The month in review…
September was an active month on the policy and political front. Even with Nigeria’s inflation reversing trend—breaking an 18-month disinflation streak by rising to 11.2% y/y—the Monetary Policy Committee opted to hold interest rates. This was a pivotal decision in the run-up to the election which would likely induce demand-push inflation. Meanwhile, Kemi Adeosun resigned as Minister of Finance after government investigations confirmed that her NYSC certificate was a counterfeit, and she was replaced by former Minister of State for Budget and Planning Zainab Ahmed. Furthermore, political party primary season kicked off with most parties electing their preferred candidates for presidential and gubernatorial elections in late September and early-October. Finally, reflecting the tepid economic sentiment as the year concludes, both the World Bank and International Monetary Fund downgraded their 2018 GDP growth forecasts for Nigeria from 2.1% to 1.9%, still above Vetiva estimate of 1.7%. Buttressing this, purchasing managers’ index (PMI) numbers for September indicated a slowdown in economic momentum, with both manufacturing and nonmanufacturing PMI declining in the month.
Key stories in the month
Goodbye Skye, Hello Polaris… Over two years after the Central Bank of Nigeria (CBN) discharged the management of Skye Bank and installed a new management team, efforts to turn the bank’s fortunes around proved fruitless. The CBN revoked the license of Skye Bank and established a bridge bank (Polaris Bank) to assume the assets and liabilities of the defunct bank. On a positive note, depositors’ funds remain safe. The new bank (Polaris Bank) was capitalized by the Asset Management Corporation of Nigeria (AMCON) who would now be seeking buyers for the bridge bank.
Inflation hits bottom… After falling for eighteen straight months, Nigeria’s inflation reversed the trend, rising 0.1 percentage points to 11.2% y/y in August as persistent food price pressure finally told on a weaker base. The nearterm outlook is bearish, with expected fiscal injections likely to put further upward pressure on inflation. Despite this, the Monetary Policy Committee (MPC) opted to maintain the status quo at its September meeting, recognising that tightening would do little to stem food inflation and may harm still-weak economic growth. Nevertheless, the committee showed a strong lean towards tightening. Three of ten members voted to increase the monetary policy rate whilst of the seven that opted to hold, three pushed for a 250bps hike in the cash reserve ratio. Barring a material change in price or exchange rate dynamics, we do not anticipate any monetary policy change between now and the February elections as the relevant uptick in inflation and capital outflows have been factored into the MPC decision to hold.
External reserves moderate in September… Nigeria’s external reserves declined by $1.5 billion to $44.3 billion, continuing the Q3’18 trend. The movement in reserves was likely driven by Central Bank of Nigeria efforts to stabilise the exchange rate amid pressure on emerging market currencies due to U.S. monetary tightening, seen in the fact that the naira has outperformed most of its emerging and frontier market peers. We expect stronger oil receipts to ease pressure on external reserves, a sentiment echoed by the Central Bank of Nigeria at its September Monetary Policy Committee meeting.
Current account surplus comes in strong in Q2’18… Data from the National Bureau of Statistics showed that Nigeria’s current account surplus was ₦2.4 trillion in Q2’18, up from ₦2.2 trillion in Q1’18 and equivalent to 8% of quarterly GDP. The improvement in Nigeria’s external position came on the back of a significantly lower petroleum product imports (from ₦718 billion to ₦278 billion) which drove imports to a two-year low of ₦2.1 trillion. Meanwhile, exports also dipped slightly in the quarter (5% to ₦4.5 trillion) amid weaker non-oil exports, but this was more than compensated for by the decline in imports.
Nigeria Air project suspended… In July 2018, the Federal Government revealed the logo of the new national air carrier, Nigeria Air. However, in mid-September, the project was suspended indefinitely amid claims that the Economic Management Team—led by the Vice President—disapproved of the plan. Nigeria’s aviation minister insisted that Nigeria Air will still take off one day, but it is likely that this project will tread the path of previous failed attempts at establishing a national carrier.
Modular refineries get a lease of life… The Federal Government signed a Memorandum of Understanding with the Export-Import Bank of China for a $500m credit facility to establish modular refineries. The facility will finance purchases of equipment from China for modular refining activities. More than 35 modular refineries have been licensed but only 10 are in advanced stages of construction (expected to be completed by 2019). Nigeria’s public refinieries have underperformed in recent times (average capacity utilisation of just 13% in the first five months of 2018), making the country reliant on petroleum imports.
Minimum wage causes stir amid weak fiscal state… The committee, tasked with formulating a new national minimum wage reconvened at the start of October following strike action by the Nigeria Labour Congress (NLC) after the Federal Government (FG) initially paused the review of the minimum wage. The NLC is pushing to increase the minimum wage from ₦18,000 to ₦65,500, in line with an FG promise to review the minimum wage before the 2019 polls. Although the wage increase is growing in political importance, we note that Nigeria’s current fiscal position—at federal and state levels—is not conducive for an increase in salaries. Personnel costs consumed 70% of revenues for the 2017 FG budget year, and any increase would pressure government finances.
