A Changing Economy: Economic and Financial Markets Outlook 2017 -2021


Friday, February 03, 2017 9:58 AM / FSDH Research

Executive Summary

·         The current foreign exchange shortage and the pressure on the Nigerian economy from the external sector are changing the consumption and the production patterns in Nigeria. These challenges provide exceptional opportunity for Nigeria to look inwards and build comparative advantage. This will create employment opportunities, industrialise the economy and provide the platform to earn the needed foreign exchange.

·         The Nigerian economy needs to be competitive before it can create the wealth that is required for its growing population. And this will ensure an inclusive and sustainable growth.

·         Coordinated fiscal, monetary and trade policies and incentives that will attract investment capital from the private sector to develop the nation’s infrastructure are prerequisites. These will create an environment where both small and large businesses will emerge to provide the needs of the nation using its endowed resources.

·         The World Bank and the International Monetary Fund (IMF) expect that the global economy will grow at a faster pace in 2017 than it recorded in 2016.

·         Most economies would record higher economic growth in 2017 than in 2016. Policy stimulus and improvements in global commodity prices would drive most of the growth.

·         Prices of global commodities should appreciate in 2017 and 2018 looking at consensus forecasts.

·         Political tensions from the advanced economies have created policy uncertainties, particularly on Brexit and the outcome of U.S. Presidential election.

·         We expect the Federal Open Market Committee (FOMC) of the U.S Federal Reserve to increase the Federal Funds Rate (The Fed Rate) faster than anticipated in 2017.This is to curb the expected rise in inflation rate that will arise from aggressive fiscal spending and tax cut in the U.S. Consequently, yields and interest rates in the international financial market may rise and may cause capital flight to advance economies from the emerging economies.

·         Nigeria may manage the impacts of the global economic developments if oil production increases. The increase in oil production can only occur on a sustainable basis provided there is peace in the Niger Delta region.

·         The outlook of inflation rate in Nigeria largely depends on what happens to electricity tariff and price of the Petroleum Motor Sprit (PMS). We expect these prices to increase in line with the economic realities. Although we expect inflation rate to drop, it would remain in double digits with increase in electricity tariff and PMS price.

·         The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may commence an accommodative monetary policy toward the end of Q1, 2017. This may cause the interest rate and yield to decline marginally.

·         Exchange rate may remain stable with increased crude oil production, drop in imports, and increase in foreign inflows through Foreign Direct Investments (FDIs) and Foreign Portfolio Investments (FPIs).

·         With appropriate policies that will inspire investors’ confidence, the equity market is ready for a rally.

Global Economic Growth
The International Monetary Fund (IMF) stated that economic activity is projected to improve in 2017, especially in emerging market economies. This is contained in its latest World Economic Outlook (WEO) Update for January 2017.

The IMF projects global growth at 3.4% in 2017, from an estimated growth of 3.16% in 2016. Advanced economies are projected to grow by 1.9% in 2017, from 1.6% in 2016, led by growth in the United States (U.S). The IMF projects a growth of 4.5% in 2017 for the Emerging Markets and Developing Economies (EMDE) from an estimate of 4.1% in 2016.

The IMF notes that policy stimulus and improvement in commodity prices will aid the growth. The report indicated that financial market sentiment toward emerging market economies has improved. However, prospects differ sharply across countries and regions, with emerging Asia in general and India in particular showing robust growth. Sub-Saharan Africa is also experiencing a sharp slowdown.

It added that many emerging market and developing economies still face policy challenges because of weaker commodity prices. The IMF added that the real Gross Domestic Product (GDP) contraction in Nigeria was estimated at 1.5% in 2016 because of the disruption in oil production. Other factors are foreign currency shortages from lower oil receipts, lower power generation, and weak investors’ confidence. It added that Nigeria will record a growth of 0.8% in 2017.

The growth forecast of the IMF for Nigeria at 0.8% in 2017 is lower than the forecasts of the World Bank and Fitch Ratings at 1% and 1.5%, respectively. The IMF notes that political tensions from the advanced economies have created policy uncertainties, particularly on Brexit and the outcome of U.S. Presidential election

The political choices in Europe make it harder to advance or even maintain economic reforms in the Euro-area. In the U.S, the normalization of monetary policy and the faster pace of the Fed Rate increases may threaten the global financial system and create foreign exchange misalignment.

