Nigeria FY 2020 Outlook - A Delicate Sprout

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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