Nigeria’s President, Umaru Yar’Adua finally put the lie to the strident and persistent denial by the Governor of the Central Bank of Nigeria, Prof. Chukwuma Soludo of the nation’s economic susceptibility to the roiling global financial crisis.

President Yar’Adua, acknowledged, last week, the fact that the effect of the global economic malaise are already being felt in Nigeria, while announcing the names of members of a new broad based Presidential Steering Committee that will fashion out a strategic response to the impact of the current global financial meltdown on the country. The committee, which will coordinate a “new economic framework” is to be headed by the President himself.

In this review, we highlight 13 dangerous signs that are indicators of an economy on the brink of collapse even if Prof. Soludo thinks otherwise.

Nigeria at risk of down grade of sovereign rating which may balk foreign interests in debt issues

The slump in the prices of crude oil has created a desperate situation for the Central Bank of Nigeria as it limits its ability to defend the Naira, the currency of the continenet’s biggest crude oil producer.

Gunther-Kuschke, a sovereign-risk analyst at RMB, the investment banking unit of First Rand Ltd. in Johannesburg, wrote in a note to clients last week that the Nigerian Central Bank won’t be able to sustain its support of the naira in an environment of declining oil prices and falling export revenue.

“The Central Bank will have to reassess its strategy of using foreign reserves to support the naira,” said Kuschke. “They’ll want to keep their reserves intact in order to protect their credit rating.”

Nigeria is rated BB- by Fitch Ratings and Standard & Poor’s, three notches below investment grade. The nation’s foreign reserves slumped 11 per cent to $55.05 billion in the 3 1/2 months to Dec. 18, according to data compiled by RMB.

“A ratings downgrade would really hurt their ability to raise capital at reasonable rates, particularly through sovereign-debt issuance,” said Kuschke.

This would put at risk Nigeria’s approved plans to issue a $500 million 10-year sovereign bond to fund infrastructure projects in the country and part of the $5billion deficit budget financing it has to embark on to bridge the projected shortfall in income.

Miserable National Earning prospects

So many factors in the international environment are seemingly conniving to dampen any hope of buoyant earnings for Nigeria from its dominant crude oil export. Nigeria was literally smiling to the bank until September 2008 when the price of crude oil which had hit a high of $147 began a rapid retreat. Last week, the nation’s mainstay export earner had crossed the Mason Dixon line, selling at a price below $33.

One of the reasons oil prices continue to tumble, in the consideration of market experts, is that crude oil inventories have continued to build, suggesting that demand for oil and gasoline will not rebound anytime soon.

The United States of America’s Energy Department’s Energy Information Administration said last week that crude inventories grew by 1.2 million barrels for the week ended Friday, 9 January. Though this was below the expectation of three million barrels, according to the average of estimates in a survey of analysts by Platts, yet the department said in the report that oil stocks jumped 6.7 million barrels the previous week, meaning less and less crude is being used.

Gasoline inventories rose by 2.1 million barrels, 300,000 barrels ahead of analyst estimates, and distillates increased by 6.4 million barrels compared with the estimate of a gain of 1.7 million distillates.

The build in distillates – used for heating oil and diesel fuel – comes as blowing snow and frigid temperatures pound much of the country.

Prices have also continued to fall, according to experts, because there is growing evidence that a weakened global economy has eaten away at energy demand.

Besides, as the US, Nigeria crude oil main buyer, enters a corporate earning season which is expected to be fraught with bad news.

“Clearly, the focus is back on the macroeconomics, and the concern that the demand for oil is just not going to be there any time soon, and there’s going to be plenty of oil out there,” a US Department of Energy official, said last week.

Traders are buying crude and putting into storage in hopes that it will be worth more at a later date. Oil tankers are being leased at sea and storage space for crude on land is not easy to find as futures contracts expire, meaning the buyer must take delivery.

“Little wonder then why overall crude oil supplies have since jumped to a 35-week high,” Schork wrote in his daily publication, The Schork Report.

The US largest manufacturers have slashed spending on fuel and penultimate week, aluminum producer Alcoa said it was cutting 13,500 jobs and making deep production cuts.