The IMF added that, across the world, protectionist trade measures have been on the rise. This may likely change global trade and economy. Looking at the World Bank forecast as contained in the Global Economic Prospects, January 2017, the global economy will grow by 2.7% in 2017 to reach 2.9% in 2019.

The U.S economy is expected to grow from 1.6% in 2016 to 2.2% in 2017. The China economy is expected to decelerate from a growth rate of 6.7% in 2016 to 6.5% in 2017. Growth in India is expected to increase in 2017 to 7.6% compared with 7% in 2016.

The growth in Sub-Saharan Africa is expected to increase from 1.5% to 2.9% while Nigeria’s growth is expected to recover from a contraction of 1.7% in 2016 to a growth of 1% in 2017. The U.S forecast does not incorporate the effects of policy proposals of the new U.S. administration, as their scope and ultimate form are still uncertain. The table 2 below shows the global growth forecast for different regions.

Global Bond Market
The prices of government bonds appreciated in more countries in 2016 than in 2015. The 5.87% March 31, 2023 Argentina Government Bond recorded the highest Year-on-Year (YoY) price increase of 22.96% to 121.68 in December 2016.

This was followed by the 7.60% April 14, 2021 Russia Government Bond which recorded a YoY price increase of 7.28% to 98.20.

The Argentina Bond, Egypt Bond and the Nigeria Bond closed the year at negative real yields. The real yield on the Kenya Bond remains the most attractive amongst the countries we monitored, followed by the India Bond.

The relationship between the policy rate and the inflation rate in the countries covered did not follow a particular pattern. While some countries have inflation rate higher than policy rate, the reverse is the case in some other countries.

Risks to the Global Economic Growth Outlook

Commodity prices outlook

·         Increase in fiscal spending in the U.S. and planned tax cut.
·         Expected increases in the Federal Funds Rate in the U.S.
·         The growth outlook for the Chinese economy.
·         U.S. Dollar appreciation and the negative impact on emerging and developing economies could weigh down global growth.
·         Trade protectionist stance in the advanced economies.
·         The consistency of the OPEC and some non-OPEC crude oil output cut.

Implications for the Nigerian Economy
·         The expected increase in interest rates and yields may increase the interest expense of the FGN.
·         Attracting Foreign Portfolio Investment (FPI) into Nigeria may be difficult because of the attractiveness of the U.S. fixed income securities.
·         The fiscal deficit that the Federal Government of Nigeria will run in 2017 may increase.
·         U.S. Dollar appreciation may lower oil price and reduce FGN’s oil revenue
·         The yields and interest rates in Nigeria may remain high despite easing monetary policy stance.
·         The growing protectionism policy in advanced countries may have negative impact on Nigeria’s exports.

Nigeria may manage the impacts of the global economic development if oil production increases. The increase in oil production can only occur on a sustainable basis provided there is peace in the Niger Delta region.

Nigeria should also develop strategies to take advantage of its large market size which its population offers. Nigeria also has a comparative advantage in agriculture and agro-allied business value chain if it develops its infrastructure.

Global Commodity Markets
The prices for both energy and non-energy commodities rose in Q4 2016 compared with prices recorded earlier in the year. According to the World Bank, commodity price indexes for both energy and non-energy are expected to rise by 26% and 3% respectively in 2017.

Energy Prices
Crude oil, coal and natural gas price rose in 2016 as the Organization of Petroleum Exporting Countries (OPEC) and Non-OPEC members countries agreed to lower production. Coal prices firmed up as supply tightness in China continued. Natural gas was equally faced with supply tightness as some notable producers suffered production outages. Energy prices is projected to continue to rise further in 2017 and to further tighten in the second half of 2017 as large stock overhang depletes.

Non-Energy Prices
The World Bank notes that the prices of non-energy commodities are expected to increase by 3% in 2017. Metals and agricultural prices are expected to record increases for the first time in the last six years. Metal prices are expected to uptick following supply tightness particularly for lead and zinc.

