The month of May brought contrasting perspectives of how the Nigerian economy has fared recently. Capital inflows for the Q1’18 period came in strong at $6.3 billion, supported by an improving economic outlook and stable foreign exchange market. In contrast, economic growth in the same period was tepid – recorded at 2.0% y/y vs 2.1% y/y in the previous quarter – weighed by weakness in key sectors such as agriculture and trade. More positively, annual inflation continued its downward trend, falling from 13.3% y/y in March to 12.5% y/y in April as base effects continued to support disinflation. Despite moderating inflation and weak growth, the Monetary Policy Committee (MPC) eschewed a rate cut at their May meeting amid fears of inflationary pressures from sizable fiscal injections in the second half of the year, particularly with the 2018 Budget remaining unpassed at the start of June. Finally, purchasing managers’ index readings showed another economic expansion in May, albeit at a slightly slower pace.
Key stories in the month
Nigerian economy expands in Q1’18…The Nigerian economy grew by 2.0% in the first quarter of 2018, below Vetiva and Consensus expectations of 3.4% and 3.6% respectively. Growth was largely driven by the oil sector (up 15% y/y) as the non-oil sector only grew by 0.8% y/y in the period, pressured by a slowdown in Agriculture and negative growth in Services, the largest sector of the economy. On a more positive note, industrial output expanded faster than expected, benefitting from continued price and foreign exchange stability. We revise our Q2’18 and FY’18 real GDP growth forecasts to 1.8% and 2.1% respectively (previous: 2.1% and 2.4%).
MPC holds rate at previous levels… The Monetary Policy Committee of the Central Bank of Nigeria held the base rate at 14% and maintained all other monetary policy levers at their previous levels. Although inflation had moderated at a faster pace and weaker-than-expected growth calls for monetary stimulus, the committee was of the view that inflation trend may reverse later in the year as a result of the possible increase in government spending. Amid this, eschewing a rate cut is the prudent call, and we expect this to benefit the economy by engendering further price and exchange rate stability.
Capital imports return to pre-oil crash levels… Data from the National Bureau of Statistics showed that capital imports rose to $6,304 million in Q1’18 (Q1’17: $908 million, Q4’17: $5,383 million), the highest figure since 2014. This growth was driven by a surge in foreign portfolio inflows to $4,566 million (Q1’17: $314 million, Q4’17: $3,478 million).
We note the strong relationship between capital imports and oil prices (currently hovering around the highest level since late-2014) and expect the positive oil price outlook to mitigate capital reversals caused by pre-election jitters and monetary tightening in the United States.
Infrastructure integrity threatens oil production… Oil production activities took a hit in May as a leak forced the Trans-Forcados pipeline to be shut down for a week mid-way through May. Also, Royal Dutch Shell declared Force Majeure on Bonny Light exports as a shutdown on the Nembe Creek Trunk Line stream had made it impossible for the company to meet its oil lifting allocations. The two events cut production of about 400,000 barrels a day. Whilst Forcados shipments are back on track, the Force Majeure remains in place on Bonny Light exports, which amount to about 200,000 barrels a day. We note that Nigeria’s oil production had been relatively flat in previous months – averaging just over 2.0 mb/d of crude (1.8 mb/d excl. condensates).
Low demand for FGN bonds… The Debt Management Office sold just ₦50 billion (₦70 billion on offer) at the May Bond Auction, the lowest monthly bond
sale since November 2016. Although the sale was in line with 2018 trend of moderating bond supply (January offer: ₦110 billion), it was also driven by much lower demand. Total subscription across all tenors was ₦90 billion, compared to ₦262 billion in April and the previous low of ₦118 billion in February (only two tenors on offer). Moreover, stop rates at the auction came in marginally higher than the April Auction – 13.50% on the 5-year and 7-year bonds and 13.55% on the 10-year bond vs. 12.8% on the 5-year bond and 12.90% on the 7-year and 10-year bonds in April. All in all, there was evidence of weaker demand for bonds and pressure on interest rates in the primary market.
President sets up infrastructure fund… The Presidential Infrastructure Development Fund (PIDF) was set up to invest in critical road and power projects in the country. The PIDF received $650 million seed funding from the Nigeria Liquified Natural Gas dividend account and will be run by Nigeria Sovereign Investment Authority.
National Assembly passes 2018 Budget to Presidency… On the 16th of May, the National Assembly passed an amended version of the 2018 Budget, meaning it only required presidential assent. The legislature increased the budget from ₦8.6 billion to ₦9.1 billion, allocating extra funds to the ministries of power, works & housing, education, and others. The oil price benchmark was also increased from $47/bbl to $51/bbl – still a far cry from the $70/bbl average recorded in the first five months of the year. The Presidency confirmed receipt of the budget at the end of the month, paving the way for passage in the near future – a timely development as the 2017 Budget ran until the end of May.
