Nigeria Mid-Year Economic Review 2019

Retrofitting the Nigerian Economy: Issues and Drivers

Choices & Action!

Outline

• Synopsis

• Retrofit

• What should We Focus on?

• Global Macroeconomic Review

• The Nigerian Economy

• The 21st Century Economy

• H2 2019 Outlook

• End Notes

2

Synopsis

3

The Nigerian economy has struggled for

acceleration since recovery from the 2016

recession. The prospects are still bright, but gaining momentum requires making some changes that seem simple on the surface but difficult to make. These changes requiring

surgical strike mentality and energetic execution may be the way out.

Synopsis (contd.)

4

• Surgical strike is a military terminology for an

action that produces an intended resultagainst a predetermined and well-defined military target, without or with minimal collateral damage.

• It also means an action aimed at quick resolution of a problem or issue in order to prevent it from escalating into a full-blown war!

Retrofit

5

To retrofit is to add a component to something that never had it when it was manufactured.

For example, a 59-year old apartment block that is newly fitted with elevator, central air-conditioning system, shared supplementary non-grid power system and all bedrooms en-suite.

The retrofitted unit becomes infinitely more

effective and efficient than its pre-retrofit state.

What’s should we Focus on?

6

We have conducted severally half-yearly and annual reviews with outlook over many years. Telling the same story!

Perhaps we should begin to shift focus in our analysis and conversation, taking account of the dynamics of economics:

The fading rational, economic man and evolving socially adaptable man. (Kate Raworth, 2017)

By end-July 2019, the US economy would have been growing for 121 months at a stretch, being the longest run since records began in 1854! (Economist, July 2019)

The rising and strengthening phenomenon of ‘unmodellablebehavior’.

The inability of government to effectively fund growth and desperate need to make growth trickle down.

For Nigeria, the exploding population that looks likely to account for about 26.7% of world population growth between now and 2050! (UN

Focus on? (contd.)

7

Shift:

From GDP growth to measuring quality of life and equitable distribution of growth benefits?

From whatever-happens to competing for resources and attention.

From the deception of resource-rich country to attractive investment destination.

From waiting for investors to come to actively pursuing the type of private investors that will make the difference.

Global Macroeconomic Overview

“The outlook for the global economy has darkened” due to

the following major factors: Tightened global financial conditions;

Moderate industrial production;

Intensified trade and political tensions; and

Large Emerging Markets and Developing Economies (EMDEs) experiencing significant financial market stress.

World Bank GEP 2019

8

Global Macroeconomic Overview (contd.)

Key issues / risks: Trade wars between USA and China.

Slowing advanced economies, especially UK and mainland Europe.

Rising protectionism – ‘America First’ and Brexit.

Deeming growth prospects for commodity exporters.

Slowing growth in China and other East Asian countries.

China slowed to 6.2 percent in Q1 2019, but for a $14 trillion GDP, that’s still massive (annualized) addition of $868 billion which is 2.46 timesNigeria’s $353.27 billion (Q1 2019 annualized)!

EMDEs largely (Nigeria included) will suffer from country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills.

Growing risks of global policy uncertainty.

Weak productivity gains and climate change effects will adversely impact output and growth.

9

The Nigerian Economy

The economy is growing, but not fast enough. GDP growth rate slowed

to 2.01% during Q1’19 after recording higher levels of growth in the two preceding quarters. However it was still higher than 1.95% recorded in Q1’18.

An average of 1.91% for 2018 was above 0.83% for 2017. The Nigerian economy is primed to hit a peak of 2.65% growth in 2019.

10

-2.50%

-1.50%

-0.50%

0.50%

1.50%

2.50%

3.50%

Q3'15Q4'15Q1'16Q2'16Q3'16Q4'16Q1'17Q2'17Q3'17Q4'17Q1'18Q2'18Q3'18Q4'18Q1'19

Nigeria: Real GDP Growth Rate (%), Q3 2015 - Q1 2019

Year 2014 2015 2016 2017 2018 Q1’19

% Growth 6.23 2.82 -1.41 0.83 1.91 2.01

This does not talk to

growth beneficiariesand income distribution.

The Nigerian Economy (contd.)

External Sector

11

The external sector is growing strongly, except for the great influence of hydrocarbons in foreign earnings.

