Ambushed!: Economy’s minefield craves minesweepers for investment inflows

BY PHILLIP ISAKPA & CHARLES ABUEDE

• Tariff hikes‭; ‬Rising prices‭; ‬Depleting FX reserves‭; ‬Election uncertainties threats to investment

The pictures that have been coming out of the Nigerian economy and its investment climate in the last two weeks have left many local and international analysts worried about what they consider to be the deepening of the uncertainties that have surrounded Africa’s largest economy by gross domestic product and market size, as well as by population numbers, for nearly a decade.

Caught up in the current global economic misalignments as a result of the Russian-Ukraine war in Europe, Nigeria’s own domestic economic misalignments are continuously being exposed, say analysts. It appears to be a follow-through from a 2014-2015 dip in oil prices that ushered in, not one, but two recessions in the lifetime of the present government headed by President Muhammadu Buhari, a former maximum military ruler.

Further exposures to the vulnerabilities of the Nigerian economy have come by way of the global Covid-19 pandemic that brought this government and its economy already unsure and unsteady to the reality of its fragility. Getting to grips with the economy was never a thing casual and deep observers trusted this government with, especially with the president so laid back and out of depth on the economy that his failure to make the right and quick appointments to man economic functions exposed him and the government to the danger that the country faced in the face of any eventualities under its watch.

Those eventualities have since shown up aplenty and beyond economic matters, the one area that the government, since it is led by a former military general, was expected to triumph over all else, security, has joined forces with the economic knock-knees to compound the uncertainties enveloping the economic climate for investments.

Last week the United Kingdom issued a travel advisory to its citizens planning to visit Nigeria and listed a number of states they should not visit or be very careful about. One of them is Kaduna, where unlike the North-East, there appears to be a systematic approach to the security situation that has the governor unsure about all the attributes of an intelligent public officer attributed to him when he was a minister under the President Olusegun Obasanjo.

For a very long time, the United States has issued such a warning too to its citizens about Nigeria and the insecurity in the country. This is not the kind of news that brings comfort to investors, especially with the new dimension of blowing up rail tracks and killing passengers on board and kidnapping others.

But the real indices of the minefield that is now the character of the Nigerian economy are not too difficult to see. They have tumbled in quite a lot in the last few weeks, some in the last few months, and yet others even years before.

Analysts quickly point to tariff hikes across board, rising prices across makes, shapes, qualities of products and services, depleting foreign reserves even in the face of oil prices that have looked north since the beginning of the year. On top of all these are the election uncertainties which ordinarily put a halt to investment decisions in many economies of the world when elections are to be held. In the case of Nigeria, however, the pervasive uncertainties result from lack of clarity, consistency and policy assurances required to give confidence to investors to ignore all else and get on with the economy. 

Analysts say they look at these occurrences hitting the economy on all sides, especially coming as they have in the last few weeks, including rising commodities prices, spiralling inflation, the brewing uncertainties from election spending-fuelled inflation, to come to the conclusion that there are mines littered everywhere and that the economy needs a minesweeper to make the field safe for normal activities and investments.  Indeed, say many economic observers, the economic and investment landscape is already under threat from the uncertainties around the next general elections, especially as foreign short- and long-term investors rejig their portfolios and many take a stand-off stance to wait out the elections, their outcomes and aftermath. Even before the elections, you can factor in the recent inflation numbers from the National Bureau of Statistics for February, 2022, where the disinflation trend observed in January took a reversal with a 10 basis points acceleration to 15.70 percent year on year, driven by a faster increase in the core inflation component, despite the abatement to 17.1 percent in food inflation, as well as the effects from the geopolitical crisis in eastern Europe.

The conflict in Eastern Europe has pushed commodity prices higher as supply chains adjust resulting in additional cost pressures for Nigerian consumer goods manufacturers whose production relies heavily on imported inputs such as diesel, whose market is deregulated, with its price rising to above N600 per litre in some parts of the country in March 2022. Analysts say this is expected to trigger high operational cost, resulting in higher prices of goods and services.

