Nigeria growth forecast

8/14/2019 Nigeria growth forecast

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Economics

Nigeria: Annual economic outlookThe need to diversify the export base away from oil

6 March 2009

Victor Munyama

Despite Nigerias domestic economic challenges (the unrest in the oil-

producing Niger Delta region, poor electricity supply and major

infrastructural constraints), the economy maintained its growth

momentum in 2008. The country continues to show signs of a pro-

reform, pro-investment environment, which attracted a lot of interest

from the regional and international investor community. The policy

framework continues to improve. Despite being an emerging economy

characterised by traditional sectors such as agriculture, manufacturing

and trade, the country is still seen through its oil sector (being the

largest oil producing nation in Sub-Saharan Africa SSA), with an

estimated 32 billion barrels of oil reserves located along the coast and

shores of the Niger River Delta. It is also estimated that the country has

about 100 million cubic feet of natural gas reserves. However, the non-

oil sector (agriculture, services, telecommunications and construction)

has been the primary driver of growth, following a continued contraction

in the oil sector in the past few years.

Projections for 2009:

Real GDP growth is expected to slow down to 3%

Oil production is expected to average 1.89 million barrels per day

(mbd)

Naira exchange rate should depreciate to an annual average of

NGN151.50/USD

Average annual inflation to increase to 13%

Current account deficit expected to be 0.2% of GDP

Fiscal deficit expected to be 3% of GDP

Recent trends

Production

The unrest in the Niger Delta region, which intensified in the first half of

2008, disrupted crude oil production throughout 2008. Including

condensates, crude oil production declined by 0.2 million barrels per

day (mbd) to average 1.94 mbd in the first half of 2008 compared with

the same period in the previous year. Over the same period, the

Nigerian reference spot price for crude (Bonny light) averaged US$114

per barrel compared with an average of about US$70 per barrel. In the

second half of 2008, the average crude oil production declined

averaged 1.90 mbd. During 2008, crude oil production declined from a

high of 2 mbd in March to 1.85 mbd in December. The bonny light spot

price averaged about US$87.4 per barrel in the second half of 2008.

The poor performance of the oil sector also led Angola to surpass

Nigeria as the leading oil producer in Africa during April 2008. Overall,

the Nigerian economy was left to depend on the performance of the

non-oil sector as the oil sector continued to contract.

Figure 1: Real GDP growth (%)

Source: National Bureau of Statistics

It was still evident in 2008 that the non-oil sector, which contributes

about 80% to total GDP, remains the overall driver of growth in the

Nigerian economy. In the first half of 2008, real GDP growth slowedto an average of 6.1% from an average of 7.2% in the second half

of 2007. The growth in the non-oil sector also softened to 8.7% in

the first half of 2008 compared with 10.3% in the second half of

2007. The oil sector continued to disappoint as it contracted by

3.3% in the first half of 2008 compared with a 4.7% contraction in

the second half of 2007. Overall, the economy is estimated to have

grown by 6.8% y/y in 2008 compared with 6.2% y/y in 2007. The

non-oil sector (particularly agriculture) is estimated to have grown

by 9.5% y/y in 2008 while the oil sector contracted by 4.5% y/y over

the same period.

Even though the agriculture sector (which constituted about 42% of

GDP in 2007 and accounted for over 60% of employment) remains

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the dominant sector in terms of its contribution to non-oil GDP, real

growth was more broad-based in the first half of 2008. The agriculture

sector grew by 6.3% in the first half of 2008, accounting for about

39.8% of GDP. Other sectors, building and construction, wholesale

and retail trade, and services, grew by 13.1%, 12%, and 10.3%,

respectively. Industrial output (which constituted about 22.1% of non-

oil GDP) declined by 1.9% in the first half of 2008 mostly due to poor

infrastructure, especially poor electricity supply.

Figure 2: Gross domestic product by activity (2007)


The slowdown in the agriculture sector was due to, among other

factors, poor infrastructure, the global food crisis, and increases in

prices. Responding to the crisis, the government undertook certain

measures aimed at boosting either production or supply of agricultural

products. Some measures included: approving a tax holiday for

importers of rice between May and October 2008, approving the

rehabilitation of dilapidated irrigation infrastructure and expansion of

the irrigation schemes, and also constructing 25 new silos to improve

the storage capacity of the National Food Reserve. The government

also implemented the Guaranteed Minimum Price for the buyer of last

resort scheme. Overall, the agricultural production index slowed down

to 4.8% in the first half of 2008 from 7.4% in the second half of 2007.

Even though the agricultural output was slower in the first half of 2008

compared with the second half of 2007, growth was still recorded

across all sub-sectors. Average world prices of Nigerias major

agricultural export commodities at the London Commodities Market

(cocoa, coffee, cotton, palm oil, copra, and soya bean) also trended

upwards, increasing by 18.8% in the first half of 2008 compared with

36.1% in the corresponding period in 2007. This was mainly due to

supply shortages in the international markets.

