As the global village is making adequate preparations to morphine crude oil to a less painful death and usher in clean source of energy, the Nigerian government refused to accept the reality of decreasing relevance of sweet crude oil. This fact was revealed in the country’s 2016 budget that used $38 price per barrel as the benchmark, despite the fact that my humble self and many others have called for the use of $30 price per barrel in the 2016 budgets of most crude oil producing nations. This simple mistake of using $38 per barrel and the inability of the new government of President Buhari to drastically cut off at least 30% from the choking and highly bloated recurrent expenditures from the previous budgets has indicated a gloomy and unpleasant economic environment in 2016. Many African crude oil producing nations are more likely to default on their debt repayment obligations because of the 2016 fourth quarter global recession.
It is not safe to constantly promise hope to citizens and always end up delivering failure because the poor masses might react unpredictably due to many decades of undeserving economic hardships. Henceforth, this administration should make more efforts to communicate the true state of the economy to the citizens, instead of the customary make-believe attitude of previous Nigerian leaders. It seems as if the 2016 budgetary team failed to realize that Nigeria is in dire need of new beginning because of the surging foreign debts, plummeting crude oil prices, China’s slowing economic growth and the ongoing global currency devaluation wars. The 2016 Budget can either be setting Mr. President up for failure, or it could be that the preparers were grossly ignorant of the converged global village economic and financial concerns. How can the 2016 budget with N2.2t debt and N1.3t debt servicing charges, propose another N1.8t borrowing in a harsh global economic environment? (How feasible is this revenue projection of 2.2 million barrels of crude oil every day at a selling price of $38 per barrel, when the country is currently producing less than 1.8 million barrels per day, in a global village that is flooded with crude oil?) The country should not be fooled by the transitory spike in crude oil prices because of Iran-Saudi Arabian conflict; long term crude oil price still has a bias of $25 per barrel.
Here are some of the global headwinds likely to escalate the financial and economic crisis in Nigeria come 2016:
- China’s Economic Slow-Down: I expect China’s economic slowdown to worsen in 2016 because of actions and inactions of many third world countries. By restraining and cutting off imports from China in efforts to conserve their fast depleting foreign reserves, China’s economic slowdown will eventually intensify. Most of third world countries are quickly running out of foreign reserves, and even if Chinese manufacturers were to give such countries those products on extended favorable credit terms, the global currency devaluation wars would still make those Chinese products very expensive and unattractive to those consumers in such countries that import heavily from China- Nigeria inclusive. China might be tempted to diversify their investments in most African countries since such investment are constantly being diluted because of global currency risks. This is the first overlook in Nigeria 2016 Budget that would come back to haunt the country.
- Mounting Iran- Saudi Arabian: This growing tension is capable of accelerating the cost of borrowing money, by presenting a surging inflationary fear that would force US Fed Reserve to increase the velocity of interest rate hiking. I am expecting transitory spike prices of crude oil and some other commodities, the world should pray that the conflict will not last because it will financially suffocate countries that intend to borrow more money and also repay their outstanding debts- Nigeria inclusive.
- Continuous Crude Oil Sell-Off: The global interest rate increases would definitely not help crude oil prices to recover anytime soon. In my book titled “Crude World of Oil” published in 2012, I opined that there was a huge divergent between the prices of Brent oil and WTI (Texas Intermediate). From all ramifications, WTI oil is a better quality and should attract a better price than the Brent, but September 2012 contract price of Brent oil was selling for $113.54 as against contract price of WTI’s $92.87. For more details, go to page 33 of Crude World of Oil for more predictions. This is a second overlook that might render the 2016 Budget useless. This article “Saying Goodbye to one of mankind greatest discoveries” on my blog will support my position on crude oil also.
- Expect Dow Jones Industrial average to head to 19,500 causing further capital outflow from Nigerian Stock markets, creating a potential loss of 25% by 2016 year end. The surge in US Equity market in 2016 will definitely make all roads to lead to US in 2016. Expect boom and bust in US Equity market sometime in the year.
- Rising Global Interest Rates: Interest rates globally are expected to rise because of the unintended consequences of King Dollar. For almost a decade, US Fed did not increase the fed fund rate until the 16th day of December 2015, when that was hiked twenty five basis points or quarter of a point. The enormity of US Fed’s action of little increment in the cost of capital will definitely push emerging, developing and under-developing economies many years back in any economic accomplishments such countries much have attained. Most of these emerging and under-developing economies will have to issue new bonds to repay/retire old bonds in a rising interesting environment. The new issues might not be able to attract foreign institutional/ retail investors because most of these countries have lost their borrowing power. This is the third biggest blunder on the paths of those economists that prepared the Nigerian 2016 Budget. Aggressive cost cutting on the country’s bloated recurrent expenditures would have helped to prepare a realistic 2016 budget for the country.
