Nigeria; A Dim Reflection with lower growth forecasts – Cordros Capital


Thursday, February 04, 2016 04:05 PM / Cordros Capital


The global economy is expected to grow at 3.1% in 2015 (vs. 3.4% in 2014) – according to IMF estimates - before picking up modestly to grow at 3.4% in 2016. The lower growth in 2015 was a result of patchy recovery in developed economies, while growth in emerging and developing economies (especially oil-exporting ones) stalled.

Reactions across markets in 2015 were mixed. Equities were upbeat in the first half of the year while momentum tapered in the second half. 



A Thorny Path to Growth

Our growth forecast for 2016 is 3.83%. The projection would have been larger were it not for our bearish outlook for the oil sector. Whilst acknowledging the resilience of the non-oil sector and remaining convinced of its ability to support growth in 2016; output from the sector is unlikely to reach its pre-2015 run rate or be robust enough to absorb the potential drag -- caused by lower oil price – from the oil sector.


Fiscal Policy – From Transition to Change

The assumptions driving the optimistic 2016 budget are realistic (on average) in our view. That said, we acknowledge that there are a few projections (on both income and expenditure lines) that seem ambiguous on the surface. Noteworthy, however, is that the risk of these ambiguities to the success of the entire Appropriation Bill is modest.

Inflation - Ignore the Hype! Single Digit Still in Sight

It is our view that it was the CBN's inflation (CPI) target of 6-9%, and not the single-digit, that came under serious scrutiny in 2015. We see a re-occurrence in 2016, wherein we estimate the CPI to close 9.2% average (vs. 9% in 2015). Note however that overall, there appear to be more upside risks than downsides, going into the year.

Interest Rate - The Path is the Key

After a 6-year tightening cycle, Nigerian monetary policy rates are reversing directions. With factors weighing on Nigeria's economic fundamentals set to remain through 2016, the monetary authorities will be compelled to be more stimulatory. An important dynamic beyond the kick-off of the easing cycle, is the progression.


External Sector - Balance of Payment Crisis? 

Concerns about the country's Balance of Payments position going into 2016 are elevated. This is hinged on the likelihood that current account deficit will expand further in 2016 on the back of resumed fall in commodity prices (Nigeria's main exports).

Currency - Still Seeking its True Value 

In 2016, we forecast a further decline in the Naira across all major market segments, following consensus estimates for lower oil prices and further Fed tightening. In the meantime, we believe the CBN will double down on its demand management strategies.


Equities - Sentiment Outweighs Valuation 

From valuation perspective, Nigerian equities are largely attractive (even from conservative earnings perspective) and argument in favour of a market rebound in 2016, on the back of this alone, is strong. Notwithstanding, we do know that it is unlikely that the market would stage a recovery this year. We envisage sell-offs in the first half and buy-backs in the second half. On average, the ASI would trail end-2015 levels by between 10-15%.

Fixed Income - Yields to Remain Compressed 

Our overall view is that yields will remain compressed in 2016, with the key theme being the nature of Nigerian economic downturn. The resumption in the decline in oil prices (-17.0% YTD) further threatens Nigeria's economic recovery and strengthens our view that the current economic slowdown - average GDP down to 3.0% in 2015 from 6.2% in 2014 - is likely to be protracted through 2016. This would have huge implications for the aggressiveness of both monetary and fiscal policymakers' expansionary policies.


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