| Reviews & Outlooks |    1213 VIEWS  |
| Reviews & Outlooks | |
| 1213 VIEWS | |
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| PROSHARE | |
Tuesday,
December 17, 2019 /11:07 AM / By Vetiva Research / Header
Image Credit: Vetiva
The need to attract FDIs
Since the start of 2019, we have observed a greater
adoption of accommodative monetary policies by major advanced economies. This
spurred foreign portfolio flows to Nigeria and other developing markets, with
positive interest rate differentials. However, the same could not be said about
foreign direct investments (FDIs) which have remained relatively tepid post
Nigeria's economic recession. The absence of FDIs is mainly due to a dearth of
fiscal reforms required to taper the infrastructure deficit in the country and
spur stronger, but sustainable economic growth. Specifically, this outlook
report highlights how several challenges facing the real sector (ranging from
inadequacies in power supply, budget implementation and transport
infrastructure) have capped Nigeria's economic growth.
Could a normal budget
cycle make the difference?
2019 marked a record low capex implementation in
Nigeria, amidst distractions from protracted election activities and
appointments of ministerial heads. According to the Minister of Finance, the
government has only disbursed N650 billion for capital spend since the start of the year, representing
22% of the capex budget-the weakest capex performance in over a decade. Looking
forward, there is a growing hope of better capex performance in 2020,
underpinned by the government's drive to revert the budget plan to a normal
(January-December) cycle, coupled with less political distractions. While we
believe a normal budget cycle would facilitate a better capex spend in 2020, we
posit that a suboptimal revenue performance could dilute this benefit.
A better yet delicate
growth
Nigeria can expect modest growth in 2020 (Vetiva: 2.4%
y/y, IMF: 2.5% y/y), driven by sturdier growth in agriculture (2020F: 2.7% y/y,
2019E: 2.4% y/y) and services (2020F: 2.4% y/y, 2019E: 2.0% y/y). On the
flipside, we believe oil sector growth would slow to 3.0% y/y in 2020 from 4.5%
y/y in 2019, given our underwhelming outlook for oil investments. Overall,
while we expect Nigeria's economy to strengthen in 2020, we opine that this
growth is rather a delicate sprout, as shocks, such as lower-than-expected
crude prices and disruptive policies, could dwindle our growth projections.
Improved sentiments for
Nigerian Equities in 2020
In 2019, foreign portfolio investments to Nigeria were
heavily skewed to the fixed income market, with loose monetary conditions in
the developed economies driving demand for high yielding instruments. In stark
contrast, portfolio investments avoided Nigerian equities this year, with the
ASI recording a YTD loss of 15.5% as at December 12. We expect FPIs to remain
overweight on fixed income in 2020, given concerted efforts by CBN to keep
foreign investments "onside", even at the cost of alienating some domestic
investments. We however expect improved sentiment for equities, driven
primarily by estranged domestic demand in the fixed income market and the lure
of depressed valuations relative to other frontier markets.
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