The decline in the index for industrial production by 1.6% in the first

half of 2008 was due to a decline in both manufacturing production

and electricity consumption. Performance in manufacturing production

continued to be constrained by poor infrastructure, especially poor

electricity supply, poor road networks, and a high pump price of

diesel. Also, most locally produced goods continued to fare poorly

due to unfair competition from imported finished products.

In the first half of 2008 electricity generation fell by 8.1% to about

2,600 mega-watts per hour (MW/h) compared with the corresponding

period in 2007. The continued disruption of gas supply, attacks on

infrastructure, and low water level at the hydro power stations

severely affected electricity generation. Also, high power outages and

emergency load shedding led to significant decline in electricity

consumption to about 1,900 Mw/h in the first half of 2008. This was a

10.4% decline compared with the first half of 2007.

Nigerias crude oil production continues on its declining path since a

production peak of 2.5 mbd recorded in 2005. In the first half of 2008

production averaged 1.98 mbd compared with an average of 2.16

mbd in the second half of 2007.

Figure 3: Oil production and price

Source: Central Bank of Nigeria

The continued decline in production was due to instability in the Niger

Delta region. Oil exports averaged about 1.49 mbd in the first half of

2008 compared with 1.71 mbd in the second half of 2007. However,

owing to the rise in the gas/oil ratio in the wells, gas production

increased by 17.1% to an estimated 30.09 million cubic metres

(MMm3) in the first half of 2008 from 25.70 MMm

3in the second half

of 2007. Of the total gas produced, only 67.7% was utilised while

32.3% was flared.

Figure 4: Gas production and utilisation (million cubic metres)


Monetary policy

Owing to mounting international and domestic pressures, headline

inflation, which had remained subdued and in the single digits since

June 2006, surged into double digits beginning June 2008. A

combination of high food and energy prices and fiscal expansion saw

inflation increasing significantly from 6.6% y/y in December 2007 to

Agriculture,42.0

Oil & gas,19.6

Building &construction,

1.7

Finance &insurance,

3.9

Wholesale &retail trade,

16.2

Manufacturing, 4.0

Telecommunication, 2.3 Others, 10.3

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US$/barrelmillion bpd

Total production Bonny Light spot price (RHS)

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Gas produced Gas utilised Gas flared


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9.7% y/y in May 2008. Overall, headline inflation averaged 11.5% in

2008 compared with 5.4% in 2007. Even though the energy prices,

which constitute about 18.1% of the consumer price index (CPI) basket,

averaged 6.2% in 2008 compared with 10.2% in 2007, the second

round effect of high energy prices in the first half of 2008 became more

evident throughout the year. That is, despite being Africas largest oil

producer, the country continues to import about 90% of its petrol

requirements because of a lack of sufficient refinery capacity. The

energy prices increased from an average low of 1.7% y/y in May to

average 11.7% y/y in December 2008.

Figure 5: CPI inflation (%)


Food prices were the primary driver of inflation in 2008. The global

shortages of food drove the food component (which constitutes about

64% of the CPI basket) into double digits throughout 2008. Food

inflation increased from an average of 8.7% y/y in February to an

average of 17.9% y/y in December 2008 also due to high importation

costs. Food imports constitute about 5% of GDP. Overall, food inflation

averaged 15.8% in 2008 compared with 1.9% in 2007. Despite controls

on domestic fuel and electricity prices aimed at insulating the core

inflation (headline inflation excluding food), non-food inflation increased

from an average low of 0.5% y/y in March to an average of 10.4% y/y in

December 2008. Overall, core inflation averaged 5.6% in 2008

compared with 9.4% in 2007.

Figure 6: CPI weights


The broad-based increase in prices was also evident in the increase inheadline inflation excluding energy and food, which increased from an

average low of negative 1.3% y/y in March to an average of 15.3% y/y

in December 2008. Most of the increase in these core measures of

inflation was also the result of expansionary fiscal policy and high

export revenues that drove up domestic liquidity in most of 2008. The

disbursement of about US$8.2 billion from the Excess Crude Account

(to be disbursed in naira) in 2008 and a further allocation of US$10.24

billion to address the major shortfall in the energy sector led to

significant increase in domestic liquidity, thereby also exerting high

inflationary pressures.

The continued rise in headline inflation during 2008 can also be

attributed to a significant increase in money supply growth. Higher fiscal

expenditure in the budget as the country continued to tackle its

infrastructure deficits, and the disbursements of oil savings from the

Excess Crude Account to state governments led to a significant

increase in domestic money supply. Broad money supply (M2) recorded

some of its highest levels ever, increasing by 100.1% y/y in March

2008. However, following the increased global financial crisis, broadmoney growth began slowing down in the second half of 2008. On

average, M2 increased by an average of 55.7% in the second half of

2008 compared with an average of 87.4% in the first half. Overall, M2

increased by an average of 71.6% in 2008 compared with an average

of 33.7% in 2007.

