Friday, January 17, 2020 / 05:29
PM / NOVA Merchant Bank / Header Image Credit: NOVA Merchant Bank
Coming off a synchronized deceleration in 2019 (with growth estimated to have declined 60bps to 3% YoY), the IMF forecasts the global economy to expand by 3.4% in 2020. The expansion is anchored on improvement in key emerging markets, (e.g. Latin America, the Middle East, emerging and developing Europe) who witnessed economic strains in 2019. As a result, while the impact of waning trade protectionism and still accommodative monetary policy is expected to limit the downside for growth at 1.7%, emerging and developing economies growth is forecast to expand by 70bps to 4.6%.
The U.S. Energy Information Administration (EIA) forecasts a faster increase in crude oil supply of 1.63mbpd compared to demand increase of 1.34mbpd over 2020. with the global crude oil market expected to record surplus of 0.26mbpd in 2020, compared to deficit of 0.02mbpd in 2019. Accordingly, Brent oil price is forecast to average $60.51/bbl in 2020, compared to 2019 average of $64/bbl.
We expect the Nigerian economy to grow by 2.4% YoY over 2020 (2019: 2.1% YoY). Central to our forecast is a possible breach of the OPEC production cap (with estimated crude oil production of 2.05mbps, including condensates) and receding herdsmen and farmers conflict amidst ongoing government intervention in crop production which we expect to support growth in Agriculture. For the services sector, we believe ICT will continue to provide the necessary support for growth, with investment in fintech and customer acquisition in same expected to support much stronger growth in the sector in 2020.
Currency and Reserves
We believe there is a strong risk of further haemorrhaging in the gross external reserves, possibly to as low as $33.1 billion at the end of December 2020 (excluding possible foreign borrowings). Our expectation is based on our modelled oil and non-oi inflow, which suggests that the apex bank will run on lower flows over 2020, with average monthly inflow of $3.9 billion (2019 average: $4.6 billion). However, despite our expectation of cumulative lower CBN intervention over 2020 (with monthly average of $4.3 billion), the lower inflow informed monthly average reserve drawdown of $371 million (2019 average: $424 million) over 2020. Notwithstanding our fundamental based purchasing power parity suggesting 12% overvaluation of the Naira, we expect the CBN to keep the Naira-dollar rate stable over 2020 between the range of N363-368/$.
In assessing the trend of consumer prices over 2020, we have analyzed the possible shocks from persistent border closure, the implementation of the electricity tariff starting at the end of H1, possible currency depreciation, implementation of the increase in VAT rate to 7.5% from 5% and a possible removal/reduction of petrol subsidy. With our weighting more skewed to persistent border closure, the implementation of the electricity tariff and possible currency depreciation, we expect inflation rate to average 14.1% in 2020 compared to average of 11.41% in 2019
With the FX reserve (which was a major ammunition in the CBN's growth focused and balance sheet management drive) at a two-year low at the end of December 2019 and our model suggesting likely haemorrhaging to $33.13 billion (excluding possible foreign borrowings of $2.8 billion) at the end of December 2020, we believe the odds favor stable to moderate upward adjustment to OMO rates over H2 2020 to attract FPIs and provide support for the reserves. However, we do not rule out further unorthodox policies by the apex bank or reversal of some of the policies implemented in 2019 to limit the pressure on the reserves and achieve some level of artificial stability in the FX market.
Based on our oil revenue estimate and non-oil revenue forecast, our base case scenario suggests revenue implementation for 2020 could decline marginally and shy of the projected budget revenue by 48%. Also, in line with historical partial implementation of the budget (especially capex spend with 5-year average of 59%), our base case scenario assumes budget implementation of 84% (5-year average: 83.1%). On our scenarios, we forecast fiscal deficit could range between N3.6 trillion and N4.5 trillion in 2020, compared to budget projected deficit of N1.8 trillion.
While our outlook for the reserves favors upward adjustment to the OMO rates, we expect the divergence between the OMO and NTB rates to persist over 2020. The major caveat to our expectation is a ramp up in government borrowings to gradually reduce FGN obligations to the apex bank. Also, if the FX pressure intensifies, we do not rule out upward adjustments in the NTB rates to make it more attractive for foreign portfolio investors given the sizeable liquidity at the NTB compared to OMO.