EUR 3.48 For Business Accounts Only

Economic Update - October 2017

• Will Inflation durably converge on the CBN target? In line with recent trend, headline inflation printed at 15.98% YoY, 30bps lower than prior month. The finer details showed the 8bps YoY increase in the food basket was offset by a 16bps decline in the core basket. Whilst the pressures from flooding activities across key food producing activities drove the uptick in food inflation, the subdued pace of price increases in energy and education underpinned the contraction in core inflation. Going forward, the ongoing harvest season as well moderation in transport inflation should ease pressures on the food front. On the other hand, deceleration in diesel and transport inflation should sustain the core trajectory in the coming period. Against this backdrop, we forecast a 30bps decline in October’s inflation to 15.7% YoY, 0.6% MoM. Consequently, we hold the view that inflation will sustain its downtrend to end the year at 15.6% with 2017 average of 16.5%. Farther out, we see scope for substantial deceleration in headline inflation in 2018 owing largely to high base effects from 2017 and relative stability in PMS and electricity prices which feeds into our estimate 12.4% over H1 18.
• The party continues for the Naira:   The naira continued to show relative stability at the I&E window (IEW) as well as the parallel market, closing at N360.83/$ (-0.1% MoM) and N362/$ (+0.8% MoM) respectively. At the I&E window, average turnover remained sturdy at $215 million- 46%  higher than the average turnover since the inception of the window while elevated sales by the central bank muted demand pressures at the parallel market. Going forward, we think there are grounds the naira to sustain gains in the near term and possibly into the first quarter of 2018. Given the robust size of CBN’s reserves (+3.9% MoM to $33 billion) as well as the sustained rally in crude oil prices (3.8% MoM to $57.65/bbl.), the CBN looks to be in a better position to maintain aggressive dollar sales should demand pressures resurface.
• MTEF: More red ink ahead but debt strategy will change gear: Last month, the Buhari administration presented the 2018-2020 medium term expenditure framework (MTEF) and the fiscal strategy paper (FSP) to the legislative arm as part of preliminary preparations for the presentation of the 2018 appropriation bill. With respect to the 2018 fiscal year, the administration is requesting a 15% increase in outlays relative to 2017 while expecting revenues to rise at a slower pace of 11% in 2018. In terms of outlays, the framework is proposing higher allocation to recurrent expenditure with proportion of non-debt recurrent and debt service expected to rise to 41% and 26% in 2018 respectively (2017: 40% and 25% accordingly) while capital expenditure prints at 28% of expenditure (2017: 29%).On the revenue side, the FG’s projects oil revenue of N2.4 trillion (+15.1% YoY), other revenues of N1.8 trillion (+14.5% YoY) and a modest increase in non-oil revenue to N1.4 trillion (+0.9%YoY). While assumptions for crude oil prices are roughly consistent in the near term, the administration’s crude oil production assumption is much higher than our forecast and guides to an overly optimistic projection for oil revenue. Elsewhere, we think non-oil revenue will be shy from projections with 2018 fiscal deficit expected to come in higher than FG projections.  That said, given the FG’s preference for longer term external financing, we expect subdued pressures on the domestic debt market.
• Market forces drive down yield curve: Following the 93bps decline in the prior month, the yield curve dipped further by ~54bps to average 16.9% in October, largely driven by the long-dated bonds, on falling inflation and lower supply. The foregoing enriched valuation in the belly of the curve versus the long end, and thus for tactical purposes we hold a relative preference for medium-term instruments. The extended dip in the yield curve was on the back of lower treasury and bond issuances as well as stronger appetite for longer term bonds trailing the release of the FG’s 2018 borrowing framework which supports a tilt towards higher external borrowing. Going forward, prospects for below market rate stabilization security issuances by the apex bank and the deluge of OMO maturities (N1.7 trillion), which are very much in the wings for the remainder of 2017, suggest sustained moderation in T-bill yields in coming months. Similarly, aided by an expectation of further clampdown in inflation and a potential scarcity of FG’s long-dated treasuries, we expect investors to continue to lock-in high rates in the current month with the consequent impact stoking downtrend in yields at the long end.
• October PMI: Tentative signs of further recovery: Purchasing Managers Index published by the CBN sustained an expansionary trend in October. The details of the report show that manufacturing and non-manufacturing activities expanded to 55.0 and 55.3 points respectively. On the manufacturing leg, the outturn more closely mirrored the firming in business sentiment and continues to point to a more upbeat pace of activity in the manufacturing sector while the tenacity of the agriculture and finance & insurance contributed to the expansion in the non-manufacturing PMI. As usual, given the weight of manufacturing (9.4%) and Agriculture (23.0%) to Nigeria’s economic activity, we are of the view that overall growth over Q3 and Q4 will be driven by the resilience of these sectors as well as growth in the oil sector which should offset a less upbeat picture on the services sector. However, taking the manufacturing and non-manufacturing readings together, the October composite PMI marginal retreated to 55.0, down from 55.1 in September, a consequence of slowing non-oil activities. Thus, oil sector growth – a reflection of higher production and prices, should play a critical role in our overall GDP growth forecast for Q3 2017 and Q4 2017 of 1.1% and 2.0% respectively. Consequently, 2017 GDP growth should print at 0.7% YoY.
• See attached for full report