Economic boom seen for Nigeria on election of right candidate

BY ONOME AMUGE & CYNTHIA EZEKWE 

• Cowry Asset analysts optimistic about recovery

Amid all the downcasts and doomish projections for global and local economic outcomes in 2023, a crack on the rock could release life saving freshwater for Nigeria’s economy if the country’s electorate vote in the right candidates in the February 25 presidential elections, analysts at a Lagos-based investment house, Cowry Asset Management, have said in an outlook report made available to Business A.M.

 

Both the World Bank and International Monetary Fund (IMF) have in their most recent projections of the world economy, downgraded their earlier forecasts and suggested that the roads of 2023 are paved with thorns and outcomes are likely to see the global economy in difficulties.

 

For instance, 2023 began on a gloomy note with the International Monetary Fund (IMF) predicting a global deceleration, while also projecting about two-third of the global economy to go into recession in 2023.

This was followed by the World Bank which also predicted a slow global economic growth, which it projected to grow by 1.7 percent in 2023, a sharp decline from three percent it predicted in July 2022.

But a bullish optimism for the economy in 2023 has been offered by analysts at Cowry Asset Management, a Lagos-based investment house led by  investment banker Johnson Chukwu, who say Nigeria will experience an economic boom if the right candidate is elected in the forthcoming presidential election.

Nigerians will on February 25 go to the polls when the country holds its presidential election to elect a new government to replace outgoing President Muhammadu Buhari who came into power in 2015 under the All Progressives Congress (APC) and has delivered some of the country’s worst economic indicators in the last seven and a half years.

Giving an overview of the Nigerian economy in a report titled, “Nigerian Economic Report Card 2022 Full Year Review”, Cowry Asset Management noted that 2022 was a challenging year for Nigeria’s economy which was besieged by inflation hike, dwindling oil revenue, currency depreciation, contraction in manufacturing sector, among other negating factors which dragged economic performance into an abyss.

The investment company noted that Nigeria’s economy grew at a slower rate of 2.25 percent year-on-year in real terms in the third quarter of 2022. The Q3 growth, it said, signifies a 1.78 percent decrease compared to the 4.03 percent growth recorded in Q3 of 2021 and a 1.29 percent decrease from the 3.54 percent recorded in the preceding quarter.

It also remarked that the persistent increase in energy prices, supply chain bottlenecks, rising inflation, impending food crisis, socio-political tension and the sharp increase in interest rates have led to tightening external financial conditions. It added that the country’s worsening fiscal position is further highlighted by the inability to optimise the global oil price rally as the government faces revenue generation challenges amid an increasing debt burden.

Reversing these negatives now rests on the election of the right candidate for president in February, the Cowry Asset analysts appear to suggest. “Even the “japa syndrome”  will reduce, if we elect the right president, because once the economy begins to grow, Nigerians in diaspora will begin to come back.

“…Also the FX pressure will continue, until a new government comes in and improves crude production which will balance the economy,” Cowry Asset stated.

 

The analysts also suggested that the key factors the country needs to focus on are diversification of portfolio, noting that the telecommunications industry is one area to invest in. Investors were also  advised to spread their investments, and not to be very bullish at  the pre-election period.

Johnson Chukwu, managing director and chief executive officer, Cowry Asset Management, who spoke on the economic report of 2022 and the economic outlook of 2023, described 2022 as an eventful year in the economic and social space globally.

“We saw an upsurge in crude prices; in the first eleven months of the year, it averaged more than $100, principally because of the war and the decision of OPEC members, to keep a lead on crude oil production. Added to that were the issues around Western countries imposing restrictions on Russian oil, at the last count, they put a price cap on Russian sea bond oil supply to Western countries,” he said.

All these factors, he noted, constrained supply to the global crude oil market and led to elevated prices of crude oil, gas, diesel and kerosene.

Chukwu  pointed out that there was a slow down in the major economies which included the U.S, Europe, and China.

The outgone year, he noted, also witnessed ‘red’ in many stock exchanges, which saw the S&P lose about 20 percent, while Nasdaq lost about 30 percent.

“Last year, we also witnessed the first major collapse of FTX,  one of the big crypto currencies operators, and their concern is that the contagious effect of that collapse could affect other cryptos; of course that has actually brought the need for deregulation of some of the crypto industry. The impact of FTX  collapse has begun to affect even mainstream financial institutions,” he noted.

