Nigeria: New fiscal measures pose upside risks to inflation

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According to the National Bureau of Statistics (NBS), headline inflation slowed for the third consecutive month in August 2019, shedding 6bps to 11.02% YoY. The current inflation reading was largely in line with our 11.04% YoY forecast and 8bps below Bloomberg consensus estimate. With this reading, Nigeria has now seen its lowest inflation reading in 43 months. In our view, the sustained temperance in inflation has been largely driven by swift moderations in food inflation (-22bps to 13.17% YoY in August alone), with core inflation moderating by a cumulative 16bps in the last three readings.

We attribute the observed softening in food price pressures to the positive impact of early harvests, which kept markets well supplied even in the lean season. According to Famine Early Warning Systems Network (FEWSNET), this year’s harvests are expected to be average to above-average across a broad section of the country except in pockets of conflict-affected areas in the North. Elsewhere, the moderation in core inflation coincided with tamer price increments in clothing & footwear and Alcoholic beverage, Tobacco & Kola sub-segments.

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MPC is unlikely to reduce rates in response to moderating inflation

Notably, both headline inflation subcomponents of food (-4bps to 1.22% MoM) and core (-10bps to 0.57% MoM) moderated for the second consecutive month in August. We believe the ongoing moderation in inflation supports our average inflation projection of 11.12% YoY in 2019E (compared to 11.25% YTD), with higher food production from the main harvests likely to taper inflation further in the coming months. Despite the upside risk presented by the recent border closure, we hold the view that inflation is more likely to trend lower for the rest of the year given that imported food only accounts for 13.2% of Nigeria’s CPI basket.

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Clearly, while the trajectory of inflation lends credence to a more accommodative monetary stance, CBN’s recent preference for Open Market Operations (OMO) as the defacto liquidity management tool, together with the glaring upside risks to inflation at the turn of the year, significantly reduces the likelihood of a modification to key policy rates at the next Monetary Policy Committee (MPC) meeting.

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All roads are likely to lead to higher inflation in 2020

While we expect continued moderation in inflation through the year, we see several upside risks to inflation in 2020. These risks include the impending implementation of higher electricity tariffs ( to be implemented in two installments: partial increase in January and a shift to full cost-reflective tariff in July); the proposed increase in VAT rate to 7.2% from 5.0%; the addition of items to the FX restriction list; stricter policy enforcement at the borders; and, to a lesser extent, the planned implementation of the minimum wage increase. Beyond the risks mentioned, the recently constituted Economic Advisory Council, formed by President Buhari, is widely expected to suggest more pro-market reforms such as the liberalisation of the exchange rate and the removal of existing petrol subsidies. If implemented, the policies would, no doubt, result in short term inflationary pressures before long term beneficial impact materialises.

CardinalStone Research

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