NSR H2 2019 (8) - Balance of Payment - Foot On The Pedal

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Friday, July 26,  2019  02:00PM / ARM Research / Header Image Credit: Qsstudy

 

At the start of the year, we had guided to moderation in Nigeria’s current account surplus in Q1 19 to $420 million as we estimated that lower crude oil price over the quarter will constrain the value of oil exports. While we projected a moderation in overall imports, driven by faster decline in oil imports, we stated the impact will be muted by the decline in export. In line with expectation, oil exports faltered over the quarter on the back of lower oil prices. However, a material jump in nonoil imports worsened the narrative with the current account balance returning to a deficit of $1.09 billion in Q1 19. On the financial account, capital flows into the country expanded faster than expected. Particularly, the US Fed tapered its aggressive stance, with guidance of multiple rate cuts over the year to mute the impact of unsettled trade agreements with China on the overall economic growth. The resultant effect saw foreign investors seek carry trade opportunities in emerging markets with capital flows into Nigeria over the first five months of the year reaching a record high of $12.6 billion.  

Going into the rest of the year, we project improvement in the current account, with end year surplus position of $2.2 billion (-58% YoY).  We believe the income deficit will improve, while our estimate for unilateral transfer surplus was revised higher. For capital flows, we highlight two factors dominant to flows into the country over the year. First, a sustained dovish stance from the US Fed and secondly, the attractiveness of fixed income yields (OMO and Treasury bills) relative to other EM peers. While we believe inflows into the country will persevere, we think flows will however slow relative to H1 19 on the back of thinner carry trade opportunities. On asset classes, barring any near transformation that could trigger economic growth in the country, we expect foreign investors to remain biased, leaning towards short term instruments.

 

One-off non-oil import narrowed trade surplus

At the start of the year, we had guided to moderation in Nigeria’s current account surplus in Q1 19 to $420 million as we estimated that lower crude oil price over the quarter will constrain the value of oil exports. While we projected a moderation in overall imports, driven by faster decline in oil imports, we stated the impact will be muted by the decline in export. In line with expectation, oil exports faltered over the quarter on the back of lower oil prices. However, a material jump in nonoil imports worsened the narrative with the current account balance returning to a deficit of $1.09 billion in Q1 19. Notably, while other constituents of the current account (services, income and current transfer) showed improvement, the decline in trade surplus weighed on the overall balance.

 

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Trade surplus dropped 68% in the quarter to $2.2 billion, mirroring the surprise increase in imports (+30% QoQ to $12.9 billion) after the festive season in Q4 18 and lower value of exports (-9% QoQ to $15.1 billion) from to lower crude oil prices. According to data from the National Bureau of Statistics, the one-off jump in imports was due to purchase of a pharmaceutical glassware valued at $1.44 billion1 (12% of total non-oil imports). Meanwhile, import of refined oil products declined 67% QoQ to $804 million during the quarter, reflecting lower volumes imported2 as well as lower product prices. Elsewhere, value of exports declined following the 18% drop in oil receipts (85% of total exports) to $12.8 billion -- reflecting the 7% decline in crude oil prices to $63.8/bbl., notwithstanding the increase in oil production to 1.96mbpd from 1.91mbpd – while value of nonoil exports jumped 2.2x to $2.3 billion following increased sale of manufactured goods. 


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On the flip side, other components of the current account balance improved over the quarter.  The services deficit contracted 6% QoQ to $7.8 billion, from lower fees on professional and technical services (-23% QoQ) – which offset increased spending on personal and business travel (+20% QoQ). Meanwhile, non-residents booked lower receipts in returns on Foreign Direct Investments (-20% QoQ to $2.9 billion), leading to lower income deficit from $3.7 billion in Q4 18 to $3.04 billion in Q1 19. Lastly, surplus in unilateral flows went further north, as Nigerians abroad paced up remittances home by 20% QoQ to $7.6 billion.