On the Chinese economy, he emphasised that for the first time in a long while, China saw the exodus of foreign investors as it witnessed the longest Covid-19 lockdown, which started in 2020, and continued all through 2022.  He described the country’s resumption of economic activities in 2023 as a good advantage globally, as it would lead to the resumption in supply chain and an increase in the flow of both capital and consumer growth.

Going forward, the Cowry Asset managing director recalled that the IMF and World Bank downgraded the global economic growth rate.

“For Nigeria, their projection is that our GDP growth rate will be about 3.2 percent last year, and about 3 percent this year. But if you look at what we achieved last year, you will observe that in the third quarter of last year we grew by 2.25 percent. So far this year, we have only grown by 2.9 percent,” he observed.

Chukwu, in his presentation slide, showed that the oil sector contributed 5.66 percent to the total real GDP in Q3 2022, down from the figures recorded in the corresponding period of 2021, and the preceding quarter where it contributed 7.49 percent and 6.33 percent respectively.

In contrast, the non-oil sector grew by 4.27 percent in real terms in Q3 2022, continuing to function as the country’s growth engine, outperforming the oil sector as it expanded in real terms by an average of 5.04 percent in nine months. In the period under review, the non-oil sector contributed 94.3 percent to the total real GDP, higher than the share recorded in the corresponding quarter of 2021 and the previous quarter of 2022 which stood at 92.51 percent and 93.67 percent respectively.

 

Looking at the distribution of Nigeria’s GDP, he pointed out  that agriculture accounted for 29.67 percent of the GDP, trade accounted for 15.35 percent; telecommunications accounted for 15.35 percent, while the manufacturing industry accounted for 8.59 percent of the GDP.

Dwelling further on the figures, he noted that the agricultural sector added 1.34 percent in the third quarter of 2022; the telecommunication sector had a growth rate of 10.53 percent largely from data services; the trade sector increased by 5.08 percent, and trade recorded a growth of  about 5 percent; while the manufacturing sector contracted by about 1.9 percent.

According to the Cowry Asset CEO, the major growth driver was the non-oil sector, which grew by 4.27 percent, driven by telecommunications service in terms of size. He noted that  financial services grew by 12 percent, but it only accounts for 3.4 percent of the GDP which is  not so huge, although its impact is quite significant.

Speaking on the decline in the manufacturing sector, he said; “The question now is how do we restore growth in the manufacturing sector? The problem with the manufacturing sector is that they are facing severe increases in cost – energy cost. Most of them are running on diesel. Diesel price is about N830 for urban areas, outside Lagos, it could be higher than that. They also have to deal with higher interest rates,” he said.

On the issue of inflation which accelerated for the 10th consecutive month to 21.47 percent in November from 21.09 percent in October representing the highest reading since September 2005, Chukwu said the inflationary pressure has been driven by four major factors.

He identified the first factor as  insecurity in the country which has weakened food production, leading to an increase in the prices of  food, which accounted for 24 percent in November last year.

The second contributing factor, he noted,  is the ‘patch through’ effect of currency depreciation.

“The currency has been depreciating because we are not producing enough crude oil and we don’t have enough reserve,” he said.

 

He highlighted the third factor as the rising cost of imported energy input such as oil and diesel. He bemoaned that the cost of fuel in some locations is as high as N300 per litre, and diesel is as high as N700 per litre.

The fourth factor, he pointed out,  is the revenue funding of the CBN. According to him, the  CBN has continuously funded the federal government irrespective of the limitation posed by the CBN Act.

 

“The major concern now is that the inflation might worsen in the coming months as a  result of  the October/December flood, which will unleash its effect as the food crisis in subsequent months, particularly products like rice, which have a low output as a result of flood effect. The food inflation will lead to upsurge of inflation in various sectors.

“Of course, we know the implications of inflation, it leads to decline in producing power, which will lead to decline in standard of living of average citizens. The reason why citizens are going on strike in the UK is as a result of inflation, which has affected their standard of living, but here, we seem to have a thick skin to navigate  or survive inflationary pressures,” he said.

