Nigeria Outlook 2018 – The Silver Lining?

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Global Economy in 2018: Can we hope for another cheery year?

Despite rising geopolitical tensions, growth in the global economy was robust in 2017, projected at 3.6% vs. 3.2% in 2016. More interestingly, growth is strengthening in its most synchronized form since the global financial crisis. The 45 largest economies tracked by the OECD are expected to expand in 2017 and 2018. Markets are testing new highs, interest rates are well anchored, corporate earnings are improving, commodity prices are rallying, even as consumers and businesses appear energized.

Our outlook for the global economy in 2018 is positive. While we are mindful of the risks on the horizon, especially the elevated geopolitical tensions, we expect pick-ups in global investment, trade, industrial production, business, and consumer confidence to further bolster global output level. Also, the sustained policy stimulus by the ECB and BOJ is positive for the financial market, while a stable outlook for oil prices suggests that the appetite for assets in oil-exporting economies like Nigeria is set for another bullish year.

Sub-Saharan Africa: Have we turned the corner?

Growth in Sub-Saharan Africa (SSA) economies also took a positive turn in 2017 after a sharp slowdown in 2016. This was supported by a rebound in commodity prices, favourable external conditions and consolidated reforms to tackle macroeconomic imbalances, even though developments in three of the big four markets (South Africa, Angola, and Kenya) remained largely underwhelming. Nigeria and South Africa exited recession in Q2-17 driven by rebound in oil export and Agriculture sector respectively. Looking ahead, growth is anticipated to strengthen as commodity prices firm up and domestic demand gradually gains ground. Ethiopia is likely to remain the fastest-growing economy in the region but momentum in West Africa will continue (driven by Nigeria, Ivory Coast, and Ghana) at a faster pace while the South African region will remain at 2017 level, amid elevated political uncertainty.

Nigeria: The silver lining?

Following the implementation of a decent list of pro-market policy actions in 2017, the chill of recession has given way to spring, and leading indicators have turned positive. Improvement in currency market condition, oil output level and prices have given the economy a new lease of life. Though slowly, inflation rate is moderating and investor confidence is strengthening. Going into 2018, we argue that Nigeria’s current economic resurgence, which is broadly oil output led, will not be robust enough to prompt a fast pace recovery in the absence of bold policy actions or above $80/b oil price. While the outlook on key macro variables seems positive, the economy remains vulnerable. We forecast a GDP growth of 2.5% in 2018. This, in our view, will be driven by the spill-over effect of the upsurge in oil output as observed in 2017. The growth of the Services and Manufacturing sectors remains very weak, making the overall growth outlook vulnerable to the vagaries of oil output.

We estimate average inflation to settle at 12.2% but renewed pressure on general price level is likely in H2-18 due to election spending and a possible wage review. Our outlook on the currency market, the flow of funds and movement of external reserves is medium-term stable amid expected stability in the oil market and supportive policy environment. The risk to this outlook includes outsized exposure to Foreign Portfolio Investments (FPIs) and uncertainties associated with the build-up to the 2019 election.

We expect monetary policy to be less hawkish in 2018. Accordingly, we have pencilled in a 100bps reduction in MPR in Q1-18 and a further 100bps reduction to 12.0% by Q2-18, if headline inflation rate declines sharply in H1-18. However, the Policy Rate may come under pressure in H2-18 due to the build-up to 2019 election. Efforts to boost non-oil revenue is commendable but oil revenue remains at the mercy of N/Delta militants. Against this backdrop, we ask, is 2018 “The Silver Lining” for the Nigerian economy?

 

Naira Assets: A tough act to follow

Much in line with our forecasted bull case return estimate of 41.5%, Nigerian equities market benchmark index surged 42.3%y/y in 2017, the highest since 2014. In the fixed income space, yield averaged 16.9% (vs. 13.4% in 2016), driven by tight monetary policy and increased government borrowing. Across market segments, returns averaged 30.0%, making 2017 a tough act to follow. In 2018, fundamental justifications for a sustained bull run in the Nigerian equities market are compelling. Improvement in both the global and domestic macroeconomic environment points to lower risk-free rate and equity risk premium, thus, we expect the cost of equity to moderate. The only downside to our outlook is the pre-election year uncertainties. On a balance of factors, we see further upside for Nigerian equities in 2018 with a base case return expectation of 12.4%. In the fixed income space, we expect yields to moderate, but with several twists. A 100bps rate
cut is imminent in Q1-18 but further reduction depends on how fast inflation rate moderates. Overall, we expect average yield to sit at 10% – 12% range in 2018.

 

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Contents of this report includes:

Global Economy 

  • Can we hope for another cheery year?
  • United States: Fiscal policy holds the key
  • European economies: Hard or soft Brexit?
  • Emerging markets: India is the new growth engine
  • Oil: Are we out of the woods?

Sub-Saharan Africa

  • Gradually turning the tide
  • Output growth outlook: Have we turned the corner?
  • Fiscal and monetary policy outlook: A need for fiscal consolidation
  • Foreign exchange: Uneven performance, same prospect
  • Equity market: Bear in bull’s clothing?

Domestic Macro and Policies

  • Policies and socio-economic overview
  • GDP growth: Out of recession but yet to recover
  • Headline inflation: Too many risks on the horizon
  • Currency: Is the FX market conundrum resolved?
  • Monetary policy: Policy easing imminent, but not for too long
  • Fiscal policy: An aggressive drive to mobilize non-oil revenue

Financial Markets

  • Fixed income markets: Yields to moderate, but with several twists
  • Fixed income strategy for 2018
  • Equities market: A stylish finish to a wobbly start
  • Equities strategy for 2018

Sectors

  • Banks: Riding the business cycle to a safe harbor
  • Consumer: Performance rebounds after 8-quarter long recession
  • Industrial Goods: Yet to recover
  • Oil & Gas: In dire need of reforms
  • Agriculture: Riding on policy initiatives
  • Companies
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