Oil production climbs steadily… Nigeria’s oil production continued to recover, with early estimates from the Ministry of Petroleum Resources recording crude oil and condensate lifting at 2.16 mb/d, up slightly from August, and a multi-year high. On a more bearish note, the EGINA FPSO project was scheduled to come on-stream by the end of 2018, but recent setbacks make an H1’19 kick-off date more likely. The project is expected to add 200,000 barrels of crude oil a day to Nigeria’s production capacity.
Equity market endures harsh quarter… The Nigerian Stock Exchange (NSE) All-Share Index (ASI) shed 6.0% in September and 14.4% in Q3’18, marking the largest quarterly market decline since Q4’14—notably the quarter preceding the 2015 elections. September performance was weighed down by concerns over regulatory actions during the period and particularly bearish sentiment in the Consumer Goods (down 7.6%) and Industrial Goods (down 8.3%) sectors. Considering the weak emerging market sentiment and the onset of election season, market performance is likely to remain weak in the final months of 2018.
Issue in focus: Nigeria’s fiscal woes laid bare
2017 fiscal deficit was ₦3.8 trillion, compared to ₦2.2 trillion in 2016, equivalent to 3.3% of GDP (2.2% last year). The deficit also overshot the 2017 budget target of 2.2%. The deficit ballooned on the back of a 26% rise in government spending amid a 10% fall in revenues. And, whilst 2017 spending was the highest on record, 2017 revenue was the lowest in seven years, underscoring Nigeria’s still-weak revenue position. In fact, revenues were so weak that the government borrowed (₦3.0 trillion) more than it earned last year. Moreover, the focus of spending is a worry; for every naira earned in 2017, the Federal Government spent 70 kobo on salaries, 62 kobo on debt servicing, and 54 kobo on capital expenditure. This combination of increased spending and poor revenue generation is brewing a debt problem -debt servicing was up to 62% from just 22% in 2012 and compared to the previous Debt Management Office threshold of 28%. And considering that most of the increase has come via external borrowing, Nigeria’s fiscal position looks even more vulnerable to any shock in oil prices or political stability as this would further pressure debt servicing costs. It has become increasingly urgent that Nigeria boosts its non-oil revenues, and it is likely that FY’18 numbers would give the same message.
The U.S.-China trade war rumbled on as President Trump imposed another set of tariffs on Chinese exports to the United States as preliminary negotiations bore little fruit. Meanwhile, the contest between the two economic behemoths took a detour in the month as the U.S. Treasury Department raised concerns over recent currency swaps between China and a host of African countries, highlighting a potential negative impact on efforts to tackle illicit financial flows. China’s currency swaps are part of a measure to boost the use of the yuan and have encouraged a few African countries to consider adopting the yuan as a reserve currency.
Meanwhile, the International Monetary Fund gave its verdict on the medium-term impact of the trade war, downgrading its 2018 and 2019 global GDP growth
forecasts from 3.9% to 3.7%, partly due to early effects of the trade war on sentiment towards emerging markets. 2018 GDP growth in emerging markets was downgraded from 4.9% to 4.7% and 2019 GDP growth was downgraded from 5.1% to 4.7%. Likewise, Sub-Saharan Africa 2018 GDP growth forecast was downgraded from 3.4% to 3.1%. Driven by this, forecasts of the growth in global trade volumes were reduced from 4.8% and 4.5% in 2018 and 2019 to 4.2% and 4.0% respectively.
Global oil prices enjoyed their best month in 2018, as the Brent crude benchmark crossed $80/bbl for the first time in 4 -years, averaging $79/bbl over the month. The main drivers for the surge in oil prices were the effect of U.S. sanctions on Iran which have decimated Iranian oil exports, as well as the continued decline in Venezuelan crude production. Tanker data collated by Bloomberg indicated that Iranian oil exports declined to 1.7 mb/d in September, the lowest since February 2016, whilst OPEC data shows aggregate Venezuelan production has declined 0.5 mb/d to 1.2 mb/d so far in 2018. As we expect these two factors to persist, oil prices should remain strong, with only a negative shock in global oil demand—now a possibility given the IMF’s more bearish global outlook—a potential dampener for oil bulls.
What to look out for in October…
- OPEC releases its monthly oil market review on the 11th of October. It will show the scale of recent production declines in Iran and Venezuela.
- The National Bureau of Statistics releases the Consumer Price Index (Inflation) data for September on the 16th of October. It will give a preliminary indication of the pace of increase in inflation after its recent reversal.
- A major European Summit will be held on the 17th and 18th of October, though it is unlikely that the UK would have a clear revised proposal for the EU countries to vote on.
- The first reading of United States Q3’18 GDP data will be released on the 26th of October. Projections of U.S. growth for 2018 have been unscathed from recent downgrades and the economy expanded impressively in Q2’18.