Figure 7: Money supply and credit growth (%)


The surge in broad money growth was due to significant increase in

domestic credit and net foreign assets of the banking sector. The

banking sector reforms coupled with the positive business environment

and sharp decline in credit extended to government led to an increase

in private sector credit lending. Credit extended to the private sector

(PSCE) reached record levels, increasing by as much as 103.7% in

April 2008. The global financial crisis led to credit contraction globally as

financial institutions tightened their lending criteria. The banking sector

came under severe pressure as confidence in the financial markets took

its toll. Banks were forced to stop or reduce lending and also recalled

some of their loans. PSCE grew by 70.4% in the second half compared

with 100.1% in the first half of 2008. Overall, PSCE increased by an

average of 85.2% in 2008 compared with an average of 59.2% in 2007.

Net foreign assets increased by an average of 13% in 2008 compared

with an average of 30.7% in 2007.

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CPI inflation Food Non-food

64%

18% 4%

4%

3%

2%

5%

Food & non-alcoholic bev. Hse water, elec, gas & other fuel

Transport Furn & hshld equip maint

Clothing & footwear Alcohol, tobacco & kola

Other

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In the first half of 2008, the Central Bank of Nigeria (CBN) came under

pressure to fight the looming inflation stemming from high global food

and energy prices, excess liquidity due to high oil prices, and fiscal

expansion. As the stable inflation environment evident in 2007 began to

show signs of dissipating, the CBN was forced to tighten monetary

policy in the first half of 2008. By June 2008, the Monetary Policy Rate

(MPR) had been increased by 75 basis points from 9.5% to 10.25%.

Following the worsening state of global financial markets, the CBN

instituted several measures in an attempt to address the liquidity

pressures in the system. In an emergency Monetary Policy Committee

(MPC) meeting on 18 September 2008, the MPC decided to reduce the

MPR by 50 basis points from 10.25% to 9.75%. The Cash Reserve

Requirement (CRR), having been increased from 3% to 4% in June

2008, was reduced from 4% to 2%. Liquidity requirement for banks was

reduced from 40% to 20%. The CBNs lending facilities to the banks

was expanded from overnight to 360 days. These measures injected a

significant amount of liquidity into the system.

Figure 8: Interest rate (%)


The commercial banks average prime lending rate, which had declined

to 13.5% in December 2007, increased to 16.1% in December 2008.

The prime lending rate averaged 16% in 2008 compared with an

average of 15.7% in 2007. The 91-day Treasury bill (T-bill) rate, which

remains the reference rate on which other rates are based, declined

from a high of 9.2% in July to 6.9% in December 2008. We expect

monetary policy to remain accommodative in 2009. The CBN will have

to balance the challenges posed by excess liquidity in a high interest

rate environment and fighting double-digit inflation.

As Nigeria is a highly import-dependent country, the naira exchange

rate remains a yardstick by which Nigerians measure the standard of

living. Also, the Nigerians continue to measure governments

performance in terms of the currencys performance in the international

markets. Thus, maintaining a stable exchange rate is not just important

for preserving the purchasing power of the naira but it is also part of the

monetary policy strategy. One of the CBNs statutory mandates is to

safeguard the international value of the legal tender currency. The

execution of this mandate has been evident in the sustained stability of

the naira exchange rate, which has fluctuated around the budget set

exchange rate in the past two years. In the first half of 2008, the naira

exchange rate averaged NGN117.55/USD.

Figure 9: Exchange rate

Source: Bloomberg and the Federal Ministry of Finance

The sustained stability of the naira exchange rate waned in the second

half of 2008 mainly due to further negative developments in the global

economy. The decline in the private capital inflows, and continueddecline in the oil prices led to a significant increase in the demand for

foreign exchange in the Wholesale Dutch Auction System (WDAS),

beginning October 2008. In the second half of 2008 the naira exchange

rate averaged NGN120.07/USD, having depreciated by about 18%

between November and December 2008. The CBNs intervention in the

foreign exchange (forex) market did not stop the nairas depreciation as

the currency depreciated to about NGN156/USD at some point in

January 2009. Heavy intervention also led to a significant decline in the

countrys foreign exchange reserves, which declined from about US$64

billion in October 2008 to about US$52 billion in December 2008.

Various measures were undertaken in an attempt to arrest the negativedevelopments around the naira exchange rate.

Financial markets

Even with the evidence of the Nigerian financial market rapidly

integrating into the global markets and high growth performance, the

financial sector remains relatively shallow by international standards.

Foreign investors interest in naira assets amid strong global liquidity

and the continued search for yield in global markets experienced in

2007 seems to have disappeared in the first half of 2008. The Nigerian

Stock Exchange (NSE) experienced some bearish performance in the

first half of 2008. Activities in both the primary and secondary market

declined. The market capitalisation of all listed securities declined by

9% in the first half of 2008 compared with the second half of 2007. The

NSE All-Share Index declined by 3.5% at end-June 2008 compared to

end-December 2007.

