2009 Budget

The President presented the 2009 budget to a joint sitting of the National Assembly on 3rd December. The benchmark oil price used was $45/barrel. The Federal government will spend N2.87 trillion from a projected revenue of N1.78 trillion. Consequently, the estimated deficit is N1.09 trillion.

The deficit could be financed via several means which include the devaluation of the Naira and internal and external borrowing. Since the announcement of the budget, the Naira has depreciated from N120 to $1 to N140 to $1 a decline of more than 16.5%. The market is therefore anticipating a devaluation of the Naira in 2009 hence the sudden increase in demand of dollars in the Foreign exchange market. The Central Bank has since jumped in to “defend” the Naira. How long this defense will last is anybody’s guess. However, it is safe to assume that unless oil prices rises above $65/barrel, the Naira will remain at N140 to 1$ or fall further.

The budget does not offer much hope for the capital market. The Federal government needs to borrow to fund its deficit. It is quite obvious that banks don’t have much to lend, since a large chunk of their loanable funds are trapped in the comatose Nigerian Stock Exchange (NSE). This further tightening up of liquidity means interest rates will not ease up anytime soon.

As the Naira depreciates, inflation is likely to go up further reducing purchasing power and Naira liquidity. This will lead to less cash being available to individual investors to speculate on the NSE.

The various State governments will soon present their 2009 budget. Just like the Federal government, most of the states will be running a huge deficit in 2009 which will largely be financed through borrowing. The outlook for 2009 can therefore only get worse.

My conclusion from the above is that 2009 will also not be all that rosy for the NSE. The 51% decline so far recorded in 2008 is not likely to be repeated in 2009. However, I don’t expect a more than modest gain. The Index will probably not recover to its early 2008 level until in 2010 or beyond.

The one thing that could change this rather gloomy outlook is a change in oil price. If the average oil price for the year ends up being above $65/barrel, then the capital market might benefit from spill over effect. We can only hope it does.

A Year to Forget

On 6th November, the All Share Index (ASI) went up for the first time in 43 trading days. It was a welcome respite. The relief lasted only 8 trading days during which the ASI gained 12.6% and closed at 38,018 on 17th November. Since then it has been all downhill once again.

From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.

Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.

What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.

The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.

As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?