ThinkBusiness Today - June 1st

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and welcome to the month of June.

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Deal with Nigeria’s debt by stabilizing it

It gets worse before it gets better.

The government is broke. Nigeria is broke. So, fuel subsidies, which never made sense had to go. But now that the Nigerian public have been called again to make sacrifices and must cope with about 150% increases in the price of fuel, those in government must also now make their own sacrifices. Reforms are tough, and those that pursue reforms should be ready to make sacrifices themselves.

Markets

• Nigerian equities continued the positive sentiment as it increased by 0.06% on Wednesday. The benchmark NGX All-Share Index (ASI) inched up 30.93 (0.06%) points to close at 55,769.28, representing a 1-week gain of 5.98%, a 4-week gain of 6.64%, and an overall year-to-date gain of 8.82%. The increase was attributed to the significant rise in CONOIL (9.96%) and MRS (9.93%),

• Oil prices fell by 1.13% on Wednesday on stronger US $ and as weak data from top oil importer China raised demand fears. Brent crude futures for August delivery were down $1.75, or 2.37%, to $72.71 a barrel. U.S. West Texas Intermediate crude (WTI) fell $1.90, or 2.74%, to $67.56. Despite the latest pullback in prices, analysts do not expect OPEC+ to announce further cuts in the upcoming meeting.

• The Naira strengthened at parallel market as it appreciated by 0.26% to close at N753/$ but remains unchanged at N464.5/$ at the I & E window.

• Natural gas futures remained under pressure in early trading Wednesday as bulls pinned their hopes on more impressive cooling demand developing into the back half of June. The Natural Gas futures was up by 0.30% to close at US$2.33.

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National Headlines

• “Subsidy is gone” – Fuel prices at the pumps ranged between N490 and N530 in different parts of the country yesterday, as the 50-year-old wasteful and inefficient subsidy finally goes. It is a demonstration of the awful pace and pattern of reforms that it has taken Nigeria to be on its final knees for the subsidy to go. However, those that still criticize the President for his approach do not fully appreciate that Nigeria finances was already in the theatre when he sworn in three days ago, and it requires a major surgery. President Buhari had carefully packaged a financially and insecurity ridden nation for his successor. Meanwhile, I can understand the rhetoric by the Nigeria Labour Congress (NLC), this is about the last straw of its relevance. There are significantly more important labour related issues that it had failed to respond to.

Global Headlines

• “Debt ceiling Act” passed in the US House – The bill – Fiscal Responsibility Act – to raise the debt ceiling from the current US $31.4 trillion passed in the House early hours of this morning West African Time (WAT) by 314 – 117. This was going to be greatest hurdle because the House is dominated by Republicans, some of whom rejected the compromised deal between the President Joe Biden and the House Speaker Kevin McCarthy. The bill has now moved to the Senate and the expectation is that it will become a law, in time before the US government could default on its debt if the ceiling was not raised.

• Why should you care about the US debt ceiling? – For weeks now, I have kept you updated on progress to raise the debt ceiling in the US. Perhaps some, may ask, why bother? It is because the inability of the US to raise its debt ceiling and its default ramifications will be catastrophic for the global economy, and emerging economies like Nigeria. Yes, some of the effects will come from how it affects the US domestic economy – security payments, military payments, and likely recession. But it will also affect oil price and payments, the strength of the US $, and most importantly that 60% of the world’s foreign reserves are in the US $, including our meagre US $34 billion. We should care.

News Analysis – Deal with debt by stabilizing it

As a matter of fiscal priority, just like the removal of fuel subsidies, President Bola Ahmed Tinubu must deal with Nigeria’s current unsustainable debt trend. How? Given the precarious fiscal conditions, and the growth of Nigeria’s debt in the last 10 years, the best way of dealing with Nigeria’s debt is to stabilize it.

Before we look into ways of doing that, this is a summary of the debt situation today. Total debt is at US $103 billion, both domestic and external debts, 61% and 39%, respectively. Debts to GDP is estimated at 35% (this depends on which exchange rate is used in calculating the GDP). But it is clear, as the government has shared before, servicing Nigeria’s debt now requires about 90% of today’s revenues.

Nigeria’s Debt Dynamics 2010 - 2022

There is no painless way out of the fiscal mess that we are in. But it can be managed. And the goal is to reduce the rate of growth of the debt. How?

1. Deal with budget deficits – Nigeria’s budget deficits is the source of all growth in debts – spending monies we don’t have and borrowing monies we can’t pay back comfortably. Deal with it. The first place was the removal of fuel subsidies, but that is not all. So, I expect a credible finance minister in the coming weeks will deal decisively with budget deficits and quickly. The comfort of a 15% CBN funding is also damaging, so scrap it.

2. Raising taxes is off the table – There is perhaps a temptation to raise taxes. This should be a no-go area. The shallow formal economy – banks, insurance, FMCGs etc. will bear the brunt and they are already reeling from a depressed economy.

3. Start rescheduling negotiations – The government should start talks that leads to the rescheduling of most of the country’s debts immediately. Rescheduling allows longer time to pay the debts, reduces current repayment terms and frees resources for priority expenditure.

4. Speed up revenues by blocking leakages – This is perhaps the most important but also perhaps the most difficult. The most obvious and damaging example of this leakage is crude oil losses. Reducing significantly crude oil theft will improve dramatically government’s revenues from oil sales.

5. Start privatization of state-owned enterprises – Yes, perhaps this is not a good time to sell government assets, but this is a good time to start preparing them for sale. Another important element I hope the government will undertake is to list many state-owned enterprises on the exchange.

The Week Ahead

• OPEC+ will meet on Sunday June 4, 2023. At the last meeting April 3, 2023, it announced output cuts of 1.16 MBPD. Some OPEC+ members announced voluntary production cuts in April that would take effect in May, but oil prices have continued to decrease due to concerns about economic growth and interest rate hikes.

• Friday June 2, 2023, the United State will release its monthly unemployment rate for the month of May.