The declining trend in the stock exchange continued during 2008 mostly

due to the global financial crisis. The meltdown in the world financial

systems and continued negative sentiments and lack of confidence in

the banking sector led to sharp drop in the NSE All-Share Index that is

heavily dominated by the banking stocks. The NSE All-Share Index was

also affected by significant outflow of portfolio as foreign investors seek

safe haven for their investment. The NSE All-Share Index declined by

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about 66% from a high of 65,000 points in February 2008 to 21,000

points in January 2009.

Figure 10: Nigeria stock exchange

Source: Bloomberg

External sector

Even with the strong performance of the non-energy sector and

governments efforts to diversify away from the oil, the countrys

external sector performance continues to rely heavily on the oil sector.

Crude oil exports account for about 90% of the total exports volume

while generating about 95% of export earnings. Significant disruption in

oil production was well compensated for by the high oil price such that

the country continued to record a strong current account surplus. During

the first half of 2008, Nigeria recorded a balance of payments surplus of

N999.0 billion (US$8.5 billion), which was slightly lower than the

N1,073.3 billion (US$9.2 billion) surplus recorded in the second half of

2007. This positive development continued to show a favourable trade

balance, which was mainly driven by high crude oil prices, significant

inflows of foreign direct and portfolio investments, and high capital

inflows in the form of remittances.

The current account surplus narrowed slightly to N2,355.9 billion

(US$20.1 billion) in the first half of 2008 compared with N2,371.4 billion

(US$20.3 billion) in the second half of 2007. The first half of 2008 also

saw pressures on the capital and financial account moderating as the

deficit narrowed by 70.1% to N153.3 billion (US$1.3 billion), which was

1.1% of GDP, from N512.7 billion (US$4.4 billion) in the second half of

2007. High crude oil prices also led to a significant increase in the

external reserves, which increased to an average of about US$58 billion

(about 16.6 months of import cover) in the first half of 2008 comparedwith an average of US$48 billion (about 15.2 months of import cover) in

the second half of 2007. By the third quarter of 2008, gross external

reserves had increased to about US$64 billion (about 17.3 months of

import cover).

Figure 11: Foreign exchange reserves (US$ million)

Source: Bloomberg

Owing to the high levels of imports, the first half of 2008 saw the trade

balance decline by 25.6% to N1,552.0 billion (US$13.3 billion)

compared with the second half of 2007. The continued disruptions in oil

production in the Niger Delta region led to a decline in oil exports (which

accounted for about 99% of the total exports in the first half of 2008).Due to the high cost of the business environment caused by poor

infrastructure, non-oil exports (accounting for about 1% of total exports)

declined by 57.2% in the first half of 2008 compared with the second

half of 2007. Of the non-oil exports, agricultural produce constituted

about 66% of the total in the first half of 2008 while minerals, semi-

manufactured, manufactured, and others constituted about 9.6%,

12.1%, 11.5%, and 0.2% over the same period, respectively. Overall,

aggregate exports declined by 10.7% in the first half of 2008 compared

with the second half of 2007.

Figure 12: International trade (US$ billion)


The import bill continued to rise as import increased by an average of

1.8% in the first half of 2008 compared with the second half of 2007.

Non-oil imports constituted about 81.2% while oil imports constituted

about 18.8% of the total imports. Of the non-oil imports, the industrial

sector accounted for about 41.1% of the total imports. Finished goods

(food and manufactured goods), transport, minerals, agriculture, and

others accounted for 36.6%, 6.1%, 0.9%, 1%, and 14.3% of the total

import, respectively.

The slump in the oil price in the second half of 2008 is expected to have

significantly reduced Nigerias total exports. We expect import growth to

have slowed in the second half of 2008 due to slowdown in domestic

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Exports Imports Trade balance


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demand. Overall, the falling import costs coupled with a weak naira

should help Nigeria sustain a small current account surplus.

Public finances

The fiscal responsibility bill continues to be the cornerstone of

governments fiscal management. The federal government has also

shown its commitment to prudent fiscal management by adhering to the

medium-term expenditure framework (MTEF) aimed at maintaining

prudent and responsible expenditure processes. In preparing the 2008

budget, the medium-term fiscal strategy (MTFS) 2008-2010 acted as

governments positioning system. The budget was aimed at addressing

the need to accelerate physical and human infrastructure for wealth

and poverty reduction. The 2008 budget was also aimed at creating an

enabling environment for the private sector.

Table 1: Budget assumptions

Source: Federal Ministry of Finance

An assessment of the 2008 budget performance reveals mixed results.

The major drawback was the late passage of the budget that rendered

completion of some major projects difficult. Also, the government did not

fully realise the benefits of record-high international oil prices as

domestic oil production was characterised by frequent disruptions

throughout 2008. Crude oil production averaged 1.92 million barrels per

day (bpd) in 2008 against a budget set assumption of 2.45 million bpd.

Overall, the oil revenue, which constitutes about 85% of the total

government revenue and about 90% of the total foreign exchange

earnings, has been disappointing.

