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.