Thursday, December 20
2018 05:38 PM / Vetiva Research
Nigeria needs to look within
The major developments in the global scene—deteriorating Sino-American trade relations, increasing interest rates across large developed markets, and tightening commodity markets— represent bearish scenarios for Nigeria. The effects of these changes were apparent in 2018 as we observed significant capital reversals from emerging & frontier markets, and 2019 would bring similar challenges.
Even with an improvement in any of these areas (a distinct possibility on the trade front given the 90-day truce), Nigeria must embrace the responsibility of driving economic growth and development from within. As the dominoes fall, the decisions made at the polls in Q1’19 assume greater significance given the importance of getting economic policy right.
Pivotal elections give Nigeria a chance to set down marker
The 2019 elections are finally upon us, and we are cautiously optimistic that the electoral process would emulate the 2015 edition in delivering a peaceful and transparent process, but we anticipate a further slowdown in policy and investment until after the elections.
Looking at the potential outcomes, the incumbent offers stability and policy consistency whilst the primary challenger has positioned himself as an ardent supporter of deregulated markets. Although 2019 economic performance is unlikely to be materially affected by the outcome of the elections, investor confidence can be significantly boosted by a favourable outcome and smooth process.
Modest economic growth anticipated in 2019
Looking at economic fundamentals, Nigeria can expect modest growth in 2019 (Vetiva: 2.7% y/y, IMF: 2.3% y/y), driven by continued recovery in industrial activity and services. However, our base scenario projects relatively weak growth in agriculture (2.6% y/y, the slowest in 25 years) and oil & gas as Nigeria’s oil production would likely be constrained by the OPEC output cut agreement and recent underinvestment in the upstream sector.
One key issue in 2019 would be the foreign exchange market, given recent pressure on the naira amid a slide in oil prices and external reserves. Although we appreciate that the Central Bank of Nigeria is in a stronger reserve position than in recent years, we anticipate a mild depreciation of the naira to NGN390/USD in the NAFEX window by year-end in order to stem net capital outflows from the economy.
A muted capital market outlook
In the fixed income market, rising global interest rates and consequent capital outflows, investor jitters caused by the elections, rising inflation, and tightening monetary policy all point towards higher yields. We project that similar factors would drive the equity market and anticipate a post-election boost to the market but expect overall market performance to remain soft, as underlying economic conditions would still be the same.
Our market return projection is between -5% and 5%, with a point estimate of 2.5%. Looking at the major sectors on the Nigerian Stock Exchange, we predict the greatest joy in the banking sector, noting that in recent years, investors have been quick to over-weight Nigeria’s banking sector during periods of market recovery.