EUR 3.72 For Business Accounts Only

Economic Update March 2017

​In this report, we discuss government’s economic recovery plan, expected Q1 17 GDP reading and impact of recent developments in currency market on inflation and fixed income market outlook.

• CBN sustains aggressive dollar sales: Following the raft of policy measures implemented by the apex bank in February, the CBN bolstered its campaign with further moves aimed at strengthening the convergence between the interbank and parallel market. First off, execution rate for dollar sales to retail users was revised downwards to N360/$. In addition to selling to Banks and BDCs at N357/$ and N360/$, the CBN also raised its forward intervention sales to ~$1.2 billion. In testing the sustainability of the apex bank’s sizable dollar sales, we evaluate potential dollar inflow and outflow through the CBN and evaluate their impact on the nation’s reserves. In addition to the $2.2billion potential external borrowings, we forecast a $13.9 billion oil inflow over 2017 (+36% YoY) reflecting improved oil production of 2mbpd (2016 average: 1.83mbpd) and higher oil prices of $55/bbl. (2016 average: $43.87/bbl.). In all, we expect overall inflow to outweigh potential dollar sales and non-WDAS outflows. This suggest that CBN could successfully sustain its market intervention in the near term.

• Eyes on inflation as NGN gains ground at parallel market…: Reflecting impact of high base effect from 2016, headline inflation moderated 92bps from prior month to 17.78% YoY in February. Though we noted that base effect from 2016 and sustained deceleration in the core basket (from November 2016) would keep YoY inflation on the down-low, we were heedful of pressures from rising food prices (+71bps to 18.5% YoY) as carry-over impact from naira declines to a low of N510/$ at the parallel markets in the earlier weeks of February left price competitiveness of Nigerian farm produce intact over period. Fast-forward to March, the raft of FX policies by the apex bank from late February 2017 which has led to a staggering 22% naira appreciation at the parallel market to N390/$ in March now questions the premise for our prior food inflation expectation for the coming reading. Wafting support for this inquest is the first contraction in cereal prices in four months as at end of February (-9% MoM to N130/kg)—a month for which the full impact of CBN’s new policy was yet to take footing. Thus, we expect moderation in food inflation to bolster inflation deceleration in March reading, which we forecast at 16.6% YoY.

• …sparking interesting expectations in treasury market: Over March, the naira yield curve dilated a further 82bps MoM to 18.13% as a surge in T-Bill yields (+2.06pps MoM to 20.58%) trumped moderation in bond yields (-41bps MoM to 15.69%). Given improved system liquidity (+22% MoM to N229 billion on average) which stemmed from the N523 billion Paris Club debt refund to states in the period, we believe yield expansion at the short end of the curve reflected sustained sell-offs as investors gradually priced in potential impact of inflation moderation on interest rate trajectory. At the long end of the curve, marginal clearing rates declined another 37bps MoM to 16.27%, largely reflecting cautious bidding by investors evidenced by the 95bps MoM decline in maximum bid rate to 17.05%. In addition to the subdued inflationary reading, we believe increased prospect of sizable external financing by the FG underpinned the prudent bid rates at the auction. Given our expectation for more aggressive stepdown in inflation—which should increase scrutiny on CBN’s justifications for its current hawkish policy—and viable external borrowing options amidst expected increase in market liquidity, we expect yields to moderate in the coming periods. On the policy front though, in view of its going efforts aimed at currency stability, the apex bank could prefer a tilt towards gradual step down in marginal clearing rates at coming auctions.