 

Commenting on the measures adopted so far by the government and CBN to fight inflation, he noted that the monetary authorities have continued to tighten financial conditions, as it raised the monetary policy rate to 16.50 per cent from 15.50 per cent; which is now 500 bps(basis points). He also noted that the bank’s cash Reserve Requirements(CRR) and liquidity ratio were retained at 32.5 percent  and 30 percent respectively.

 

According to Chukwu, there is a nexus between Nigeria’s crude production, reserve, and the revenue.

He noted that Nigeria failed in meeting the allocation given  by the Organisation of the Petroleum Exporting Countries (OPEC), which is 1.830 and 1.74 million  barrels per day for October and November respectively, as a result of oil theft, and vandalism.

Though the government has involved some security agents and ex militants to police the pipe lines, while crude production has gone back to 1.2 million barrels in the past couple of days, he warned that if Nigeria doesn’t increase its crude oil production, the local currency will keep on depreciating, and inflation rate will be high.

 

Talking about the debt situation of Nigeria, he said Nigeria is gradually moving towards a ‘Ghanaian situation’ as he recalled that Ghana defaulted in local currency debt and foreign currency debts which rose to $6 billion, while the cedis lost value globally in 2022.

 

“The problem with Nigeria is that the revenues are restrained, and the government does not have enough revenue for the current debt profile, which is a major burden to the next government,” he said.

In his assessment  of the 2023 budget, he emphasised that the budget is the most important fiscal tool that the government uses to shift the direction of the economy, or stimulate economic growth.

He noted that the government came up with a budget of about N21.83 trillion, budgeting distributable revenue  N11.09 trillion,  plus a N10.8 trillion  deficit for the 2023 fiscal year.

He, however, stated that there are four illegalities in the current year’s budget, and hoped that they will be remedied subsequently.

 

The first irregularity, according to him,  is that the budget was passed before the Finance ACT. He pointed out that the finance bill is supposed to be a precursor to the budget.

“The fiscal revenue Act states that before the budget is presented, the finance bill is already considered, and signed into law,” he said.

The second irregularity, he said, is that there is a budget deficit of about 5.0 percent of the GDP, contrary to the fiscal revenue Act which stipulates that the budget deficit should not be more than three percent of the GDP.

“So ideally, the National Assembly should not pass a budget that contradicts an existing law of the country,” he said.

 

He also observed that the National Assembly approved the extension of the 2022 budget to March, while the 2023 budget has been signed into law which is an irregularity as two budgets cannot run concurrently.

“The only reason why you extend a fiscal plan is if the other fiscal plan is not ready. But this time around, we are going to have two budgets run concurrently,” he said.

 

The fourth  irregularity he observed is that the government has not paid back its borrowing from the CBN as there is an outstanding internal borrowing(local currency borrowing) of about N7.09 trillion in the 2023 budget.

“Ideally, the law states that until the federal government pays back the previous outstanding fiscal borrowing from the CBN, it cannot be advanced  further, but those things were overlooked. That’s why most of us think that the 2023 budget should be a piece of document that will remain in the drawing board, until the new government comes in,” he remarked.

Cowry Asset Management, in its review of the Nigeria equity market showed that the equities market witnessed a bullish recovery in Q4 2022 compared to the third quarter of the year. In a similar terrain, the All-Share Index (ASI) and market capitalisation both increased significantly from 49,024.16 and N26.45 trillion as of September 30, 2022, to 51,251.06 and N27.920 trillion respectively as of December 30, 2022.

The investment company remarked that the market rode on the positive performance reports from the quoted companies for the third quarter of the year and the prospect of strong dividend payment at the end of the financial year.

Analysing the performance of the country’s market segments in 2022, the company’s CEO noted that the equity market did quite well, recording a market Year-to-Date  (YTD) rise of 19.98 percent, while also recording a growth of 0.9 percent so far in 2023.

Looking at the indexes that drove the growth of last year, he noted that the  oil and gas index were the major contributors, driven by the likes of  Seplat. He also pointed out that the industrial sector enjoyed a boom until the last quarter of the year when increase in interest cost began to reflect.

 

He noted that the banking sector grew by 12 percent, while the banking index appreciated about 2.8 percent in its  year-to-date performance.

