EUR 3.48 For Business Accounts Only

Nigeria Strategy Report H1 2018 Excerpts - Balance of Payment: Visibly losing size but gaining weight

• We expect a slower growth in exports to shrink the CA balance to 2.75% of GDP in 2018 (2017: 3.6%). Elsewhere, a confluence of pull and push factors is expected to cause a slight moderation in the financial account. Overall, our expectation for a decline in both the current account and financial account implies a downside to the country’s balance of payment, albeit benign.
• Nigeria’s current account (CA) surplus expanded to $2.3 billion in the third quarter ($1.2 billion in Q2 17), the ‘bluest ink’ in the overall current account in four quarters. There are a few factors that have acted to push the surplus higher in recent quarters. First, the increase in trade surplus, which was largely in a deficit between Q3 2015 and Q3 2016 due to collapse in crude oil production and prices, has recovered this year as oil prices have rebounded from their multi-year lows in early 2016 and more importantly, crude oil production has recovered sizably. In addition, Nigeria received far more transfer payments in the third quarter and made less transfer payments abroad. The deficit in the services balance has trended higher in recent quarters, but not enough to prevent the overall current account surplus from expanding.
• Capital flows to Nigeria extended its solid growth into a second successive quarter in Q3 17, with combined flows of $4.1 billion over the quarter being $2.4 billion and $2.3 billion higher QoQ and YoY respectively. The strong capital flow emerged from portfolio flows which stood at $2.8 billion ($2 billion higher QoQ), even as ‘other investment’ sustained up its expansion, rising $513 million QoQ to $1.3 billion largely on account of loans.
• Going into next year, we believe the combination of higher crude oil prices and production provide some cheers for oil export outlook. This brings our outlook for exports to be $47.3 billion (+10% YoY). For import, whilst continued FX liquidity should leave increased importation of manufacturing products largely intact, sustained reduction in the importation of petroleum products and raw materials should moderate the impact. We therefore expect import to expand at a faster rate of 15% YoY to $37.3 billion. Consequently, we look for trade surplus of $10.19 billion in 2018 (FY 17E: $10.7 billion).  Overlaying the implied  trade surplus with our expectation of services and income deficits as well as our target for net current transfer, we expect the country’s current account to print at $6.3 billion (FY 17E: $8.1 billion).
• In framing our outlook for financial account (capital flows), we think the confluence of pull and push factors suggest a moderation in capital flows. Though more central banks are likely to pursue monetary tightening, stronger global growth and persisting low yields in advanced markets implies demand for EM risk assets will likely remain over 2018. On the domestic front, in the light of an emerging lower yield environment as well as heightening political risk ahead of the 2019 election, we think flows to short-term debt instrument as well as bonds will likely cool off in coming quarters. On equities, while valuations remain attractive relative to peers especially in the light of the naira depreciation, the temptation to take profits ahead of the elections might prove too strong to resist for foreign investors in the second half of 2018. Throwing in prospects of tamer oil prices in the second half of 2018, we see bearish influences on NGN assets as raising scope for outflows and accordingly estimate capital flows to be $6 billion for the year (down 39% YoY). On balance, we expect the financial account to print at a lower level relative to prior year.
• Overall, our expectation for a decline in both the current account and financial account implies a downside to the country’s balance of payment, albeit benign.