ThinkBusiness Today - May 29th

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and welcome to a new week.

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After 8 disastrous years, a new beginning beckons

For so long I have wondered what would best capture the day and moment that President Buhari’s disastrous presidency ends.

Relief.

Congratulations to Nigerians for surviving the most clannish, divisive, incompetent, and corrupt government in our history. Even in the last days and weeks, the government continued to demonstrate its penchant for joke and lack of leadership. Indeed, President Buhari will remain an inglorious example of awful leadership, wasted opportunities, self-destruct, and dashed hopes. A President that in 2015 defeated an incumbent President, after contesting four times, supported by the entire global community, got immense votes from North and the South, and rode on a special wave against a lackluster 16 years of People’s Democratic Party (PDP). In the end, as he leaves office today, he is a full display and symptom of how a nation cannot grow, nor do better, than the consciousness of its leader.

Oh yes, many will point to progress in infrastructure and some very important legislations, such as the possibility of States generating and distributing their own electricity, railways now on concurrent list, and the Petroleum Industry Act.

But what is a government supposed to do in 8 years? Even a dead clock is correct two times in 24 hours.

Today, I sincerely believe a glorious history beckons for Nigeria. Why? Given the background of the new President Asiwaju Bola Ahmed Tinubu, GCFR, I expect two minimum things. First, the understanding of the role of investment in driving economic growth, and the understanding that those investments will not happen without improved macroeconomic conditions (See analysis). Second, the progress we seek in Nigeria will not happen without serious, concrete, tangible, and sustained reforms.

I hope I am right.

Markets

• The benchmark NGX All-Share Index (ASI) rose 152.28 (0.29%) points on Friday to close at 52,973.88, a 1-week gain of 1.51%, a 4-week gain of 1.41%, and an overall year-to-date gain of 3.36%.

• Brent crude closed at $76.95 a barrel, up 69 cents, or 0.9%. The West Texas Intermediate crude oil price in the United States rose 84 cents, or 1.2%, to $72.67 a barrel. On a weekly basis, both benchmarks gained for the second week in a row, with Brent rising 1.7% and WTI rising 1.6%.

• Naira appreciated at the I & E window on Friday exchanging at N464.51 to the dollar a 0.11 percent increase against the N465.00 to the dollar traded on Thursday. However, at the parallel Market, Naira depreciated at 3.22% to close at N769/$.

• Natural gas futures slid about 2.38% to US$2.42 on Friday despite the U.S. Energy Information Administration (EIA), reporting an underwhelming storage build for a second week in a row that suggested the oversupplied market may be turning the corner on fundamentals.

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National Headlines

• 15% Ways and Means – This is one of the jokes of Buhari’s presidency – Spending N22 trillion off the record but legalizing it before leaving office. Not satisfied, and requiring such in the future, let us make it a permanent feature. The House of Representatives has approved an amendment to the Central Bank of Nigeria Act, raising the ceiling of Ways and Means advances from the apex bank from 5% to 15% of previous year’s revenue.

Global Headlines

• US Congress to vote on debt ceiling deal – Weekend, the US President Joe Biden and the US Speaker Kevin McCarthy reached a deal to raise the debt ceiling and prevent a first US default in history. The bill is expected to be ready Monday morning and put for votes before it becomes law in time before the 5^th of June that the US Treasury says it will run out of money.

• Turkey’s Erdogan to serve another five years – Recep Tayyip Erdogan, the Turkey’s president won run-off elections in the country over the weekend. In the first election May 14^th , neither of the leading candidates received at least 50% of the votes. In the run-off, the 69-year-old leader that has ruled Turkey since 2003, first as a Prime Minister, and President since 2014, won by 52.14%. The Turkish Lira declined against the US $ following the result of the elections, even after losing about 77% of its value in five years.

News Analysis – Macroeconomic Stability for Investment, Growth and Jobs

As Nigeria ushers in a new President in Asiwaju Bola Ahmed Tinubu GCFR, growing the economy should be the paramount objective and a matter of urgency, as well as dealing with growing insecurity problems, poverty and unemployment, and widespread social inequality and exclusion.

