Economy loses to transition, monetary, fiscal policies in 2015

CBN Governor, Godwin Emefiele

By Kelechi Mgboji
Assistant Business Editor

The outgoing year is best described as a lost year with falling economic growth impacting real ‘human’ cost on the population majority of whom live on less than $5 a day.

No thanks to oil price shocks, pre and post electioneering issues, political transition with its fiscal policy gaps, monetary policy challenges, insurgency conflagration, and attendant poor economic outlook; all combined to depress the economy in 2015.

Global crude prices have fallen sharply since mid-2014, hurting the country’s public funds and leaving many states unable to pay public salaries in time or fund infrastructure projects and other state services.

But the much needed policy response to turn around the fortunes of the economy which has begun too late is encapsulated in the recently released 2016 zero-based budget proposal of N6.04 trillion, where 30 per cent of the budget is allocated to capital expenditure.

Despite President Mohammadu Buhari’s huge bailout packages to state governments to resolve legacy debts and backlog of salary arrears inherited from the administration of Goodluck Jonathan of the Peoples Democratic Party (PDP), it appears that never have the masses been more impoverished than since when the All Progressives Congress (APC) took control on May 29, 2015.

Gross Domestic Product (GDP) crashed from 6.4 per cent at the start of 2014 to 2.5 per cent end of 2015.

Hit by a plunge in crude prices and the Central Bank of Nigeria (CBN’s) insistence to draw from the reserves to defend the naira, foreign exchange reserves also declined to $30.04 billion end of November from $36.9 billion in the same period last year.

Also, the equities market is not left out in the crashing fortunes of the economy, having fallen to about three and half year low, spooked by policy gaps, investors’ massive sell offs for fear that the local currency might be further devalued.

Signs of hard times during the year under review reared up ugly head when the outgone government tightened the fiscal stance, reducing planned expenditure by 5 per cent in the 2015 budget, funded through cuts in capital rather than recurrent spending and some limited tax hikes on the luxury sector.

The Ministry of Finance had projected 5.5 per cent growth in 2015, down from 6.4 per cent at the start of 2014.

In November 2014, the CBN had decided to devalue the naira to accommodate the immediate downward pressure on the naira/dollar exchange rate.

The CBN widened the naira/dollar band from 150-160 to 160-176 (an effective devaluation by 8 per cent).

Another devaluation followed unannounced in February 2015, when the apex bank made further accommodations – cancelling its dollar auctions and targeting a new fixed exchange rate of N196.5.

The exchange rate in the parallel market – that had widened to N230/dollar in February as the CBN tightened access to naira liquidity – finally started to realign with the official rate after a peaceful response to the election results.

However, the gains of the peaceful transition were not sustained as the long delay to form the new cabinet took toll on the economy.

Investors who had previously sought exposure to Nigeria’s high growth potential became nervous over perceived over valuation of the naira, insisting the local currency be further devalued.

Equities sink N2tr lower

With just a few days to the end of 2015, the Nigerian capital market closes as one of the worst performing markets.

Year-to-date losses recorded by the market so far, stood at over N2.07trillion as aggregate market value of stocks on the Nigerian Stock Exchange (NSE) declined from year opening level of N11.49 trillion to N9.41trillion representing a 18.05 per cent loss as at November 31.

NSE benchmark All Share Index (ASI) shed 0.84 per cent on Monday, December 14, 2015 to close at 27, 385.65, a level last seen in December 2012.

At 27, 385.69, the index is down 20.98 per cent year-to-date, as against 34657.15 basis points at which it had opened for the year.

All the sectors on the stock market have fallen sharply this year with the consumer goods index down 22.4 per cent and the index of the top 10 banks shedding 19.9 per cent.

The NSE hit its 2015 peak of 35,728.12 basis points on April 2, the day after Buhari was declared the election winner, and Jonathan conceded defeat.

