Weighing Economic Implications of Elections’ Postponement

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 Trading floor of the Nigerian Stock Exchange…portfolio investors on a wait-and-see mode

Beyond the logistic and financial implications of the postponement of the general elections, two major international research firms, Renaissance Capital and Standard Chartered Research, believe the Nigerian financial authorities may have to take some pre-emptive measures in order to tame the effects of the dwindling oil price on the economy before the new election dates, reports Festus Akanbi

After the initial shock that trailed the postponement of the general election originally scheduled to start yesterday, some stakeholders in the Nigerian economy including international economic watchers have begun to paint different scenarios that the postponement may create in the coming months.

No Cause for Alarm
Interestingly, if the body language of those running the nation’s economy is to be relied upon, then there are chances that the postponement may not bring upset in the economy.
The assurance was given by the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, in an interview on ARISE NEWS TV (a THISDAY sister company) last week.
In the interview monitored in Lagos, the minister said there was no reason to entertain the fear being raised in certain quarters, as INEC and President Goodluck Jonathan had promised that the elections would hold by March 28 and April 11 and the handover date of May 29 would remain unchanged.

The minister explained that the current fate of the economy in the face of regime of dwindling oil prices cannot bring the Nigerian economy to its knees, saying even the World Bank had predicted that Nigeria would grow at 4.8 per cent this year.
“This shows that the Nigerian economy, unlike others that are contracting, still has traction, and most of this growth is driven by the non-oil sector.
“So what this means is that even with low oil prices, we have other segments of the economy that could add another $3 billion to the coffers this year which would be shared by the states.
“It could be better but it shows that the non-oil sectors’ contribution to total revenue is growing and we intend to tap on this to diversify the economy,” she said.

Standard and Poor’s Rating
Also last week, the international rating agency, Standard & Poor’s  released its latest assessment of Nigeria which retains the country’s sovereign rating at BB- with a negative watch. Previously, it was BB-.with a negative outlook. This means that the ratings agency has adjusted its rating slightly by placing the country on negative watch because of the pressure of falling oil prices on the economy as well as political risk.
In the estimation of the Special Adviser to the Coordinating Minister of the Economy and Minister of Finance,  Paul C Nwabuikwu, the rating showed that Nigeria has not been downgraded but that the country clearly needs to work harder to actualize its recently announced policy response to the current economic challenges.
A statement from the minister’s aide said other oil producing countries, like Saudi Arabia, have also been put on negative watch, while a number of others, including Kazakhstan, Bahrain and Oman were downgraded outright.
“It is important to note that in spite of the serious challenges arising from the sharp fall in oil prices, Nigeria is doing quite well compared to some other oil producing countries. For example, while the economies of Russia and Venezuela are projected to contract and experience negative growth this year, Nigeria’s GDP has been projected by the IMF to grow by 4.8% which is quite robust by global standards.
“Overall, there are two broad implications. First, the economy, despite many challenges, retains key strengths. Second, we have to keep working harder to continue to turn these strengths into real value for the country and its citizens,” the statement read.

Shift in Polls and Pressure
  Despite the assurance from the nation’s top economic managers, international economic watchers said the shift in polls may force Nigerian government to frontload some policies initially designed as post-election economic policies.
In a special report titled ‘Nigeria: Postponed Polls: Protracted Uncertainty Weighs on Naira’, the international investment and financial advisory firm, Renaissance Capital said by postponing the election, the authorities have further exposed the weakness of the local currency in the face of continued depletion of the nation’s foreign reserves.

Focusing on the dwindling value of the naira, Rencap’s report stated; “Ideally, we believe the Central Bank of Nigeria (CBN) would prefer to wait until after the elections to make difficult policy decisions. However, the low level of FX reserves ($33.9bn on 5 February), and their accelerated decline since the beginning of February, leads us to believe the CBN may not be able to hold out for six weeks. FX reserves are now at the same level they were in 2011, when the CBN devalued the naira. FX reserves fell by $408mn in the first week of February, double the $215mn decline in January. We think the CBN may be compelled to act sooner rather than later – particularly now that protracted political uncertainty is likely to intensify downward pressure on the naira.”

Capital Controls
Noting that the emerging scenario has called for immediate review of bailout strategies for the naira, Rencap said its initial permutations that naira devaluation might wait till after the election may have to give way to an urgent decision on the local currency.
Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, had at a recent parley with members of the organised private sector in Lagos, dismissed the possibility of further devaluation of the naira, a pronouncement supported by some economic experts who warned that another round of devaluation on the eve of a national election would put the government in trouble with the electorate.
All these considerations, according to the Rencap’s report may have to give way in the face of the continuous pressure on the naira and the attendant erosion of the foreign reserves.

