EUR 3.42 For Business Accounts Only

Economic Update - September 2017

• Flood impact should stir ‘dead cat bounce’ on inflation: In line with recent trend, headline inflation contracted 4bps from prior reading to 16.01% in August. Going by provided breakdown, this step-down in headline was triggered by a moderation in food inflation, which printed at 20.25% YoY in the period. Despite the retrace in food price pressures in August, we still hold the view that the last flooding disrupted harvesting in September, with knock-on effect likely to keep MoM food reading ahead of trend levels. Elsewhere, in spite of the recent blip, we expect YoY core inflation to resume deceleration in September as gains from improvements in FX liquidity become more telling. However, largely reflecting flood-induced food pressures, we now look for MoM headline reading of 0.95% for September (average in the three years leading to 2016: 0.79% MoM) which translates to a YoY inflation of 16.14% for September. 
• Expect sustained naira resilience in the near term:   In September, the naira appreciated at the interbank market (+0.9% MoM to mean of N359.79/$) with average FX turnover at the I&E window increasing by 5% relative to prior month. We link this naira resilience to CBN’s sustained FX sales and regulatory moves to curb speculative activities on the currency. Elsewhere, impact of continued FX interventions and narrowing system liquidity also filtered through to the parallel market, wherein the naira edged up by 1% MoM to a mean of N364.7/$ in September. Given the robust size of CBN’s reserves (+2% MoM to $32.5 billion going by the apex bank’s latest publication), aggressive dollar sales should continue in the near term with the consequent impact set to leave naira in the green. Furthermore, with sizable foreign flows set to capture fizzling-out high local interest rates, the downside for the naira remains limited, in our view.
• The sword of CBN cuts naira yields: The naira yield curve extended its deceleration to a third consecutive month in September (-93bps MoM to 17.47%) following 111bps and 76bps moderations at both the short and long end respectively. Despite the almost two-fold MoM surge in net NTB issuance to N123 billion and a 13% MoM contraction in system liquidity to N360 billion, T-bill yields continued to take cue from accommodative signals at the monetary policy end. At the long-end of the curve, amplified subscription levels at the auction, on the back of declining rates at the PMA, drove a decline in bond yields. The attendant impact of this cascaded to a downtrend in secondary market bond rates. Going forward, despite the MPC’s decision to hold key policy parameters at its last meeting, 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 yield downtrend at the long end.
• Nigerian PMI: are economic activities hitting new gear?: Going by latest CBN surveys, manufacturing and non-manufacturing activities expanded for the sixth and fifth straight month (respectively) in September. Overall, sustained expansion in PMI readings (manufacturing and non-manufacturing) over last few months clearly corroborates our expectation for positive GDP growths for Q3 17 (1.7%) and Q4 17 (1.9%). This expectation looks beyond the projection of further currency-induced gains in manufacturing to potential pass-through from steady increases in domestic crude oil production owing to improved security situation in the Niger Delta.