Investors had hoped for a sustained rally after smooth elections in March and peaceful handover of power.

However, the rebound could not be sustained as the new government was perceived as being too slow to tackle economic crisis, and monetary policy issues (with naira seen as overvalued) that kept foreign investors on the sidelines.

Shares were down 6.5 per cent in October and posted a further 7.1 per cent loss in November as active foreign investors took flight for fear of further losses after consistent decline between June and September.

Several companies, especially consumer goods firms, have posted weak profits, attributing the poor results to the effects of currency controls which have raised costs.

Bank stocks have sold off because of the heavier regulatory burden.

And high cap stocks which opened the year at higher prices and a large segment of stocks especially in the banking and oil & gas sectors are trading either at par value or far below their intrinsic value.

Inflation rate was 9.4 per cent in November, compared with the inflation-adjusted average year-to-date return at the equities market at -18.83 per cent.

It is an indication that investors have lost more than a double of the real value of their investments in the equities market.

The Nigerian bourse had ended 2014 as one of the worst performing exchanges as the market capitalisation of the listed equities depreciated by N1.749 trillion from N13.226 trillion at the start of the year to N11.477 trillion.

This was despite the listing of companies such as Caverton Offshore Support Group, Seplat Petroleum Development Company and Omoluabi Savings and Loans, which added hundreds of billions of naira to the market capitalisation.

The NSE ranked 72 out of 74 exchanges considered with the All-Share Index at -20.67 per cent negative, data compiled by CNNMoney using benchmark year-to-date performances of exchanges showed.

A separate report published on December 24, 2014 by The Telegraph (UK) had ranked Nigeria number three among the worst performing stock markets in 2014, with Columbia in the second spot and Russia in the first.

It would have been worse but for equities rally in the last days of 2014 which led to an improvement in year-to-date return of the NSE ASI, enabling it to close 2014 with a year-to-date return of -16.14 per cent, the Exchange’s worst performance in years.

The performance was in sharp contrast to that of 2013, which the Exchange ended as one of the best performing exchanges in the world with the NSE ASI YTD return of 41 per cent.

Crashing currency prices

Year 2015 will be also remarkable for crashing currency prices. Bigger currency shifts have happened around the world with some economies worse off weathering the storm.

In August, the Chinese devalued their currency, the yuan, by 4 per cent, a development that shook global markets for weeks.

One of the biggest, the fall of the Russian ruble, has barely made a dent in the world economy.

A sharp drop in the price of oil has driven down the value of the ruble by an incredible 29 per cent compared to the United States dollar.

The Brazilian real has fallen 32 per cent compared to the dollar, primarily because of corruption and a collapsing business infrastructure.

The Canadian dollar and Mexican peso are struggling to keep up with the growth of the U.S. dollar.

The peso has fallen 19 per cent side by side against the dollar, while Canada’s dollar has fallen 14 per cent.

Both of these are due to a slow recovery from the economic meltdown, especially in Mexico where the job numbers remain terrible.

Across Europe, the Euro has been struggling as well. It’s continuing what has been a long downward slide to parity with the U.S. dollar.

At one point, each Euro was worth well over $1.60, but in recent months the price of a Euro has dropped dramatically to just over $1.08.

This slide in currency value is one of the hardest felt, as the entire continent of Europe struggles to rebound from the crash in 2008.

Many European Union (EU) member states are saddled with debt that will be difficult to pay off, or even make a payment on, in part because of their quickly-dropping currency valuation.

The picture in Asia is similar, although slightly more complex.

In Japan, unemployment is relatively low and exports are high. The value of the yen has fallen 7 per cent and the economy is generally healthy.

In China, the yuan was devalued by just 4 per cent – the least of any other country’s money.

Even Australia and New Zealand could not escape the downward valuation of their nations’ currencies.

Australia’s dollar has lost 19 per cent of its value relative to the U.S. dollar, New Zealand’s dollar has lost 16 per cent.

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