The report said, “Our base case is that a formal devaluation will be avoided until after the elections. We expect the CBN to move the mid-point of the official exchange rate band to above N200/$1. This would imply an interbank exchange rate close to N220/$1.”
The report said that even if the Federal Government is bent on avoiding outright devaluation because of the likely response from members of the public, a form of capital controls is urgently needed.
Rencap therefore said that “to hold off devaluation, we think Nigeria may require soft capital controls, which would lead to FX liquidity getting squeezed again.”
This is however with its underlining risks as, according to the research firm, “This increases the risk of JP Morgan removing Nigeria from its key emerging currency bond index (JP Morgan will assess Nigeria’s place in the index in 2Q15) and FX reserves falling to such an extent that current credit ratings come into question. Our most plausible alternative scenario (30-40% probability) is that the CBN will loosen its hold on the naira before the 28 March elections. It would do this by allowing the naira to weaken on the official FX market (as it did in November, before the 8 per cent devaluation), which would translate into corresponding depreciations in the interbank and bureau du change markets. We believe this would help the CBN to stem the fall in reserves.”

Another international research firm which raised the spectre of fresh pressure on the economy, the Standard Chartered Global Research, said in its report last week that the extension of the election period creates additional uncertainty that may affect economic outcomes.
“We do not share the view of many market participants that the authorities will wait until after the election to announce a large official devaluation of the NGN (Nigerian naira),” the research said.
It disclosed that many offshore investors, still attracted by Nigerian yields, have been waiting for the uncertainty of the election period to pass before recommitting themselves to Nigerian markets.
According to the report, ‘With prolonged election-related uncertainty, the risk is that these FX inflows are delayed.
“We believe the Central Bank of Nigeria (CBN) has adopted a pragmatic approach to exchange rate and reserve management during this episode of weaker oil prices,” the report said.
The CBN tightened policy in November while simultaneously devaluing the official retail Dutch auction system (RDAS) rate to more realistic levels (at the time). Access to FX through the RDAS window was also limited in order to safeguard FX reserves.
Perhaps recognising that investor inflows ahead of an election were unlikely, the CBN did not tighten policy further at its January 2015 policy meeting. Nigeria’s well-behaved inflation trend, with CPI inflation still in single digits, and concerns over slowing growth may also have been factors behind that decision.
The research firm therefore said, “The election delay puts at risk our call for further policy tightening at the March MPC meeting.
With oil prices still languishing at low levels, resulting in minimal injections into the FX reserves, we expect the reserves to come under further pressure, perhaps dropping to about six months of import cover.
“A further tightening of administrative controls is plausible, with fewer categories of demand eligible for RDAS auctions. We expect spreads between Nigeria’s parallel and interbank FX rates to remain pressured, although an agreement by Nigeria’s Financial Markets Dealers’ Association limiting daily NGN depreciation in the interbank market to two per cent will likely slow the pace of weakening.
“Despite the weaker parallel-market NGN rate (which mainly reflects smaller-scale, informal-economy and bureau de change transactions), our SC-PCPT has not picked up evidence of pronounced inflationary pressure.”

Policy Risks
The report added that the postponement of election will also potentially delay the formulation of policy aimed at helping Nigeria cope with lower oil prices.
It said, “The 2015 federal government budget currently assumes a benchmark oil price of USD 65/barrel (bbl). This is widely anticipated to be revised lower after the election, and the decision may now be delayed.
“Efforts to accelerate non-oil revenue collection, especially measures that do not require legislative approval, are likely to continue in the near term.
These include new levies on luxury imports, a review of tax exemptions granted to some investors, accelerated tax audits, and a potential doubling of the VAT rate to 10 per cent. We see little reason why the VAT rate increase would have to wait until after the election, although there is likely to be some uncertainty around the timing.”
It quoted the finance ministry as saying that state governments are likely to be the key beneficiaries of a VAT increase, as they will share the majority of the proceeds through monthly FAAC allocations.
The report said with an estimated 80 per cent of the budget now devoted to recurrent expenditure, even the likely pause in economic activity before the election is unlikely to provide much support for public finances.
“State government finances are especially pressured, pointing to more frequent supplier arrears. The slowdown in economic activity resulting from weaker government spending and payment arrears may offset any price increases associated with a weaker FX rate.
This also likely helps to explain the current disinflation trend indicated by the SC-PCPT,” it added.

Market Reactions
Also, the Managing Director/Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, was quoted by Bloomberg as saying, “We are going to see the market react in a negative way. The economic uncertainty of the country has increased. By extending the uncertainty, investors who were waiting for the outcome of the election will not come back.”
On his part, the Head of Research at Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said: “We had expected that after companies release their full-year results in March and the election is over, some stocks will begin to recover. The postponement has extended the market uncertainties.”
Also, the London-based Head of Africa Strategy at Standard Chartered Plc, Samir Gadio, said: “The market is likely to remain in a risk-aversion mode this week.”
Confirming their forecasts, market capitalisation at the Nigerian Stock Exchange (NSE) fell significantly by N208.381 billion on Monday to close at N9.796 trillion, compared with the N10.005 trillion at the close of trading last Friday.

Similarly, the naira fell to a record low despite the intervention by the Central Bank of Nigeria (CBN). The nation’s currency closed at N196.50 against the dollar, extending its slide since the start of November to 18 per cent, according to Reuters.
The naira also slumped 12 per cent against the dollar at the interbank market in the past three months, the biggest decline among 24 African countries tracked by Bloomberg, while in the Apapa area of Lagos the naira sold for around N207 to a dollar in the bureau de change segment of the market.

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