Figure 13: Federal Government revenue (Naira billion)


During the first half of 2008, a total of N3,723.8 billion (US$31.8 billion) in

federal government revenue was collected. This was 24.4% higher than

the budget estimate. Though government showed some improvement in

non-oil revenue receipts, it was the sustained increase in the

international oil price that averaged US$114 per barrel in the first half of

2008 that bolstered the increase in revenue. Total government

expenditure (N1,380.58 billion or US$11.8 billion) was 0.5% higher than

the budget estimate (N1,374.01 billion or US$11.7 billion) in the first half

of 2008. This resulted in an overall notional deficit of N9 billion (US$0.1

billion), which amounted to 0.1% of GDP. Of the total government

expenditure in the first half of 2008, recurrent expenditure was 68.4%

while the rest was transfers (5.1%) and capital expenditure and net

lending (26.5%).

Figure 14: Government finances (% of GDP)


Debt profile

During 2008, the countrys total debt profile continued to increase. By the

end of June 2008, the total government debt was estimated at

N2,781.4 billion (US$23.8 billion), which represented about 23% of GDP.

Of the total debt, 84% (N2,339.0 billion or US$20 billion) was domestic

debt while the balance (N442.4 billion or US$3.7 billion) was external

debt.

Table 2: Total debt stock (% of GDP)

End-June2007

End-December

2007

End-June2008

Total debt 25.9 23.5 23.0Domestic debt 21.4 19.6 19.3External debt 4.4 3.9 3.7Total debtservice 1.9 1.3 1.2


Between June 2007 and June 2008, the outstanding domestic debt

increased by 13.7% as the Federal Government increased its borrowing

to meet its financial needs. Federal government bonds amounting to

N175.1 billion (US$1.5 billion) were issued over the same period. About

76% of the total outstanding domestic debt, which amounted to 170.5%

of the governments total retained revenue, was held by the banking

sector. About 84% of the total external debt stock was owed to themultilateral creditors. Owing to the oil revenue windfall, the government

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Overall balance (cash basis) Revenue Expenditure

2008 Budget assumptions

Crude oil production 2.45 million bpd

Benchmark oil price US$59 per barrel

GDP growth rate 11.0%

Inflation 8.5%

Exchange rate NGN117.00/US$

Total revenue N1.986 trillion

Expenditure N2.47 trillion

Joint venture cash call US$4.97 billion

Deficit N0.56 trillion

% of GDP 2.5


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was able to improve its external debt sustainability position as reflected

by continued improvement in the total external debt stock as a

percentage of total export earnings. This ratio improved to 10.8% in the

first half of 2008 compared with 12% in the first half of 2007.

National policy assumptions and the international

environmentThe country remains politically stable. However, President Umaru

YarAduas administration faces some difficult challenges going forward.

The impact of the global financial crisis compounded by the sharp

decline in the oil price will make it difficult for the administration to fully

meet its commitments as laid out in the home-grown national

strategies, the National Economic Empowerment and Development

Strategy (NEEDS), NEEDSII, and the presidents Seven-Point Agenda,

which are rooted in the pillars of poverty reduction, wealth creation and

employment generation through the development of an enabling

environment for growth. These frameworks have been laid out to guide

the government in its task of aligning public policy with the basic needs

of the economy. Thus, in a country with relatively high levels of poverty

and a diverse ethnic and religious mix, the present administration will

have to not only expedite reforms but also improve the domestic

economic performance.

The current global economic recession, coupled with the low oil price,

poses challenges that directly affect the implementation of government

policies. The governments guiding vision, which is captured by the

presidents Seven-Point Agenda, focuses on the following aspects:

investing in the energy and power infrastructure that will enhance both

generation and distribution of electricity; diversifying the economy by

enhancing the non-oil sectors such as agriculture and manufacturing;

improving the transport infrastructure; contributing to more sustainable

and enduring economic growth and performance that will increase

employment opportunities; investing in human capital development

through better education and health systems; investing in and improving

national security, especially in response to the Niger Delta unrest; and

addressing the issue of land ownership.

The Seven-Point Agenda has provided a foundation upon which both

monetary and fiscal policies are advanced. The adoption of the fiscal

responsibility bill has helped not only in stipulating that the budget

should be accompanied by a three-year plan that outlines the medium-term fiscal strategy but also in ensuring that a fiscal rule is adopted that

will force government to save the oil revenues. The US$45 per barrel

benchmark oil price and the forecasted oil production of 2.292 mbd for

2009 might be optimistic, such that realised revenues might be lower

than forecast. Despite a significant slowdown in oil revenue,

infrastructure spending will remain governments main area of focus.

Monetary policy challenges remain that of managing excess liquidity in

a high interest rate environment. We expect monetary policy stance to

be accommodative in 2009.

In addressing the negative developments in the naira exchange rate,

the CBN adopted the following (temporary?) measures (on 14 January

2009) aimed at stabilising the currency:

The Retail Dutch Auction system (currently using the Wholesale

Dutch Auction System) should be reintroduced with effect from 19

January 2009.

Bids for purchase of foreign exchange must be cash based.

Funds purchased by banks at the Auction should be used for

eligible transactions only and may not be transferred into the

inter-bank foreign exchange market.

Authorised dealers should return unused funds to the central

bank within five business days.

