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Nigeria navigates through choppy global macroeconomic waters - FXTM

DECEMBER 03, 2019

The Nigerian economy continues to display resilience against heightened geopolitical risks in the form of trade uncertainty, Brexit, volatile oil prices and global growth fears.

Nigeria’s encouraging economic growth in the third quarter was one of the bright spots in the emerging market universe. GDP defied the slowing trend seen in other large economies to grow by 2.3 percent from upwardly revised 2.12 percent in the second quarter and 2.1 percent in the first quarter.

What is helping to support the country’s growth in the face of growing risks to the global economy?

The Nigerian state’s drive and ongoing quest to diversify the economy has broadened its potential to earn from economic activity other than the commodities sector. It could be said that in this case, state policy is creating new opportunities for economic growth through diversification, slowly leading to less reliance on the Oil sector.

The same cannot be said for inflation, which jumped to 11.61 percent in October thanks to Benin border closures. Although the closure is intended to put an end to smuggling, it has also dampened trade and hiked inflation.

Still, on an annual basis, growth in the manufacturing sector recorded the fastest growth in 2019 by expanding 1.1% during the third quarter. Given how the value added by the manufacturing sector is roughly 8% of GDP, this should support the improving sentiment towards Nigeria. It is worth keeping in mind that growth in the manufacturing sector has escaped many other economies because of the pressure from trade disputes between the US and China.

Nigeria’s outlook still influenced by China

If Nigeria’s economy is displaying resilience against depressed Oil prices and trade uncertainty, some of the credit goes to the healthy relationship with China. Total trade with China was worth over $10 billion in 2018 and $3.1 billion in the third quarter of 2019.

The Naira/Yuan swap deal gets around the trade hindrance of a strong USD by allowing importers of Chinese goods to settle payments in Yuan instead of Dollars.

According to the half-year report by the Central Bank of Nigeria (CBN), this has had the effect of increasing liquidity and reducing foreign exchange pressure. It’s also likely to have reduced exposure to the effects of the US-China trade dispute. In addition, the interest rate incentive for deposits in Yuan in Nigeria is not inconsiderable after the CBN left rates unchanged at 13.5 percent.

Having said that, China’s economy cooled to six percent in Q3 and this may start impacting Nigeria’s export sales if the slowdown deepens. Nigeria’s exposure to a slowdown in China may be significant when we remember that three-quarters of its 2017 mineral exports went to the Asian giant. And this is just one example.

A further slowdown in China could also impact Nigeria’s borrowing for much-needed infrastructural projects. The state has borrowed $6.5 billion from China since 2002 and relies on these funds for development. Indeed, around 80 percent of Nigeria’s funding comes from China. Other than that, Chinese companies’ investments in Nigeria hit $20 billion according to Ye Shuijin, the president of the China Chamber of Commerce in Nigeria.

While the Naira/Yuan swap deal may cushion the local economy from the global effects of the US-China trade dispute, a trade deal between the world’s largest economies would be good for Nigeria.

Looking ahead to 2020, other external factors influencing the outlook for Nigeria’s economy are Oil prices, interest rate developments from the Federal Reserve and Brexit. Domestically, I’m watching for more positive signs that Nigeria is diversifying, breaking away from Oil reliance to more sustainable sources of growth. Already, growth in the non-Oil sector rose to 1.8 percent annually, adding 1.6 percent in Q2 on an annual basis, reflecting quickening growth in the agriculture and industrial sectors. 

Lukman Otunuga is Senior Research Analyst at FXTM

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