- Credit Crunch: One of the major reasons US Fed increased interest rates on the 16th day on December 2015 might have been to start shrinking the almost four and half trillion ($4,500,000,000,000) dollars of balance sheet; so what is the rationale of Nigerian government trying to aggressively expand the 2016 Budget when the cost of borrowing will be getting very expensive. As a matter of fact, Nigerian government might even fiddle with the possibilities of retiring some of the long term debts in this low-interest rate environment because very soon, maybe in few quarters or in early 2017, it might be very difficult for the country to honor its debt obligations. Nigeria’s new debt song will begin to sound like the Greece government: Default! Default!! Bailout! Bailout!! Fourth quarter global recession must be adequately prepared for or Nigerian currency (Naira) might even go beyond my predicted exchange rate of N500 to US $1.
- European Migrant Crisis: European migrant crisis will continue to weigh heavily on Europe’s economy, making the ongoing Quantitative Easing in European Union to bear less fruits. The pains of US Fed’s premature hiking of interest rate might greatly be felt in Europe in the coming months; expect Euro and British Pounds to depreciate further against King Dollar, unless US Fed can creatively talk down King Dollar. European migrant crisis can even be a blessing to Nigeria, because Europe will render much financial help to Nigeria and other African countries, in effort to prevent another wave of Africans economic hardship induced African migrants to Europe. Read my older article titled “How European Migrant Crisis well help Africa”
- Nigerian Commercial Banks: Many Nigerian commercial banks were stupidly exposed to oil and gas sectors of the economy; I expect a minimum of ten percent of the commercial banks to go under unless some of the banks quickly seek merger and acquisition with less exposed local and foreign banks. The proposed merger will help the banks to conserve their depleting resources from huge overhead costs.
Here are some of the clear and immediate dangers facing Nigeria’s harsh economic environment:
- Dollar Denominated Loans: Since the global economy has been dollarized to include every facade of human lives, Nigerian currency will be completely decimated because the country is running out of King Dollar’s shelter (plummeted foreign reserves).
- The airline industry will experience excruciating and hard operating conditions because their costs of operation will sharply rise while the incomes of their patrons will continue to slide, creating affordability issues. Shrinking passengers (revenue base) with rising operational costs is a perfect environment for failure. I seriously recommend synergy in the airline to help address the rising cost issues to encourage passengers to remain on the beautiful sky of Nigeria.
- Expect more Nigerians to revert back to road travelling thereby increasing the pressure on the nations’ highways; therefore, the government should quickly deploy some of the capital expenditures on the roads. Monies that would be recovered from National assembly budget for wonderful cars for themselves should go to the building and rebuilding of the country’s roads.
- Expect the real estate (Lands and Buildings) sector to suffer a severe price depression because the ill-gotten monies that have fueled the sector for decades might no longer be easily available. There will be a prolonged slump in the prices of properties creating a deflationary environment that would help in rebuilding Nigeria’s economy. Specific on survival strategies in 2016 should be available on special request. Supply will greatly outweighs demand.
- Increased Security Issues: It is really a shame that Nigerian government has not figured out that the increasing security concerns in the country has stubbornly refused to be conquered because of the centralized Police Force system. Decentralizing police services to towns/villages level will not only curb the 2016 projected crimes, but will also help to create millions of gainful employments to the escalating unemployment figures in the country. Full details are available in “Nigerian Promising Era” a book published in of June 2016.
- Liquidity Crunch: The actions and inactions of apex bank of the country (CBN) in 2015 monetary policy will definitely be a major drag on the commercial banks. Nigerian banks must reduce overhead costs through synergy. The over-exposed banks in oil and gas sector must immediately seek possibilities for merger with both local and foreign banks or outright sell. Confidential reports available.
- Increasing of Nonperforming Loans: Some Nigerian commercial banks made out loans to big oil and gas sector players when crude oil price was over $100, so expect more companies to default on their debts. Commercial banks that are slow to broker a merger and acquisition deals might be forcefully closed. Follow my blog for warning on distress banks so that you will be among the first to exit, remember history of bank failures in the country.
- Rising Costs of Goods and Services: The present administration’s effort to manage the almost empty treasury has resulted in both the fiscal and monetary policies not being business-oriented policies that are capable of subduing high inflationary growth rate in the country. Expect more Nigerian families to slide into chronic poverty levels in 2016.