Alcoa, chip maker Intel and biotech company Genentech will report fourth quarter results, giving investors a glimpse of how deep the current recession may be.

“Given that we’re likely to see quite a few rather poor fourth quarter earnings reports, downward pressure will continue to be exerted on oil,” said Victor Shum, an energy analyst with consultancy, Purvin & Gertz, in Singapore. “Worries about the macroeconomic outlook will continue to constrain oil.”

Oil prices have also fallen over fears that rising U.S. unemployment will undermine crude demand. The Labor Department said Friday that employers slashed 524,000 jobs in December and 2.6 million jobs for all of 2008. The nation’s unemployment rate jumped to 7.2 per cent, the highest since 1993.

Central Bank devalued the Naira for the wrong reasons

Even when it was obvious the naira was rapidly sliding against the dollar, the Governor of the Central Bank of Nigeria, Prof. Chukwuma Soludo, refused to make a public explanation as to what could have been responsible for the slide even as he had told the nation weeks before then that the nation’s economy was immune to the negative effect of the global financial melt down.

Despite the bank’s frantic efforts to allay the public fears, the value of the naira continued to plummet, yet, it was not until the members of the National Assembly demanded an explanation from the CBN Governor in person that the Governor availed the Nigerian public a morsel of explanation for the sliding naira.

The CBN Governor told the National Assembly that devaluation of the naira was a deliberate policy to increase the quantity of naira available for government in the light of dwindling income from the sale of crude oil.

Critiques of the policy said it would only lead to the degeneration of the nation’s economic sphere because the Nigerian government has no control over the price and quantity of crude that can be sold. They also dismissed the intension to devalue the naira so drastically it is impacting on cost of living of the average Nigerian.

“The Central Bank of Nigeria cannot determine the price of a barrel of crude, this is dependent on so many factors in the international market. The government cannot also determine the exact quantity of crude that can be taken away from the largely Niger Delta area of the nation, which is engaged in a protracted running battle with the nation’s armed forces and creating substantive distraction for oil exploration and producing companies operating in the Niger Delta,” an oil sector consultant in Nigeria said.

“Over a period of four months we can see a near maelstrom scenario in the international oil circle. Prices of crude had plummeted. From projections in the users country a reversion to climbing price is not expected in 2009 except something dramatic happens.

“On output, the nation is constrained, recall that the Federal Government budget is predicated on $55 per barrel of crude and a production projection of 2.25million barrels a day. Even, before the ink dried on the projection, the 2.25million barrels per day projection was coming in a short pack of 1.8 million barrel per day. Weeks after, OPEC made a desperate price beating thrust to create a bulwark against falling prices of crude by cutting supplies to the world market. So, now, Nigeria’s production quota a day is about 1.7million barrels a day.

“This has dire consequences for the nation’s income flow. The CBN lost the initiative to stem the fall of the naira by acting proactively before the all out impact of the global financial meltdown started reflecting on Nigeria’s financial markets,” the consultant said.

Nigeria now ranked 18th on the most-at-risk country

From newly rich Russia to impoverished sub-Saharan Africa, social strains are threatening the established political order, putting some countries’ very survival at risk.

The disillusionment and spillover effects of the global recession “are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardise global security in general”, says Louis Michel, the EU’s development aid commissioner.

It’s the failed or failing states that stand to lose the most. “The punch line: poverty does cause violence,” says Raymond Fisman, a professor at Columbia Business School in New York. Researchers led by Edward Miguel of the University of California have even quantified it: a 5 percent drop in national income in African countries increases the risk of civil conflict in the following year to 30 percent.

The frailest nations are those south of the Sahara. The region accounts for seven of the top 10 countries in a ranking of “failed” states compiled by the Fund for Peace, a Washington-based research group.

Nigeria, which has the continent’s biggest fossil fuel reserves, is staring into a $5 billion budget hole due to the oil price swoon. It confronts an emboldened guerrilla movement in the Niger Delta, the oil-producing region that has attracted the likes of Royal Dutch Shell and Chevron.

“The outlook is not optimistic,” says Pauline Baker, the president of the Fund for Peace, which ranks Nigeria 18th on the most-at-risk list.

