Thursday, March 17, 2016 07:00PM / Vetiva Research
Monthly Economic Review
· Nigeria’s response to economic challenges, how effective?
· Inflation rises to 3-year high, forecast indicate further pressure
· GDP growth at 16 year low, risk of negative real growth looms
· Fixed Income Market: yields to rise on higher inflation print
· Equity Market: tracking recovery in oil price, up 7% since February
Special feature: response to economic challenges, how effective?
The year 2016 has kicked off in similar fashion as the fourth quarter of 2015, as growth-impeding challenges such as weak oil prices, illiquid foreign exchange market, shortages in refined petroleum products and rising inflation persist. The weakness in production levels and business activity as revealed by the CBN February 2016 PMI report reinforces this view, and somewhat signals the possibility of yet another weak GDP growth print for the first quarter of 2016 following a 16 year low print (2.79%) in 2015.
We are quick to highlight the Government’s anti-corruption drive with the blocking of leakages over the past couple of months as good first steps. We think the implementation of the Treasury Single Account (TSA) which has accrued about N3 trillion, the restructuring of the NNPC and appointment of credible hands to oversee revenue generating MDAs are undoubtedly the most laudable highlights so far. However, we think the government may need to do a little more, particularly on the economic front.
With the dire need to diversify export earnings away from oil, we find it most critical the need to fast track government policies that encourage job creation, domestic production and position industries for export. Whilst the benefits may not be fully appreciated in the near term, a well-articulated execution roadmap which highlights key areas where Nigeria can be competitive is desirable and must be communicated so that the private sector can run with it.
On the currency front, whilst we acknowledge the responses from the CBN which have kept the official exchange rate range bound, the market still appears illiquid and continues to hamper operations in the real sector and investment inflows.
Nigerians will like to see a long lasting resolution of the persistent fuel shortages and epileptic electricity supply that have rocked the country with dire economic consequences.
Whilst the Government may be addressing these issues in one form or another, we think a more holistic economic framework needs to be clearly articulated and communicated.
Nigeria needs to define what kind of economy it wants to become in 5 to 10 years, what it needs to do to get there, and start putting the right pieces together – this demands more than a Medium Term Expenditure Framework (MTEF)! A vision of the ‘Tomorrow Nigeria’ must be painted today and effectively communicated for all and sundry.
Inflation rises to 3 year high, forecast indicate further pressure
NBS reported inflation for February at a 3-year high of 11.38% with broad based increases in all sub-indices of the CPI save for Restaurant and Hotel. The spike in core and food inflation relative to previous years is attributable to the exchange rate pass-through which has affected consumer prices in both sub-indices through the imported/processed food components and has also pervaded domestic prices (noting the 11.34% y/y and 1.38% m/m rise in domestic food prices).
On m/m basis, increase in electricity tariff played contributed to sharp rise in core inflation. Whilst we do not expect to see m/m changes as high as that of February as slower price increase in Utilities and reduced Naira volatility serves as a buffer, we think inflation could remain firmly in double digits for the rest of the year. Our revised estimates indicate that inflation could hit a high of 12.4% y/y in October before ending the year at 12.2%. Overall, we expect inflation to average 11.5% in 2016.
Risk of negative real growth looms in Q1’16
Nigeria’s economic growth slowed sharply to 2.79% y/y in 2015 (2014: 6.2%). Notably, the traditionally strong Q4 came in weakest at 2.1% (5 year average: 5.9%). Meanwhile, with macroeconomic indicators in 2016 thus far suggesting a much tougher operating environment relative to 2015, growth from some of the traditional sectors might come under threat.
First, oil prices have averaged $34.38/bbl in Q1’16 so far compared to an average $55.17/bbl in Q1’15 even as preliminary figures shows that average production levels hover around same levels. Going by this, Nigeria risks further slowdown in oil sector GDP.
Secondly, according to the CBN Manufacturing PMI report for February, production level, new orders, employment and raw material inventories are declining at a faster rate with a reading of 45.5% in February (from 47.2% in January). Of the 16 manufacturing sub-sectors covered, 13 reported decline in February.
We believe the tight FX supply is the key factor here. If we then consider the double digit inflation expectation, risks of slower (if not negative) overall real GDP growth cannot be overlooked.
Fixed Income market, yields to rise on higher inflation print
Compared to Jan/Feb, demand for fixed income securities has been marginally stronger in March, supported by sustained system liquidity and a decrease in the number of OMO auctions by the CBN.
Yields have been on a modest downward trend since mid-February albeit still higher than levels seen in Q4’15. In the bond market particularly, speculation over possibly lower than expected FGN domestic borrowing following the pace of TSA accretion and loot recovery further improved buying bias.
However, with the latest inflation print above the benchmark interest rate of 11%, we expect to see re-pricing of fixed income securities in the short term with yields ticking up.
Equities tracking recovery in oil price, up 7% since February
Since the severe pressure witnessed in January (NSE ASI down 17% for the month) following the fall in oil prices to 12 year lows, sentiment has improved considerably on the Nigerian stock market; again driven by recovery in oil prices. From the low of $27/bbl in January, Brent crude prices have recovered strongly, hitting a year high of $41/bbl as talks of a production freeze dictated markets.
The positive market mood has been further bolstered by the well-received FY’15 results from large cap DANGCEM and some Tier I banks. The ASI has returned +4.4% in the month of March following +2.7% return in February. Nonetheless, we think any positive market reaction to better-than-expected scorecards will be short-lived given that the broader macroeconomic picture remains bleak.
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