For the agricultural prices, the outlook for the components varies considerably, largely dependent on supply conditions. Oil and meals as well as raw material components are expected to record growth while grains prices are expected to be on the decline. Table 4 below shows the forecast for some selected products.

Global Oil Price

The decision of the OPEC and some non-OPEC countries to cut crude oil production has led to a significant boost to oil prices. The intention is to influence a sharp draw down from the existing global supply glut and influence an upward bias; thus allowing oil price to rise to stimulate investment in the sector.

Oil prices in the international market trended up for most part of 2016, with even a more significant increase recorded since November 2016. The OPEC Reference Basket (ORB) fell sharply by 39.10% to US$22.48/b as at January 20, 2016 from US$31.27/b as at end December 2015.

In 2016, the ORB also increased by 70.45% to close at US$53.30/b as at December 30, 2016. The Bonny Light also increased by 51.71% to US$56.01/b at endDecember 2016, from US$36.92/b at end-December 2015.

According to the EIA the total crude oil demand in 2016 is estimated at 97.56mb/d while supply is 98.37mb/d leading to excess supply of 0.81mb/d. Non-OPEC producers are expected to supply 57.79mb/d leaving 39.77mb/d for OPEC members to fill.

FOMC Rate Decision

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (The Fed) raised the Federal Funds Rate (Fed Rate) by 0.25% to 0.50%-0.75% at its December 2016 meeting and indicated an accelerated pace of increases over time.

We expect the FOMC to increase the Fed Rate faster in 2017 because of the aggressive fiscal spending and tax cuts policy of President Donald Trump.

This is because these fiscal actions will drive inflation rate above the 2% target of the FOMC. The chart below shows that the Fed Rate was in the region of 5% in 2016.

Implications of the Rate Hike

·         Flow of funds to the U.S. from emerging markets and developing countries.

·         Appreciation of the U.S. Dollar.

·         Downward pressure on commodity prices.

·         Increase in the yields on the Dollar denominated fixed income securities.

·         Increase in the cost of fund from the international debt market.

·         Drop in the global liquidity

The Nigerian Economy

Real Gross Domestic Product (GDP)

The Nigerian economy entered into a recession in Q2 2016. Factors that led to the contraction are: drop in oil production; foreign exchange shortages; non-payment of salaries; weak electricity generation; and low investors’ confidence. The economy contracted further in Q3 2016.

According to the National Bureau of Statistics (NBS), the Nigerian economy as measured by the GDP contracted by 0.36%, 2.06% and 2.24% in Q1, Q2 and Q3 2016, respectively. This is lower than the growth rates of 3.96%, 2.35% and 2.84% recorded in Q1, Q2 and Q3 2015, respectively.

The non-oil sector of the economy grew in Q3 2016, having recorded negative growths in Q1 2016 and Q2 2016. The sector recorded a marginal growth of 0.03% in Q3 2016, compared with 3.05% recorded in the corresponding period of 2015, and the negative growth of 0.38% in Q2 2016.

The growth in the non-oil sector was driven by increased activities in Crop Production, Information and Communication and, Other Services. The oil sector recorded a significant contraction in activities in 2016. The oil production loss because of vandalization of pipelines was responsible for the contraction in the oil GDP.

The oil GDP contracted by 22.01% in Q3 2016, from a growth of 1.06% recorded in Q3 2015. The non-oil sector contributed 91.81% to the GDP in Q3 2016, while the oil sector contributed 8.19%.

The Services sector remains the largest sector of the Nigeria economy, accounting for 53.18% and 50.24% of the GDP as at December 2015 and Q3 2016 respectively. This is followed by Agriculture, which contributed 23.11% and 28.65% of the GDP as at December 2015 and Q3 2016 respectively. The third largest sector is Industries, which accounted for 23.71% and 21.11% of the GDP as at December 2015 and Q3 2016 respectively.

