Emerging Markets: Is Nigeria Heading For A Recession?

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You just can’t get away from it. While researching for this article, I decided to stay clear of Europe just in case I ran into the term Brexit for the millionth time, so I looked at Africa and Nigeria in particular. And there it was, right in my face:  “Why Brexit portends negative effects on Nigeria’s economy”.

May I answer that question with the hope that it will be allowed to die a quick death? Even though Nigeria is a great trading partner of the UK, it is sufficiently isolated so as not to have any detrimental effect. So I found some solace in another headline that proclaimed, “Brexit’ll Not Affect Nigeria’s Economy”. Well said.

Remember, without Brussels in its way, Britain will be able to make lucrative trade deals with the world and especially commonwealth countries, including Nigeria.

In my humble opinion, Britain extricating itself from that pompous union will be a net positive for Nigeria. So whether or not Nigeria makes it economically is totally up to them. Recently, the Nigerian Central Bank abandoned the currency peg and allowed the Naira to sink or swim. There was initial optimism that the move would draw in foreign investors, but that optimism was short-lived. The specter of a recession is beginning to loom larger, mainly, in my opinion, because the economy is not well diversified.

GDP in the first quarter of 2016 came in at a negative 0.4% year-over-year; however, it actually contracted 13.7% quarter-over-quarter, a very scary number. Exports made up mainly of oil and gas were down 65% year-over-year from March 2016, and that of course robs the treasury of much needed revenue.

The only Nigeria focused ETF, The Global X MSCI Nigeria ETF  has a negative 42% one year return and is down 23% YTD. On the other hand, Dangote Cement has a nice positive return of 13% YTD based on the government’s intention to boost infrastructure spending.

Oil has been trading in a tight range over the past few months, though some analysts are predicting it is set to break out and climb above $50 a barrel. If this is true, then maybe investors should take a look at Mobile Nigeria, which does have a positive YTD return but would stand to benefit from any increase in the price of oil.

The current cost of producing a barrel of oil in Nigeria is $31.60; however, the breakeven price for that country is $141.70! So something has to give. And don’t blame it on Brexit because that will have no adverse effect on the Nigerian economy. Let’s hope that term is finally laid to rest, because if it isn’t my final request may be, “Beam me up, Scotty.”

First published: NASDAQ, 06.07.16

http://www.nasdaq.com/article/emerging-markets-is-nigeria-heading-for-a-recession-cm644517

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