Standard Bank forecasts:
• We expect the economy to grow by 2.5% y/y in 2019.
• We expect the C/A surplus at USD4bn (1% of GDP) in 2019.
• We expect USD/NGN at 365 by the end of 2019 and 376.0 by end 2020.
GDP growth - moderate
We expect the economy to grow by 2.5% y/y in 2019, as private consumption expenditure should improve amid moderating inflation. A potential minimum wage increase from the Federal government should also support demand-side growth. The recent volatility in oil prices, skewed to the downside, has brought back questions around the economy sliding back into recession, should oil prices stay lower for longer. The latest Q3:18 growth numbers show some level of recovery in the agricultural sector; we expect this to continue in 2019, barring further disruptions.Growth in 2019 will be driven by the non-oil sector. In truth, government spending, particularly to bridge the persistent infrastructural deficit, will be vital in further unlocking growth in the non-oil sectors.
Balance of payments – C/A surplus set to narrow
We expect the C/A surplus at USD4bn (1% of GDP) in 2019 owing to relatively lower oil prices y/y and a moderate rebound in import growth. An oversupplied oil market, hinged on increased production levels in the US and Russia, coupled with slowing aggregate demand, could ensure oil prices moderating further in 2019. Foreign reserves were impacted largely by the trend of net financial outflows in 2018, although we saw some accretion towards the end of the year owing to the issuance of the USD2.8bn Eurobond. We expect net outflows to continue in Q1:19, with scope for a reversal of some of those outflows after the election cycle ends and there is more clarity on policy direction.
Monetary policy - hawkish stance to continue
The CBN is keen to keep monetary policy conditions tight, at least over the next 6-m. Undoubtedly, volatility in oil prices and election related capital flow reversals will support the CBN’s tightening stance, not to mention the potential for further rate hikes in the US. However, we believe that the CBN will take measures to drive economic growth, such as lowering interest rates. Perhaps in H2:19, after the electioneering process has been concluded and policy direction is clearer. Ceteris paribus, we expect headline inflation to moderate to an average of 10.4% y/y in 2019, from just over 12% y/y in 2018.
FX outlook – CBN poised to keep FX stable
We maintain that the CBN will continue to prioritise FX stability in the near- to medium term, true to its core mandates. Hence, we see the USD/NGN pair at 365 by FY19. Although, lower oil prices could pose some upward pressure to our estimates. Sure, election jitters could ignite portfolio outflows in Q1:19, which will put some pressure on the currency in the near term. However, we expect that the monetary policy tightening stance of the CBN to keep market yields attractive enough to encourage portfolio inflows in H2:19.
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