Tuesday, June 26, 2018 5:30PM / Vetiva Research
An economy slow out of the traps
The Nigerian economy did not fare as well as expected in the first half of 2018 (Q1’18 GDP growth: 2.0% y/y vs. Vetiva and Consensus forecasts of 3.4% y/y and 2.6% y/y, respectively). Weakness in the services sector (c.60% of Nigerian economy) was unsurprising in light of still-weak consumer wallets, but the slowdown in agriculture was a real concern – particularly as it may be reflecting the negative impact of escalating violence in the Middle Belt region.
Admittedly, there were some important wins in the first half of the year; high oil prices maintained foreign exchange stability and supported FG revenues whilst inflation declined significantly in the first six months – assisted by a high H1’17 base, triggering yield moderation in the fixed income market.
However, the overall narrative of the year has been an underwhelming one, best represented by a bear run in the equity market that wiped 14% off the market between February and May, almost eroding a 16% surge in January.
Dimmer outlook for rest of 2018
Many of our 2018 forecasts have been downgraded though remain above 2017 estimates. 2018 GDP growth is projected at 1.9% y/y (previous: 2.4% y/y), compared to 0.9% y/y in 2017. The dimmer picture begins with the oil sector as infrastructure integrity issues prevent Nigeria from producing at capacity whilst oil prices are expected to trend slightly lower in H2’18 on the back of rising output. We expect to see some policy support from the recently passed 2018 Budget (20th of June), though the imminent 2019 elections may complicate its effect. Indeed, we expect elections to dominate near-term activities, with election spending boosting the economy through government and consumer spending, but also inducing greater inflationary pressure.
The latter effect underpins our view that monetary policy status quo will persist until the elections. Impending elections are also likely to induce greater economic uncertainty and distract policy and governance at the tail-end of the year, neither of which is positive for confidence or investment. In terms of electoral activities, we do not anticipate any unusual changes to peace and stability, even as we expect militant activity to increase ahead of the 2019 polls.
Election jitters sideline healthy market fundamentals
Despite an improving macroeconomic environment and a semblance of policy stability, Nigeria’s financial markets would likely be steered by the fallout of electoral activities and rising global interest rates. The equity market has been hit by pre-election jitters, with foreign investors moving to the sidelines, and is expected to perform tepidly in H2’18. Comparable multiples with peers suggest the Nigerian equity market remains undervalued and we maintain a strongly positive post-election outlook on Nigerian equities.
Meanwhile, as late budget passage, pre-election spending, and food price pressure induce higher inflation at year-end, we project a 100bps yield uptick in H2’18. Beyond 2018, the government’s shift from the domestic debt market, Nigeria’s potential re-inclusion into the JP Morgan Bond Index, and retreating inflation provide a case for longer-term yield moderation.