What next for Nigeria’s economy? Navigating the rocky road ahead
Nigeria in the eye of the storm For net oil exporters like Nigeria, the fall in oil price by 60% in 2015 had far reaching impact on the economy with government revenue declining rapidly, foreign investors exiting the domestic market and the Naira value coming under pressure. We have been here before Oil-related crises are not new to Nigeria.
Two previous episodes of falling prices had resulted in a freefalling Naira and slowing economic growth: • 1986 Global Oil Glut: an oversupply of oil built up in the 1980s as demand weakened and new forms of energy were developed. Average oil prices fell 48% between 1985 and 1986.
This led to an economic contraction over the next two years, with the Naira depreciating by over 70%. • 1997 Asian Financial Crisis: during 1997 and 1998 the oil price gradually declined in response to cooling demand as the financial crisis in Asia deepened. While the Naira initially stood firm and growth continued, the deteriorating political situation led to a devaluation of 75% in 1999. Nigeria’s performance in the wake of the 2008 global financial crisis was more encouraging.
As volatility rippled out from the US-subprime crisis, Brent Crude fell from $145/ bbl to below $40 in the space of six months. However, stronger domestic growth fundamentals combined with a weak US$ prevented the Naira falling further than 20% against the dollar. Economic growth resumed at preshock levels only two years later.
Importance of oil to Nigeria Oil as is common knowledge, is Nigeria’s main source of foreign exchange earnings and government financing, (See Figure 1).
The impact of the oil price drop on the economy has led to downward adjustments of growth expectations for the country by the World Bank who in June 2016 said Nigeria would grow at 0.8% this year, down from an estimate of 4.6 it made in January.
This the bank said is owing to weakness resulting from oil output disruptions and low prices. More so, Nigeria’s economy contracted for the first time since 2004 in Q1 2016 with indications that a recession is imminent after a four-month delay in the nation’s budget, stalled economic stimulus programs in addition to foreign-exchange restrictions, fuel shortages and a plunge in oil production following renewed militancy in the oil rich Niger Delta.
The federal government on Wednesday 13 June 2016 said its earnings had declined by 40 per cent as a result of the drastic fall in oil prices, as well as the persistent attacks on oil installations in the Niger Delta. As a result, it said the N6.06 trillion budget for this year will only be partially implemented. In 2015, PwC published a report titled –
What next for Nigeria’s economy? Navigating the rocky road ahead in the Economy watch – May 2015. The publication focused on possible economic scenarios to help organisations prepare for an uncertain environment in 2015 and 2016 following the decline in oil prices. We projected that even under a benign economic scenario, the Nigerian economy will struggle to realise growth much higher than 4.0% (Projections by the Federal ministry of Finance at the time was 5.5%).
This projection was based on in-depth research and economic modeling by economists at PwC. We emphasized that getting the policy response right matters a lot as the situation imposes a real ‘human’ cost on the population. On the other hand, businesses must react and adjust in the right way in order to be able to weather the storm.
More so, our World In 2050 analysis, expects GDP per capita to hit $10,000 in Nigeria in 2030 – just a one percentage point slower growth rate per year would see this development threshold delayed by almost a decade, to 2038. The possible scenarios and outcomes We explored two types of shocks in the May 2015 Economy watch report: an oil price shock and a political shock. The first scenario looks at oil price averaging $55/bbl over 2015 and stabilising at $70/bbl in 2016 with a smooth transition and maintenance of political stability in the country. Scenario 2, envisaged the re-emergence of Iran oil production in Q2 of 2015 which could drive oil prices to as low as $35/bbl and reaching a new equilibrium level of $60/bbl in 2016 consistent with the most bearish forecasts from analysis. The third scenario follows a similar pattern as scenario 2 with oil prices averaging $45/bbl in 2016 in addition to severe political or security shock arising from escalation of Boko Haram insurgency and/or resurgence of restiveness in the Niger Delta. be of paramount importance. We recommend FIs to focus on the following four key imperatives: 1. Critically assess organisation strategy and status: The need here is to assess whether your strategy and operations are appropriate for the changed business environment. FIs need to stress test their business plans and challenge existing forecasts to determine whether sufficient funds are available to drive business growth for the next 18 – 24 months. Furthermore, MIS and reporting systems must be realigned to give the relevant information at the right time, to make critical decisions. Winners will need to demonstrate agility and flexibility by preparing in advance for the future – starting with a robust Business Recovery and Resolution Plan.
- Manage assets, people and capital: Delayed interest and loan repayments from customers and increase in default rates have increased pressure on FIs to quickly find means to generate additional income from previously low income generating assets. Optimising cash management systems, creating an integrated banking application that ensures consistent customer experience across channels and reducing leakages are levers for FIs to carefully evaluate, whilst balancing against any potential knock-on impact with stakeholders especially foreign investors and regulators. On the people side, it is critical to identify key talent and retain them; along with continuous productivity improvement throughout the Organisation. Retaining and motivating the best people is critical to the organisation’s future, and appropriate incentives must be planned to ensure a longer term commitment. Hence employee culture and performance measures must be aligned with the evolving business strategies.
- Manage cost base: The objective here is to drive operational performance and efficiency, remove waste and reduce unnecessary complexity. Options such as strategic outsourcing, reviewing current agreements and even questioning the current business model are required to achieve this.
The need is to plan and execute targeted rather than ‘across the board’ cuts, while continuing to invest in those areas that are required to achieve strategic goals. The challenge lies in managing profit with the help of cost-cutting targets and business process optimisation, without jeopardizing the long-term health of the Organisation. 4. Innovate: The Financial Services industry is facing the omnipresent risk of disruptive innovation mostly led by non-banks who are targeting key areas such as payments and small-term lending which account for nearly 80% of daily customer interactions. Financial Institutions need to drive innovation by harnessing and optimising technology, driving better internal collaboration and knowledge sharing and bringing in new global insights. Once the core area of innovation is identified, FIs need to figure out how to best structure and allocate resources so that ideas and solutions can be quickly identified and implemented.
While we should not underestimate the capacity of incumbents to assimilate innovative ideas, the disruption of the financial sector is clearly underway with disintermediation being the most powerful weapon.
Customers of the future will be more autonomous regarding choices, more informed, advised, more “social” and expect the FIs who serve them to respond accordingly.
Leading banks are responding by moving away from “managing branches” to managing customer experience across “integrated channels”. We believe this will be met through strong omni-channel capabilities enabling customers to interact with the bank seamlessly across channels and transition from one channel to another regardless of the transaction type or where they are in the process.
Financial Institutions, not already thinking in this direction, should seek to develop:
(a) Business Recovery plan that is realistic, challenging and forces the taking of bold, and potentially unpalatable actions in advance of a stress, to avoid failure;
(b) Systems implementation road map that enables the leveraging of the right combination of digital technologies and resources to create unique customer experiences; and
(c) robust Financial model to grow market share, increase revenue and improve operational efficiency. The FIs with the best contingency plans in place, with agreed actions and appropriate delegated authority allowing quick decisions; are the ones that will come out of this crisis in the best shape.