- Many States to Default on Their Debts: Most Nigerian states simply depend on the Federal government share of crude oil revenues to sustain their respective states, and this is why many state governments still owe over six months of salaries to the poor workers. Many states will likely default on both their local and foreign debts, unless such states quickly monetize their hidden assets. I have a blueprint on how such acts could be performed (send email for details). It is terribly sad and irritating that many state governments who still owe many months of salaries to their workers are still allocating so many resources to their own version of recurrent expenditures in their 2016 state budgets. The states must be reminded that rascality and inconceivable financial spending in a collapsing economy can trigger off deadly and consuming civil disobediences, bearing in mind huge financial pains the poor masses will be going through to rebuild the country.
- Surge in Agitations: Nigeria is technical in austerity measures environment, the vices that goes with austerity environments are the surge in civil disobediences and other agitations, and if not adequately addressed, could lead to something big. The group that is currently agitating for sovereignty must be engaged for meaningful dialogues. During the early years of President Goodluck Jonathan’s administration, his government misdiagnosed, discarded and referred Boko Haram military insurgent group as militant agitation fueled by Northern politicians that lost out in the election. It is now obvious that the group Boko Haram had never been a political group because the country has a president who is a Northern extract, and yet the group is still terrorizing and killing citizens in some parts of the country. Biafrans agitators must be properly diagnosed and engaged to preserve unity of the country.
- Possibility of Massive Bank Failures: Nigerian commercial banks will now have to source for King Dollar to pay for their foreign loans that have been heavily diluted by the weakened disobedient servant (Naira). As Nigerian commercial banks are getting ready to start coughing out the dollars spent some years back now in 2016, expect the entire business environment to witness so many hiccups, because banks are oxygen that supplies air to gasping economies. Nigerian policy makers should be very careful as to technically avoid hyper-inflationary environment from 2016, because there are hidden signs of perfect storm for fast approaching financial disasters.
- Unforced Naira Devaluations: I am mulishly bullish in predicting Nigerian Naira exchange rate of N500 to US$1 US King Dollar before the year ends in 2016. I definitely would love the policy makers to prove me wrong on this forecast of N500, because that will reduce the pains Nigerians would go through. Nonetheless, the impending 2016 bated economic environment are some of the unintended consequences of letting chronic corruption grow unabated for over five decades. If Nigerians are willing to endure the painful changes in 2016, there will be hope for a better country in the coming years. Please do not blame President Buhari for the devaluation, because the country will be paying for many decades of little or no Capital Expenditures.
Some green areas and potential gains from the economic restructuring activities:
- Increase in Non- Crude Oil Exporting Activities: Some of the gains of austerity measures will be seen in the gradually increasing export activities of non-crude oil and gas related businesses and services. Nigerian government must lure individuals and companies into producing for exports, because such actions will help to add value to Naira.
- Increased Revenue from Taxation: Survival of many states and Federal governments would depend on the ability of the governments to transparently tax and account for revenues generated from taxes. The only bad side on taxation now is taxing Nigerians who are definitely not use to paying taxes, and coupled with the fact that many citizens have lost tremendous portions of their wealth. Let us watch and see how this action will work out.
- Clean Energy (Solar and Natural gas), Mining and Agriculture will witness a surge and considerable returns as global warming effects gain more attention. Investors in such areas should be smiling to their banks.
- Possibilities of Real Economic Diversifications: Diversification of Nigerian economy is the best way to get out of these self-inflicted chronic economic woes that the leaders unintentionally allowed to come upon the country, but the actual diversification might not happen unless there are few constitutional amendments that would encourage such meaningful and sustainable diversification. Nigerians should hold on to Mr. President tenaciously because based on history, he is the rightful candidate that has a good heart to fight corruption to submission.
In summary, President Buhari’s administration should be more transparent with Nigerians, because if Mr. President had stood his ground when he warned Nigerians that the treasury was empty, Nigerians would have been fully in support of his open painful reforms. Nonetheless, Mr. President needs to make more political enemies because that will show signs of aggressive fight on chronic corruption. Finally, he needs overwhelming support from Nigerians to withstand the deadly gathering attacks from the chronically corrupt elites, because they have enough resources and forces to pull the president down. In as much as I cannot stand some of Mr. President’s decisions and actions in the past few months, he is still be best candidate to maneuver the fast sinking ship of Nigerian economy to a safe harbor. His advisers should encourage him to take a second look on Naira devaluation because that is the payment for the sin of looting that took place in the country for over many years. Based on the dialectics of history, Nigerians should not allow Mr. President to walk away from the podium now, because the last time he did it in 1985, Naira was terrible devalued- 10,000% in 20 years. This article does not possess much value now until in 2018 when Nigerians will look back and blame themselves for not paying attention to it. Hear ye! Hear ye!. One single advice to President Buhari and all the state governors will be to quickly get rid off thousands of the political appointed Advisers that are quick to confirm the leaders’ less articulated policies.
Christopher Okoli is a US based Investment Advisor, Consultant, Author, Blogger and Human Right Activist
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