However, growing the Nigerian economy without reliance on oil prices and revenues will require the transformation of the Nigerian economy. Transforming the Nigerian economy is about changing the current foundations and structure of the Nigerian economy. Although successive administrations made this their objective, they have all failed to achieve this critical objective because they focused on the wrong metric.

In Nigeria, macroeconomic instability goes beyond inflation. It is compounded by severe current account imbalances, rising national debt and worsening exchange rate fluctuations. To promote high levels of savings and investment and have a chance at long-term sustainable growth, the President must deal decisively with price instability, especially of inflation and exchange rates.

Figure below shows Nigeria’s growth dynamics since independence and how they have been driven largely by oil prices and revenues. In 60 years (1960 – 2020), Nigeria has been unable to double its income per capita. Income per capita was US$1,367 as at 1960 and US$2,504 at 2022. In the comparable period, the global per capital income tripled. The main reason for this poor productivity and income growth is the poor fiscal choices (government expenditure) made in response to changes in oil prices and revenues.

Growth Pattern 1960 - 2022

And this is the source of Nigeria’s macroeconomic instability – the unquenchable appetite for increases in government spending, irrespective of the dynamics of oil prices. As it is with individuals and businesses, a country where successive governments are weak on spending (cannot save), cannot prosper.

The genesis of Nigeria’s macroeconomic instability and the underlying driver of poor fiscal choices is the assumption and expectation that oil prices will continue to rise and the unquenchable appetite for spending that follows that assumption. That assumption guides and it is exhibited in Nigeria’s budgets since the 1970s. Despite the history of dynamics of oil prices and the fiscal responses to these changes, majority of Nigerian leaders still believe the only direction of oil prices is up. This is not a judgement on the levels of government expenditure, it is that the poor discipline response to changes in oil prices / revenues based on unrealistic expectations lead to poor fiscal choices, weak investment and growth, and unsustainable debt and poverty.

To provide a stable macroeconomic environment, the Tinubu administration will ditch this assumption about revenues, including that of oil prices. Economics is about expectations. Successive governments have often planned annual budgets with the assumption that oil prices will continue to rise. When oil prices match those expectations as it did between 2010 and 2014, government expenditure is stable, so is inflation, current accounts, foreign exchange, and government debts grows steadily.

See what happens when there is a shock and without savings. Between 2016 – 2022, GDP growth averaged 1.3% whereas population growth rate remained at 3%. Income per capita fell drastically from $2,679 in 2015 to $2,504 in 2022 and for the last 8 years, income per person declined by 7%. By 2024, the income per capita would be $2,680 which would be the same level as of 2014, thus, wipe out 10 years efforts on growth.

Stabilizing the Nigerian economy requires the following;

By whatever approach to fiscal policy and its underlying dynamics, first things first - grow government and national reserves (savings) so as to stabilize the Naira, reduce macroeconomic instability from the fluctuation in exchange rates, attract foreign investments and grow the economy and jobs.

The Week Ahead

• Today is the inauguration and Swearing-In of President Elect, Asiwaju Bola Ahmed Tinubu as the 16th President of the Federal Republic of Nigeria at Eagle Square. This will mark the seventh consecutive democratic transition of power in Nigeria.

• 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.

• The NBS will release the Q1 2023 capital importation data on Wednesday 31st May 2023. The latest data shows that the capital importation has been declining since Q4 2021. Put in perspective, the capital importation declined by 20% to US$5.3billion in 2022 from US$6.7 billion in 2021.

• Also, the NBS will release Q1 data on selected banking data on Wednesday 31^st May 2023. This data cut across credit, payment channel, staff strengths among others.

• On Tuesday, May 30, 2023, Japan will release the data for unemployment rate for the Month of April. Japan’s unemployment rate unexpectedly rose to 2.8 percent in March 2023 from 2.6 percent in February, above market consensus of 2.5 percent. This was the highest reading since January 2022, as the number of unemployed increased by 150 thousand to 1.95 million.

• On Wednesday 31^st May 2023, France, Italy, France, and Canada are expected to release their various reports on Inflation report for the Month of April.

• Also, Euro area GDP and inflation report is expected to be released on Thursday, June 1^st , 2023.

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