“Unless Nigeria begins to pull itself together, I think, with the lowering oil price in particular, it is quite vulnerable.”

The crisis could undermine the development momentum. It would mean joblessness would increase, and that could undermine the stability of nations like Nigeria.

Foreign investors are not in a hurry to come to Nigeria

Emerging market equity investors last year withdrew a record $48.3 billion (R452 billion at yesterday’s exchange rate) from their funds as the global financial crisis and economic recession hurt demand for riskier assets, according to data from EPFR Global.

The Morgan Stanley Capital International emerging markets index, which tracks 746 companies in developing nations, dropped 54 percent last year, the worst annual performance since the measure was created in 1987. Foreign investors withdrew $321.4 billion from the equity and bond funds that EPFR tracked.

The question for 2009 is whether credit markets will continue to thaw and whether all of the fiscal stimulus to come and the expectation of a recovery in economic activity later this year will be enough to coax some of the cash back into equity and bond exposure,” said Brad Durham.

The direct implication of this is that the foreign funds that drove the Nigerian stock market by the admission of the Director-General of the Nigerian Stock Exchange, may be tied down in their home countries as the funds that could have been brought into Nigeria must have found save havens in less risky assets.

Low remittances from Nigerians living abroad

The financial crisis and ensuing economic downturn has significantly slowed the flow of global remittance to developing countries for the first time in almost a decade. The key reasons for the almost global decline are now widely accepted:

–Job losses. Many immigrants in key remitting countries (such as the U.S., Australia and Spain) lost their jobs in 2008.

–Cost of living. Rising inflation in many developed economies throughout much of 2008 is likely to have eroded some remitters’ capacity to maintain the value of their remittances.

This will have a major effect. The U.K. Overseas Development Institute’s Humanitarian Policy Group Report has cited household surveys in Guatemala, Ghana, Uganda, Bangladesh and Sri Lanka, which have demonstrated remittances, have helped people escape poverty.

There is a general sense of individuals being cash-strapped around the country as relatives abroad cannot send money to families here.

Banks lending slows down

Nigerian banks were at the head of the boom period between 2002 and mid 2008, just emerging from a consolidation exercise with money virtually brimming in their vaults, the banks liquidity position was highly enhanced with public sector deposits which had been boosted by increased earning s from skyrocketing oil prices.

The story and its details have since changed, however. Oil price had hit the dirt, the federal government has informed the component parts of the federation to forget sharing money from the excess crude account which translates to mean that there is a paucity of funds.

The impact on banks is already telling, compared to when the banks had money to lend out, the vaults are drying up, while those whose projects are considered auspicious enough to be financed have to pay hefty interest on the loan or overdraft.

This has led to a general slow down in the real sector.

Micro finance banks at risk

The operations of micro finance banks were just getting into top gear only to be slowed into a state of desperation as it were, from the effect of global financial meltdown. Some of the licensed micro finance banks had ambitiously used the commercial bank’s operating template as their standard of operations. Now, not a few are in a strait as they tried to tend to customers and live up the high class standard they set for themselves.

Those interviewed said their sub sector is peculiar because unlike banks that have the money market where banks can fill their liquidity short fall, the micro finance banks don’t have such platform so they are left to fend themselves.

On the last count, about 30 micro finance banks are said to be desperate for fund injection into their system.

Dollar credit line dries up

An immediate fallout of the global financial melt down is the close down of the window that allows Nigerian banks fund their dollar and other foreign exchange needs through funds made available by their accredited foreign correspondent banks. Not many banks in Nigeria can access this window any longer.

Prices of goods are in flight

Inflation has no other name than general and persistent increase in prices of goods and services. Government officials always find a way of redefining the essence of rising prices away from its practical implication. The Governor of the Central Bank, in his characteristic Economic theorization told a bewildered nation that inflation cannot be domiciled as part of the effects of the global financial meltdown.

Whatever may be the case may be, the truth is that prices of goods are growing wings and flying out of reach of even the very buoyant. Our survey of wholesale and retail products shows that manufacturers are engaged in revaluating the prices of products to recoup possible losses to the crashing naira. Most retail prices have gone up by more than a hundred percent in the last six weeks.

