False alarms on Nigeria

Nigerian Stock Exchange (NSE)
Nigerian Stock Exchange (NSE)

“The prophets of gloom and doom are increasingly prolific and apocalyptic.” Peter Bernstein
RECALL the JP Morgan emerging market index episode of 2015. According to the high priests of voodoo market intelligence, the heavens would fall once Nigeria got ejected from the index. Lest you forget, some had also predicted that Nigeria would disintegrate in 2015.

Talk about the mix of wind, sun, and fire. These prophets of doom and gloom have become even more prolific in scare mongering. Have you read the latest article on Nigeria burning at the seams in Foreign Policy Magazine? Apart from the clowns of market intelligence, The Economist and Financial Times occasionally join the fray in raising false alarms on Nigeria’s economy.

These pundits have already passed judgment on the current economic policy stance of the government as not supporting of its three priorities of anti-corruption, security, and the economy. We note that there are indeed areas for improving the current economic policy framework given the budget debacle and the monetary and exchange rate policy summersaults (more on this later).

Without even an iota of a chance, however, these pundits have essentially been speculating that Nigeria will end up as a dysfunctional economy with a completely collapsed currency, hyper inflation, deep recession, and even electoral defeat for the current government in 2019. They are fond of comparing Nigeria with Venezuela.
Economic fortunetellers and the capital market
These economics fortunetellers, with their self-fulfilling prophecies, now suggest that Nigeria will soon be ejected from the MSCI Frontier Equity Index. We note that Nigeria’s equity market is already among the world’s cheapest, with market capitalization to GDP ratio of 10 per cent compared to South Africa (160 per cent), China (75 per cent), India (70 per cent), and Kenya (37 per cent).

Dani Rodrick, the Princeton economics professor reminds us “we know from painful experience that financial markets’ short-term focus and hard mentality behavior often lead them to neglect significant economic fundamentals.”

Unlike Warren Buffet, they have turned the equity market into a casino instead of a vehicle for long-term investment finance. As this legendary investor once noted, “be greedy when others are fearful and be fearful when others are greedy.” This is the time for long-term investors to search underground and find golden gems.
Nairamageddon is the second plank of their gloom scenario.

These pundits use all sorts of dubious and spurious statistics to justify the need for massive devaluation and encouraging speculative activities to drive up the parallel market rates. They even claim that the true Naira exchange rate has strengthened over the last two decades. Where is the underlying productivity growth to support that claim? Where is the real wage growth to match that productivity growth?

We have already debunked the claims of these pundits that capital inflows are simply waiting in the wings, ready to pour back in like heavy rain only if Nigeria would devalue its currency. Nigeria is not immune to the global capital outflows sneeze of $735 billion in 2015 from emerging markets, in spite of currency depreciations by one-third in over 75 countries as investors have searched for safety in a period of uncertainty.

We now add as the United Nations Conference on Trade and Development (UNCTAD) notes, capital flows, stock market declines and depreciations in emerging markets have become dangerous liaisons pulling down economic growth, lowering fiscal revenues and adding to foreign debt woes.

Oilmageddon is the other plank of the gloom scenario.
These same pundits were predicting that oil price was going to the moon a few years back. In one case, a firm that projected oil prices averaging $65 in 2016 just four months ago has now ratcheted that down to $10.

We note Larry Summers’ remarks that even the IMF’s global economic growth projections have been off the mark 220 times! We maintain that while the prices of oil may be far from the top, they are close to the bottom.

More importantly, we posit that Nigeria should view this low oil price period as a real opportunity to sweat its large balance sheet of non-oil GDP of N90 Trillion, which currently generates revenue of only 3.5%, compared to 15% in BRIC countries and 35% in OECD countries. Should oil revenues drop to zero, the 2016 budget deficit would widen to N3 trillion, 95% of non-oil revenue and 3.2% of non-oil GDP. Intensifying revenue diversification away from oil, enhancing independent revenue, and plugging leakages via the Treasury Single Account are the way to go.

We note that whenever the price of oil plummets from its dizzying heights, devaluation has been turned into a lump sum tax to generate revenue to the three tiers of government. In this context, an exchange rate policy instrument that should serve as a competitive tool and shock absorber now simply provides impetus for ignoring domestic revenue diversification efforts, while encouraging fiscal malfeasance.

Avoid the merchants of fear

To paraphrase Scott Locklin in Clown of Quantitative Finance, however, we urge the solipsistic prophets of doom with their nihilistic vision of the Nigerian economy to please spare us with their market dyspepsia as they operate in their cloud cuckoo land. For one, they all seem to swim in the same direction; and anyone who chooses to swim in the opposite direction is a heretic to be burn at the stake. As Peter Bernstein, however, reminds us: “The dark voices we hear are always the same dark voices, and the sheer volume and lack of variety in argument has begun to dilute their impact on us.”

The morale of all this: Avoid the merchants of fear with their avalanche of apocalyptic economic pessimism on Nigeria. Our growth story may have tempered, but our entrepreneurial spirit and dynamism are intact and unrivaled, at least, in Africa.
Dr. Oshikoya, an economist and a chartered banker, is CEO of Nextnomics Advisory.

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