Nigeria H2'19 Outlook - Feeble feet on thorny grounds

Nigeria H2'19 Outlook - Feeble feet on thorny grounds                                                   

Narrow opportunity window amid easing global monetary conditions: A sense of urgency is required for Nigeria to derive optimal benefits from the sudden increase in global liquidity conditions occasioned by the switch to accommodative monetary policy by central banks in developed markets. IMF projections indicate, that global GDP growth could ease to 3.3% for FY’19 due to weaker growth in the U.S. and the Euro Area but return to 2018 levels of 3.6% by FY’20 from stronger growth in EMDEs and SSA. Nigeria would do well to use this narrow window to conclude its budget funding plans for 2019 to attract relatively lower cost funding for much needed capital expenditure. Though growth in budgeted spending has been skewed in favour of capital investments over the past few years, actual spending has not reflected this given sustained inconsistent CAPEX implementation; average CAPEX implementation at 65% vs 94% for recurrent spend in the past four years.                              

Nigeria’s fiscal realities remain dire: With the trend in higher government spending in the past few years delivering limited economic benefits but successfully weakening Nigeria’s fiscal position, the government’s fiscal strategy in the coming years is highly critical to navigate the thorny terrain. Notably, while higher than budgeted oil prices will support oil revenues in 2019, this remains insufficient in offsetting the underperformance in budgeted oil production. Though Nigeria’s drive to diversify revenue sources has seen the FG budget higher Non-oil revenues every year, actual performance shows only a modest ramp-up in non-oil revenues amid sustained weakness in tax revenue. Meanwhile, Nigeria’s recurrent expenditure continues to rise at a faster pace than capex, with the disparity expected to widen following the higher minimum wage implementation. Overall, given that high debt servicing costs is a key risk to Nigeria’s debt sustainability, managing Nigeria’s feeble fiscal structure remains paramount to ensuring stability.                                                       

Fixed income to persist as investors' toast: In H1’19, foreign portfolio investments favored Nigeria’s the fixed income market, with apathy for Nigerian equities due to the less than impressive economic growth outlook. That said, central banks in developed markets (U.S., EU and the UK) have drifted further away from monetary policy normalization to refocus their policy thrust on easing financial conditions to spur economic growth. We believe that the bulk of FPI flows will remain in fixed income markets given our expectations of continued investor apathy for Nigerian equities. We also believe that the relatively depressed valuation of the Nigerian equity market compared to other emerging and frontier markets will bring some respite for Nigerian equites in H2’19. Our market return projection is a base case of -13% (bull case: -8%, bear case: -18%).