Foreign exchange Net Open Position of banks will be reduced

from 10% to 5% from 19 January 2009.

Further signs of strong forex demand and the CBNs failure to meet

market demand continued to render the currency weak. In an attempt to

continue to address the currency weakness, the MPC decided on 9

February 2009 to:

Continue managing the exchange rate within a band of +-3% until

further notice; and

Maintain the difference between the CBN buying and selling rates

within one per cent, and that of the banks within one per cent.

On the international front, the global economic outlook for 2009 has

weakened and this should negatively impact Nigerias government

programmes. The world economy is now expected to grow by a mere

0.5%, which is the slowest growth recorded in the recent past. The Sub-

Saharan Africa is also expected to grow by about 3.7% in 2009 from an

estimated 5.5% in 2008. We expect the oil price to average US$45 per

barrel in 2009 before rising again to about US$65 per barrel in 2010.

The slowdown in oil prices and other commodities and the overall slump

in global demand for commodities should negatively impact Nigerias

fiscal space.

Table 3: Global economic outlook

Real GDP growth (year-on-year)

2006 2007 2008F 2009F

World 5.1 5.0 3.3 0.5AdvancedEconomies 3.0 2.6 1.4 -0.8

United States 2.8 2.0 1.2 -1.0

Euro-zone 2.8 2.6 1.0 -1.5

United Kingdom 2.8 3.0 0.8 -1.8

Japan 2.4 2.1 0.3 -0.5Emergingeconomies 7.9 8.0 6.6 4.0

China 11.6 13.0 9.6 7.0

India 9.8 9.3 6.5 3.5

Brazil 3.8 5.4 5.0 2.0

Russia 7.4 8.1 7.0 3.0

Africa 6.1 6.3 5.2 3.6

Sub-Saharan Africa 6.6 6.9 5.5 3.7

Developing Asia 9.9 10.0 8.4 5.0Source: IMF (2008), Bloomberg, Standard Bank est.


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Forecast summary

Production

There has not been any positive solution to the Niger Delta unrest,

which continues to disrupt crude oil production. As the rebel militias

continue to target oil production facilities, we expect these disruptions tocontinue hampering oil production in 2009 such that the country might

not achieve its full production capability. The depressed international

price of oil has also led the Organisation for the Petroleum Exporting

Countries (OPEC) to reduce Nigeria oil quota to about 1.6 mbd. Thus,

Nigerias oil production will be hampered throughout the forecast period

and growth will continue to be driven by the non-oil sector (e.g.

agriculture, manufacturing, construction, and telecommunications).

Growth in the non-oil sector has been driven by strong gross fixed

capital formation as government continued with its infrastructure

investment drive. However, the slump in international oil price will put a

severe strain on government fiscal space such that infrastructurespending should slow down in 2009.

Figure 15: Total oil production (million barrels per day)

Source: Central Bank of Nigeria & Standard Bank est.

Nigeria will also face tighter international credit conditions that will limit

access to finance. During 2007, Nigerias foreign direct investment

(FDI) inflows amounted to about US$12.5 billion (6.6% of GDP). The

bulk of these inflows targeted the oil and gas sector. However, the

current global financial crisis will dictate that FDI inflows should slow

down in 2009. We are forecasting a global growth of about 0,5% in

2009. Gross fixed capital formation should only grow by an estimated

2.2% in 2009 compared with an estimated growth of 12.3% in 2008.

Figure 16: Real GDP growth (%)

Source: National Bureau of Statistics & Standard Bank est.

Consumer demand should weaken in 2009. Nigerias public sector

accounts for about 50% of the national economy. In the recent past,

government fiscal expansion led to an increase in government

employees salaries (both federal and state). That led to buoyant

activities in the consumer market. However, high interest rates coupled

with double-digit inflation and a weaker exchange rate should dampen

activities in the consumer markets. Thus, we expect final consumption

expenditure by household to slow down to 3.2% in 2009 compared with

an estimated real growth of 6.5% in 2008.

Monetary Policy

As the global economy continues to slow down, we expect credit

conditions to be tighter. Domestic banks might find it difficult to renew or

extend credit lines and this should also impact negatively on domestic

private sector credit extension. In the recent past, the banking sector

reforms and a positive business environment contributed significantly to

a rapid increase in credit lending, which led to strong surge in broad

money supply. We expect the tighter market conditions to weigh heavily

on the domestic banks ability to lend to the private sector. Thus, private

sector credit extension should decline significantly, which should also

lead to a slowdown in broad money growth throughout the forecast

period. We expect M2 to increase by an average of 5% in 2009

compared with an average of 71.6% in 2008.

The slowdown in broad money growth (M2) should be positive for

inflation in the medium term. However, food prices should continue to

exert upward pressure on headline inflation. Thus, headline inflation

should average 13% in 2009 but decline gradually to single digits during

the forecast period. Monetary policy should stay accommodative in2009. Thus, we expect the MPR to be 9.5% by the end of 2009.

