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Nigeria | Strategy Report | 2017H1 Review + 2017H2 Outlook

Executive Summary

Our January 2017 report was themed ‘getting off the mud puddle’. The theme was to capture our broad view on the strong likelihood of Nigeria exiting its first ever recession in 25 years. Also, the theme builds on the 2016 report, ‘stuck in the mud’.

Nigeria Q1 2017 GDP growth contracted by -0.50% from -1.50% in 2016. The benchmark rate remains at 14% while yields have risen. The equities market is back in positive territory (up 23.23% in H1). The government accessed international debt with strong interest in the euro bond issues. Both monetary and fiscal policies have been concerted to steer the economy back on to the path of growth. Local crude production has bounced back with a corresponding uptick in global prices which have help lift government revenues and the exernal reserve. These are indications that the economy is getting off the mud puddle. The CBN has increasingly become more vocal and active in its objective to keep liquidty tight in order to draw inflows into the markets with attractive rates, boost Dollar liquidty and ensure price stability. The IMF and World Bank still expect the economy to grow by 0.8% and 1% in 2017 respectively while the IMF raised its 2018 growth forecast to 1.9%.

But this positive development should not distract from key structural impediments to a stronger recovery of the economy. There are still downside risks. Lower crude earnings, high debt service-to-revenue ratio vs. the high debt levels and slow pace of infrasturcture development are risks in the medium term. On the monetary policy front, the Naira defence will continue to be the CBN’s core objective while inflation—which on a year-on-year basis has been moderating downward will take backstage. However, we have reviewed higher our 2017 average inflation forecast from 11.50% to 15% as food inflation has been rising at a much faster pace than we anticipated in the January report. Interest rate is expected to remain at 14% in the second half of the year as the CBN has long demoted this tool in its action plan to defend the Naira. However, a sharp drop in crude price below the $35bpd handle poses an upside risk to the benchmark rate.

We have a positive outlook on the financial market. On fixed income, yields should remain elevated as the CBN retains tight money policy to maintain/expand interest rate differentials between Nigerian debt assets and developed nation debt assets. On equities, we expect any rally in H2 to be more muted. We think the market would defend the returns recorded in H1. We believe the market has rightly priced in all the available positive information including the FX reform, recovery in crude production and capital flows. We are more constructive on the banking, industrials and selective in the consumer goods sector.