Monthly Economic & Financial Market Outlook: Growth Prospect Improves But Uncertainties Remain…

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Executive Summary

Domestic Scene:

  • The prospect of economic growth improved following an expansion in the Purchasing Managers’ Index (PMI) in March 2018 after recording two consecutive months of slowdown.
  • FSDH Research, however, notes that there are still infrastructure problems and security challenges that require urgent attention in order to ensure sustainable growth in Nigeria.
  • The rising foreign capital inflows into Nigeria; favorable crude oil price; and increased oil production have led to significant accretion to the external reserves. The current external reserves position continues to provide short-term stability for the value of the Naira.
  • The highest monthly foreign exchange inflows to Nigeria through the Investors’ and Exporters foreign exchange window was recorded in January 2018 at US$6.04bn while the inflows in March 2018 at US$5.15bn was higher than the highest amount recorded in 2017 at US$4.53bn.
  • FSDH Research expects the inflation rate to decline further to 13.49% in March, mainly on account of the base effect of the previous year.
  • The declining inflation rate may lead to a further drop in the yields on fixed income securities, particularly at the short-end of the yield curve.
  • FSDH Research notes that the current strategies of the Debt Management Office (DMO) to reduce the interest expense on the debt of the Federal Government of Nigeria (FGN) is working.
  • The FGN has announced that it may raise less debt in Q2 2018 than initially indicated. This development may reduce further the yields on the FGN securities.
  • Although FSDH Research believes the yields on the NTBs may drop further, we are of the view that the yields on the FGN Bond may move up gradually from the current level.
  • FSDH Research expects a total inflow of about N1.85trn to hit the money market from the various maturing government securities and Federation Account Allocation Committee (FAAC) in the month of March.
  • FSDH Research expects the market to remain relatively liquid in April. This may necessitate the issuance of Open Market Operations (OMO) to mop-up the liquidity in the system.
  • We expect the equity market to appreciate in Q2 2018 based on historical performance. Investors may take strategic positions in stocks that have good fundamentals to take advantage of the expected appreciation in the market.
  • Some of the uncertainties in the economy are: delay in the passage of the 2018 Budget; the possibility of capital flight as a result of monetary policy normalization in the advanced countries and the possible increase in the food prices as a result of the rising unrest in the food producing states in Nigeria.

International Scene:

  • The Federal Open Market Committee (FOMC) of the U.S Federal Reserve System raised its anchor interest rate, the Federal Funds Rate (Fed Rate), to 1.50% – 1.75% from 1.25% – 1.50%. FSDH Research expects that the FOMC will increase the Fed Rate to 2.25% – 2.50% by year-end.
  • FSDH Research notes that subsequent external borrowing may attract higher interest rates as yields in the global market move up.

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