Economic Coverage: Nigeria Macroeconomic Overview for Q1 2018 & Outlook for the Rest of 2018


Coming from the two consecutive growths witnessed in the second-half of 2017 after the economy recovered from a protracted recession in the second quarter of 2017, the Nigerian economy is on a track to post an improved growth in the first quarter of 2018. Our assertion here is based on a number of positive economic data that were released within the period under review.

Amongst which are; a healthier foreign exchange reserve account, which at the current position of $46.04 billion is at a 3-year high. A purchasers’ managers Index (PMI) reading of 56.7 index points in the month of March, indicating that the manufacturing industry has fared relatively better in Q1 2018 as a result of lower inflationary environment.

According to the National Bureau of Statistics (NBS), the Consumer Price Index (CPI), an indicator that designates prices of goods and services in the economy was reported at 14.33% in February, representing 6.77% lower than 15.37% with which it opened the year. One major score here is the fact that this is the thirteenth consecutive decline we have seen on this price indicator. This has helped to deflate some levels of input costs on manufacturers’ production line, thereby helping to sustain their going concern status.

Irrespective of the above positives, the economy was equally confronted with varied challenges that created a drag to it. Amongst which are; continued delay in the passage of 2018 budget, the unending face-off between the executive and legislative arms on policies enactment, the failure of the CBN’s MPC to hold her scheduled meetings in January and March due to inability to form a quorum and the unending security threats in the economy.

Interest rate and its relationship to investments

The interest rate is a very key policy in the economic dynamics of a country. Little wonder it has been one of the most debatable policies in the country by economists and policy analysts alike ever since the country tripped into recession in Q1 2016 and through the period of early recovery in Q2 2017. Notwithstanding the recessionary environment, the MPC in her January 2017 meeting increased the MPR from 13% to 14% in order to achieve the CBN’s main aim of curtailing inflationary pressure which was already at a worrisome level. Since then, it has remained unchanged even when the economy witnessed marginal growth. Note that inflation hit the peak of 18.7% in January 2017.

The impact of this decision by the MPC coupled with other positive actions such as the creation of the Importers’ & Exporters’ (I&E) FX window and the increase in oil production volume and prices, has so far helped to subdue the inflationary pressure leading to a lower rate of 14.33% as at February 2018. However, the effect on investments, particularly, in the country has been soft while on foreign investors, it has been positive.

Another view point on interest rate is its impact on investment in an economy. In 2016, we saw a weak inflow of investment into the country from both the domestic and foreign sides as the high-interest rate led to increase in the cost of borrowing for local investors as commercial bank lending rates skyrocketed making loans inaccessible, which consequently, incapacitated many businesses. On the other hand, foreign direct investments (FDI) and foreign portfolio investors (FPIs) retreated due to the high-risk business environment as the economy grappled with the recession.

However, in H2 2017 with the oil volume rallying up as a result of relative peace in the Niger Delta and policy adjustments made by the CBN, while the MPR still remained at status quo, the economy returned to sustained growth. This led to an increase in investments by FPIs into the country which grew by 304.27% from $1,812.88 million to $7,329.06 million year-on-year (YoY) in 2017 as they sought for increased returns on equity, fixed income and money market. Data from the NBS on capital importation gave credence to this.

Recent economic data are looking positive and portends a buoyant economy in 2018. As history has shown, the contribution of domestic and foreign investment inflows will be essential to drive 2018 growth expectation. The MPC body language has shown that the MPR will not be changed any time soon since inflation target of either a higher single digit figure or a lower double-digit figure has not been realized. However, they are calls from different quarters for a reduction in the MPR as they say it is the right time for such reduction to happen in order to stimulate growth. If not the MPR, other close benchmarks such as cash reserve ratio or liquidity ratio should be adjusted downward, they say.

We are of the opinion that the MPC will soften its stance on the MPR in Q2 2018 to ameliorate the plight of domestic manufacturers and investors in the country. We believe this is necessary to stimulate more growth as the country needs more production activities. Once this is done, the commercial banks will be expected to reduce their lending rates making it more affordable for businesses to access loans. Risks to this happening are the effect it is likely to have on foreign exchange inflow. Yet we believe the current FX reserves account is strong enough to withstand any future fluctuations.

Inflation; impact on prices and productivity

The first quarter in 2018 witnessed a further drop in the inflation rate with food inflation reducing significantly. According to reports on inflation from the NBS, the Consumer Price Index (CPI) which measures inflation started the year with decreased 15.13% (YoY) in January 2018. This was 0.24 percentage points lower than the rate logged in December (15.37%) making it the twelfth consecutive slowdown in the headline inflation since January 2016.

In February 2018, prices dropped further to 14.33% YoY, loosening from a 15.13% recorded in January and also outperformed market expectations of 14.5%. This was the lowest inflation rate since April 2016 as cost rose less for food and non-alcoholic beverages, housing and utilities. Note that the inflation rate has been on a descent after reaching a 12-year peak of 18.72% in January of 2017.

