*L-R: Chief Executive Officer, Coscharis Motors Ltd., Mr. Cosmas Maduka, Chief Executive Officer, Metropolitan Motors Ltd, Mr. Olutoyin Okeowo, Chairman, Toyota Nigeria Ltd. Chief Ade Ojo, Minister of Industry, Trade and Investment, Olusegun Aganga, Chief Executive Officeer, Dana Group; Mr. Jachy Hathiramani, Mr. Adeoye Ojuoko, SMT Nigeria (Volvo) and Mr. Mohah .B. Wasnani, Globe Motors Holding Nig. Ltd. during an interactive meeting on the new Automobile policy recently approved by Federal Government at the Ministry Headquarters, Abuja.
Global Economic Outlook
According to the International Monetary Fund (IMF), the outlook for the global economy is good with a projected improvement in growth from 2.9% in 2013 to 3.6% in 2014. The Eurozone economies have pulled out from recession and now on a positive growth trajectory for 2014. The United States economy, the largest in the world, is expected to sustain its recovery path with a growth of 2.6% from 1.6% in 2013.
The economies of the sub-Sahara African countries are projected to post an impressive average of 6% growth as against 5% in 2013. Emerging economies will maintain positive growth trend of 5.1%, although some of the economies may experience slower growth rate. Overall, the outlook for the global economy looks good and this would impact on commodity prices, especially crude oil. Oil prices are likely to be steady at around $100, which will be good for the Nigerian economy.
The Nigerian economy in 2014 would be characterized largely by macroeconomic and investment climate conditions that prevailed in 2013. The GDP growth will remain strong at over 6% relative to global average of 3.1%. The Nigerian economy may emerge as the largest on the African continent and one of the top 30th in the world after the GDP rebasing which is expected in 2014.
The positive outlook of the global economy would impact positively on crude oil prices which could serve to sustain the current growth momentum of the Nigerian economy. Performance of the major drivers of growth are also expected to be sustained – telecommunications sector, Building and Construction; Hotel and Restaurants; and Solid Minerals. The market size, driven by high and growing population and emerging middle class will remain robust with corresponding opportunities for investors. The pre-election activities may take its toll on the economy through distractions of partisan politics and heightened election spending. However, the resilience of the economy will endure.
Naira Exchange Rate
The naira will experience moderate depreciation given the current pressure on the foreign exchange market and the increasing divergence between the parallel market rate and the official rate. The mounting pressure on foreign reserves and excess crude account are indicative of these pressures. These developments would also fuel speculative activities and round tripping in the foreign exchange market. A moderate depreciation is expected and this is already envisaged in the Medium Term Expenditure Framework (MTEF) and the budget where the exchange rate assumption is N160 to the dollar. Business model of investors in 2014 should therefore make appropriate allowance for a moderate depreciation in the naira exchange rate.
The high interest regime will persist for as long as the tight monetary policy stance of the CBNis sustained. Although a change in leadership of the apex bank is expected to be effected in 2014, significant shift in policy stance may not occur. Investors should therefore brace up for the perpetuation of a highinterest rate regime in 2014 and construct their business models accordingly.
Inflationary pressures may intensify this year as a result of a number of factors impacting the supply side of the economy:
• Trade policy issues – High tariff on rice, proposal to ban fish importation, upward review on tariff on vehicles.
• High transportation cost
• High energy cost
• High cost of fund
• Exchange rate depreciation in the parallel market.
• Deregulation of downstream oil sector if the PIB is passed.
All these are variables that would put pressure on prices in the 2014.
The prosperity of a business would depend to a large extent on the capacity to manage risk. In 2014, the economy will be characterized by the following risk conditions which investors in the economy need to take account of in their business strategy for the year.
i. Moderate inflation risk – it will be difficult to keep inflation within single digits in 2014 given the various variables that would generate pressures on prices which have earlier been highlighted.
ii. Moderate risk of fiscal imbalances which may result from revenue shortfalls especially with regard to crude oil output. Budget assumption of 2.39 mbd appears optimistic given the prevailing situation in the oil producing areas, attacks on pipelines and oil theft.
iii. Moderate Regulatory Risk. Harsh regulatory environment has become a concern to many investors. Some regulators could be overbearing and create dislocations for investors. However with increasing communication and mutual understanding, the risk may be mitigated in the New Year. But the risk level would still be at a moderate level.
iv. High Political Risk. Being a pre-electionyear, and with current developments in the political space, political risk will be high in 2014. As the political activities begin to gather momentum on the run up to the 2015 election, transactionsor projects that are public sector driven will be more vulnerable. It is therefore advised that from 2014, exposure to big public sector transactions of long term nature should be undertaken within this context.
v. Interest rate risk is high. The interest rate regime in 2014 is high and volatile. This demands that highly leveraged investors should be cautious and take full account of this factor. Offshore funds will be better for business in this environment in 2014. High interest rate regime is also not advisable for long term projects at this time, especially in the real sector.
vi. High Exchange Rate risk. Given the mounting pressure on the foreign exchange market and the differential between the parallel and official rates; the pressure on foreign reserves and the excess crude account, there is a high risk of depreciation of the exchange rate during the year.
vii. Infrastructure risk is high. The high infrastructure deficit would persist in 2014. Investors should moderate expectations from current power sector reforms as improvements in power supply may not happen as fast as expected. Therefore business models should continue to be based on the premise of weak infrastructure in 2014 as in previous years.
viii. Corruption risk is high especially for public sector transactions and also present to a lesser degree in some private sector institutions. This is a component of risk that would persist in 2014 and which investors would have to grapple with.
ix. Security Risk is high: The security situation in some parts of the country is still a big issue for investors. The situation though moderating, may persist in 2014. The oil theft and pipeline vandalism are risks that would have to be taken into account as well in 2014 in relevant business decisions. They havesignificant implications for gas supply to the power stations as well as government revenue.
x. Policy Risk. Policy inconsistency is a major challenge of the Nigerian economy. Again for long term investors this is a risk variable to worry about in 2014. This is often the case with trade policies – tariff, import restrictions etc.
xi. Risk of Capital Flow Reversals: the economy is awash with an estimated $15 billion portfolio inflow, otherwise known as hot money. Developments in the global and domestic economies will determine whether the funds will remain in the economy. However, with the positive outlook for the global economy, the high returns that the domestic economy offers, the risk of the capital flow reversal may the assessed as low in 2014. Capital flow reversal could have a significant impact on the economy and could trigger major dislocations.
The purpose of highlighting the risk factors is to enable investors in the Nigerian economy have a good understanding of the risk variables in the Nigerian business environment and adopt proactive strategies to mitigate these risks.
The Lagos Chamber of Commerce and Industry wishes business community a prosperous 2014. The Chamber is confident that the Nigerian economy is still a good place to do business and enjoy good returns on investments. The challenges and risks may be daunting, but the opportunities and returns are equally enormous.
ALHAJI REMI BELLO, FCA
President, Lagos Chamber of Commerce and Industry
5Th January 2014