EUR 4.00 For Business Accounts Only

NSR H1 2021 Excerpts - Nigeria Inflation - Sailing in the sky

Nigeria Strategy Report – H1 2021 Excerpts

Domestic Economy and Markets

• In this report, we focus on the major themes that steered consumer prices over H2 20 and delineate our outlook for inflation over FY 2021.
• In our H2 2020 NSR, we projected a northward trend in inflation hinged on the implementation of several policies by the government’s arms in order to combat the adverse impact of the pandemic on the economy. Precisely, we expected the twin impact of currency devaluation and the hike in transportation cost to push inflation upwards. In addition, we anticipated an underwhelming harvest owing to NIMET’s forecast of a dry spell season and lower level of agricultural activities due to the lockdown implemented between the land preparation and planting season. While these factors came to fruition, the pressure on food prices was further aggravated by the flooding experienced in key Northern states in the latter part of the year. Elsewhere, due to the deregulation of the downstream sector, PMS price saw a twin hike in H2 20, reflecting gradual recovery in global crude oil price. Furthermore, electricity tariff was increased by an average of 108% from N25.2/kwh to N52.4/kwh on average. Consequently, headline inflation rose 146bps to 13.78%  YoY over the second half of 2020 (H1 20: 12.31%) propelled by increases in both food and core basket.
• In setting our views, we analyze possible shocks to the CPI - highlighting our expectation on the market-determined PMS prices, currency and reopening of the land border. For starters, we believe PMS prices will remain a stoking influence on inflation in 2021, due to the deregulation of the downstream sector. Precisely, we estimate PMS prices to fall within the range of N168 – N176/litre on average for FY 2021 (2020: N146.1/litre). Overall, we employed two scenarios in our forecast for FY 2021. On the first scenario, our assumption of the reopening of the land border on the 31st December 2020, the interplay of seasonal factors, uptick in PMS prices due to the deregulation of the downstream sector and hike in electricity tariff which kicked in September 2020, informs a mean inflation rate of 17% YoY (FY 20E:13.2%) and 1.21% MoM which is our base case. Towards the latter part of the year, we expect to see some decline in inflation rate owing to the impact of the high base effect from the prior year. On the downside, a higher than anticipated hike in PMS prices and further devaluation in currency should aggravate inflationary pressures over 2021. This informs our projection of an uptick in inflation rate over 2021 to 18.5% YoY and 1.49% MoM, which is our bear case scenario.