Nigeria’s Spine-Tingling Suspension Saga
Nigerian shares were battered through May for a 2 percent loss as they may be removed from the MSCI frontier index, following similar expulsion from JP Morgan’s local debt gauge, with pervasive foreign exchange controls. President Buhari, marking a year in office, defended the regime as “reconstructing the state spine” but directed his central bank chief to consider modifications. The official rate is below 200/dollar, while the parallel one is at 350, amid widespread import shortages that have gutted manufacturing as oil prices remain at record lows. The economy was in recession in Q1, and the World Bank annual forecast envisions only 2 percent growth helping to drag the continent average to 4 percent. Foreign capital inflows were only $700 million in April, and the trade balance has turned to deficit as inflation tips toward 15 percent. Petroleum exports provide two-thirds of government revenue and Delta rebels have again damaged pipelines to slash production, leaving a $10 billion fiscal deficit officials plan to cover with domestic and overseas borrowing. The Finance Minister is in discussions with multilateral development lenders and the Chinese over infrastructure credit lines, while states have been unable to honor contracts and pay salaries. It further reduced fuel subsidies in a nod to budget reality, but diesel and power scarcity persist and have incited street unrest. President Buhari appointed new management at the state energy company to improve performance, but the massive restructuring effort will take years according to experts while capacity further withers. Smuggling has been a main channel for $20 million in daily imports, draining international reserves heading toward the $25 billion level as they are released at a $200 million/week pace satisfying just a fraction of demand. Current output at 2 million barrels/day is half the medium-term target as joint venture partners await resolution of $10 billion in claims.
Bank stocks have crumbled under the weight of oil industry bad loans which are estimated at 15 percent against the reported overall 5 percent ratio. The five biggest listings have delayed 2015 results, and several chief executives are under investigation as well for allegedly abetting corruption under the previous administration. The crackdown has overshadowed positive capital market building moves as the parliament considers a promotion package and pension funds obtain more equity allocation leeway. President Buhari’s team is also under fire for its handling of the Boko Haram scourge in the north, where he has promised tougher security sweeps at the same time the regional agricultural economy has imploded without an anti-poverty and diversification strategy.
South Africa won a respite from its own gloom as Moody’s signaled a sovereign rating downgrade pause, following a $1.25 billion bond issue at 3.5 percent over US Treasuries. Finance Minister Gordhan is now in the headlines for alleged abuse of authority, after the highest court called on President Zuma to answer numerous embezzlement charges. He defeated a legislative no-confidence vote from the findings, as growth and fiscal consolidation plans continue to falter. Recession will be narrowly avoided, but inflation should stabilize at 7 percent keeping the central bank on hold. The largest public pension fund, with $120 billion in assets, expressed interest in acquiring Barclays units for sale under its divestiture push, which my require stiff activist spine to engineer turnaround, according to observers.