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Markets turn against 2017 Fiscal plan

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***Parallel market premium widens, as oil price falters
***Analysts disagree on Outlook

By Emeka Anaeto

IN the first week of resumption of businesses across all markets in Nigeria and abroad in 2017, market results are raising three pressure points in Nigeria’s 2017 fiscal and economic outlook. At close of markets, weekend, the initial upticks in the international price of crude oil had reversed, Naira value to the USDollar had also reversed its initial stability in the unofficial segment while retail prices of household commodities spiked further, poking the consumer price index upwards.

Brent Crude, the international flagship grade, which had hovered significantly above USD58/barrel at the beginning of the week closed the week at USD57.1/ barrel. Specifically, it showed significant instability on Friday trading between USD57.38 and USD56.55.

Nigerian Stock Exchange

Finance Ministry and Budget/Planning Ministry officials have expressed optimism that a significant oil trade above USD42.5/barrel benchmark for 2017 budget would help bridge the deficit gap of N2.4 trillion contained in the budget.

Currency exchange rate crises persists

Similarly, tradings at the autonomous segments of the foreign exchange market destablised the relative stability in exchange rate recorded towards end of last year, as Naira value plunged to N493/USD, from N485/USD, even as Central Bank of Nigeria’s controlled market still showed stability at N314/USD.

Unrealistic budgetary assumptions

Though the autonomous market was not reflected in the fiscal plan 2017 economy experts believe that not only does the autonomous rates rule economic affairs in the open market for goods and services, it eventually defines the outcome of fiscal policy actions.

Hence in the development last week they see an unrealistic budgetary assumptions being forced out of line with a possibility of further official depreciation of the Naira later in the year.

Reflecting on the market situation, the Financial Derivatives Company, headed by a popular economists, Bismark Rewane, has predicted that Naira would be forced to depreciate at the CBN controlled interbank market to N350/USD, while crashing to N520/USD in the autonomous market. These are expected to stoke up inflation towards 20 per cent (18.3 per cent, October, 2016) before dropping to between 15 – 17 per cent,  according to FDC.

However, analysts at Cowry Assets Management Limited, a Lagos based investment house, are optimistic that the adverse development in the forex market would be contained by positive developments in the external reserves.

They stated: “In the current week, we expect stability of the Naira/USD exchange rate as the increasing Reserve spur confidence on the ability of the Central Bank of Nigeria (CBN) to intervene more aggressively in the official market window.”

CBN had reduced its volume of foreign currency supply to the interbank market segment last week signifying restricted ability to meet the demands.

But with the significant accretion to foreign reserves in the past three weeks which show an  increase of 1.7 per cent week-on-week to USD26.155 billion as at Wednesday, January 04, 2017, the apex bank is expected to increase supply this week or later this month, if reserves continue to rise.

Consequently, the one month, three months, six months and 12 months forex forward contracts were stable at N305.25, N320.18/USD, N330.537/USD, N346.07/USD and N378/USD respectively.

External reserves rose to USD26.2 billion on January 04, 2017, up from USD25.8 billion dollars on December 30, 2016.

Data from the CBN shows Nigeria’s forex  reserves had risen to over four-month high of USD25.7 billion on December 28, 2016, up from USD25.4 billion dollars on December 23, 2016.

Related to the above development during the week was a reported significant rises in consumer prices across various products and services, with implication that the 12 per cent inflation benchmark of the 2017 budget would not be achieved.

Analysts believe the current wave of retail price spikes was being driven by sustained crises in the forex market which the 2017 budget scarcely addressed.

Fiscal policy roadmap

Commenting on the weak points of the 2017 budget, Bode Agusto & Company, led by a leading financial analyst in Nigeria, Bode Augusto, stated last weekend: “At a time of dismal economic performance characterised by economic contraction, and weak fiscal communication, the Budget will assume greater importance as a fiscal policy roadmap.

“However, this budget fell short of expectations. While Keynesian assumptions may be at the root of the government’s fiscal plans to spend its way out of the recession, the budget will do little to stimulate private sector confidence for investments for a number of reasons. “Firstly, the demand management strategies deployed by the Central Bank coupled with other knee-jerked polices, such as the arrest of currency traders selling above ¦†400/US$, seem to have attracted little concern in the Budget.

“This germane issue is at the root of Nigeria’s current recession and will remain a deterrent to investors until it is genuinely addressed through the proper policy framework. It has increased Nigeria’s macro-risks and even poses greater dangers to the economy than the falling oil prices which initially popped the economic decline.

“The inertia towards the Forex price controls has led to poor corporate performance which has materially affected the ability of the Federal Inland Revenue Service (FIRS) and the Nigerian Customs Service (NCS) to meet their budgetary revenue targets.

“The budget also reflects the statist nature of the Nigerian government. While Keynesian spending models may help prop the economy, the government also needs to embark on macro-economic reforms that will stimulate investments and create jobs simultaneously.

“The widening budget deficit especially on the domestic debt market where borrowing is projected to rise by 27% in 2017 will lead to a crowding-out effect on the private sector.

“The widening deficit at a time of deteriorating macro-indicators like inflation and unemployment will lead to higher borrowing costs for the government.

“The rise of the yields on the benchmark debts will also impact private sector borrowing costs and constrict investment capacity.”

 

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