On the flipside, he observed that the consumer goods suffered principally because of low producing power, while he described the insurance index as  ‘the weeping child’,noting that the  industry itself has the challenges of capitalization.

 

Cowry Asset,in its sector-by-sector outlook, said the industrial sector’s major challenge is access to foreign currency to be able to access raw materials, but noted that the resumption of economic activities in China will help improve the sector. It further noted that as Nigeria gets closer to the general election, there will be some rush to complete roads and infrastructure projects as a campaign strategy which will increase the demand for construction materials and force growth in the sector.

In its outlook for the oil and gas sector, it stated that there is a positive outlook with regards to oil production as the issues regarding the decline in production are expected to be addressed within the coming quarter and year. It also noted that there is an improvement in the country’s oil production, following the recent report of a rise in production level standing at 1.59 million barrels per day as of December 6, 2022. Given the purported growth, Cowry Asset projected an increase in prices of oil and gas sector stocks listed on the exchange. Investors are also expected to take positions ahead of the financial year-ended result release and dividend declaration.

 

The outlook for the telecommunication sector is considered rosy as there is a continuous boom in data services, plus Airtel acquisition of 5G spectrum and the newly revised CBN cash withdrawal limits which is expected to result in more digitalised transactions.

According to Chukwu, the telecommunication sector is in a good position to command investment in the coming  period.

 

In its assessment of the consumer goods sector, the report noted that the sector grew marginally in 2022 by 0.06 per cent, which means that it was flat last year.

The CEO of  Cowry Asset explained that the sector is negatively impacted by consumers’ disposable income, which  was majorly caused by the inflation.

“The consumer goods sector will continue to be under pressure  in the coming year, although there are operators who have now adopted some level of fractionalisation of their products, and now, there are smaller fractions of their products in sachets which are available to the poor consumers in the society. But that sector may not record a boom, unless the economy bounces back,” he said.

The report showed that the insurance industry recorded the worst performance in 2022 as only Cornerstone Insurance, out of the 21 insurance companies of the NGX mainboard, recorded a year-to-date appreciation of 30.43 percent to close at N0.60 per share on December 30,2022.

Given the poor result of the sector, Johnson advised that the industry has to be strengthened in terms of capitalisation.

Cowry Asset also projected that the year 2023 would have more sell-offs if the insurance sector does not work on its policies and delay releasing its financials for investors to peruse.

On the issue around the FX market, the report disclosed that the exchange rate at the Investors & Exporters (I&E) window is N456, while the government is still budgeting N435 as the official rate.

In the forex market outlook for 2023, the report said Nigeria is expected to record significant transfers from abroad due to the rising number of emigrants to the West in search of opportunities, skills, labour and education purposes. It, however, noted that there is a limit to which foreign remittances will help provide stability in the foreign exchange market.

“In the new year, our expectation is that heightened demand for the dollar will sustain its pressure on the Naira. The Nigerian banks’ resolve to ration FX spending limit for customers as well as the unavailability of new banknotes following the rollouts of the newly redesigned naira by the apex bank will exacerbate the issue even further, particularly in the first quarter,” the report added.

In its macroeconomic outlook for 2023, Cowry Asset said the uncertainty surrounding the exchange rate will prevail in the face of less impressive net inflows into foreign reserves. It also noted that the planned subsidy removal on petrol by the federal government may leave Nigeria on a fiscal cliff, the Nigerian average in a perilous situation, worsened by the spike in the insalubrious inflation rate, rising energy and commodity prices as well as induced pressure on profit margins of most manufacturing companies and other businesses who will record an unprecedented increase in their opening costs.

The company also highlighted key investment strategy themes for 2023 which include:

Portfolio rotation- With 2023 expected to be a year of policy normalisation across the world, investors are advised to rotate from long term assets to short/mid dated assets as the former is more vulnerable in such a period.

Market awareness- Investors were advised to be well informed about markets they dabble in. “Unless your money is in the hands of proven fund managers, investors should only take positions they are well knowledgeable on.

Diversification: The report emphasised that diversification remains a key theme. “In a time of economic recovery, we expect investors to diversify across and within assets in order to minimise risks and improve returns,” it stated.

Cautious Optimism- Investors are expected to be guided by both fundamental and market sentiments to avoid being caught off guard.