Nigeria: Transitioning or Traversing?


Thursday 31st August 2017 2:40PM/ Vetiva Research

Strong early performance sets up economic rebound in 2017

Coming off its first full-year recession in 25 years, the Nigerian economy looks to have turned a corner in 2017. Notwithstanding continued efforts to further diversify the economy, this improvement sprang from a recovery in the country’s oil production following fruitful talks between the Federal Government (FG) and militant groups.

Supported by a relatively stronger oil price, higher dollar earnings buoyed foreign exchange market (FX) liquidity – as the Central Bank of Nigeria (CBN) loosened its purse strings – and federation earnings, whilst stability in the Niger Delta brought a halt to the energy challenges peculiar to 2016.

Momentum is positive for the rest of the year and even maintaining the status quo should see Nigeria step out of recession this year. Nonetheless, policy action taken in the rest of the year will determine the strength of the economic recovery and also shape the nature of Nigeria’s post-recovery economy.

GDP Growth projected at 1.9% and 3.2% for 2017 and 2018

Oil output should be stronger till the end of the year, barring resurgent production disruptions, whilst the extension of the OPEC output cut to March 2018 should support oil prices through Q1’18. Amidst this, we foresee a continued improvement in FX market liquidity going into 2018, and gradual steps towards greater price discovery even as the multi-rate regime persists.

Meanwhile, similar to 2016, delays to 2017 Budget passage may hamper capital expenditure disbursement and slightly cap the multiplier effect of fiscal stimulus. And despite recent dovish body language from the Monetary Policy Committee (MPC), we expect sticky inflation and currency considerations to deter monetary easing, at least till stronger base effects weigh further on inflation in early 2018.

Overall, supported by a low base in 2016, the recovery in oil production and progress in the agriculture sector should lead Nigeria to 1.9% GDP growth in 2017 (IMF: 0.8%, MTEF: 2.2%).

Furthermore, we project growth of 3.2% in 2018 (IMF: 1.9%, MTEF: 3.5%), an acceleration driven by the view that down-trending inflation in 2018 should ease consumer wallets, along with monetary policy, even as efforts on the fiscal and supply-side fronts begin to properly bear fruit after the usual lag.

Today’s policies will determine shape of post-recovery economy

The seeds of Nigeria’s post-recovery economy will be planted now so one eye must be kept on the long-term outlook. In this regard, the Economic Recovery & Growth Plan (ERGP) and Presidential Enabling Business Environment Council (PEBEC) are critical. Efficient execution of the former is a necessary condition for achieving sustainable growth and structural transformation of the Nigerian economy. Meanwhile, the latter could address persistent obstacles to private sector growth and public sector efficiency.

Political will would be required to make progress in these areas, along with the long-delayed passage of the remaining elements of the Petroleum Industry Bill. Finally, fiscal and monetary decisions in the coming months ought to be taken with a long-term outlook. The positive stimulus of countercyclical fiscal policy must be married to aggressive measures to ramp up non-oil revenues given Nigeria’s unfavorable debt servicing position.

Furthermore, the case for monetary easing to support short-term economic recovery must be weighed against the need to ensure corollary growth in aggregate supply, in order to achieve long-term price stability.

No change in fixed income market, equities projected to soar: Capital market performance would be steered by economic performance and the fixed income and equity markets could continue to chart contrasting paths. We expect sticky inflation and tight monetary policy to pressure yields for the rest of the year. Furthermore, with the CBN expected to persist with its aggressive liquidity management in the near-term, we do not anticipate yield curve normalization until 2018.

Meanwhile, we foresee a very strong close for the NSE All-Share Index in 2017; within a range of +47% and +53% (Ytd: +33%; 2016: -6%). Equity market performance should be bolstered by stability in the FX market, an improving macroeconomic picture, and increased Pension Fund Administrator participation by the end of the year.

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