However, due to declining oil revenue, government might be forced to

borrow domestically to fund infrastructure investment. This should drive

yields higher in 2009. We do not expect government borrowing to

crowd-out the private sector as there is no vibrant corporate bond

market. The recent shortage of T-bill notes lead to a significant collapse

of the rates. However, this is not sustainable in the long term, such that

T-bill rates should start increasing to around 8% by the end of 2009.

Figure 17: CPI inflation (%)

Source: National Bureau of Statistics & Standard Bank est.

These measures taken to stabilise the naira exchange rate have not

only paralysed the foreign exchange market but have also reversed

some of the exchange rate liberalisation the country has implemented

-

0.50

1.00

1.50

2.00

2.50

3.00

2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f

6.0 6.2

6.8

3.0

5.96.3

6.9

5.8

0

2

4

6

8

2006 2007 2008e 2009f 2010f 2011f 2012f 2013f

0

2

4

6

8

10

12

14

2006 2007 2008 2009f 2010f 2011f 2012f 2013f


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since the mid-1990s. For example, the measure that funds purchased

at the Auction cannot be sold on the inter-bank market effectively shuts

down the inter-bank market and runs the risk of encouraging a parallel

and illegal exchange rate market. Depending on the recovery of the oil

prices, we expect these measures to be in place throughout 2009 and

into 2010. The sign of a reversal of a market-determined exchange rate

might also dampen the confidence gained with the international

investors since the liberalisation of the exchange rate. We expect the

naira to continue trading at around its current levels in the short term.

Thus, the naira should average NGN151.5 per US dollar in 2009.

Figure 18: Naira/USD exchange rate

Source: Bloomberg

External sector

The decline in the price of Brent crude oil should affect the countrys

external sector performance. Crude oil exports account for about 90%

of the countrys total exports. Continued unrest in the Niger Delta region

and OPEC oil production cuts should severely impact Nigerias current

account balance. Thus, we expect total exports to decline from an

estimated US$95.2 billion in 2008 to US$48.7 billion in 2009. However,

as new oil fields come online in 2009, we expect a slight increase in oil

exports volume. Despite the country being Sub-Saharan Africas

largest oil producer, Nigeria still imports about 90% of its petrol

requirements because of a lack of refining capabilities. We expect the

import costs to decline significantly following the sharp drop in the

international price of oil. The recent currency depreciation should also

lead to a significant drop in imports. As the economy slows down

certain sectors might reduce their imports of raw materials. Therefore,

imports should decline in nominal terms from an estimated US$48.7

billion in 2008 to US$35.5 billion. Thus, the trade balance is forecast to

decline from US$46.5 billion in 2008 to US$3.5 billion in 2009 (2% of

GDP)

The decline in oil prices coupled with lower profit remittances from oil

companies operating in Nigeria should lead to shrinkage of the income

deficit of the services and income accounts. However, we expect the

income and services accounts to remain in deficit. The slowdown in

global economic growth should put a dent in the inflows of remittances

from Nigerian diaspora. Thus, private capital inflows should decline.

However, the current transfer account should remain in surplus.

Therefore, we forecast a slight deficit of 0.2% of GDP in the current

account in 2009. The current account balance should return to surplus

in 2010 and throughout the rest of the forecast period as oil prices

recover.

Figure 19: Current account balance (% of GDP)

Source: Central Bank of Nigeria & Standard Bank est.

Public Finances

The depressed international price of oil should put severe pressure on

government fiscal space in 2009 and this should lead to significant

expenditure cuts. The projected aggregate expenditure in the 2009

budget is 2.87 trillion naira compared with 3.3 trillion naira in 2008. We

expect the crude oil price to average US$45 per barrel in 2009. Thus,

revenue collection will decline significantly and that should dampen

overall government consumption expenditure, which should record a

real growth of 2.9% in 2009 compared with an estimated real growth of

10.5% in 2008.

The 2009 budget was also based on the conservative benchmark oil

price of US$45 per barrel compared with the US$69 per barrel initially

proposed. Oil production is estimated at 2.3 million barrels per day. This

appears too optimistic as further attacks on oil facilities and

infrastructure would disrupt oil production. Thus, budget deficit is

estimated at NGN757 billion ((US$5.1 billion). That is 3% of GDP.

Figure 20: Non-oil primary balance (% of GDP)

Source: Federal Ministry of Finance & Standard Bank est.

We expect fiscal policy to remain expansionary during 2009. The 2009

budget is aimed at delivering the presidents Seven-Point Agenda by

enhancing investment in physical infrastructure and human capital

development, implementing socio-economic reforms and consolidatingdemocracy. Depressed oil prices pose a significant challenge to

110

120

130

140

150

160

2006 2007 2008 2009f 2010f 2011f 2012f 2013f

-5

0

5

10

15

20

25

2006 2007 2008e 2009f 2010f 2011f 2012f 2013f

-35

-30

-25

-20

-15

-10

-5

0

2006 2007 2008e 2009f 2010f 2011f 2012f 2013f


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10

governments ability to meet its revenue target for 2009. Thus,

government might be forced to increase its domestic borrowing to cover

the shortfall in revenues. As the yields in domestic bonds increased in

2008, domestic borrowing should be expensive. The continued

depressed state of the international financial markets will also make it

difficult for the country to borrow internationally. For these reasons,

government might be forced to tap into the Excess Crude Account to

cover for the revenue shortfall. Another major threat to stable

government finances is the disruptions in crude oil production. The

referenced 2009 budget oil production of 2.292 mbd might still be difficult

to achieve as the country struggled to produce 2.0 mbd in 2008.

