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Omodele Adigun
For the economy to get elevated on to global stage, the Central Bank of Nigeria (CBN) has to cut its benchmark interest rate, says Lukman Otunuga, the London-based research analyst with FXTM, the online financial trading company.
According to him, the re-elected President Buhari t should rev up the economy to make inflation tank to between 6 per cent and 9 per cent level. “That band should be able to offer a window for CBN to cut interest rate in an effort to boost domestic economy,” he says. Otunuga, at an interview session in Lagos last week, x-rayed the global economy and advised what Nigeria should do to get round the economic challenges.
Global economy
External factors impact Nigeria’s economic recovery. Nigeria is not alone, although it is very easy to be negative about Nigeria. But once you look at the bigger picture, you will see that it is not only Nigeria that is facing headwinds. Other major economies, even China and the US, the biggest economies in the world, and other emerging markets, are feeling the tension. If the global conditions continue to suffer, Nigeria, like other emerging markets, will feel it.
Away from that, there are four key things that I think will drive global market and impact Nigeria’s economy this year: US-China trade developments. This will have significant impact on Nigeria’s economy. For one, yes, there is a sense of optimism right now over US and China securing a trade deal. But we have seen this many times over when both nations close to securing something. But in the last minutes, things tend to fall apart. If this happens again, this will create risk aversion. And risk aversion is negative for emerging markets. Nigeria is an emerging market.
Secondly, we have already seen that the US-China trade developments have impacted profits in the United States and China. And China has slow growth, first time in almost two decades.
The reason this is very important is not only because Nigeria and China have Naira-Yuan swap deal, but China and Nigeria have a very intricate trade relationship. It is quite symbiotic!
Nigeria imports a lot of things from China; China imports some things from Nigeria. So, there is a saying that if China sneezes, Nigeria would catch cold. This is another thing we need to look out for.
If you look at things from the surface, Brexit looks like it may not have impact on Nigeria. But when you look deeper into the matter, you will realise that some Foreign Direct Investments (FDIs) from UK actually come to Nigeria. So if UK ends up crashing out of the European Union (EU), this naturally will negatively impact FDIs from the UK to Nigeria. This is another thing to look out for.
If the environment globally is negative, and major economies like the US, China, and parts of Asia are experiencing a slowdown, naturally, this will result in a drop in export and import demand. That will spill back to emerging market, including Nigeria.
Inflation
When I came back to Nigeria in August 2018, the main thing was that inflation was at a worrying level; very scary. I remember: a bag of rice was going for about N18,000, N19,000, unlike two years before when it was about N10,000. My analysis then was based around ways in which CBN could limit inflation. I must confess, on my mind, I thought that the best route the central bank could take to tame inflation was to actually raise interest rate higher. But it seemed the central bank was able to weather the storm and the inflation pressure rate was stabilised. At the end of the day, the CBN actually left the monetary policy unchanged for 2018.
Poll
Last year, the main talking point was the general elections. And now, we have the results. We have seen that President Buhari has secured another four years. If you have read my previous article, I did ask, ‘Will he use the four years to elevate Nigeria? That is the main thing I am looking for right now. The head of government has another four years. This suggests continuity, which would be seen as a welcome development for foreign investors. What we will now be looking for is if in these four years, we can see change that will be able to elevate Nigeria on to global stage.
