Nigeria 2016 Outlook: A Slippery Path to Recovery


Monday, January 25, 2016 3:40PM / United Capital

Global growth will continue to seek for balance. With the EM "commodity super cycle" officially over, and China still trying its best to find a fulcrum,  we believe global growth will remain fragile at best over 2016. We are slightly more upbeat on the advanced economies as we expect that the US economy will continue to hobble along the recovery path albeit at a much slower pace than the US Fed anticipates. This, we think, will have profound impact on the rate of normalization. The pace of QE in the Eurozone and Japan is also likely to quicken. A stronger dollar is likely to further test the resolve of key EM and FM economies and their fiscal balances, while exerting further downward pressure on commodity prices to the detriment of many SSA economies.

Nigeria needs to make hard choices. The road to recovery is long and tortuous for Nigeria as the government faces hard policy choices with short term pain. The record expansionary budget for 2016 is hinged on non-oil revenue, with a view to deviating from historical trend, an attempt we believe will likely be faced with execution challenges. We like the renewed vigour for governance, strong anti-corruption drive, as well as the seemingly stronger political will to push through reforms necessary to navigate current macroeconomic challenges. What we are yet to see is a coherent economic blue-print necessary to guide a fast paced structural shift in the Nigerian economy.

Aligning fiscal and monetary policy may require an exchange rate adjustment. It is difficult to imagine a smooth execution of the highly expansionary 2016 budget given current macro realities especially the bearish trajectory of oil prices.  The exchange rate  assumption in the budget ( i.e the Official interbank rate) stands at USD/NGN 198 with a budget deficit of N2.2trn. As at the time of writing this report, oil price was trading at $27.6p/b. This potentially increases the deficit to N2.4trn if the exchange rate remains unadjusted. However, a 27.6% adjustment in the currency will keep the proposed deficit constant. A further scenario play around oil prices and the exchange rate required to maintain the proposed budget deficit of 2.2trn is summarized below:


Macro variables will test support levels. Our 2016 outlook is underpinned by the bearish expectation for oil price which is expected to reverberate across key sectors of the economy. We think real GDP growth will take a fillip from increased and more productive government spending, hence we expect a mild recovery to 4.4% in 2016. The inflationary path is dependent on the pass-through from an imminent currency adjustment with Official exchange rate likely to close the year at NGN/USD 240. However, with the benefits of a relatively higher base, and delayed transmission effect of a possible devaluation, we expect inflation rate to average 9.5% for the year. A somewhat renewed harmony between fiscal and monetary policy will see the policy rate lowered further to 10.0% .

Expect a challenging year for Naira assets. We look to see robust system liquidity over H1-16,  one of the most important themes for naira FI assets. While uncertainties around FX will continue to hold back foreign inflows in the fixed income market within the period, we expect that the current pricing of risk in the equities market, will continue to push momentum to the FI market, with attendant decline in yields. Government's expansionary spending which is  likely to gather momentum in H2 will however place a floor on yield with the possibility of an uptick. Overall, we project that average FI yields will trim between 100-150bps on average over H1, barring surprises around FX.

We are bearish on equities as we expect the market to ride the roller coaster of oil price and FPI funds flows in 2016. What's more, the outlook for company performance in 2016 remains feeble on account of challenging operating environment. We have modeled quarterly equity market returns on probability weighted oil price scenarios to arrive at a forecast return of –9.2% for the year .

Kindly download the United Capital 2016 Outlook Report Here



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