Nigeria in 2017: Whispers of Recovery


Wednesday, August 2, 2017 9:10AM/Cordros Research

Growth – Gaining Momentum

The global economy is expected to grow modestly stronger in 2017 than initially expected, according to the International Monetary Fund's (IMF) latest estimates. The upward revision to the growth forecast hinges on continued rebound -- from the second half of last year -- in advanced economies, where U.S., Japan, and some big Euro Area member countries performed better-than-expected in the first quarter.

Markets – No Room for the Bears

Global equities ended the first half of the year on a positive note, as the bulls dominated activities across the U.S., Euro area, and Asia, with bullish proceedings stemming from positive earnings report, encouraging economic data, monetary policy actions, currency swings, government policy, political events, and quite profoundly, the "Trump factor".


Growth – Echoes of Recovery

We project the Nigerian economy to grow by 0.97% in 2017. Our expectation is anchored primarily on recovery in the oil sector (on less disruptive output) and stronger growth in the non-oil sector (on continued improvement in the foreign exchange space, commencement of capital releases, and continued growth in agriculture).

Fiscal Policy: The 2017 Budget

The aggregate expenditure in the signed 2017 budget was increased by 2% to N7.44 trillion, compared to the amount presented in December, bringing the deficit to N2.5 trillion, from N2.36 trillion.

We reiterate that the proposed spending programme is suitable for Nigeria's economic condition, and the stimulus will of the current administration cannot be questioned. The challenge, however, bothers on funding, and hence, the rising deficit, both in absolute term, and as a proportion of the GDP.

Interest Rate – Easing on the Horizo

We maintain our position that the MPC will lower the MPR by 100 bps to 13.00%, from 14.00%, in 2017, hinged on continued moderation in inflation rate, the anticipated rebound of GDP growth to the positive value, and the growing pressure from the business community.

Exchange Rate – All Things Work for NGN Stability

The accretive potential of the FX reserve over H2 remains consistent with the strong view we had in January. And while acknowledging the already front-loaded sales in H1, we expect the reserve would offer the CBN the comfort to continue to intervene in the markets, while keeping a tight check on import demands.

Inflation – How Sticky Can Prices Remain?

For the rest of 2017, we note that except monthly inflation rate stays below the 1.5% average recorded since the beginning of the year, the likelihood of the headline index reaching 20% by December cannot be ruled out. On balance, we forecast the headline inflation rate in 2017 to average 16.10% (bull case) or 17.73% (bear case).

Equities – Equities Set for First Appreciation in Four Years

Following the outperformance in H1, we look for a sustained uptrend in domestic equities over the remaining part of the year. The gains will be supported by consistency and sustainability of policies that speak to near term macroeconomic recovery, in addition to better-than-2016 corporate earnings.

Fixed Income – Varied Yield Patterns

Yield pattern in the fixed income space was mixed over H1, with investors, in the first three months of the year, shifting focus to attractive yields in both the T-bills and bond markets amid increasing averseness towards risky assets.


Financial Services – Positive Outlook for H2 Despite Lower FX Gains

Our outlook for the banking sector remains positive, with economic activities gradually improving, coupled with the increased supply of foreign exchange to both retail and corporate users.

Our profitability outlook for H2-17 is broadly bullish for our universe of Tier 1 banks, ignoring that 2016 and Q1-17 earnings were bloated by fx-related gains (both on FCY interest income and gains on FX transactions).

Consumer Goods – Positively Changing Story

From considerably improved access to the dollar, to moderately recovering consumer confidence, easing energy challenges, balance sheet deleveraging, and cost-reflective pricing, the prospects of our universe of consumer goods companies appear much better than a year ago.

Cement – The Power of Pricing

Strong pricing, cheaper and stable energy supply, gradually recovering economic activity (the non-oil sector exited recession in Q1), moderately optimistic business expectations, the signing of the 2017 budget (wherein capital expenditure remains a priority), as well as improved monthly earnings of all tiers of government (up 39% y/y between January and May), are supporting factors for cement companies to thrive on.

Agriculture – Still Appealing

The agriculture sector will remain appealing, on the back of continued government support, import restriction on key food items (rice and palm oil) with significant supply deficit, improved profitability of export commodities due to currency depreciation, higher domestic food prices owing to seasonality effect, and expected high yield during the harvest season with favourable weather outlook.

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