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NSR H1 2020 Excerpts - Balance of Payment - Edge of the Cliff

• In this afternoon’s cut-out of our core strategy document – The Nigeria Strategy Report, we focus on development in the domestic environment, highlighting our views on the Nigeria’s current and financial accounts position.

 

• Over the first three quarters of 2019, the current account balance recorded a total deficit of $9.2 billion compared to a $4.2 billion surplus recorded over similar period in 2018. This is the lowest point the current account balance has touched since 9M 2015 at -$13.4 billion. The deterioration largely reflects the surge in non-oil imports and services deficit which offset the dip in the income deficit and rise in current transfers. On capital importation, coming into the second half of the year, we highlighted our concerns of thinner carry trade opportunities in the Nigerian market, relative to some other emerging markets (EM). In line with our expectations, we did see a slowdown in the pace of capital inflows over the second half of the year. Over Q3 19, capital flows dropped 11% QoQ to $5.4 billion. However, total capital importation over 9M 19 ($20 billion) still printed higher than corresponding period in 2018 ($15 billion), thanks to the record-high flows which came in Q1 19. Overall, the aforementioned increased pressure on the foreign reserves which dropped by $4.5 billion YoY to $38.5 billion over FY 2019.

 

• We envisage an increase in the current account deficits going into 2020. Our forecast is hinged on our expectations of lower oil prices going into the year as well as the strengthening domestic purchasing power greased by the CBN’s expansionary policies which could increase pressure on imports and services deficit. Overall, we see all the quarters in 2020 closing in deficits with a FY total of $16.9 billion, compared to our 2019E of $11.6 billion. On capital flows, there is some uncertainty on the direction for flows over 2020. However, foreign investors’ concerns regarding the steep declines in the FX reserves and valuation of the naira,  as well as direction of the CBN’s unorthodox policies (which has resulted in lower liquidity in the OMO market) are likely to outweigh any positives which hover around the relatively stable yields on OMO rates and cheap equity valuations.