-

1,000,000.0

2,000,000.0

3,000,000.0

4,000,000.0

5,000,000.0

6,000,000.0

Q12013

Q32013

Q12014

Q32014

Q12015

Q32015

Q12016

Q32016

Q12017

Q32017

Q12018

Q32018

Q12019

V

o

l

u

m

e

Nigeria: Exports vs Imports, Q1'13-Q1'19

ImportsExports

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

Q1 2

013

Q2 2

013

Q3 2

013

Q4 2

013

Q1 2

014

Q2 2

014

Q3 2

014

Q4 2

014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q1 2

016

Q2 2

016

Q3 2

016

Q4 2

016

Q1 2

017

Q2 2

017

Q3 2

017

Q4 2

017

Q1 2

018

Q2 2

018

Q3 2

018

Q4 2

018

Q1 2

019

S

h

a

r

e

Nigeria: Oil vs Non-Oil Exports, Q1'13-Q1'19

Oil Non-Oil

Foreign trade data suggests strengthening. Exports have expanded strongly on the back

of hydrocarbons earnings! Imports dampened between Q2’17 and Q4’17

but upturned in Q1’18 and sharply in Q3’18!

Oil remains the prime mover, accounting for 92.5% of exports in H1’18, 83.31% in H2’18 and 88.24% in Q1’19, on the back of favourable oil prices and steady production / export.

This portends vulnerability.

In Q1’19, major export trading partners were India, Spain, Netherlands, South Africa and France, while major import trading partners were China, Swaziland, United States, India and Netherlands.

The Nigerian Economy(contd.)

Public Debt Stock (Mar’19)

12

Why we should not worry about these figures! What type of loans? What is the cost? What is the tenor? What is the money going into? What we should consider --

Debt/GDP, Debt/Budget, Debt/Infrastructure nexus, and whether a nation can go bankrupt or be liquidated?

The ‘noise’ about debt is misplaced and counterproductive! Its restructuring favours cheaper external debt. If Nigeria desires to bridge infrastructure deficit, she

MUST borrow!

Category US$ ml N Ml Change Q1’19

External (FGN+ States + FCT)

25,609.63 7,860,875.93 $335.27 (1.33%)

Domestic (FGN) 42,721.68 13,113,420.29 $1,111.24 (2.67%)

Domestic (States + FCT) 12,942.77 3,972,783.37 $390.86 (3.11%)

Sub-Total Domestic 55,664.46 17,086,204.66 $1,502.11 (2.77%)

Overall Total 81,274.09 24,947,080.59 $1,837.37 (2.31%)

Two risk issues – exchange valueof the Naira and investor confidence.

They know quite well that if Nigeria looks inward, she can never go bankrupt!• They don’t want you to know that Nigeria ranks lowly 155/174 in Debt/GDP ratio, and 110/160 in

infrastructure index.

The Nigerian Economy(contd.)Top-10 Infrastructure and Debt/GDP Ratio

13

Top-10 Debt/GDP

Top-10 Infrastructure

Ranking in Debt/GDP

GDP Ranking

Japan Germany 51 4

Greece Japan 1 3

Lebanon Sweden 100 22

Italy Netherlands 64 18

Portugal Austria 28 27

Cape Verde Singapore 8 36

Congo United States 10 1

Singapore United Kingdom 24 5

Bhutan Switzerland 129 20

Unites States UAE 156 29

Nigeria 78 / 160 (2018_WB) 155(21.3%_2017_TE)

30 (2017_WB)

A simple covariance testshows a strong positive correlation between Debt/GDP ratio and infrastructure for top-10 (63.95)!

The Nigerian Economy (contd.)The Economy is Diversified

14

Oil generates most of the earnings, but accounts for less than 10% of GDP! A disconnect of sort, as its

linkage to the rest of the economy is weak!

Agriculture and Trade are dominant and hold the best prospect for wealth creation for ‘small capital’ households!

Agriculture

21.9%

Mining &

Quarrying

9.2%

Manufacturing

9.8%

Electricity &

Aircon

0.2%Water Supply

& Sewerage

0.2%

Construction

4.1%

Trade

16.9%

Accommodatio

n & Food Svcs

1.1%Transportation

& Storage

1.8%

ICT

13.3%

Arts &

Entertainment

0.3%

Finance &

Insurance

3.2%

Real Estate

5.6%

Prof & Tech

Svcs

3.5%

Admin &

Support Svcs

0.0%

Public Admin

1.9%

Education

2.1%

Human Health

& Social Svcs

0.7%

Other Svcs

4.2%

NIGERIA: GDP Q1 2019

Q1’19 GDP:

• Oil = 9.14%;

• Non-oil = 90.86%

The Nigerian Economy (contd.)Import Finance Capacity

15

20

25

30

35

40

45

50

2015 Jun

e

2015 Au

g

2015 Oct

2015 Dec

2016 Feb

2016 Ap

r.

2016 Jun

e

2016 Au

g

2016 Oct

2016 Dec

2017 Feb

2017 Ap

r.

2017 Jun

e

2017 Au

g

2017 Oct

2017 Dec

2018 Feb

2018 Ap

r.

