The Bumpy Year Ahead

The Nigerian economy took a hit in 2015 as a result of the decline in oil price and political uncertainty in the first half of the year. However, 2016 could turn out to be a far more difficult year to navigate.

Oil price recovered in Q2 last year to above $65 but that is looking like ancient history as it broke $30 a barrel this week for February delivery. The Nigerian Federal budget already with a record deficit is looking even more precarious as the benchmark price of $38 has been breached.

The Naira has not surprisingly tumbled in the unofficial market even as the Central Bank of Nigeria (CBN) kept the exchange rate at a value pegged in January 2015. The official rate is obviously no longer realistic. It is unfortunate that the CBN has yet again allowed its hands to be forced into devaluation. The bank appears reactive and with all the data at its disposal it is most unfortunate that it is the last to see what is obvious. The bank meets on 25th and 26th January and an official devaluation is inevitable.

The lack of clarity on the foreign exchange regime has affected the fortunes of the Nigerian stock exchange (NSE) even as it grappled with other challenges of a slowing economy. The All Share Index (ASI) of the NSE lost 17.4% last year and is already down 15.4% this year. The last time oil collapsed was late 2008 to 2009 and the ASI lost 30.6% in January 2009. Then as now, the worst hit were the banks. A difference worth highlighting though is that the banks today are a bit healthier than in 2009. Nevertheless, banks will be hard hit this year, as they will be forced to write off hundreds of billions of Naira in loans to oil and gas firms. Over 25% of assets transferred to AMCON after the 2009 debacle were related to oil and gas transactions And this was even before the Nigerian Content Act which created opportunities in oil and gas sector for Nigerian firms came into effect. Consequently, with the Act enacted in 2010, the percentage of write-offs will be even more heavily skewed towards oil and gas in this dispensation.

The key questions though as we navigate this very difficult year are thus: Is the CBN up to the task? Does the bank know what to do and have the courage to execute? Is the finance team of the Federal government up to the challenge? My hope is that they are otherwise the bumpy ride will be even more treacherous and it is best not contemplated.

As for the NSE, you have to be thick-skinned to venture into investing at this time. However, January 2016 could prove to be as good a time to buy good companies at great valuations as January 2009. The challenge, though as always is keeping a cool head as the majority panic and having the courage to step into the lion’s den and coming out alive. It surely will be an interesting year, stay tuned and all the best.

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