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Finance
experts argue that the 2010 fiscal budget is becoming countercyclical
in that it is aimed at stimulating the economy from its current state
of contraction, a fall-out from the global financial crisis.

Financial
Derivatives Company, a finance and research firm, says that although
some macroeconomic variables paint a relatively healthy post-crisis
economy, the underlying structure that propels sustainable growth is
still tenuous and requires fundamental shifts that could alter the
growth paradigm.

How will the markets react?

In
its economic bulletin issued on Friday the firm says Money and Stock
markets would have their own fair share of economic reactions, arising
from the signed budget.

“Interest
rates are now well below inflation rate which could induce capital
flight and a switch to other asset class,” he said. “The $5.98bn to be
raised by the government through domestic borrowing could help
stabilize rates which are currently at record low. However, this could
have the unintended consequence of crowding-out the private sector.”

The
record low interest rates are already threatening to lead to capital
flight and portfolio rotation by institutional investors, it added.

The
bulletin also highlighted that the equity market has been oblivious to
the signing of the budget, recording a fall of 0.1 per cent and 0.31
per cent in the two days the budget has been in existence. It however
revealed that the indifference of the market comes as no surprise as
there is no direct link between a non-implemented budget and the
market.

The
finance firm says some indicators that back up the requirement for a
fundamental shift include the nation’s external reserves (now
$40.56bn), which have declined sharply by 33 per cent from $60.2bn in
2008, compared to other emerging economies like Brazil and Mexico that
have built their reserves by 34 per cent and 21.5 per cent in the same
period.

Also,
the Excess Crude Account (ECA) has been depleted from $20bn in the
pre-crisis era to less than $4bn while average oil price YTD of
$78.89pb is still about 47 per cent below its all-time peak of $149pb
in 2008.

Oil
production (according to OPEC estimate was 1.986mbpd in March) has
improved, but it is still below productivity of three million barrels
per day.

Money and stock markets remain ambivalent in spite of record low interest rates.

Inflationary pressures

Inflation
has however declined modestly Year on Year to 11.8 per cent in March
from 12.3 per cent in February which is far above short term interest
rates. The inflation gap, which measures the difference between money
supply (M2) growth and GDP growth rate, was 10 per cent as at 2009
compared to 51.82 per cent in 2008.

Inflation
pressure will increase as a result of the budget spending – 45 per cent
of total spending is billed for recurrent expenditure. Other sources of
inflation risk include budget leakages and the proposed deregulation of
the downstream oil and gas sector, the statement highlighted.

According
to the bulletin, the Nigerian economy possesses the absorptive capacity
to convert this budget into a catalyst for growth, but this will depend
largely on monetary policy stability and the success of reform policies
like the Asset Management Company and the Petroleum Industry Bill.

Economic distortion, excess liquidity, no credit

The
economic bulletin also argues that the presence of excess liquidity and
absence of credit is countercyclical, adding that with a massive fiscal
deficit now estimated at six per cent of GDP, maintaining monetary
stability at this time will be a major challenge.

“The
Central Bank has resisted the temptation of tightening when price
inflation is in double digits of 11.8 per cent and interest rates very
low- 2-3 per cent per annum,” it says. “With the budget now signed and
spending kicking in, the Central Bank will have to steer a mid-course
between neutral and tightening.”

The
$31billion spending bill was signed into law by the acting president,
setting the stage for Nigeria’s most ambitious and possibly profligate
spending program in two decades. Capital expenditure is projected to
increase by 82 per cent to $12.3billion while recurrent expenditure is
to shoot up to $13.8billion, a 27 per cent increase from the 2009
budget.

The
weekly report from Afrinvest, also a finance and research analysis
firm, states that the Nigerian Stock Exchange All-Share Index lost 31
bps as at Friday, closing at 27, 400.21 from 27, 486.62 the previous
day. Market capitalisation also moved in the same direction, closing at
N6.6 trillion as a total of 598.4million shares valued at N5.8billion
were traded on Friday.