No hope of reversal of fortunes for the Nigerian Stock Market

Regulators and stock market operators had assured the investing public of speedy revival of the stock market as the market began to founder in the early days of March 2008. Some more observant market operators and commentators had canvassed the need for a Federal Government bailout plan for the stock market. Recall that the then Minister of Finance, Shamsudeen Usman had reviled that option as unnecessary, the CBN Governor aligned his position with the then Minister of Finance.

Unfortunately, the management of the Stock Exchange and the Securities and Exchange Commission opted to remain silent in the face of the illogicality the Federal Government was canvassing to justify it non involvement in the revival of the stock exchange.Last week Monday, Prof. Ndi Okerek Onyuike, Director-General of the Exchange muster enough courage to inform the nation that the government got it wrong by not intervening in the market.

“Government pronouncement that it would not bail the market, even before the stakeholders concluded their meeting on the way forward showed that it did not appreciate the problem in the capital market.” Okerek-Onyuike said at a press briefing to review the activities of the market in 2008.

The Director General of the Exchange disclosed that foreign portfolio investments dropped by over 41 per cent to N150bn, while record of sales by foreign investors puts the figure at N550bn, representing a net outflow of N400bn.

The NSE DG used the occasion to express her personal frustration over how certain forces and interests in government had short circuit efforts at reviving the market for their own selfish end.

“Nigerians are parochial in their approach to national issues, especially on the true situation in the Nigerian capital market. It is our usual approach that once we are not in charge we make every effort to pull down people for selfish reasons,” Okereke-Onyuike.

The present dilemma is that some experts have estimated that the Nigerian stock market needs about one trillion naira to experience a rebound, only the Federal Government can dare pull that kind of money but as it turned out the federal government is cash strapped.

It is a hopeless situation for the stock market.

Massive jobs cut imminent

Already, there are indications that the banking industry would soon experience massive job cuts as banks have concluded plans to lay off thousands of workers as part of strategies to cope with the impact of the global financial crisis. Concerned economists said this won’t be limited to the banking sector as cost of production increases across board for manufacturers and the operating environment becomes inclement.

CBN losing battle to save the naira

The Governor of the CBN, Prof Chukwuma Soludo may pass as a congenital optimist. It would now seem that rather for him to engage in proactive policy direction to save an obviously crashing naira, the professor of economics would rather grandstand and postulate positions derived from nomadic logic.

It was not until this past Wednesday 14 January, after a Monetary Policy Committee meeting that the Governor of the CBN abandoned his long talks on optimism to reel out emergency measures to secure the value of the naira.

The Naira had depreciated by N7.25 from N146.20/US$ on Friday, 9 January to N153.45/US$ on Monday at the Interbank market largely because the CBN, the only major source of supply, could not meet local demand that has been increasing in the last few weeks as a result of speculative trading.

After the Monetary Policy Committee meeting the CBN announced that strict foreign exchange management measures will be utilized to forestall; the continued decline in the local currency. The CBN then announced the reintroduction of the Retail Dutch Auction System (RDAS) with effect from January 19,2009. Bids under the RDAS will be on cash basis; currencies purchased shall be used for transactions stipulated in the required documen-tations, purchases made by banks on customers’ behalf shall be published in the dailies fortnightly, foreign exchange Net Open Position (NOP) of banks shall be reduced from 10 per cent to five per cent effective January 19,2009 among others.

Experts said the harm had been done before the CBN introduced its belated naira saving measures. By Friday, 9 January, the naira had depreciated by N18.73 or 14.3 per cent in the official market since the beginning of the year. Last week, from N131.27, the naira depreciated to N144 in the official market, losing N12.73 to the dollar.

Most hit are importers that enjoyed credit financing from their suppliers. Most had secured their supplies at the rate of N118 to a dollar, those that have their payment due in January have accumulated the difference between the exchange rate in November and now with significant impact on their cash flow.

The Nigerian Employers Consultative Association (NECA), the Nigeria Labour Congress (NLC), Manufacturers Association of Nigeria (MAN), and other members of the organised private sector warned that the continued fall of the Naira would lead to widespread increases in prices of goods and services, unemployment, and increases in costs of capital projects across the country.

One Response

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