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ECONOMIC SIGNPOSTS TO WATCH FOR THE REST OF 2010

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The state of a country’s economy is a very crucial factor that determines the direction of the capital market and other investment outlets. For this reason, macroeconomic indicators usually come in handy especially in periods of uncertainty such as we are currently experiencing in Nigeria. For the past one month, the capital market has been oscillating and showing signs of vacillation. And this is understandable precisely because the economic climate does not give clear signals of prosperity for the rest of this year. At best, the current signals are tending southward. The capital market is a subset of the economy, which merely reflects the overall economy during booms or downturns and has, as a result, been prevaricating. It will, therefore, be foolhardy and a costly mistake for any investor to ignore performances at the macroeconomic level, since they are pointers of the future health or otherwise of the economy and the capital market.

Global economy

Perhaps, the most reliable factor to which we can look for an understanding or prediction of what the Nigerian economy would look like in the nearest future is the state of the global economy.  Since the crushing impacts of the global economic meltdown of 2008 and 2009 became indisputably evident in Nigeria, contrary to the claims of the Central Bank of Nigeria, Nigerians have become more mindful of happenings on the global economic scene. Currently, concerns about Europe have slowed down economic activities around the globe for fear of a ripple effect that can drag down the entire global economy as did the United States subprime crises. Just last week, Nigeria’s Central Bank governor, Malam Sanusi Lamido Sanusi, warned that Nigeria’s chances of economic growth were being threatened by the European crisis.

His warning must have been informed by economic uncertainties in Europe. It is also timely although investors and economic analysts are already watching the unfolding events in that continent closely. It is, therefore, obvious that the level of success that economic managers in the West achieve in their efforts to rein in the ominous clouds of a looming downturn will, to a large extent, determine how well Nigeria’s economy would perform. The capital market would naturally follow suit. Fortunately, the IMF and World Bank are working closely with the EU and troubled countries like Greece and Portugal whose economies are almost cracking. Investors should, therefore, watch the developments in Europe keenly. 

Recovery of the U.S economy is equally crucial to global economic health. Efforts of Barrack Obama’s administration have not begun yielding sufficient fruit to boost confidence among consumers. That economy’s performance is still being closely watched and developments there would also determine the extent to which the global economy would grow or decline. More than ever before the interrelation of the world’s economies has become all too glaring. Investors should watch out for the resolution of sovereign debt problems in other places like Japan as well as the United States.        

Crude oil revenue

As always, revenue from petroleum products, particularly crude oil is a crucial factor in Nigeria’s economy since it is the country’s main source of revenue. Whenever the developing world is experiencing economic prosperity, there is high demand for crude oil. These periods lead to what is commonly referred to as oil boom. Such periods are usually good periods for investors as there is sufficient liquidity at both the local and international levels. Nigeria’s main challenge is the price of crude oil in the international market which has been spiralling downwards or oscillating below $75. The budget was based on an ambitious benchmark of $67. Last week it dropped below $70.  There is every possibility that it may drop further. Although the budget will get another benchmark that is more realistic, If the price of crude remains at this low level, it is unlikely that the economy can rise beyond its current sluggish state. This is because it will affect liquidity in the system. This has caused much concern in both government and business circles as it implies a drop in accruable revenue.

Chaotic budget

This is the sixth month in the year but the budget has yet to be fine-tuned. The original document passed by the National Assembly and passed into law has been jettisoned by both the legislature and the executive because of the irregularities and contradictions it contains. Already, there is much hue and cry over a supplementary budget that is considered wasteful by most commentators. Implementation of the budget is already chaotic. Most assumptions on which the budget is based have been faulted and are going to be reviewed but heavy spending is taking place even when it is clear that income will be significantly less than initially expected. There is no respect for budgetary processes and this will reflect negatively on the economy especially when money is not spent on key areas of the economy.

Election year pressure

From the look of things, this is an election year and there is likely to be pressure on the nation’s scarce resources as the ruling party would likely spend to please the populace. The President for example has approved salary wages for certain categories of workers in what is seen as a political move to pave way for his declaration of intention to run for office in the next election. In a sense, this can improve liquidity in the system except that the prevailing economic downturn, inflation and credit crunch may erase the effect of the money being pumped into the system. What might make matters worse is the expected opposition to President Goodluck Jonathan’s likely decision to run for office. If that decision is made public, it is likely going to heat up the polity and investors would withdraw and watch while the economy would slow down with the capital market indices plummeting. In the event that he decides not to run for office, the reverse would be the case.

Regulators’ activities

Regulators have been blamed for most of the capital market’s troubles. During periods of uncertainties, they find it difficult to understand how to go about their duties circumspectly. They are usually in the habit of becoming hyperactive, churning out policies or making pronouncements that rattle the already nervous markets. The CBN and SEC are very guilty of this and should be watched keenly.     

Banking reforms/credit crunch

As the year wears out, another factor that would determine the direction of the economy and the capital market would be the banking reforms. Already, stakeholders are awaiting the AMCON bill to be signed into law by the President. The pace at which this is done is important. Decisions as to the fate of ailing banks will also be crucial to the economy. Up till now, the banks are still shell shocked by the so-called reforms and are yet to resume any meaningful lending despite complaints by the CBN and other stakeholders. As long as the banks refuse to lend, the economy and the capital market would remain dull. Investors should watch what steps the apex bank would take to address the problems created by its interventions in the sector. 

Increasing debt profile

Nigeria is an amazing country. A few years after it got out of the excruciating debt burden that threatened it with economic slavery, it is plunging headlong into another debt overhang. At present, its foreign debt stands at $4.3 billion. There are calls on governments to watch their debts but depleting income from oil means that majority of the governments would jump at the debt option because they lack the creativity and acumen to meet the challenges of governance. This is even more worrisome, considering the fact that the foreign reserve is depleting fast. 

It is difficult to predict where the economy and the market would be headed but they lean heavily towards a slowdown and an oscillating market for much of the rest of the year. Except the European crisis is allowed to get out of hand, there should be some stability with prospects of growth next year in which case, medium and long term investors just need to wait for the right prices to position themselves during the expected oscillation.

 

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