2018 Jun

e

2018 Au

g

2018 Oct

2018 Dec

2019 Feb

2019 Ap

r.

2019 Jun

e

$ B

illio

n

Nigeria: External Reserves , Jun'15 - July'19

With a monthly import bill of N1.277 trillion (or $3.31 billion) from Q3 2018 to Q1 2019, current external reserves of $45.044

billion represents 13.61 months, which is above the minimum threshold of 6 months (it was 11 months during recession).

In Q1’2019, importation of machinery and transport

equipment accounted for 40.66%of total imports.

Sustained investor confidence in the I&E Window will keep this stable, taking a lesson from the Argentinian experience of 2018.

To talk devaluation in Nigeria’s current situation is a dubious argument, given the steady shift in the local production / import nexus.

The Nigerian Economy (contd.)Attractive Investment Destination

16

Year Amount2013 21.32

2014 20.75

2015 9.64

2016 4.73

2017 12.23

2018 16.81

Q1’2019 8.49

But, if the bulk of foreign investment inflows are portfolio in nature, the swings are unavoidable and Nigeria is vulnerable!

There is something foreign investors see in Nigeria that most Nigerians don’t seem to see!

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Q1'13Q3'13Q1'14Q3'14Q1'15Q3'15Q1'16Q3'16Q1'17Q3'17Q1'18Q3'18Q1'19

Capital Importation ($'bl), Q1.2013 - Q1.2019 Q1 2019 totaled $8.49b, already 50.5%

of total of $16.81b in 2018; 2017 was $12.23b, while 2015 and 2016 combined was $14.77b!

2016 to early 2017 saw loans dominate, filling the gap created by dwindling portfolio investments.

Portfolio investments (PI) in money market instruments revived and have dominated since Q4 2017 due to more high-yield, low risk instruments open to foreign investors!

Nigeria remains an attractiveinvestment destination. PI accounted for

51% of total in 2017, 70.1% in 2018 and

84.21% in Q1’19!

The Nigerian Economy (contd.)Stable Exchange Rates

17

Rate remains stable because the CBN has capacity to intervene in the market.

Some analysts call it ‘defending the Naira’, but it is a primary function of central banks and

necessary stimulus for an

economy desperate for growth! CBN did $22b in 2017 and $48b

in 2018, and still has as at 15th July 2019 $45.11b 30-D average!

The exchange rates in the 3 major FX market segments have been stable in the last three years!

149.00

199.00

249.00

299.00

349.00

399.00

449.00

Nigeria: Exchange Rates, May'2015 - July'2019

The Nigerian Economy (contd.)Stable Exchange Rates

18

Sub-Saharan Africa Top 5 Destination Cities, 2017 (International Overnight

Visitors)

State #

Average length of

Stay Spend

Average Spend

/ Day

Lagos 1.5 million 7 nights $589 million $57

Dakar 0.8 million 2.3 nights $303 million $165

Kampala 0.5 million 7 nights $561 million $168

Nairobi 0.4 million 13 nights $283 million $50

Accra 0.4 million 10.5 nights $507 million $132

Source: Mastercard Global Destination Cities Index, 2018

The Nigerian Economy (contd.)Stable Exchange Rates

19

From the pie chart in slide 14, the major drivers of Nigeria’s GDP are

Agriculture, Trade, ICT, Mining & Quarrying, Manufacturing, and Real Estate.

These together accounted for 76.7% of Q1’19 GDP!

There were estimated 202.28 million Nigerians as at Wednesday, 19th June 2019!

Your company needs to find its bearing in these, by answering the following questions.

Who are these people? Where are these people? How many

individuals/corporates in these sectors does your companyhave in its portfolio?

How, when and from whom can your company get them?

The Nigerian Economy (contd.)Misery Index

20

3.0

8.0

13.0

18.0

23.0

28.0

2010 2013 Q3'14 Q2'15 Q1'16 Q4'16 Q3'17 Q2'18

Nigeria: Unemployment Rate (%), 2010-Q3 2018

0%

5%

10%

15%

20%

2015- Jun

2015-Oct

2016- Feb

2016- Jun

2016-Oct

2017- Feb

2017- Jun

2017-Oct

2018- Feb

2018- Jun

2018-Oct

2019- Feb

2019- Jun

Nigeria: Inflation Rate (Jun'15-June'19)

21.50%

23.50%

25.50%

27.50%

29.50%

31.50%

33.50%

Maximum Lending Rate (Dec'09-Jun'19)

-2.50%

-1.50%

-0.50%

0.50%

1.50%

2.50%

3.50%

Q3'15 Q1'16 Q3'16 Q1'17 Q3'17 Q1'18 Q3'18 Q1'19

Nigeria: Real GDP Growth Rate (%), Q3 2015

- Q1 2019

The Nigerian Economy (contd.)Misery Index (contd.)

