President Muhammadu Buhari has spent most of his 16 months in office combating the terrorist group Boko Haram and rooting out corruption in government. What’s been left to fester is the economy.
Africa’s largest country — by population and gross domestic product — slipped into recession in the first half of this year, and the International Monetary Fund predicts output will contract by 1.8 percent in 2016. The main culprit is oil. Nigeria has been hit by the plunge in the price of its leading export and by a revival of militancy in the Niger Delta region that slashed production by nearly 20 percent in the second quarterfrom the first, to 1.7 million barrels a day. Militant groups have stepped up attacks on oil installations to retaliate against Buhari, who has vowed to crack down on oil theft and to wind down an amnesty program of his predecessor, Goodluck Jonathan, that effectively paid rebel groups to protect oil platforms and pipelines. S&P Global Ratings cited the oil problems in lowering Nigeria’s credit rating by one notch last month, to B.
Adding to the woes, high inflation and a tumbling currency have created a stagflation almost as bad as Brazil’s. Inflation soared to 17.6 percent in August from 9.3 percent a year earlier. Capital has been fleeing, depleting foreign exchange reserves by nearly 28 percent since the end of 2015, to $24.8 billion. With its firepower depleted, the Central Bank of Nigeria eased its currency peg in June, triggering a 35 percent plunge in the naira, to 304.5 to the dollar. Although Finance minister Kemi Adeosun called for rate cuts last month to spur the economy, the central bank — which raised its policy rate by 200 basis points in July, to 14 percent — refused to budge.
“The problem they have now is that high inflation can persist because expectations remain that the currency could devalue more,” says Matthew Vogel, Dubai-based strategist of frontier and emerging markets at investment manager Duet Group. The more flexible exchange rate regime aims to entice investors back, but many are still on the fence. Kevin Daly, emerging market fixed income manager at Aberdeen Asset Management in London, says the naira would have to get a lot cheaper — “somewhere in the 360 to 370 range” — to entice him back into the market. The authorities are looking to ease the financial squeeze with a $1 billion Eurobond issue later this year, but investors don’t see that as a game changer. The deal would cover just a fraction of the government’s 2016 borrowing goal of $10 billion, and even that target may be low. Earlier this year the IMF forecast the deficit would widen to 4.4 percent of GDP, but that was before the economy fell into recession. The money won’t come cheap. Although spreads have tightened recently, Nigeria’s outstanding Eurobond due in 2023 was yielding just over 6.6 percent last month.
Nigeria has announced plans to borrow a total of about $3 billion from the World Bank and the African Development Bank, but Buhari has refused to seek IMF help. Aberdeen’s Daly says he shouldn’t need a bailout: “Despite the very poor growth environment, debt sustainability isn’t really an issue.”•
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