 

The ‘Fed effect’ delivers a fillip to capital inflows

At the start of the year, we outlined a base case outlook for capital importation into the country with our forecast assumptions centering on development in advanced economies (especially the trajectory of monetary policy in the US), our forecast average oil price as well as a stable post-election outcome. Coming into the year, the US Fed tapered its aggressive stance, with guidance of multiple rate cuts over the year to mute the impact of unsettled trade agreements with China on the overall economic growth. As expected, the US 10-Yr bond yield fell from 2.7% at the start of the year to 2.1% at the end of Q2 19. The resultant effect saw foreign investors seek out higher yields especially in emerging markets (See report: NSR H2 19 - EM Capital Flows - Break out the champagne). Focusing on Nigeria, capital flows over the first five months of the year reached a record high of $12.6 billion (H2 17: $9.5 billion), surpassing the flurry of flows following the establishment of IEW in 2017 and even the pre-oil crisis period. In line with historical pattern, the strong capital flow was driven by surge in portfolio investment flows (Jan – May: $10.2 billion vs. H2 18: $3.1 billion) which contributed circa 80% of the total flow into the economy. Elsewhere, while ‘Other Investment’ printed higher at $2.2 billion (H2 18: $1.2 billion), Foreign Direct Investment (FDI) witnessed the first decline since H2 17 to print at $326 million (H2 18: $686 million). Notably, total capital imported in the first five months of the year is already 75% of total flows in 2018 of $16.8 billion.


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Perusing the breakdown, FPI flows to equity market ($1.0 billion) expanded only 68% relative to H2 18 while investments in the bond market ($875 million) and money-market ($8.3 billion) jumped 2.8x and 2.6x respectively. Elsewhere, Other Investments surged 81% on the back of increases in Loans (+33% to $1.5 billion) and Other Claims (+12x to $647.7 million). Foreign Direct Investment (FDI) into the country remained weak with flows ($326.3 million) declining 53% over H1 19.


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Still juggling, but surplus within reach 

Going into the rest of the year, we project moderation in the current account surplus to $2.2 billion (FY 18 surplus of $5.3 billion) emanating from reduction in trade surplus, which more than outweighed expectation of better performance across other lines. On trade, we expect the trade surplus to contract further to $15 billion (FY 18: $22 billion), reflecting an increase imports to $45 billion (FY 18: $41 billion). Specifically, we expect the relatively stable FX to continue to spur non-oil import demand in the interim. On oil import, we believe the increasing supply of petroleum products by NNPC’s with the recent signing of the direct saledirect purchase (DSDP) agreements with 34 companies (previously 22) will further support increase imports in the year ahead. Furthermore, latest data by NNPC shows the volume of imported petroleum products via DSDP has jumped 31% over April and May from Q1 average. Elsewhere, following the upward review of forecast crude oil price over the second half of the year ($58.5/bbl, compared to previous estimate of $52.2/bbl.), we model total exports of $60 billion (FY 18: $63 billion) In FY 19. Across other constituents, we expect persisting deficit in services with an upward adjustment over the second half of the year. However, we believe income deficit will moderate going into the year to $11.5 billion (FY 18: $15.1 billion) due to lower repatriation of returns on investments (particularly FDIs). On the other hand, our estimate for unilateral transfer surplus was revised higher to $27.9 billion (FY 18: $24 billion), given the strong start to the year and the historically higher transfer over the second half of the year.

 

How likely is capital importation drying up soon?

Going into the rest of the year, we highlight two factors dominant to flows into the country. First, a sustained dovish stance from the US Fed and secondly, the attractiveness of fixed income yields (OMO and Treasury bills) relative to other EM peers. We believe a prolonged dovish posture by the US Fed will spur increase in global liquidity and definitely see foreign investors chase higher yields in fundamentally sound economies. At its last monetary policy meeting, though the US Fed left rates unchanged, it however opened the door for a rate cut in the future as the US economy weakens under the burden of trade tariffs and a slowdown in consumer spending after years of rapid growth against a backdrop of subdued inflation. As a matter of fact, according the Fed-dot plot, 8 out of 12 members now favor a rate cut this year. That said, we went further to make a comparison of domestic yields against comparable frontier and emerging markets. To buttress, we computed real returns between domestic yields across the markets against the US 10-Yr bond yield. From our findings, we observed that while Nigeria real return remains positive, real returns in specific markets including Egypt, Mexico and Turkey are few notches higher. Hence, while we believe inflows into the country will persevere, we think flows will however slow relative to H1 19 on the back of thinner carry trade opportunities. On asset classes, barring any near transformation that could trigger economic growth in the country, we expect foreign investors to remain biased, leaning towards short term instruments.

