A new report by the pan-African credit rating agency, Agusto & Co, has backed the decision of the federal government to sell assets to fund critical infrastructure.
Apart from its plan to engage in borrowings to fund the 2021 budget, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had said during a presentation on the 2021 budget that the federal government would also sell some non-oil assets to serve as an additional source of finance for the year’s budget.
In its report, titled: “2021: The Year of the Vaccine,” which THISDAY obtained yesterday, Agusto & Co advised the federal government to undertake “bolder actions on asset reforms by reducing its exposures to moribund state-owned enterprises such as the refineries.”
It noted that funds earned from such divestments could be channelled into other high-impact assets such as critical infrastructure.
It stated that the COVID-19-induced economic crisis creates a perfect storm to implement market-friendly reforms that had long been in the books of the federal government.
“We believe the government should expend some of its political capital on a full deregulation of the downstream petroleum industry beyond the current reforms on pricing it has currently implemented,” it added.
The federal government had budgeted fiscal spending of about N13.6 trillion in 2021.
However, Agusto & Co. projected aggregate spending of about N10 trillion, while fiscal revenues would be about N3.5 trillion, indicating a record deficit of over N6 trillion.
“Despite the worsening fiscal position of the sovereign, the federal government can access credit at lower yields. In addition, the federal government’s increased borrowing from the central bank that has risen by more than 500 per cent in five years will likely continue in 2021, thus reducing the dependency of the government on financial markets in a period of higher demand for government securities.
“With naira yields on government debt securities at about the same levels with dollar yields, the incentives for the carry trade have been effectively nullified, thus making Nigeria an unattractive destination for foreign portfolio investors. Our outlook for 2021 is that real interest rates will remain negative, thus enabling the government to cheaply finance its deficits,” it said.
According to Agusto & Co., Nigeria’s long-term high inflation is an often overlooked economic indicator with exchange rates enjoying greater prominence in the discourse.
This, it stated, creates a paradox, with Nigeria’s monetary policy strategy unduly focused on the pursuit of a stable currency viewed largely from the prism of foreign exchange and inertia towards inflation.
“While Nigerians have long fantasised about a strong currency – often defined as one being at par with major currencies such as the British pound or US dollar – the long term high inflationary trend remains the underbelly of the naira.
“Agusto & Co. believes Nigeria’s high inflation reflects the country’s weak economic fundamentals and needs to be reined to set the country on the path of long-term prosperity,” it added.
It stated that outside the management of COVID-19-related disruptions to the economy, foreign exchange in Nigeria would be the most consequential economic issue in 2021.
According to the firm, the pertinent issue will include the management of foreign exchange liquidity.
It said: “For now, the central bank has resorted to its demand management playbook of 2016, which did create a wide spread between the official market and the parallel market at the time.
“The outcome of the demand management playbook in this COVID era also mirrors that of 2016. The naira is currently trading at an unhealthy arbitrage of N80 to N100 to a dollar between the parallel and the official market as monetary authorities struggle to maintain stability in the foreign exchange market.
“The odds against the naira in the foreign exchange market are in two folds. First, there are the long-term fundamental issues. With naira inflation projected to be stubbornly stuck above 15 per cent in 2021 and dollar inflation at a benign two per cent, the odds against the naira indicate an inflation rate differential of about 14 per cent between the two currencies.
“The principle behind the inflation rate differential implies that the erosion in the value of the naira measured by inflation is significantly greater than the dollar. Thus, the 13 per cent inflation differential should result in the naira’s depreciation against the dollar in similar measures. Once again, this reiterates the need to pare back inflation in Nigeria.”
It added: “The second major issue is the demand-supply dynamics in the foreign exchange market. Nigeria has entered a period of low oil and gas export revenues. In 2021, we project about $30 billion in oil & gas exports, down 20 per cent from about $36 billion in 2020.
“With net foreign investment also likely to be in negative in 2021 due to the demand management strategy of the central bank, there will be significant pressure on reserves and the naira/US dollar exchange rates.
“With foreign reserves stubbornly stuck below the $40 billion threshold since mid-November 2019, and currently around the $35 billion mark, the CBN has less dry powder to defend the naira at N390/$.”
However, it explained that Nigeria is not overleveraged in foreign currency terms, especially when compared to its peers in Africa.
It added that while Nigeria has a foreign currency debt position of 56 per cent to its current account receipts, Kenya and Ghana have positions of over 180 per cent and 70 per cent respectively.
“However, with local currency debts, especially the short-term treasuries being raised at less than three per cent – thus leaving investors with over 10 per cent in negative real interest rates – the federal government is quite incentivised to raise more local currency debt than foreign currency debt,” it added.
The firm projected a Gross Domestic Product growth of two per cent in 2021.
It explained that the rapid and seismic evolutions in consumer behaviour would prove to be the major driver of corporate performance this year, stating that the winners in 2021 will be those who are able to understand the consumer trends in their industries and make the necessary adjustments to meet the needs or shape consumer behaviour in their favour.
“For instance, in the FMCG space, the recession leaves consumers poorer and thus there will be a greater demand for products in smaller retail packs.
“While in the financial sector, weaker spending even by the segment of the middle class and upper class that are still economically buoyant will lead to an increase in savings.
“This will lead to higher demand for unique investment offerings that can create value for this class of savers. In 2021, we see fintech solutions offering greater competition to the traditional savings products, especially amongst the tech-savvy millennial.
“Overall, the winners in 2021 will be firms and individuals who learn to navigate volatility with greater stability. We believe the year will throw up significant volatility that will require resilience to withstand the shocks and on the other end, the foresight to help create paths to success even amidst uncertainty. “Nigerians who have long been inured to instability may find their resilience coming under trial this year,” it stated.
