Nigeria 2018 Outlook: Acta Non Verba

Thursday, December 21, 2017 /6:00PM / Vetiva 

Policy stimulus required to shift growth beyond first gear: Amidst brighter prospects for global economic growth and the OPEC decision to extend the output cut agreement through 2018, we expect Nigeria to pursue its growth agenda within a relatively favorable global economic landscape. Internally, the most notable improvement would be the full recovery of oil production currently around 2.0 mb/d – to a level close to, but still short of the 2018 Budget benchmark of 2.3 mb/d (forecast: 2.1 mb/d). From this, we expect to see further consolidation in Federal Government (FG) revenues and the foreign exchange (FX) market. A promising revenue outlook and another record budget present a case for a year of strong fiscal stimulus – contingent on a deviation from the recent trend of delayed budget passage. The FX market, a significant win in 2017, would remain essential in the coming year. As the United States Federal Reserve persists with monetary tightening, Nigeria’s monetary path is likely to diverge from this in 2018, on the back of moderating inflation and a stronger desire to pursue economic growth. 

Notwithstanding the positive impact of looser monetary conditions on spurring credit growth in Nigeria, the risks of excess naira liquidity on inflation, capital flows, and currency remain pronounced. Therefore, we can expect a gradual shift towards monetary easing in 2018 even as the apex bank keeps an eye on preserving gains made in Nigeria’s pricing environment. Overall, driven by expansive fiscal and monetary policies, as well as strengthening consumer wallets, we anticipate 2.0% y/y GDP for Nigeria 2018 in our base scenario (Bear: -0.3% y/y, Bull: 2.9% y/y). 

Pre-election year to come with usual volatility: As the Nigerian economy looks set to reach another gear, the timing of the potential political disruption from 2019 elections is unwelcome. The second half of 2018 is likely to be blurred by greater political instability, economic uncertainty, and social unrest, whilst electioneering could potentially distract policy-makers and delay investment. 

The silver lining can be found in Nigeria’s more mature democracy in terms of credibility and transition, ensuring that the economy progresses relatively unencumbered. Despite this, we anticipate an outsized influence of the imminent elections on economic and political stakeholders as 2018 winds down, hopefully only at a minor cost to economic activities. 

Equities to hold the upper hand in capital market tussle: Despite the 2017 equity market rally driven by a partial liberalization of the country’s exchange rate regime, the Nigerian Stock Exchange remains relatively undervalued. Now, favorable external conditions support further growth; bolstered by stability in FX and energy supply, receding cost pressure and strengthening consumer demand. 

Amidst this, we project a strong equity market performance in 2018, with an estimated full year return of 15%-20% (Bear: -10%, Bull: 30%). Meanwhile, late-2017 likely marked the end of Nigeria’s golden yield environment as the monetary authorities chart a path towards lower interest rates in the country. Material monetary easing is expected in 2018, the intensity of which would be driven by the relative demands of economic growth and the pace of moderation in inflation. 

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