Annual core inflation which excludes the price of volatile agricultural products declined to 11.7%, following a 12.1% rise in the previous month. On a monthly basis, consumer prices remained unchanged, after a 0.8% increase in January.

From the graph above, it is shown that the inflation rate whose decline slowed considerably from May up until December 2017 is appearing to pick up in Q1 2018. This is due to significant drop in food inflation starting from November 2017. The earlier graph shows the fact that food inflation appeared to continue to increase in January 2017 where core inflation started declining, up until November 2017 before it started its gradual descent.

The CBN governor, Godwin Emefiele last year assured Nigerians of a gradual decline of the inflation rate. He predicted that by mid-year 2018, the inflation rate would have dropped to a single digit of 9%. This may come to realization if food inflation declines further and faster than it did last year even as it has begun the year on a good note.

Productivity and the Purchasing Manager Index

Nigeria PMI fell to 56.3 index points in February of 2018 from 57.3 in the previous month. Despite the lower figure, the PMI stayed above 50 benchmark index points and indicated the eleventh consecutive month of expansion in manufacturing activities within the economy space.

Kindly note that PMI is classified into five sub-units, which are; Production Level, New Orders, Employment Level, Inventories, and Supplier Delivery Times. Growth slowed in production level in February 57.8 compared to 59.6 in January. New orders dropped to 55.6 from 58.3 in the previous month. On the other hand, faster growth was seen in Employment (53.9 from 53.3); Inventories (58.1 from 57.7) and Supplier Delivery Times (57.0 from 56.8).

On the cost of production, input cost trend up in February to 65.4 index point from 63.3 in January while and output cost also increased to 55.9 index points from 55.0 in the previous month.

Note that the manufacturing PMI in Nigeria averaged 49.89 index points from 2014 until 2017, reaching an all-time high of 59.30 in December 2017 and a record low of 41.90 in June 2016.

The recent release on output shows that the GDP expanded in real terms by 1.92%, +365bps y/y in Q4 2017 and was broadly boosted by oil and gas output. In the fiscal year 2017, the GDP grew by 0.93%. Compared to Q3 2017 record, the GDP advanced by 0.52bps. Amongst the major contributors to the GDP are the Agricultural, Manufacturing, Construction, and Trade with 21.06%, 12.82%, 3.77% and 18.97% respectively.

We have established that the PMI and GDP has a direct relationship. This means a contraction or expansion in PMI will result in the same for GDP respectively. In our analysis, we observed that the PMI was in contraction (below 50 index point benchmark) between Q1 2016 to Q1 2017. Similarly, the GDP and the economy was in recession and recorded negative growths all through the periods referred above.

The recent downtrend reading on the PMI is expected to continue in the remaining month of Q1 2018. The PMI is expected to dip further as New Order and Production Level are expected to dip as well, which likely may result in an increase in input and output costs. Hence, the Q1 GDP is expected to come lower compared to Q4 2017 record.

Foreign Exchange and buoyant Reserve Accounts

Foreign exchange market was less pressured in the first quarter of 2018 compared to same period of 2017. The CBN made myriad of interventions in order to sustain liquidity of the dollar and to uphold confidence in the market. The official window was relatively stable with the CBN enforcing most transactions that went through. As at end of 28th of March, the window closed at N305.65, representing a marginal variation of 0.05% over the opening position for the year. The I&E window continued to dictate the route of major transactions block for the FX and was relatively volatile in the period as it undulated significantly but eventually closed at N360.03, representing a marginal appreciation of 0.08%.

Meanwhile, the total value of trades at the I&E window settled at N1.42 trillion ($3.90bn), a decrease of 25.7% relative to the value recorded in January. Between January and February, total transactions done in this window stood at N3.34 trillion ($9.15bn). Note that March’s figure is yet to be released to the market.

The biggest winner of all the positive activities that took place both in the domestic and external economic fronts within the period is the foreign reserves account. The reserves account closed at $46.04 billion, representing a growth of 18.75% from $38.77 billion it opened the year. The account was significantly boosted by increased receipt from crude oil sales (oil revenues makes about 95% of the reserves account).

We expect a high level of volatility in the equity market to continue in the Q2 2018. With the existing positive economic data, we envisage that Q1 2018 corporate earnings will be buoyant thereby driving up activity level in Q2 2018.

With the improved state of the reserves account, the CBN’s ability to support the Naira in an adverse situation now stands at a healthy six months’ period. This development can be traced to a significant increase in oil output as a result of relative peace in the Niger- Delta region.

The Equity Market continue to undulate at a cross-road

The NSE All-Share Index (ASI) closed the month of January in the green with an all-time Market Capitalization high of N16.15tn. The ASI advanced by 16.34% in January to hit a 10-year high of 45,092 points. The market enjoyed increased liquidity in the period under review as securities traded with a Daily Average Value Traded (DAVT) of N8.96bn (up 74% from Dec-2017 levels). The Broad market index closed on a positive note recording its best month-to-date return in the last decade.

