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NSR H2 2019 Excerpts - Balance of Payment - Foot on the pedal

• At the start of the year, we had guided to moderation in Nigeria’s current account surplus in Q1 19 to $420 million as we estimated that lower crude oil price over the quarter will constrain the value of oil exports. While we projected a moderation in overall imports, driven by faster decline in oil imports, we stated the impact will be muted by the decline in export. In line with expectation, oil exports faltered over the quarter on the back of lower oil prices. However, a material jump in non-oil imports worsened the narrative with the current account balance returning to a deficit of $1.09 billion in Q1 19. On the financial account, capital flows into the country expanded faster than expected. Particularly, the US Fed tapered its aggressive stance, with guidance of multiple rate cuts over the year to mute the impact of unsettled trade agreements with China on the overall economic growth. The resultant effect saw foreign investors seek carry trade opportunities in emerging markets with capital flows into Nigeria over the first five months of the year reaching a record high of $12.6 billion.

• Going into the rest of the year, we project moderation in the current account surplus to $2.2 billion (FY 18 surplus of $5.3 billion) emanating from reduction in trade surplus, which more than outweighs expectation of better performance across other lines. For capital flows, we highlight two factors dominant to flows into the country over the year. First, a sustained dovish stance from the US Fed and secondly, the attractiveness of fixed income yields (OMO and Treasury bills) relative to other EM peers. While we believe inflows into the country will persevere, we think flows will however slow relative to H1 19 on the back of thinner carry trade opportunities. On asset classes, barring any near transformation that could trigger economic growth in the country, we expect foreign investors to remain biased, leaning towards short term instruments.