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Nigeria 2019 Research Outlook: One Hurdle In Q1, Others To Follow

Reviews & Outlooks	3339 VIEWS
Reviews & Outlooks
3339 VIEWS

Thursday, January 24, 2019 10:20 AM / FBNQuest Capital

One hurdle in Q1, others to follow

The end to the distraction in sight (hopefully)

The investor interest in the elections is that they should be completed on schedule and with a clear mandate. The worst outcome would be a very close result contested in the courts and on the streets, which pushes back the window of opportunity for reform. (We hesitate to use the word ‘change’.) Incumbency still has its advantages yet we see a tighter result than in 2015. We trust that the next administration will address fuel subsidies.

A small pick-up in growth ahead

The core of the incumbent’s case is the expansionary fiscal policy, notably on the capital side. This stimulus underpins our forecast of 2.9% growth this year, along with a rise in crude oil production and some private investment. The rebuilding of household budgets is at an early stage, and would be helped by a rise in the minimum wage, and the settlement of salary and other arrears.

Solid legs to the fx regime

There has been campaign talk of radical changes to fx policy. Very few central banks have experience of genuinely floating regimes and all of them, whoever the governor, are bureaucratic creatures of habit. The CBN’s mindset is to manage rates. We would not be surprised if the current arrangements are broadly in place at year-end.

No change in the policy rate, inflation stable

We see a continuation of the MPC’s unchanged stance throughout the year. It declined to move when there has been a decent case both to hike and to ease. We expect inflation to settle within the range of 11% to 12% y/y.

Widening of yields, potential 15%+ return for equities in 2019

There is room for FGN bond yields to widen by up to 100bps over the next 12 months, given the CBN’s preference for mopping up naira liquidity. We expect equities to recover after last year’s sell-off, by 17.7% to 37,000 by year-end. The ytd loss of -1.8% implies upside potential of around 20% from current levels.

Central economic indicators
	2016	2017	2018E	2019E
Real growth (in per cent)	-1.6	0.8	2.0	2.9
CPI (in per cent; y/y Dec)	18.6	15.4	11.4	11.9
Monetary policy rate (%; year-end)	14.0	14.0	14.0	14.0
Current account/GDP (in per cent)	0.7	2.8	1.4	1.7
Bonny Light (end-period spot; US$/b)	55	67	52	65
Bonny Light (average spot; US$/b)	44	54	69	63
Official fx reserves (in US$ bn)	26	39	43	40
N/US$ (end-period)	305	306	307	310
N/US$ (average)	254	306	306	308
Sources: CBN, NBS, Bloomberg, FBNQuest Capital Research