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2018 Outlook: Elections Approaching; Not a Lost Year

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Monday, January 22, 2018 01.15PM/ FBNQuest Research  


A little political distraction
The race for the presidency in February 2019 has started although there are no formal candidates as yet. The winning zonal alliance of 2015 and the victory for the APC could be repeated. It is said that such years are lost because of the political distraction. In our view 2018 is not lost because the FGN will step up the pace of its fiscal expansion, notably with capital releases. 

Modest growth ahead, too
This fiscal stimulus is a core element in our GDP growth forecast of 2.4% this year. Additionally, we see an increase in crude oil production, selective private investment and the positive impact of the fx reforms. Beyond 2018 household consumption will recover, leading to an acceleration in growth. 

No fx regime change
The monetary authorities have arrived at exchange-rate policies that are a success in many ways, and have grown greatly in confidence. They are under no real pressure to change tack and they benefit from the “official” rate for priority transactions. Fx has become widely available. Manufacturers have it, as do middle class Nigerians with bills to pay outside the country and offshore portfolio investors. Further, its price is stable, and the CBN even thinks it should fall. 

Monetary easing on falling inflation
We expect the first rate cuts since July 2016 in response to slowing inflation in H1 2018. Positive base effects are coming into play, and we see easing of 150bps over the full year.

More yield compression; potential 25% return for equities in 2018
The narrowing of yields on FGN paper has a little further to run due to official debt strategy and a firmer total bid. This could amount to 100bps across the bond curve. We expect equities to add to the 42% gain of last year, with a further 25% in 2018 to reach a target of 47,800. The ytd gain of 18% leaves slightly over 6% additional upside potential. 

Central economic indicators

 

2015

2016

2017E

2018E

Real growth (in per cent)

2.8

-1.6

0.9

2.4

CPI (in per cent; y/y Dec)

9.6

18.6

15.4

12.0

Monetary policy rate (%; year-end)

11.0

14.0

14.0

12.5

Current account/GDP (in per cent)

-3.2

0.7

2.0

2.3

Bonny Light (end-period spot; US$/b)

35

55

67

71

Bonny Light (average spot; US$/b)

53

44

55

68

Official fx reserves (in US$ bn)

29

26

39

48

N/US$ (end-period)

197

305

306

304

N/US$ (average)

196

254

306

305

 

Sources: CBN, NBS, Bloomberg, FBNQuest Capital Research


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