Nigeria: still recovering, but also still sticky
GDP growth: recovering
We have trimmed our growth estimates because trade is yet to pick up. As the second-largest contributor to GDP, trade has remained in contraction due to weakness in aggregate demand and consumer disposable income. We now see growth of 2% y/y in 2018 (from 3.5% y/y/) and 2.9% y/y in 2019 (from 4.5% y/y).
PMI readings for Nigeria this year have pointed towards a firm improvement in business conditions but we now think that it has peaked at 59.1 in May. The contraction in the oil sector in Q2 did not come as a surprise given the temporary shutdown in the TFP and Nembe pipelines, which ultimately crimped production numbers. We expect production to rebound and the sector to return to positive in Q3:18.
Growth for Nigeria will likely remain sticky in the near term even as private consumption expenditure remains largely depressed in the absence of any meaningful wage reviews in the past eight years. Government expenditure will continue to rise, in line with the oil price and production levels, which should allow some space for infrastructure investments.
Balance of payments: still a C/A surplus
We expect the upward trend in oil prices and relatively stable oil production levels to support the C/A by FY18. We see the C/A surplus at USD12.4bn (3.5% of GDP) by year-end. Foreign reserves have come under pressure in the past few months, currently around USD45.62 billion, from a peak of USD47.8 billion in June 2018. Persistent emerging market risk-off sentiment has seen financial flows reverse into the equity and fixed income market. We now expect the foreign reserves to close the year at USD40 billion given that further Eurobond issuance this year is unlikely.
Higher exports y/y relative to imports should continue to ensure trade balance remaining in surplus. With exports still strong, we expect the trade balance at USD15 billion in FY18 (2017: USD13 billion). We maintain that the recovery in foreign direct investments will remain slow, excluding investments in offshore oil production.
FX outlook: depreciating bias amid convergence
We see scope for the USD/NGN pair to depreciate to 365 by FY18 amid further portfolio outflows. With considerable Treasury bill and OMO maturities in Q4, which we estimate offshore investors hold around 40% of, the pair could see some more pressure. While we expect the CBN will continue to provide liquidity in the IEFX segment, it wouldn’t be keen to keep rates from depreciating as it tries to protect the reserves.
Monetary policy: likely hawkish in Q4
We do not expect any change in the monetary policy stance of the CBN this year despite potential inflationary pressures. While the CBN has maintained easier monetary policy conditions for the most part of this year, resulting in lower interest rates, it could have a more hawkish stance in managing liquidity conditions, particularly into Q4. Inflation pressures from election spending, increased FAAC allocations, 2018 budget spending, coupled with more portfolio outflow pressures, support the likelihood of tightening this year.
We expect headline inflation to moderate from an average of 16.6% y/y in 2017 to 12.2% y/y this year. The disinflation process has now bottomed out we expect headline inflation to maintain an upward trajectory for the rest of the year.
Fiscal policy: elections ahead
We believe the delay in passing the Budget doesn’t give much scope for increased capital spending for the rest of the year but, with the 2019 elections up ahead, we could see faster execution of key infrastructural projects.
The approved 2018 appropriation bill came with a fiscal deficit of NGN1.95 trillion (1.7% of GDP) is expected to be largely funded by domestic and external borrowing and a tiny portion to be funded by privatisation proceeds and sale of other government properties. By our estimates, the DMO only need raise an additional NGN161 billion to meet domestic borrowing target for the year of around NGN850 billion (from NGN1.5 trillion in 2017).