3 January 2013

Nigeria: U.S. Fiscal Cliff - Analysts Harp On Economic Diversification

Following the agreement reached to avoid 'fiscal cliff' in the United States, financial market analysts yesterday reiterated the need for the Federal Government to diversify the economy.

They argued that the US fiscal cliff deal would impact negatively on the demand of primary products from Nigeria and other economies.

According to them, the increased connectivity and sensitivity of the Nigerian economy to the international markets, makes it more vulnerable to external shocks such as the US fiscal cliff.

America's long-running fiscal cliff crisis was finally resolved on Tuesday night when Congress voted in favour of White House desire to impose tax hike on the wealthiest and spare the working-class and middle-class.

The fiscal cliff implied that from 1st January 2013 a series of temporary tax cuts first introduced by President George Bush in 2001 would expire just as huge automatic spending cuts were introduced.

A failure to agree a deal would have triggered spending cuts and tax increases worth about $600 billion. To avert this situation President Obama and the Congress had to agree on a series of fiscal deals to ensure that individuals and companies would not face tax rises and also avoid reductions in government contracts, benefits and support.

But analysts at the Consolidated Discount Limited (CDL), in a report, stated that the effects of the policy on the Nigerian markets would have come in two folds.

It explained: "Firstly with the economy's long standing dependence on crude oil, another round of recession across major economies would lead to a drop in demand and prices for commodities like oil thus hurting the revenue positions of the Nigerian government and the stability of the local currency.

"Secondly, the inclusion of Nigeria's debt instruments in the J.P Morgan and Barclay's indices triggered strong offshore demand for these instruments. This increases the connectivity and sensitivity of the Nigerian economy to the international markets. Thus Nigeria will be much more vulnerable to international shocks like the US Fiscal Cliff than at any time in our history."

On his part, a Senior Analyst at BGL Limited, Mr. Femi Ademola, also said that demand for commodities such also crude oil by US, would slow down due to the policy.

"There is the tendency that demands for products, not just from Nigeria, but other countries would be reduced. Already, the dependence on oil had reduced.

Also aids and grants from the US would reduce. But what we have seen over the years is that sometimes when most of these countries are in trouble, they look at emerging markets like Nigeria for opportunities where they can invest.

"But another thing with the US fiscal cliff is that it is not going to be a US problem, it is a global economic problem and that means that there could be effects in other economies too," Ademola explained.

Continuing, the CDL report also maintained that with the US economic recovery still fragile, failure to endorse the policy would have seen growth plummeting to zero, adding that it would have pushed the economy back into a recession. "The International Monetary Fund outlook stated that if the US actually fell off the cliff it could knock possibly four percentage points of growth off the US and undermine the fragile confidence in the rest of the world," it added.

Fitch Ratings had also said that the "US fiscal cliff represents the single biggest near-term threat to a global economic recovery".

Fitch had warned that "the dramatic fiscal tightening implied by the fiscal cliff could tip the US and possibly the global economy into recession."

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