The Services sector remains the fastest growing sector with an average growth rate of 3.90% over the last 7 quarters, followed by Agriculture 2.54%, while Industries recorded an average decline rate of 5.06%. Going forward, we expect that the following factors will drive GDP performance between 2017 and 2021:

I.                   Recovery in Activities in the Oil Sector: The expected peace in the Niger Delta following the renewed negotiation with the aggrieved parties in the region could stop vandalism of oil facilities and encourage oil production. This will increase the supply of foreign exchange to the manufacturing sector of the economy.

II.                Import Substitution Strategy of the FGN: The current high cost of imported goods should alter the consumption pattern in favour of locally made inputs and goods. This is happening already and some companies are taking advantages of it to grow revenue and make profit.

III.              Development of Critical Infrastructure: Developments of power and transport networks will drive investments in Nigeria. The FGN has indicated the adoption of Public Private Participation (PPP) arrangement with the private sector for the development of some critical infrastructure in the country. With appropriate structure put in place to encourage private sector participation, economic activities will improve. We think the FGN should concession major roads and railways in the country to attract private investments.

IV.              The FGN’s Clear Economic Policy Direction: The low investors’ confidence in Nigeria is because of the FGN’s vague economic policy direction. The FGN has promised to release its policy thrust in February 2017. Coordinated fiscal, monetary and trade policies that inspire confidence in investors will stimulate economic activities.

V.                 The Abolition of the Joint Venture Cash Call in the Oil and Gas Sector: The new funding model should encourage the International Oil Companies (IOCs) to invest more in oil exploration and production. This should stimulate economic activities.

VI.               Development of the Housing Sector: In our September 2016 Economic and Financial Market Outlook, we stated that the FGN should partner with the private real estate development firms. This can be achieved by providing land and guaranteeing mortgage loans for civil servants to buy housing units. This will generate employment opportunities and stimulate activities in construction, real estate and building materials sectors. The multiplier effect of it on the economy is high.

VII.            Global Economic Outcomes: The global economy development as it relates to the demand for oil will impact economic activities in Nigeria. In the short-term the movement in oil price will affect economic activities in Nigeria because of the reliance on the sector for revenue and foreign currency.

The Broad Expectations and Drivers of Activities in 2017-2021

Construction and Real Estate Development

These sectors are labour intensive and government is already planning to involve private sector operators using various structures. The FGN plans to roll out a N1trillion real estate fund to provide affordable housing units.

Concession of Major Roads and Railway Lines

This will accelerate activities in the construction and building materials sectors and attract FDIs from foreign development partners.

Rice and Sugar Plantation and processing may receive a boost

Rising price of imported rice and sugar will promote local development.

Solid Mineral Development

The need to diversify the revenue and FX earnings. Government has approved the release of intervention funds already. But more importantly, there should be transparent means of allocating resources and the interests of the host communities should be protected.

Local Refinery of Crude Oil

Dangote refinery will come on stream between 2019 – 2020 reducing demands for foreign refined oil.

Fertiliser Plant to Boost Agriculture

Dangote Fertiliser should also come on stream in December 2019. This will increase agriculture yields and conserve foreign exchange on importation of food.

The tables 7, 8 and 9 show the growth outcomes we expect in the different sectors of the Nigerian economy. It also shows where we expect opportunities given the relative size of the economy.


·         Rapid infrastructure development – rail, road, power and gas plants. This will also create jobs

·         Road concessioners may introduce toll on the major highways across the country as a source of funding. This will promote alternative funding mechanism

·         We expect FGN and state governments to sign more Public Private Partnership (PPP) deals to promote infrastructure development

·         New agreements to fund oil and gas may be signed. This will facilitate financing opportunities v Import substitution strategies in agro-allied industries

·         Manufacturing sector should receive a boost as more FX may be more available than in 2016

·         Construction activities should continue to grow – Road, Rail, etc.

·         We expect more corporate and infrastructure bonds in the market v Housing project developments may improve.



·         Possible breakdown of the negotiations with the Niger Delta region

·         Renewed hostility between some Fulani herdsmen and communities in Northern Nigeria may reduce economic activities. This could lead to a sharp drop in agriculture activities in these areas, with the negative effect on GDP

·         The increase in global interest rate

·         The weak economic performance in advanced countries, which can reduce demand for crude oil.

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