Brace yourself……….2016 will be tougher!

The Nigerian Naira has been on a free fall lately and the CBN not able to do anything about it, at a point it even hit N280 to a dollar with a lot of Nigerians complaining and blaming the new government, the economic reality of world events shows that the increasing strength of the dollar is not peculiar to Nigeria alone and the world may be bracing for a tougher 2016.

 

In 2014, with the fall in oil prices, the International Monetary Fund (IMF) reduced its prediction for the world economic growth for 2015 from an estimated 3.8% to 3.5%, a reduction of .3% in total world GDP with Nigeria’s GDP growth reducing from the initial 7.3% projected growth to 4.8%, a reduction of 2.5% and was still the third highest only next to China at 6.8% and India at 6.3% growth and compared to South Africa, Africa’s second biggest economy which grew by only 2.1%. This meant that despite the fall in global oil prices, Nigerian’s economy was still projected to do well above world average, Nigeria was seen as Africa’s engine of growth.

Sub-Saharan Africa’s GDP was projected to grow at 5.8% through 2015 from 5.1% in 2014 surpassing that of the world average and only next to that of emerging and developing Asia that was projected to grow at 6.6%. The European Union projected to grow at 1.8%, Latin America and the Caribbean at 2.2%, Middle East, North Africa, Afghanistan, and Pakistan at 3.9%, with the United States and Canada at 2%.

The Bad News!…….

At the closing end of 2015, the world GDP did not meet the reduced adjusted figure of 3.5%, in fact the world GDP grew by 3.3% and it is project amidst all the global economic chaos to reduce further in 2016 with a projected growth of 2.7% with Sub-Saharan Africa reducing from 5.8% growth in 2015 to 3.5% growth in 2016, this means that the economy of Sub-Saharan Africa will shrink by a whopping 2.3% in revenue and the world as a whole shrink by 0.6% in growth. Apart from America in 2016, the forecast is that the year will be another year of repair, recovery, reform and risk for most countries. (The Economist, 2015)

The Federal Reserve of United States has been speculating that it would increase interest rate for some time, it finally confirmed this last week and further driving up the value of the US dollars in the international market. Why this is so: A strong economy will attract investment from all over the world due to the perceived safety and the ability to achieve an acceptable rate of return on investment coupled with low inflation rate. So the increase in interest rate will cause a massive flow of dollars back into the US economy with corporations, multinational and individuals buying up dollars worldwide to re-invest in the US economy causing disruption in demand and supply of the dollar in the international and local markets.

The second factor is the fall in global oil prices which has also reduced the amount of petro-dollars for oil producing countries like Nigeria, Saudi Arabia and Brazil. With less dollars now coming into these economies and corporations and multinationals moving money back to re-invest into the US due to increase in interest rates, most economies that depend on the petro-dollars as their main source of foreign exchange will face serious challenges in 2016.

The Signs are here!……….

Saudi Arabia……..Saudi Arabia hikes petrol prices by 40% at the pump

With a fall of more than 60% in global oil prices since mid-2014 to below USD$40 a barrel, Saudi Arabia is facing its biggest budget deficit in history of USD$90 billion, the government of Saudi Arabia has had to increase petrol pump prices by 40%. Public revenues are the lowest since 2009 when oil prices dived as a result of the global financial crisis. Saudi income for 2015 was 15 percent lower than projections and 42 percent less than in 2014. (Aljazeera, 2015)

Brazil……Brazil’s Fall: Disaster looms for Latin America’s biggest economy

Brazil, South America’s biggest economy is scheduled to host the Olympic Games in August of 2016, but there is serious doubt if the country can meet up as the country faces political and economic disaster. Fitch became the second of the three big credit-ratings agencies to downgrade Brazil’s debt to junk status on December 16^th, 2015. Brazil’s economy is projected to shrink by 2.5% to 3% in 2016 not so different from 2015. Brazil’s problems is even made worse as its political differences has made it almost impossible to tighten up its expenditures which has been riddles with massive corruption in the petroleum sector over the years. (The Economist, 2015). The currency, the Brazilian Real, has dropped to its all-time low since its introduction two decades ago, as at September 23^rd, 2015 the currency had lost 35% of its value against the dollar with CNBC describing it as “This Currency’s Collapse is astounding”. (Yang, 2015).

South Africa……South African Rand: 2016 Will be Tough, 3 finance ministers in one week

Barclay’s 2016 forecasts confirms the South African rand is predicted to struggle in 2016, the country has had to replace three finance ministers in one week to find a way to stabilize the economy from its current free fall by restoring confidence to the market, but the move seem not to be working as planned. The currency is struggling in the current global financial market which is characterised by losses in the commodity market. The Rand fell to its all-time low losing over 35% of its value to the US dollars since January with investors withdrawing from the SA economy. (The Economist, 2015).

Mexico……Mexico’s Peso Falls to Record Low against Dollar

The Mexican peso has also been recording a free fall against the US dollars, the currency has devaluation of about 18.3% since January of 2015, dropping to an all-time low since 1993, and the Mexican government revaluation as a rout in commodities followed an auction of oil blocks that many analysts declared a failure. A decline in crude prices discouraged demand when Mexico took its first step toward dismantling the state oil monopoly. (BloombergBusiness, 2015).

Canada…..Canadian dollar recovery will have to wait

The Canadian dollar is at more than an 11-year low versus its U.S. counterpart, Unemployment was 6.6 per cent in November 2014, but 7.1 per cent this year, recent Canadian data, compared with the same figures released in late 2014, show the economy is in significantly worse shape now.

The Others……

The Chinese has had a slow economic growth which has also affected a lot of their trading partners, and their currency, the Euro has had its share of the economic woes but the bottom line still remains most of these countries saved for the rainy days when the oil prices were high. Japan has lost 15.6% of the value of its currency to the US dollars since January 2015, some may say it’s not high but to the Japanese economy it is a massive devaluation.

Nigeria is in a crisis situation and in Crisis situations you take tough and decisive measures other than that you might find yourself in a total collapse of the economy. Those blaming President Buhari for taking these tough and decisive measures must study crisis management and read about how Brazil’s indecisiveness is pushing the country and South America’s largest economy into a deeper sink hole and mess.

The oil Prices might fall further…..

With the depressed market oil prices caused, it is said, by the US and Saudi Arabia not cutting back on production when demand has fallen and the removal of the sanctions against Iran which begins to disappear January 1, 2016. Whether America likes it or not, Europe was going to unilaterally nullify the sanctions in 2016, as they want the trading partner back. There will be a flood of infrastructure sales to Iran in exchange for cheap crude for Europe. Iran has more than 500,000,000 barrels of high grade crude already loaded and ready to ship the moment the sanctions expire. The price of crude may drop to $30 a barrel in the first quarter of 2016. If this all comes to pass the Naira and other currencies from the petro-dollar economies may fall even further posing greater challenges for these economies.