 

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Related News from ARM’s H2 2019 Nigeria Strategy Report  

1.       NSR H2 2019 (7) - Nigerian Fiscal - CBN Backdoor Financing Will Constrain Local Borrowing

2.      NSR H2 2019 (6) - GDP - Modest Growth, Not Much Solace

3.      NSR H2 2019 (5) - Crude Oil - Clearer Path, Not Entirely Great

4.      NSR H2 2019 (4) - EM Capital Flows - Break Out The Champagne

5.      NSR H2 2019 (3) - Commodity Prices - Mixed Bag For Global Soft Commodity Market

6.      NSR H2 2019 (2) - MEA Region - Neither Booming Nor Collapsing

7.      NSR H2 2019 (1) - Global - Wobbly Growth Picture, More Tilted To The Downside

 

Related News from ARM’s H1 2019 Nigeria Strategy Report  

1.      NSR H1 2019 (9) - Fixed Income - Will Yields Hump or Shift?

2.      NSR H1 2019 (8) - Nigerian Fiscal - More Strain On FG Finances

3.      NSR H1 2019 (7) - Monetary Policy - Maintaining The Narrative

4.      NSR H1 2019 (6) - Nigerian Inflation - Boiling Below The Surface

5.      NSR H1 2019 (5) - Currency - A Test Of Nerves And Resilience

6.      NSR H1 2019 (4) - Domestic Economy - Stable Growth In Dire Need Of Fresh Impetus

7.      NSR H1 2019 (3) - Crude Oil - Not Great But Not All Gloom Either

8.      NSR H1 2019 (2) - MEA Region: A Year of Fragile Growth

9.      NSR H1 2019 (1) - Global Growth: New Year, Same Rhetoric, Matching Growth

 

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Related News

  1. Nigeria H2-19 Outlook Report: A Treasure in the Mire?
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  6. Economic Associate’s Conference on ‘Nigeria’s Economic Outlook’, to hold on July 17, 2019
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  10. Unintended Consequences

 

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Related News from ARM’s H2 2018 Nigeria Strategy Report  

1.       NSR H2 2018 (15) - Equities: The Divergence… Fundamentals or Sentiment?  

2.       NSR H2 2018 (14) - Fixed Income: Have Yields hit the bottom?

3.      NSR H2 2018 (13) - Monetary Policy: A Classic Catch-22, Where will the Balance Tilt?

4.      NSR H2 2018 (12)- Nigerian Inflation: Approaching an Inflection Point

5.      NSR H2 2018 (11)- Currency: The Battle for Naira Stability

6.      NSR H2 2018 (10)- Balance of Payment: CA Surplus Recycled Through Record Portfolio Outflows

7.      NSR H2 2018 (9)- Growth to Run Above 2%, But Nearing a Cyclical Peak

8.     NSR H2 2018 (8) - Game Of Thrones! How They Stack Up In the Race

9.      NSR H2 2018 (7) - Pension: Multi-fund - Will Variable Assets Blow-Up or Blow Over?

10.  NSR H2 2018 (6) - Nigerian Fiscal: Déjà Vu All Over Again?

11.   NSR H2 2018 (5) -EM Portfolio Flows: Slowing the Flow, But Far From A Dribble

12.  NSR H2 2018 (4) - Commodity Prices: Peaks and Troughs Across Soft Commodities

13.  NSR H2 2018 (3) - Crude Oil: Stability Gains Ground in Titans' Tug of War

14.   NSR H2 2018 (2) – A Tale of Resolve and Recovery Across MEA

15.   NSR H2 2018 (1) – Supportive Global Monetary Policy to Consolidate Global Growth Over 2018

 

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