Nigerian Economic and Stock Market Overview: H1 2018

This ‘big picture’ analysis will look at what has happened in the economy and the stock market in Nigeria in 2018, why it is happening and how to make the best of the present situation. 

Nigeria’s economy rose by 1.95% in Q1 2018, slightly below the revised figure of 2.1% for the fourth quarter of 2017. Q1 2018 is Nigeria’s fourth consecutive quarter of positive economic growth. The GDP growth of 1.95% for Q1 2018 broke a positive trend of five consecutive quarters of improving GDP growth. The non-oil sector (which the government had made its perennial focus for a more resilient economy) grew 0.8% annualized in Q1 2018 compared to 1.5% in Q4 2017. The oil sector grew by 14.8% annualized in Q1 2018 relative to the revised figure of 11.2% in Q4 2017. Overall, Nigeria’s four consecutive quarters of positive economic growth was driven mainly by recovering oil production and steadily rising prices. The Nigerian economy appears to be moving back to its perennial over reliance on the oil sector for its economic growth.  

Nigeria is currently experiencing expansionary fiscal and monetary policies (without the lowering of interest rates). Government has been borrowing aggressively (with a growing preference for foreign debt) in its quest to adequately fund the budget deficit driven by high levels of spending on infrastructure over a short time frame. Nigeria’s economy is still experiencing low capital mobility (though improving) and large budget deficits on a sustained basis, this combination could eventually lead to the Naira declining in value. The Central Bank is continuously trying to thwart this by meeting demand for foreign currency on an almost weekly basis. This is clearly not sustainable over the mid - long term, especially when oil prices dip for a sustained period. 

Overall, we see a Nigerian government that is focused more on GDP growth than GDP per capita growth. Empowering the population financially is the surest way to sustainable and resilient real GDP growth. The government is focused more on the infrastructure gap rather than the standard of living of the average Nigerian. This is why, despite the positive economic developments mentioned above, Nigeria’s economic situation remains challenging and uncertain. Food inflation is increasing (the impact of food prices as a component of headline inflation was reduced about three years ago), tax revenue as a percentage of government earnings is still abysmally low and Nigeria still operates three different exchange rates. Banking vulnerabilities are coming to the fore again: non-performing loans are rising, concentration of loans in volatile sectors and reluctance to lend to the private sector are all making their presence felt simultaneously. The Nigerian government’s rapidly increasing borrowing is also crowding out private sector activity. How will the stock market persist on an upward trend under these negative business conditions? 

Despite the positives, the Central Bank’s reluctance to reduce the monetary policy rate to help boost economic activity is neutralizing the impact of the positives achieved thus far and weakening the growth of potential GDP. The federal government is focused on increasing expenditure to pull the economy further away from recession. The Central Bank is focused on the banks’ financial performance hence, in my opinion, its reluctance to reduce the monetary policy rate which impacts lending rates. Growth of potential GDP is a function of the long-term growth of the labor force and the long-term growth in labor productivity (combo of human and physical capital). Supply of labor comes from the population of a nation. 

The government is not taking direct measures to positively impact the financial lives of its teeming population and this is negatively impacting the growth of potential GDP. Kindly note that drivers of potential GDP are ultimately the drivers of stock market price performance; an increase in the rate of labor productivity growth will increase Nigeria’s sustainable rate of economic growth and potential return on equities. The Nigerian government is fixated on the physical capital stock while largely ignoring the human capital stock. Unemployment and under-employment continue to rise and power supply continues to dwindle The perception of Nigeria’s near-term potential GDP by investors has declined drastically from the beginning of 2018 till date and has consequently led to the wiping out of all gains made this year on the NSE Index which has fallen from a high of 19% to -1.6% as at July 9, 2018. 

Given that the federal government is fixated on the physical capital stock as it strives to reduce Nigeria’s widening infrastructural gap. It is imperative for investors in the stock market to invest in companies in sectors likely to benefit directly from the infrastructure spending focus of the Buhari administration. The two sectors I deem viable investment options under the current government policies are: cement and construction. Certain stocks in these sectors are well positioned to benefit from current government policies over the next twelve – twenty-four months and will be more resilient on the downside, even when the stock market is on a persistent decline as is the case presently.

 As Nigeria heads into general elections in seven months, it is imperative I point out that a country’s economic development has a strong impact on the survival of democracy. Policies that positively flow down to the population e.g. job creation, business loans, should be pursued over and above policies that trickle down to the generality of the population e.g. infrastructure spending; especially, in a developing economy like Nigeria. Stock prices reflect investors’ perception today of a company’s future performance built on a foundation of positive economic growth. Government actions feed into potential GDP which feeds into the perception of the consuming populace (e.g. the corporate and individual tax cuts in the USA), which feeds into the potential return on equities. The Nigerian people are the country’s greatest asset and not natural resources which are not necessary for growth. Government's policies should reflect this if Nigeria’s potential is to become a realistic reality. 

Overall, I advocate that monetary policy rate needs to be reduced by 200 basis points, government borrowing needs to stop, job creation and minimum wage need to be increased and power supply needs to improve on a sustainable and not intermittent level.  The optimism of investors coming out of recession and stabilization of the foreign exchange rate in 2017 (major cause of stock market performance in 2017) has waned. The lack of a fresh policy catalyst that positively impacts the citizenry has dampened expectations and sent the stock market back into negative territory. 

Sincerely,

Jude Fejokwu 

(Keep telling the TRUTH, even if it costs you)