Already, analysts’ expectations are beginning to manifest. Last week, the association to which Nigerian telecoms providers belong, the Association of Licensed Telecommunications Operators of Nigeria (ALTON), revealed plans to hike tariff over cost of doing business in Nigeria, what has seen them lament the negative impact on their operations, especially the higher operational costs (Opex) resulting from the rising cost of diesel.

Gbenga Adebayo, president, ALTON, said network planning, operational expense, and projection plans for telcos are based on diesel prices and added that there was a need for an intervention to save the sector, or operators might have no other choice but to begin a process of price review. In a similar vein, despite the steep headline inflation which stayed at 15.7 percent in February, Multichoice Nigeria, revealed to local consumers its plan to increase DSTV and its GOTV subscriptions beginning April 1, 2022. The move was, however, greeted with complaints by consumers, and it has now received the intervention of the Nigerian Competition and Consumer Protection (CCP) Tribunal sitting in Abuja, which has restrained MultiChoice Nigeria Limited from increasing its tariffs and cost of products and services with the matter being adjourned until April 11.

Travelling by air within the country has also been hit by a rise in the price of aviation fuel, leading to high cost of operation and a near-shutdown of operation of some airlines in the country, as well as an increase in airfares.

Experts at FSDH Capital Research, looking at the nexus of the global play on the domestic economy, in a note to Business A.M., write that, “The global economic and investment landscape will remain volatile especially if the Russo-Ukrainian crisis intensifies. In this scenario, further sanctions will be imposed on Russia by the West, crippling its trade with the rest of the world.

“As a result, inflation, corporate performance, public debt and unemployment will increase, while economic growth will be subdued in many countries. In addition, several advanced countries are considering raising benchmark interest rates to curtail inflation, and this could result in investment outflows in developing markets,” they added. Lending credence to the serious concern expressed by Nigerians on the piling up of government public debts to around N40 trillion in 2021 as announced by the Debt Management Office (DMO) amidst weak revenue generation power and undiversified economy, keeping Nigeria on the verge of debt trap; uncertainties still loom ahead for the country, which at the moment, is on a fiscal cliff as it drives closer to the new election year, 22 years since return to democratic rule.

While the war continues between Russia and Ukraine it is causing economic and social distress in several countries where the pressures and effects are being exerted with Nigeria not exempted. However, analysts have reckoned that a prolonged battle could have ripple effects for inflation, economic growth and corporate performance in Nigeria and around the world as investors continue seeking a safer haven in assets like gold and other treasures while staying underweight to equities with a preference for war and defence stocks as well as commodity-focused companies.

For Nigeria, the effect of the war is taking a toll on the economy in the form of the scarcity of commodities that are supplied by Russia and Ukraine. As a result, commodities such as wheat, maize, metals have been severely affected and this has transcended into higher commodity prices, which will trigger inflation in the month of March and in subsequent months.  As noted by FSDH Capital experts, if the crisis intensifies, central banks in advanced countries are likely to raise interest rates to address inflationary pressure. This, they said, could trigger investment outflows from Nigeria and limit inflows, exerting pressure on exchange rate and external reserves.

Talking about Nigeria’s external reserves, which has trended downwards since the approval of the $3.35 billion Special Drawing Rights (SDRs) by the IMF in August 2021 and the issuance of Eurobond in September, the country has failed to take advantage of the positive rally in the crude oil price to above $133 per barrel to grow its reserves, pointing to several structural problems, including of inefficiencies in the oil sector, crude oil theft, a weak petrol refining industry and the continuation of petrol subsidies.

However, since the external reserves opened the year at $40.5 billion, it has lost about two percent of its value year to date as a result of lower oil production below the budgeted benchmark even with high crude oil price, which has also been fingered as leading to a limited foreign currency inflows needed to boost the reserves.