Uncategorized
Victory hands Buhari second chance to lead Nigeria
By Lukman Otunuga, FXTM Research Analyst.
The people of Nigeria have decided to grant President Muhammadu Buhari another chance to restore and stabilize the economy. Although there was a combination of uncertainty, confusion and anxiety following Buhari’s election victory, this is poised to fade as focus returns back to macroeconomic conditions. With the elections done and dusted, the key question on the mind of many investors is what this means for the Nigerian economy in 2019 and beyond.
Buhari’s re-election certainly suggests continuity, something that offers the nation a chance to build on its economic recovery and growth strategy. This fact alone is a welcome development for foreign investors, especially those attracted to stability and consistency in economic policy. The truth of the matter is that the president faces an extensive to-do list within a four-year timeframe, including rekindling economic growth, boosting infrastructure and most importantly, diversification. On top of all of this, there are external risks in the form of trade tensions, slowing global growth and depressed Oil prices, all of which l have the potential to threaten the nation’s recovery.
Digging deeper into Nigeria’s economic conditions, unemployment has risen to over 23% in the last four years while the nation’s stock markets are one of the world’s worst performing. While it’s easy to point fingers and blame Nigeria’s leadership for its woes, external risks in the form of falling Oil prices was a primary culprit behind the recession. Lessons from the past should encourage the administration to invest in infrastructure and step up its efforts in finding growth from other sustainable sources. With Nigeria boasting a youthful population and fertile land, one of the solutions to attaining stability could be found in agriculture.
With the Economic Recovery and Growth Plan (ERGP) already in place, this may result in Nigeria’s economic growth hitting roughly 2% YoY. Nigeria however, like many other Oil export-dependent emerging markets, remains exposed to US-China trade developments, global growth fears and Oil prices. If the two largest economies in the world are unable to find a middle ground on trade, global growth decelerates and Oil prices tumble, it will bring nothing but bad news for Nigeria.
In regards to the foreign exchange, this is another grey area that impacts investor sentiment towards the Nigerian economy. There is a possibility that Buhari’s victory results in the continuity of the current fixed/multiple system by the Central Bank of Nigeria. While this has resulted in Naira stability in recent years, it has come at a heavy cost in the form of foreign exchange reserves. Will the CBN ever allow the natural forces of supply and demand to determine the equilibrium value of the Naira? This remains a question on the mind of many investors.
On the bright side, PricewaterhouseCoopers (PwC) reported that Nigeria remains the largest economy in Africa for the second year in a row. However, much work is needed for the nation to keep this title. The story defining Nigeria’s economy remains one that depends on Oil exports for more than half of its government revenues. This represents a major downside risk, as falling Oil prices will not only cut revenues but also spark foreign exchange instability by sabotaging the Central Bank of Nigeria’s efforts to shield the Naira. The negative knock-on effect from such a development would most likely ripple through all concerns of the economy.
At the end of the day, the quicker Nigeria is able to source sustainable growth from non-Oil sectors, the quicker there will be a positive change in sentiment towards the largest economy in Africa.