Nigeria to post N2.4trn current account deficit in 2015, says EIU

For the first time in nearly 20 years, Nigeria’s current account will enter a deficit, according to UK-based global research engine, Economist Intelligence Unit (EIU) in its Nigeria Country Report published 19 March.

Africa’s largest economy and oil producer will post an estimated N2.4 trillion deficit or 3 percent of gross domestic product (GDP), as falling oil prices, political uncertainty and naira devaluation ensure that payments and transfers out of the country exceed foreign receipts coming in.

Since the return to democracy in 1999, Nigeria has enjoyed a unique combination of strong GDP growth at average 9 percent yearly and current account surpluses at average 8 percent of GDP yearly.

In 2015, however, the EIU forecasts growth to “slump to 4.3 percent” and the current account to run a deficit “for the first time in almost two decades”, attributing this to oil price declines and mounting political instability which have “severely dented” local confidence and investor sentiments.

Analysts consensus is largely in line with the expectations of a deficit this year; what varies is the magnitude of the deficit.

For instance, Bismarck Rewane, CEO of Financial Derivatives, a research company based in Lagos, expects Nigeria to “run a current account deficit of 1.4 percent of GDP in 2015 to 2018”, which he highlighted in a presentation at the Lagos Business School earlier this month.

Giulia Pellegrini, Sub-Saharan Africa economist at JPMorgan, also projects a negative current account for Nigeria at 2.8 percent of GDP in 2015.

“Nigeria has to withstand the additional hit from lower investors’ confidence, ahead of likely highly contested elections over the next two months” Pellegrini noted in a March 10 outlook report.

The IMF, on the other hand, believes Nigeria can stay afloat this year, with a marginal surplus of 0.2 percent of GDP, based on findings from its 2014 Article IV consultation.

Despite the varied sizes of deficit, “this is a notable development for a country that has recorded multi-billion-dollar surpluses for a prolonged period of time”, argues EIU editor, Paul Walker, in the report.

Covering the deficits could be strained by expectations of a decline in foreign direct investment and portfolio investment this year, amid the political uncertainties.

“Nigeria will need to draw down on significant amounts of its foreign reserves, which will fall to around three months of import cover in 2015-16”, says Walker.

Foreign portfolio investments declined by 35 percent, to N12.2 billion in the fourth quarter of 2014 versus a year ago, according to capital importation data from the National Bureau of Statistics (NBS).

The NBS stated that the decline in capital importation “was expected” as investor confidence lowered in the build up to the February 14 Presidential polls later postponed to March 28 on security concerns.

External reserves have also fallen by 22 percent in the past four months to $30 billion currently, forcing the Central Bank of Nigeria to devalue the naira twice and abandon its official forex auction window, to trade at the interbank market (IFEM).

The current account deficit will be further compounded by a deficit budget 2015, currently nearing passage by the National Assembly; albeit likely post elections.

This creates a ‘twin deficit’ problem for Nigeria, which is known to precipitate sharp currency depreciation and fall in reserves.

Nigeria’s budget 2015 was submitted to the National Assembly late last year, with an estimated deficit of less than 1 percent of GDP, but that deficit is expected to widen to almost 3 percent of GDP, according to analysts at pan-African bank Ecobank Group.

To finance the budget deficit would require renewed borrowing both locally and externally, at significantly higher yields.

The March 2015 bond auction by the debt management office (DMO) showed 5-year, 10-year and 20-year issues clearing at an average 17 percent yield and with the highest bid range at 19.5 percent for the 10-year bond.

The CBN Monetary Policy Committee (MPC) is set to meet on Monday and Tuesday next week. It is expected that the realities of the deficit situation of the economy and the influence of the external environment would feature prominently in the committee’s deliberations.

Analysts expect muted MPC actions at Monday’s meeting, in view of the keenly watched Presidential elections holding next weekend.

“The CBN is likely to keep the MPR unchanged at its March 24 MPC meeting”, according to Razia Khan, Head of Africa Research at Standard Chartered Bank.

Strong political conditions may have relegated policy management in Nigeria for the time being, but as one MPC member has predicted, “monetary policy will have its work cut-out in the months ahead.”