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FBNQuest Research 2016 Outlook: New administration, old challenges

​NIGERIA | INVESTMENT RESEARCH | 2016 OUTLOOK

25 January 2016

New administration, old challenges

• Familiar territory for the new order: The Buhari presidency and the APC secured a strong popular mandate in elections in March 2015, and enjoy widespread international goodwill. Their agenda is to diversify the economy away from oil and replace the rentier model. Previous administrations have gone down this road and abandoned the journey in the face of opposition from vested interests.

• Focus on the fiscal: The FGN seeks to achieve its agenda fiscally, and does not expect to be rescued by a marked recovery in the oil price. Its fiscal plans are expansionary to allow for higher capital spending, funded by sharply increased non-oil revenue collection. This will require sizeable efficiency gains, anti-fraud measures and the squeezing of unremitted dues from all taxpayers. We do not think the FGN is fiscally irresponsible, and expect it to trim spending in the event of revenue underperformance.

• An unexciting growth dividend this year: We see a pick-up in GDP growth to 4.5% in 2016 on the back of fiscal expansion and sector-specific reforms. Over time, household consumption will recover, leading to an acceleration in growth.

• Exchange rate to buckle under the pressure: Exchange-rate stability remains the objective of the CBN. Weak oil prices and therefore weak fx inflows point, however, to a devaluation in 2016.

• FGN paper for the brave: FGN bond yields are likely to drift higher due to expansionary fiscal policy. Active investors will prefer to trade the NTBs. We expect another year of losses in equities in 2016. Our year-end target is 25,780, implying a y/y decline of -10%. From current levels, given the extent of the sell-off ytd (-17%) we see upside potential of 8% to our year-end target.