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Macro-Economic Update - January 2019

• Resurgence in FPI flows softens CBN intervention sales: After a tumultuous end in 2018 following spate of capital repatriation and paucity of flows, the Investors and Exporters Window (IEW) witnessed a rebound in activities in the month of January with inflows (ex-CBN) rising to $2.6 billion (+79.8% MoM), to account for 95% (vs. 58.4% in December) of outflows (+10.3% MoM to $2.8 billion). As a result, unmet demand at the window declined from $1.0 billion in December to $131 million in January. Reflecting the rebound in flows during the month, the apex bank intervention sales at the IEW declined 62.5% to $453 million (vs. $1.2 billion in December).
• Going by breakdown inflows, offshore inflow rose 298% MoM to $1.9 billion (vs. $563 million in December) following resurgence in FPI (+186.6% MoM to $1.3 billion) which on average accounts for 88% of total foreign inflows. On the other hand, local flows (ex-CBN sales) was down 17.3% MoM to $742 million (vs. $897 million in December) largely on the back of decline in Other corporates (15.4% MoM to $634 million vs. $749 million in December) to account for 85% of total local inflows.
• From our estimate, inflow through the CBN during the month declined 18.8% MoM to $3.8 billion (Dec: $4.6 billion), largely driven by the moderation in oil and non-oil inflow by 14.9% and 20.7% MoM to $1.3 billion and $2.5 billion respectively. On outflows, beyond the moderation in CBN intervention sales at the IEW, its intervention across other markets also decline during the month.
• For context, total secondary market intervention sales (SMIS, SME, Invisibles and Non-auction) by the apex bank slowed 30% MoM to $1.6 billion dollars, which coupled with the sales at the IEW, BDCs and other import demand guides to total outflow from the apex bank of $3.7 billion (down 31.7% MoM). Accordingly, the adjusted external reserve recorded an accretion of $89,000 (depletion of $753 million in December) during the month to $42.7 billion. Reflecting the reduced demand for FX during the month, the naira appreciated MoM by 0.23%, 0.14% and 0.86% at the IEW, BDC and parallel to N363.8/$, N358.9/$ and N360.6/$ respectively.
• Over the rest of 2019, we maintain our view that CBN intervention will come in relatively lower than the prior year with our estimate suggesting total outflow of $50.2 billion during the year, which is lower than $54.5 billion in FY 2018. On inflows, having modelled crude oil production and price of 2.07mbpd and $55.95/bbl. for 2019 respectively, we forecast average monthly crude oil inflow to the CBN of $1.15 billion over 2019 with overall oil inflow for the year estimated at $13.83 billion (-10.2% YoY). For non-oil inflow, while we note the relative stability post-election in Q1 2019, we estimate total FPI flows over 2019 to decline 35.4% YoY to $7.6 billion. As such, we see significant contraction in non-oil inflows to $35.3 billion compared to FY 18 of $44.9 billion. Overall, net impact of our inflow and outflow expectation translates to an average monthly reserve drawdown of $536 million over the rest of the year, which should instigate a further depletion in the reserve to $41.5 billion ($44.2 billion if adjusted for the proposed $2.7 billion Eurobond to finance the 2019 budget).
•  No premise for inflationary pressures in January: In December, headline inflation printed at 11.45%, higher than 11.28% reported in November. The uptick reflects the seasonal nature of market demand during the festive season which drives food prices higher. Core inflation however moderated, mirroring the declines in PMS prices (-15% YoY to N145.8). On a MoM basis, headline inflation moderated to 0.75%, following declines in both core and food index. For the period, core inflation moderated by 5bps to 0.51% stemming from declines in HWEGF (-4bps to 0.51%), clothing & footwear (-7bps to 0.76% ), household& equipment (-6bps to 0.73%) and health (-1bps to 0.71%) which overshadowed the slight uptick in transport and education cost. Elsewhere, food inflation dipped by 9bps to 0.81% – a reflection of the decline in processed foods as prices for farm produce which ticked higher by 9bps to 1.03%.
• Going forward, we do not foresee any inflationary pressure in January. Starting with core, data by PPPRA on petroleum product stock data shows that NNPC has sufficient petrol in its coffers which could last for 62 days as at the beginning of the year. The foregoing coupled with our expectation of lower global Brent prices guides to less pressures on core inflation. On food, the ongoing dry season cultivation and harvest of long cycle crops such as sorghum and cowpea guides to a moderation in food inflation, with FEWSNET expecting average to above average harvest. That said, we expect inflationary pressures to ease by 2bps  to 11.42% in January, with average inflation rate for the year expected to print at 12.4% (FY 18:12.2%).