GDP growth - still a recovery story
We expect GDP growth at 2.4% y/y in 2019 and 3.3% y/y for 2020. This largely hinges on a recovery in some key non-oil sectors like agriculture and trade, and continued growth in ICT rather than reform-led growth. The major risk of the farmers and herdsmen dispute in the agricultural sector still lingers and any further escalation could yet restrain output and growth in the sector. A speedy resolution of the bottleneck at the ports would be supportive of improved growth in the wholesale and retail trade sector over the coming quarters.
Balance of payments – higher C/A surplus
We expect the C/A surplus to rise to USD11.6bn (2.9% of GDP) by year-end, from USD5.3bn (1.5% of GDP) in 2018. The increase in the FX liquidity and relative stability should support imports. The oil price trajectory and oil production dynamics have favoured the balance of payments this year.
We expect the Ministry of Finance to issue Eurobonds of USD2.0bn to USD3.5bn to fund the budget deficit this year, given our expectations of a supplementary budget sometime in H2:19. All this should give rise to a further rise in FX reserves. However, the CBN’s bid to ensure a stable currency in light of significant offshore maturities between Aug 19 and Feb 20 could put pressure on foreign reserves. Hence, we expect FX reserves to close the year at USD44.1bn.
Monetary policy - tightening liquidity
We expect headline inflation to moderate to an average of 11% y/y in 2019, from 12.15% y/y in 2018. The upside risks to inflation are: petrol prices and energy tariffs rising, both of which seem unlikely, given the reluctance from the government. So, we see scope for the CBN’s monetary policy committee to cut the MPR by 50 - 100 bps this year.
FX outlook –stable currency a priority
We expect the USD/NGN pair at 365 by year-end. Lower oil prices remain the major risk for the currency, but investors could be tempted to take profits should fixed income yields fall significantly further, which ultimately would put pressure on the naira.
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