GDP growth: in recovery mode
We expect the Nigerian economy to grow by 2.5% y/y in 2018. Admittedly, this acceleration would depend on the oil sector, which makes up 10% of economic activity and also indirectly affects 65% of the economy, especially when oil prices and production rise. That said, we saw some signs of macroeconomic rebalancing in 2017, enough to make us see upside risks to our base growth forecast.
The combination of rising oil prices, which are currently higher than our base assumption of USD55/bbl, and oil production not falling below 1.75m bpd should result in stellar growth in that sector for both Q1:18 and Q2:18. After all, the sector is coming off a low base.
Government expenditure will continue to rise in line with the oil price and production levels, and should allow space for some infrastructure investment.
Balance of payments: lower C/A surplus
We expect the C/A surplus to moderate to around USD2.2bn (0.6% of GDP) in 2018 mainly due to steady oil production volumes, flattish oil prices y/y, and a slow rebound in import growth as monetary conditions ease. As a result, we expect FX reserves will continue rising to USD46.0bn by December 2018 (covering a whopping 13-m of merchandise imports).
The FX reserves position will also temporarily be buoyed by new Eurobond proceeds, which could amount to USD3.0bn. Furthermore, strong capital inflows will also lend support to the reserves position despite our expectation that some capital may reverse by H2 as investors become wary ahead of the 2019 elections.
FX outlook: limited pressure
The quantum of capital inflows into the market meant that the CBN was able to buy around USD4.5bn in a four-month period, whereas it could have easily allowed the USD/NGN to appreciate further. Instead, it chose to serve as a support at 360, probably in a bid to keep the NGN cheap enough for foreign investors. Given the increased ammunition which the CBN now possesses as well as supportive oil prices, we expect minimal pressure on USD/NGN. In our view, some upside risks persist from the possibility of election-related capital flow reversals, which may push USD/NGN towards 385 by end-2018. In addition, we do not expect a convergence of the different exchange rates through the course of the year.
Monetary policy: easier conditions
After maintaining a tight effective monetary policy stance for much of 2017, the CBN has eased policy slightly by moderating the rate at which it has been sterilizing NGN liquidity via OMO sales. We expect that the CBN will continue to engineer a tightening of the spread between the OMO yield curve and the Treasury bill auction yield curve, perhaps in a bid to contain interest cost on its sterilisation operations.
In addition to the easing in effective monetary policy, we also expect an easing in the formal policy stance as inflation continues to moderate through the course of the year. Given that we expect core inflation and indeed food inflation to remain sticky, we see headline inflation moderating to a low of 13.0% y/y in Q3:17 before rising to 13.5% y/y by end-2018. We expect that the policy rate will be cut at least twice in 2018, perhaps in H2:18, ahead of the elections and as the central bank looks to signal support for economic growth.
We expect headline inflation to moderate slightly from an average of 16.6% y/y in 2017 to 13.7% y/y this year.