Central banks
In the middle of 2018 and parts of 2019, major central banks across the world were actually very cautious. We have the Federal Reserve in the United States (USA), which adopted the ‘patient’ stance. What is meant by ‘patient’ stance is that they may be hesitant to actually raise the interest rates. This is negative for the dollar and good for Nigeria. We have the European Central Bank (ECB), which has cut growth forecast for Europe. We have the Bank of Japan, which has continued to maintain overall monetary framework policy; we have the Bank of England, which is still concerned with the Brexit developments than to bring any big economic policy. We have other emerging markets such as Turkey, Peoples’ Bank of China. The central banks have actually tended to the cautious stance. The Central Bank of Nigeria (CBN) has actually explored this caution. We are living in a time when major central banks across the world are quite hesitant to raise interest rates. This actually could provide CBN some breathing room to also cut the interest rate. Initially, my argument when I was discussing last year in Nigeria was that, even a big cut for CBN would be good for Nigerian businesses domestically. It would actually widen the interest rate differentials between the Federal Reserve and CBN. Last year, when I was in Nigeria, the Federal Reserve was actually looking at how to raise interest rate, while CBN, even though, a rate cut would have been beneficial and would actually have no damage, now that the market condition has changed. The CBN can provide breathing room. As things stand now, I don’t believe the Federal Reserve is going to do any change to the interest rate even though a big cut may be on the card at the end of the year.
Strong dollar
There is a question I have in mind: Is the US good? This question has pros and cons. Initially, the main thing was that where elsewhere was doing bad, the US was at the height of the market. That is why the dollar’s strength impacts the emerging markets. We have many headwinds that the US is facing right now. My outlook for the dollar is that we have signs of investors actually offloading the dollar. Those weaknesses may be the key thing for 2019. The key thing that made the dollar quite strong was that it was seen as safe haven currency. The reason it was seen as safe haven currency was that many people bought the notion that no matter how bad everywhere is, the US is still okay. That illusion has started to fade. And once it fades, the dollar loses its safe haven status. As curious as it may sound, this would be good for Nigeria and the Nigerian economy.
Brexit
Brexit uncertainty is the major thing in the UK right now. And it is being reflected in the economic data and the pound (sterling) valuation. And many developments are happening. The question now is, would the UK leave EU? Or would there be no Brexit? The Brexit drama is like an extended TV show that everybody would like to come to an end. And everybody wants the March 21 deadline to come so that they can talk about other things.
What is going to happen is that the government is going to extend the deadline; and there is going to be shifting back and forth. This would raise some uncertainties, and raise the pound higher. These uncertainties may be reflected in the drop of FDIs to Nigeria because nobody would want to put his money in uncertain market.
Oil price
My conclusion now that oil is trading higher is that it is all about demand and supply dynamics. The only reason oil is trading higher now is based on optimism over OPEC (Organisation of Petroleum Exporting Countries) supply cut, limiting the over-supply in the market. As OPEC continues to cut production, the US shale oil continues to pump. So every time OPEC is limiting their production in the market, it simply hands over the oil market share to shale. Don’t be surprised that few weeks from now, you will see that rising production from US shale is causing more supply in the market and the oil price falling globally. What will again impact demand for oil is growth momentum. Growth in China is slowing, growth is slowing in the US, growth in other parts of the world is slowing. This will negatively impact demand for oil. How is this linked to Nigeria?
I read a report earlier that shows that even though we speak of diversification, over 90 per cent of Nigeria’s export revenues are from oil. And this is very dangerous because as soon as oil prices trade lower, export revenues fall. This will impact government’s ability to spend. And you know the story from there. The CBN also uses the oil revenue to build up the reserves and stabilise the naira. We need fresh catalyst for oil to trade to its major level.Once we have that fresh catalyst, that is when oil will trade to its next major direction.
Nigeria’s growth
What will CBN do to support Nigeria’s growth effort? As I said last year during my discussion, I said I would like CBN to hike interest rate. But right now, the conditions in Nigeria have changed. The fact that Nigeria has been able to secure the growth of 1.49 per cent despite global headwinds is quite interesting. When you compare Nigeria’s growth to other major economies, it is not too bad. I expect CBN to leave its monetary policy rate unchanged in its coming MPC meeting. I would like to see the signs of inflation moderating. I mean inflation coming down to between 6 per cent and 9 per cent level. That band should be able to offer a window for CBN to cut interest rate in an effort to boost domestic economy. The problem with them cutting rates last year was the fact that Federal Reserve wanted to hike their interest rates. So naturally, this would widen the interest rate differentials between the naira and the dollar. Of course, that would impact the naira structure.
