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Macro-Economic Update - May 2018

• Has the FX reserve hit a snag? After reaching a high of $47.9 billion on the 10th of May 2018, which is ~$16 billion accretion from a low of $31.8 billion in September 2017, recent data from the CBN revealed a gradual drawdown of the reserve. For context, between 10th and 30th of May, the reserve has been drawn-down by $243 million to $47.6 billion. The drawdown of the reserve is largely connected with increased sale by the CBN at the IEW, $128 million in May from $65.3 million in April, in a bid to cover the sudden slump in FX inflows at the window. For the first time in 10 months, the IEW recorded a net-demand of $1 billion from a net-supply of $328 million in April following a 55% MoM decline in inflows to $1.2 billion amidst a flat outflow (-3% MoM to $2.2 billion) during the month.
• In our pre-MPC note (MPC Preview: Rate cut delayed, not derailed), we adjusted our outlook on the FX reserve. We assumed a case wherein foreign investors exit 50% of their maturing local fixed income instruments, which we estimate at $9 billion (30% of $37 billion – N11 trillion). This implies average monthly capital flight of $697 million which added to our revised mean CBN intervention across other segments of $4.3 billion brings average monthly outflows from the apex bank to $4.9 billion. On our expected CBN inflows, we have adjusted our crude oil price projection to average $70 per barrel for the rest of the year and factored in the $2 billion expected Eurobond, which raised our average monthly CBN inflow to $4.6 billion. Accordingly, we estimate mean monthly reserve drawdown of $340 million with an end year balance north of $44 billion which translates to an import cover of sub 11 months.
• Moderation in headline reading still driven by base effects. The deceleration in inflation rate continued for the fifteenth consecutive month as headline reading for the month of April printed at 12.48% YoY, 85bps lower than 13.34% YoY in the month of March. The decline in inflation continues to reflect the impact of base effects from elevated food and energy prices in the corresponding period of 2017. Disaggregating the sub-components, the decline in inflation largely stemmed from the food basket which dipped 128bps to a 24-month low of 14.80%. Also, core inflation dipped 26bps to 10.92% YoY.
• Our outlook for inflation hasn’t changed. While the ongoing Ramadan would put pressure on demand with an attendant upward pressure on food prices, we see moderation on the headline reading in the preview month supported by base effects. This backdrop informs our call for an 83bps MoM moderation in overall headline reading to 11.7% YoY in May.
• Q1 18 GDP: Same Oil Story. The Nigerian Economy grew 1.95% YoY in the first quarter of 2018, weaker than 2.11% YoY in Q4 17 (revised from 1.92%). Oil sector was the pilot for growth, as it grew 14.8% YoY underpinned by higher oil production. In the non-oil sector, agriculture (+3.0% YoY) and manufacturing (+3.4% YoY) sectors sustained growth to drive non-oil sector growth of 0.8% YoY in Q1.
• Going into the second quarter of 2018, while we have left our growth forecasts unchanged for Oil (+8.8% YoY), Services (+0.7% YoY), Agriculture (+3.1% YoY) and manufacturing (+2.5% YoY), we revised our trade forecast lower to 1% YoY (prior estimate: 2% YoY) to capture the slowdown in activities within the subsector. Accordingly, we now forecast an overall growth of 2.1% (revised from 2.2%) in Q2 18. Juxtaposing these changes with the actual growth numbers reported in Q1 2018 translates to a full year growth of 2.4% YoY (prior forecast:2.6% YoY) - with the oil and non-oil sector expected to grow by 8.5% YoY and 1.8% YoY respectively.
• Capital flows to succumb to push and pull factors. Capital importation for Q1 18 printed at $6.3 billion (+17% QoQ; +594% YoY), which is almost at par with Q3 14 levels (merely $240 million short). On a year-on-year basis, we witnessed a significant expansion across all lines on the back of the low base of last year (Q1 17: $900 million). In line with historical trend, robust capital importation was largely driven by a surge in portfolio flows (+31.3% QoQ to $4.6 billion) which contributed circa 72% of the total flow into the economy. Breakdown provided revealed that the sharp jump in FPI was on the back of strong flows to money market (61.9% QoQ to $3.5 billion) which largely neutered the decline in flows to equity market (-29.1% QoQ to $700 million).
• Going into the rest of the year, the duo of policy normalisation in advanced markets and election uncertainties in Nigeria could potentially create foreign investors’ aversion towards naira assets and, by extension, reduce capital importation into Nigeria. Already in May, we saw some pressure at the IEW largely due to a slowdown in Foreign Portfolio Inflow with the equities market returning -7.7% MoM while average yields in the fixed income market expanded 31bps MoM in May.

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