IndicatorFeb 18

Jan 18

Turnover (NGN)



Market Depth






Market Cap (NGN’ Trn)






Trading Days



However, in February, the NSE dipped with a total turnover declined of 46% month-on-month (MoM)  against  January  2018,  while liquidity indicators (market depth and breadth) also waned within the period with a Daily Average Value Traded (DAVT) of N5.3bn. It was marked by profit-taking and global correction as a result of underlying issues in the US. As such, the NSE dipped by 2.54%.

 January OpenMarch ClosePoint/value Diff

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Index (ASI)








Q1 2018 Returns


In March, the market performed relatively lower than February with ASI recording a dip of 4.21%. The market capitalization eventually dropped to N14.90tn. Despite the increased inflow of relatively improved 2017 corporate earnings, the market failed to respond positively to legacy issues in external markets continued to dictate the direction of the market.

We expect a high level of volatility in the equity market to continue in the Q2 2018. With the existing positive economic data, we envisage that Q1 2018 corporate earnings will be buoyant thereby driving up activity level in Q2 2018.

Money Market Development

The CBN was active in this market section all through the reviewed period. The bank activity was dictated by Open  Market  Operations  (OMO)  auctions.  The tenors-to- maturity ranged from 79-day to 266-day period. A total amount of N5,905.00 trillion was offered, while total subscription and allotment stood at N4,744.78 trillion and N4,366.66 trillion respectively. The bid rates ranged from 12.90 to 17.95%.

At the government securities market, NTBs was issued at the primary market on behalf of the Debt Management Office (DMO). NTBs of 91, 182, and 364-day tenors, amounting to a total of N298.37  billion.  At the 91-day  auction, total subscription and allotment were N106.69 billion and N86.75 billion with bid rates ranging from 9.00 to 25.00%.

For the 182-day auction, total subscription and allotment were N86.75 billion and N101.29 billion respectively. At the 364-day, total subscription and allotment were N1,686.62 and N1,103.96 billion respectively.

Outlook for the Second Quarter 2018:

Notwithstanding the continued challenges in the global economy as result of the continued escalation of trade war amongst major economies, the economic environment is expected to maintain trajectory witnessed in the first quarter of 2018. This expectation is based on the improved labor market, private investment, accommodative monetary policies and more stable commodity prices.

For Nigeria, the positive economic environment witnessed in the first quarter is expected to continue into the second quarter of 2018. We expect to see lower Inflation reading in Q2 2018.  This will be bolstered by the CBN unmitigated commitment to deflating any pressure on price stability. We also expect to see an improved Q1 GDP reading as result underlying economic indices.

The above forgoing is expected to have a positive impact on companies’ performances, thereby boosting activities on the Exchange.  This may likely lead to market reprising of quoted stocks.  We equally expect to see other asset classes maintaining positive traction.

Outlook for the rest of 2018:

With the significant recovery seen in commodity prices, especially oil (currently trading over $69), we see the Nigerian economy posting a stellar growth in 2018. Our optimism on the economy is fueled by the anticipated stronger contribution of the non-oil sector which performed abysmally in 2017 as a result of the gestation period required for some projects initiated in previous years to come into fruition.

On the business environment, the ease of doing the business drive by the government through review of various legislations that impedes this goal, improvement on tax administration and coverage areas, increased investment in infrastructure and agricultural activities would provide a boost to the economy.  The major headwinds to our optimism are the upcoming election season and government ’s seemingly low level of budget implementation. In our opinion, it will be in the interest of the sitting government not to sacrifice economic activities for the sake of politics.

Based on the foregoing above,  we expect the economy to grow by  2.3%  in  2018.  Our estimate here is based on anticipated oil production level of 2.2 mbpd (+ condensates) and an average oil price of $55 p/b. However, the delay in the passage of 2018 budget into law as a  result of power tussles between the executive and legislative arms and the political season expected to pick-up in the second half of 2018 are our concerns.

Other assumptions are;

  • Interest rate to drop to ŗř% in HŘ ’ŗ8 from current ŗŚ% in order to reduce the cost of capital and boost investment.
  • Inflation rate to settle at  12.5% from current 14.33%.  This would be boosted by expected increased returns of the agricultural sector as the government continues to provide attractive credit facilities to operators in the sector.
  • We expect the exchange rate to settle at N325 to US dollar at the official market rate. This is in line with our anticipation that the  CBN would drive towards a harmonized exchange rate in 2018 in order to allow room for credibility and higher confidence in the system leading to increased participation of foreign investors.
  • We expect the equity market to consolidate on the growth witnessed in 2017 with a growth of 20%. This will be driven by positive economic environment and increased participation of foreign investors.

GTI Research