I hope you are in good health and safe. This October has been like a 2020 amongst the months of this year.
Today I came across something worrying on BusinessDay newspaper (26 Oct 2020, page 29)
In particular, this part:
Here's the text extract:
"
Data compiled from the breakdown and highlights of 2020 budget performance presented by the Minister of Finance, Budget and National Planning, Zainab Ahmed, showed that in the first 7 months of the 2020, that is between January and August 2020, N2.5 trillion in revenue and spent about N6.25 trillion creating a record budget deficit of N3.7 trillion. At this pace, analysts suggest that the government may generate roughly about N4.3 trillion in revenue, spend N10.7 trillion in expenditure and end the year with a historic deficit of almost N6.4 trillion! To put this figure into perspective, Nigeria budgeted to spend just N6.06 trillion for the entire year in 2016. Today the deficit is on track to exceed that figure in just one year. In fact, total government spending in 2018 alone was N6.94 trillion according to the government. This means that the government is creating debt today at a record pace never before seen in Nigeria’s history.
This reckless behaviour by the Federal Government has now pushed the budget deficit to revenue to 174 percent as at August 2020. The debt service burden has worsened to 85% this year as a total of N2.1 trillion was used to service the national public debt compared to revenue generated of just N2.5 trillion as at August 2020. As at H1 2020, the Debt Management Office reported that the national public debt had reached N31 trillion.
Analysts from EUA Intelligence told Businessday that they fear that if the 1 year treasury yield was more market reflective and rose to a price of around 14% on local debt and 8% on Eurobond to reflect the rising rate of inflation in the country and current market average market yield on Nigeria’s Eurobonds, it will add an additional N1.08 trillion to the national debt service, which will put the debt service ratio of Nigeria from 85 percent today to 128 percent, effectively almost bankrupting the nation but forcing it to pay far more in debt service than it is able to generate in revenue.
“If the country fails to take adequate steps to improve its revenue performance, then it must cut its spending significantly rather than increase it. The excessive spending has failed to generate the promised economic growth and is on the verge of pushing the country towards a debt overburden situation which is terrible for the economy,” said an analyst from EUA Intelligence.
With the government now planning to increase its personnel expense which analyst forecast will hit N3.3 trillion this year (after posting N1.9 trillion personnel expense as at August), the only feasible way to pay for the salary increment as our finances are today is to carry more debt which unfortunately is dangerous for the government’s finances today.
"
Other facts I want you to know are:
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| Source: https://en.m.wikipedia.org/wiki/Hyperinflation |
Almost all hyperinflations have been caused by government budget deficits financed by currency creation (aka printing more money).
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| Source: https://en.m.wikipedia.org/wiki/Hyperinflation |
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| Source: https://en.m.wikipedia.org/wiki/Hyperinflation |
Now my deductions:
Our situation shows all the signs of factors that lead to very high inflation (and hyper inflation):
1) Huge budget deficit
2) Low and reducing tax receipts
3) Investors now no longer interested in low yield government bonds
4) Point 2 & 3 mean government will have to do more money printing (seigniorage) to cover the deficits
5) High and worsening unemployment rate, anti-business policies and low confidence in government = an economy where seignorage only leads to price level increase rather than boost productivity
6) Capital controls already in place (which is always a very bad sign and one that signals the government is not able to achieve much anymore with the normal fiscal and monetary tools)
My personal and business considerations:
- Hold as little cash and non-asset backed investments as possible. So today I sent redemption requests to Investment One and Meristem to take out almost all the money in my company's money market fund with them. Those funds are where the next year's office rent, tax payment reserve and money to fund products/expansion are in. But right now, I want to put them in a better than Naira place.
- I am re-evaluating my personal investment portfolio. Until now, I do a target allocation of 20% US Stocks, 10% Cryptocurrencies, 30% Nigerian Stocks and 40% Real Estate. I am thinking of switching temporarily to 20% Cryptocurrencies (with a huge chunk in stablecoins) and 20% Nigerian Stocks. Ordinarily, stocks should hedge against the effects of high inflation, but reality doesn't always work out that nicely in the short to medium term. And I fear that some companies may go under. I am favouring export-based and food companies. So I intend to put more of my stocks allocation into companies like Okomu Oil and Presco.
- Focus on scaling up the aspects of my business that earns us foreign currency. For now its very small but has many growth potentials that I have been overlooking because I was busy chasing the bigger local opportunities. Now I will consciously grow it even if it means spending some time away from the local opportunities.
- I recently got into Estonia's e-residency program and got registered as an e-resident of Estonia. I had to go to London last month (perhaps another story for another day, did 3 Covid-19 tests in 3 weeks). With the e-residency I was able to register an international arm of my company in the EU and get access to many startup services that are not normally available to Nigerian companies with less tax burden than I face here in Nigeria. Now, I will be working extra hard on realising the global opportunities potential that comes with it. Not so I can emigrate but so that I can have as much of my business diversified away from the happenings in Nigeria as possible, just as I have done same to my investments.
- Decouple from the system as much as possible. By system I mean the Nigerian systems. You don't want to put all your foreign investments in a Nigerian financial institution. If they go under or get very stressed, you will get that stress or even see your money go under too. That's the nature of custodian/counterparty risks. I stay completely clear of Nigerian financial institutions dollar funds and their foreign currency investment accounts. In fact, I prefer a setup where I can access my money without needing a Nigerian bank. I don't want the stress that comes on the financial institutions during a difficult period as a hyperinflation period would cause to trap my money.
What do you think?
Am I overthinking things, overreacting or missing something important? Do let me know.
Thanks!
