Senior Research Analyst
at FXTM
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.
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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.
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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.
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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.
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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.
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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.
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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.
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