Economic outlook

The weak global economy and developments in the oil markets will

dictate the countrys outlook going forward. If oil prices remain at these

depressed levels, we expect government revenue to decline. This

should negatively impact governments infrastructure spending, whichhas been driving growth in the non-oil sector. Thus, growth should slow

down significantly. The unresolved political instability around the Niger

Delta region might also continue to disrupt oil production, thereby

further impacting negatively on real economic growth in the medium

term. Governments commitment to prudent macroeconomic policies

should boost real growth. The current economic conditions pose a

significant challenge for government to further diversify its export base

away from oil and into other sectors of the economy.


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Nigeria

Standard Bank forecasts of selected indicators

2006 2007 2008 2009 2010 2011 2012 2013

National Accounts

Gross Domestic Product (USD billion) 146.5 155.6 166.2 171.2 181.2 192.7 206.0 218.0Real GDP growth (%) 6.0 6.2 6.8 3.0 5.9 6.3 6.9 5.8

Final Consumption Expenditure of

Households (NGN billion) 425.7 459.3 489.2 504.9 525.1 552.9 588.3 622.4

% change 7.6 7.9 6.5 3.2 4.0 5.3 6.4 5.8

Final Consumption Expenditure of

Government (NGN billion) 12.3 13.3 14.7 15.1 15.7 16.5 17.8 19.1

% change 7.7 8.1 10.5 2.9 3.8 5.0 7.8 7.2

Gross Fixed Capital Formation (NGNbillion) 114.0 131.3 147.5 150.7 159.6 171.1 184.6 198.5

% change 17.9 15.2 12.3 2.2 5.9 7.2 7.9 7.5

Oil production (million barrels per day) 2.22 2.12 1.92 1.89 1.9 2.2 2.3 2.4

Monetary sector

Money supply (M2) NGN trillion 3.5 4.7 8.1 8.5 9.1 9.9 10.9 12.1

% change 34.9 34.3 71.6 5.0 7.8 8.5 10.1 11.0

Policy interest rate (%) end period 14.00 9.50 9.75 9.50 10.00 9.75 9.00 8.5

Exchange rate (NGN/USD) average 128.5 125.7 119.0 151.5 140.3 135.6 130.3 125.2

Inflation (%) 8.4 5.4 11.5 13.0 11.5 10.3 9.8 8.5

External sector

Exports: goods and services (USD

billion) 62.51 63.12 95.26 40.71 65.35 70.33 85.14 93.45% change 1.0 50.9 -57.3 60.5 7.6 21.1 9.8

Imports: goods and services (USDbillion) 30.91 38.89 48.73 37.21 38.81 41.34 45.78 49.37

% change 25.82 25.30 -23.64 4.30 6.52 10.74 7.84

Trade balance (USD billion) 31.60 24.23 46.53 3.5 26.54 29.00 39.36 44.08

% of GDP 21.6 15.6 28.0 2.0 14.7 15.1 19.1 20.2

Current account (% of GDP) 10.0 1.6 9.9 -0.2 5.2 10.3 19.8 18.5Foreign exchange reserves (USD) endperiod 42.3 52.0 68.1 50.0 75.2 80.5 83.7 87.6

Import cover (months) end period 16.4 15.9 18.3 16.8 18.5 19.0 19.6 19.9

Public and external solvencyindicators

Gross external debt (USD billion) 5.1 3.7 4.1 4.8 3.6 4.2 4.2 5.7

% of GDP 3.5 2.3 2.5 2.8 2.0 2.2 2.0 2.6

Non-oil Primary balance (% of GDP) -26.5 -24.5 -30.6 -21.7 -27.5 -29.3 -26.5 -28.7


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Group Economics

Goolam Ballim Group Economist

+27-11-636-2910 [email protected]

South Africa

Johan Botha Shireen Darmalingam Jeremy Stevens Danelee van Dyk

+27-11-636-2463 +27-11-636-2905 +27-11-631-7855 +27-11-636-6242

[email protected] [email protected] [email protected] [email protected]

Rest of Africa

Jan Duvenage Anita Last Yvonne Mhango Victor Munyama

+27-11-636-4557 +27-11-631-5990 +27-11-631-2190 +27 11-631-1279

[email protected] [email protected] [email protected] [email protected]

Botswana

Lesotho

Namibia

Swaziland

Angola

Ghana

Malawi

Mauritius

Kenya

Mozambique

Uganda

Zambia

DRC

Nigeria

Tanzania

Zimbabwe

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Nigeria growth forecast

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