National Assembly amends CAMA … The National Assembly passed a new Companies and Allied Matters Act (CAMA) as part of measures to improve the
ease of doing business in the country. The most salient features of the new CAMA are a stronger focus on technology in the business registration process and a reduction of red-tape around small companies. #NotTooYoungToRun Bill scales through… As President Buhari has now signed the “Not Too Young to Run” Bill into law, the minimum age qualification for presidential candidates has been lowered from 40 years to 35 years, and independent candidates would now be permitted to contest in elections. Notably, the approved version of the Bill did not include the original reductions to the minimum age requirements for candidates with Senate or gubernatorial aspirations.
Central Bank Deputy Governor resigns… Adebayo Adelabu, Deputy Governor of the Central Bank of Nigeria since April 2014, was officially disengaged from service (effective 15th July 2018). The apex bank deputy governor had earlier tendered his resignation in order to pursue his gubernatorial aspirations at the 2019 Oyo State elections. He will be absent for the next Monetary Policy Committee meeting scheduled for the 23rd and 24th of July, meaning that only three of the remaining eight members of the committee would have more than four months of experience under their belts.
Issue in focus: Sell in May and go away?
The Nigerian equity market shed 8% in May as it slumped into negative territory for the year (ytd return: -0.4%) amid a 12% m/m dip in market turnover to ₦4.7 billion. There was the widespread bearish sentiment in the market through the month as foreign investors applied sell pressure even as domestic institutional players remain cautious. In the fixed income market, the yield curve shifted c.60bps higher as market sentiment also turned bearish. Although rates at the Primary Market Auction (PMA) for T-bills continued to downtrend, rates at OMO auctions were 10bps higher m/m and rates at the May Bond Auction closed c.70bps higher across the offered maturities. The upward trend in yields was partly driven by the Central Bank of Nigeria decision to hold interest rates at their May meeting and body language which suggests that a rate cut may not happen till after the 2019 elections. Meanwhile, the U.S. Federal reserve has persisted with monetary policy normalization and looks set to hike interest rates again in early June, which may trigger additional capital reversals. Compounding the dim outlook, Nigeria’s economic prospects for the year have been slightly dampened – our 2018 real GDP growth forecast cut from 2.4% y/y to 2.1% y/y – amid sluggish growth in non-oil sectors of the economy. With election season also imminent, the short-term outlook compels caution in the market, and May could be the first of many months of little joy for the markets.
United States President Donald Trump called off a symbolic June summit between the U.S. and North Korea in response to perceived aggressive remarks made by the isolationist state. The move initially rocked markets and escalated worries over prolonged diplomatic risk in the region, but by the end of the month, improved dialogue between the two parties reinstated the possibility of the summit holding on June 12th. Meanwhile, President Trump amended the Dodd-Frank Act, the landmark post-2009 financial crisis regulation, in a much-anticipated move to loosen financial regulation in the country. The revised Act weakens oversight over small to mid-sized banks in the country and reduces red tape in the industry, which should boost the financial sector, but may reintroduce the problems of moral hazard and crisis contagion – the precise issues the Act was initially designed to combat.
Across the Atlantic, political activities sent shockwaves around Europe amid fears that one of the mainstays of the Eurozone (Italy) would be pulled out of the currency union by a Eurosceptic coalition government created after the March election stalemate. However, the coalition government’s choice of finance minister was rejected by the Italian President, leading to an unraveling of the coalition and the reinstating of a former International Monetary Fund economist as Acting Prime Minister. Political uncertainty persists in Italy and will likely weigh on the region ahead of the key European Union Summit in late June.
Finally, Brent crude prices broke the $80/bbl level for the first time since November 2014 as industry reports suggested a tight market and production declined further in Mexico and Venezuela. However, Brent shed nearly $5 near the end of the month amid reports that Russia and Saudi Arabia were considering increasing oil production to ‘ease supply concerns and market anxiety’.
What to look out for in June…
- The National Bureau of Statistics releases Q4’17 and Q1’18 unemployment statistics on the 5th of June and Current Account information on the 6th of June.
- The United States Federal Reserve (Fed) holds its bi-monthly meeting on the 12th and 13th of June. The Fed has delivered on one of three expected rate hikes so far this year (March) and looks poised to increase interest rates by 25bps in June.
- The Organization of Petroleum Exporting Countries (OPEC) will meet with non-OPEC nations led by Russia on the 22nd of June to review the current output quota agreement. The consensus expectation is for the deal to be retained until at least the end of the year.
- United Kingdom Prime Minister Theresa May will bring the amended European Union Withdrawal Bill for a vote in Parliament as the country finally decides on the nature of the relationship it seeks to pursue with the EU post-Brexit. The vote will precede the EU Summit to be held on the 28th and 29th of June where the two parties could endorse the UK’s position and forge ahead.