What the year 2016 seem to hold for the global economy, particularly oil producing and dependent nations, will make the feeble hearted faint and one of the major characters that will suffer much if tough decisions are not taken is the consumer.
The chief executive officer of Financial Derivatives Company (FDC) Limited, Bismarck Rewane, sees a consumer that will be very parsimonious this year and described the 2016 consumer as one that will be embattled, challenged, and under pressure.
The consumer, during this stressful period, is one that will be dealing with several economic imponderables like higher inflation, unemployment, cut in wages, weaker naira, search for where to extract the best value for money, direction for investment, better prices, services, and quality; one other thing that will be over-bearing will be the weight of government debt.
Already, African countries have tried their hands at the Eurobond markets. Nigeria, Zambia, and Kenya were successful. The sad end of the story is that interest payments on these bonds are due in 2016, making investors increasingly worried about debt sustainability ratios. Rewane also added that African governments have credit ratings that are near junk status.
The silver linings in this debacle, however, is that the politically well determined and focused leaders are likely winners. Rewane gave the example of such leaders as Muhammadu Buhari of Nigeria, John Magufuli of Tanzania, and Macky Sall of Senegal. He said that with such leaders there is no shortage of hope this year and that the first duty of any African government is the welfare of its citizens.
The BBC has similar views for the year 2016 economic reality. It said that 2015 was a tough year for sub-Saharan Africa (SSA), but 2016 will be worse in many respects. It said that prices of SSA commodities fell sharply in 2015, and in 2016, the price volatility will increase.
In 2016, analysts believe that the European Union (EU) will be too busy with migrants while the United States (US) will no longer pretend to play global police officer. They also believe that there will be multilateral cooperation against the ISIS while the Shiite and Sunni divide will continue to haunt the Middle East, OPEC, and commodity markets.
Analysts predict that China will pursue narrow interests and become an international lender of first resort, and the Middle East will become more chaotic. Beijing, they said, will use its $3.4 trillion in external reserves to finance ambitious alternatives to the International Monetary Fund (IMF), London, and Paris clubs. It will be lender of first resort for developing countries, including Nigeria and in return, emerging markets will pledge commodities at basement prices for extended periods, they opine. They believe that Putin will be less confrontational in 2016 after winning the stalemate in Europe, and will engage the Orgaisation of Petroleum Exporting Countries (OPEC) to stabilise oil markets.
The debt burden
The Debt Management Office (DMO) noted in a publication last week that Nigeria’s total debt (external and domestic) rose 12.1 per cent year-on-year (Y-o-Y) or N1.4 trillion to N12.6 trillion ($65.4 billion) in 2015, relative to N11.2 trillion ($67.7 billion) in 2014.
The federal government (FG)’s debt of N10.1 trillion ($52.2 billion) accounted for 79.8 per cent while state governments’ debt (N2.5 trillion or $13.2 billion) accounted for 20.2 per cent of the total debt. External debt amounted to N2.1 trillion ($10.7 billion), representing 16.8 per cent of the total debt stock. This comprises of $7.6 billion (70.5 per cent) loan from the World Bank group while bilateral funding from the Chinese Exim Bank and Eurobond accounted for about 13.0 per cent apiece. On the other hand, the domestic debt which amounted to N10.5 trillion ($54.5 billion) contributed 83.2 per cent to the country’s debt stock.
Analysts at Afrinvest said that based on annualised nominal gross domestic product (GDP) of N92.4 trillion as at the third quarter of 2015, Nigeria’s debt to the GDP ratio inched higher to 13.6 per cent in 2015 from 12.1 per cent in 2014. Extending this analysis to the 2016 Appropriation Bill with the planned borrowing of N1.8 trillion – domestic (N984 billion) and foreign borrowing (N900 billion), and a tepid nominal GDP growth projection, debt to the GDP ratio will increase further in 2016.
Although the debt to the GDP ratio appears low (relative to a legislative cap of 30 per cent), the increasing debt servicing obligation as a proportion of total expenditure and against a low revenue base pose a challenge to debt sustainability. Debt service as a proportion of total expenditure will settle at 22.4 per cent in 2016, from 18.8 per cent proposed in the 2015 budget and the actual of 27.7 per cent based on a nine month 2015 budget performance.
Debt servicing to revenue will moderate slightly to 35.3 per cent in 2016, from 39 per cent in 2015. Yet, a counter-cyclical fiscal policy (with a bias for capital projects) is needed to boost the flagging economy but with servicing obligation already high and oil revenue outlook weak, the need for cheap facilities with long tenors (especially from multilateral loans) becomes more urgent.
However, in order to access this concessionary facilities, monetary and fiscal policies would need to be aligned with the current realities to improve the country’s credit worthiness. This would involve more flexibility in monetary policy and an unlocking the non-oil revenue potential to cushion the impact of the debt burden in the medium-to-long term. At the state level, sub-national debt stock amounted to N1.7 trillion in 2015 with Lagos State having the lion share of 35.8 per cent, Kaduna and Edo states trailed with 6.7 per cent and 5 per cent respectively.
State debt will also rise in 2016 as news flows currently suggest that more states are planning to secure loans. However, the viability of many of these states remain a concern as their capacity to generate internally generated revenue (IGR) are yet to be addressed. Save Lagos State (N276.1 billion), and perhaps Rivers (N89.1 billion) and Delta (N42.1 billion) which IGR represented 39 per cent, 12.6 per cent and 6 per cent of the total for all the 36 states as at 2014 in that order, poor capacity as seen in many of the states in 2015 implies that another bailout maybe imminent if the IGR capacity remains unchanged.
Low inflow of FDI
In a related note, the National Bureau of Statistics released a report on Nigerian Capital Importation for the financial year ended 2015. Unsurprisingly, capital inflows declined 53.8 per cent Y-o-Y to $9.6 billion from $20.8 billion in 2014. Foreign Portfolio Investment (FPI) accounted for 62.3 per cent of total capital imported while Other Investments and Foreign Direct Investment (FDI) accounted for 22.7 per cent and 15.0 per cent respectively.
The above is largely attributable to foreign exchange concerns coupled with blurry fiscal pronouncements in 2015 which created disincentives for foreign capital inflows and resulted in huge outflows during the year.
Reviewing the implication of slowing foreign capital vis-à-vis increasing debt profile as well as government’s borrowing plans, we reiterate the need for a reassessment of the current monetary policy stance on foreign exchange and policy harmonisation with the fiscal team to attract capital inflow and improve reserves position.