Reviews & Outlooks | |
Reviews & Outlooks | |
10134 VIEWS | |
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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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