Quick Spot Economic Analysis
The days ahead will not be easy due to the following underlining factors:
Outbreak of CoronaVirus
With the level of Strong level of reliance on China for a lot of supplies and raw materials and the current lockdown of factories and large companies, the supply chain system will definitely bump into a setback for companies in Nigeria as well. Productions also might be stalled due to absence of raw materials. This would reduce productivity and would surely have a negative impact on the real sector.
Possibly, there will be an increase in the cost of production and consequently, a rise in inflation. Small businesses will have a lot of supply shortages as well and businesses will cut down on travel plans.
The stability of the Naira is not guaranteed .This signals high level of economic uncertainty and might apparently lead to a reduction in capital inflows as we have seen in the last one week on the stock market. There are indications of an approaching trade deficit as weaker currencies stimulate more export than imports.
Stock Market Crash
The stock market crash persisted on Thursday, as the All-Share index fell by 3.72% to close at 22,695.88. Investors lost about 456.96 billion, as market capitalization fell by the same margin to N11.827 trillion as against Wednesday’s N12.284 trillion. Invariably, companies will obviously have issues about growth and expansion. As companies try to cut cost, Jobs could be lost and aggregate spending power decreases. We might be heading for a recession.
Also, there are changes on the perception on the economy. Investors begin to lose confidence and this might lead to more funds being pulled out of the economy.
Oil price crash
The price war between Saudi Arabia and Russia could be very scary for Nigerian revenue. With the cost of production per barrel at $30 and Saudi selling under $30 dollars really signifies a very chilling situation for us. This is more alarming with respect to our daily production capacity which currently stands at 2.2 million barrels per day.
The oil price hit on revenue also defines the dire situation surrounding the sustainability of the 2020 budget. The continuous drop in oil price also takes a huge toll on our currency as it is the main source of revenue and dollar earnings. In the third quarter of last year, $41 billion out of the $46 billion dollar earnings was made from crude oil. Automatically, our dollar earnings fall alongside the price of crude oil.
Recently, at any time devaluation looks imminent, the CBN intervenes. Unluckily external reserves current stand at $36 billion and the CBN has a commitment in non-deliverable forwards to the tune of almost $11 billion to supply to foreign investors. This simply means the pressure on the external reserves may not accommodate any intervention at this point. Apparently, we might see strong demand pull inflation in terms of FX which unavoidably will reduce the value of the naira.
The short reserves are also not aiding our debt profile. It simply gives a lot of doubt as regards capacity to repay debts. This could also increase the cost of borrowing as well.
Inconsistency in government policies and programs
The doubt and unevenness of government policies also pose a problem for the macro economy. Foreign investments are not really flowing into Nigeria irrespective of the various prospects in the country. Many investors have identified the lack of sure policymaking as one of the reasons for keeping their distance. It might persist if such ambience is still displayed in terms of policy making. An example is the obvious waste of time and resources supposedly injected in the Ajaokuta steel mill. The mill is a colossal waste as over $8 billion has been pumped into it and has failed to produce any steel.
These issues will affect Nigeria and it will for a very long time. The worst recession in the history of Nigeria is eminent if the virus is not controlled, due to borrowing power limit and the unwillingness of other nations and institutions to lend to Nigeria due to the above factors.
Some Survival strategy
- Avoid unimportant spending.
-Avoid risky investments.
- Avoid trouble and anything risky to health
- Engage in daily review of priorities
- Avoid lending and borrowing to friends and family, but you can still help
- Cash is king
-Liquidity defeats profitability. So, look out for sellout to grow.