21

30.00%

35.00%

40.00%

45.00%

50.00%

55.00%

60.00%

65.00%

70.00%

Nigeria: Misery Index, 2010-Q3 2018

N-power

Quality jobs

HGSFAgric production, jobs,

school enrolment & completion, nutrition

and child health

GEEP Interest-free loans

CCTSupport most vulnerable households

N-power

• 2.5 million youth in the database as at Feb

2018 and over 0.5 million engaged.

HGSF

• As at 2017, 1,051,619 pupils in 8,587 schools

in 4 States, expanded to 1,287,270 pupils in

9 States by June 2017, 7.6 million in 22

States as at April’18, 8.5 million as at

July’18 and 9.3 million pupils in 49,837

schools in 24 States catered for by 96,972

cooks as at Nov’18.

GEEP

• As at Nov’18, the beneficiaries had

increased to 1,378,804 borrowers.

CCT

297,973 vulnerable households in 20 States

as at February 2018 out of 455,857 mined from the National Social Register.

The Nigerian EconomyForeground and Background (contd.)

22

The 21st Century Economy

Following Roosevelt Institute, we can describe a 21st

century economy as:

23

“reimagining how government, civil, and business institutions can provide opportunity and security for all Nigerians.”

The 21st Century Economy (contd.)

The 21st century economy bundles opportunities and challenges, but these will cut across class, race, gender, religion and geography.

Diversity is recognized, appreciated and cultivated in: Industries and economic activities Competencies and capabilities Capital source

The Roosevelt Institute’s 21st Century Economy work tackles the need for a new social contract that: Regulates contemporary business practices; Provides economic security to a larger swath of Americans; and Invests in long-term prosperity for communities across the country.

24

The 21st Century Economy (contd.)

There are three key elements that must feature in setting a 21st century economy:

• Anchor the economy around a clearly identified economic sector or activity.

• Deliberately seek and market (offering incentives to) reputable private partners in the priority sector(s).

• Partner with governments and private investors (in and out of Nigeria) for critical inputs for its economic agenda.

25

H2 2019 Outlook

26

View of Washington!

IMF Article IV Consultation, March 2019 Context. Nigeria’s economy is still recovering from the substantial terms-of-

trade shock that triggered the 2016 recession. Over the past two years, the rebound in oil prices, a tight monetary policy, and a convergence in foreign exchange windows have helped reduce inflation and rebuild external buffers. However, persistent structural and policy challenges—including a large infrastructure gap, low revenue mobilization, and high dependence on hot money—constrain growth to below the level needed to reduce vulnerabilities and improve development outcomes. With elections now complete, there is a greater chance for faster policy implementation.

Outlook and risks. Under current policies, the outlook remains muted with growth hovering around 2½ percent, amidst limited increases in oil production and insufficient policy adjustment four years after the oil price shock. Risks are moderately tilted downwards, driven by additional delays in reform implementation, a persistent fall in oil prices, increased security tensions, and tighter global financial markets.

27

H2 2019 Macroeconomic Outlook

GDP Growth rate

Inflation rate

Interest rate

Exchange rate (N/$)

Crude Oil price

External reserves

2.65% – 2.75%

12.15%

Double digit

N306/$ vs N363/$

$54/bbl

$48.25 bn

World Bank GDP growth projection is 2.2% for 2019,

and 2.4% for 2020/21

28

IMF GDP growth projection is 2.3%for 2019 and 2.5%

for 2019/2020

End Notes

• The fate of the Nigerian economy still hangs on

hydrocarbons – volume produced and exported vis-à-vis the international oil market price.

• There are prospects that the rigidities in the oil sector will change by 2020, given the promise of the Dangote Refinery.

• Nigeria needs to reset her economy around its local conditions and culture and find the courage to resist the worn-out Washington consensus!

• The resilience and staying power of the average Nigerian

provides growth opportunities for those that look and move in the right direction.

• Nigeria is the right place to be for any forward-thinking entrepreneur and investor!

• Finally, what do you see? Opportunities or

chaos? Its your choice and your call!

29

What we measureis more important than how we measure!

30

Dr. ‘Biodun Adedipe, FCIB, MIoD, FIMC, FERP+234-8023061981

bioduna@baaconsult.com.ngbiodun_adedipe@yahoo.com

B. Adedipe Associates LimitedLateef Jakande House (3rd Floor)

3/5, Adeyemo Alakija StreetPO Box 73983, Victoria Island, Lagos

+234-1-4613794info@baaconsult.com.ngwww.baaconsult.com.ng

Thank you

God bless you more