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Nigeria H2'18 Outlook - In the shadow of the polls

The Nigerian economy did not fare as well as expected in the first half of 2018 (Q1’18 GDP growth: 2.0% y/y vs. Vetiva and Consensus forecasts of 3.4% y/y and 2.6% y/y, respectively). The dimmer picture begins with the oil sector as infrastructure integrity issues prevent Nigeria from producing at capacity whilst oil prices are expected to trend slightly lower in H2’18 on the back of rising output. We expect to see some policy support from the recently passed 2018 Budget (20th of June), though the imminent 2019 elections may complicate its effect. Indeed, we expect elections to dominate near-term activities, with election spending boosting the economy through government and consumer spending, but also inducing greater inflationary pressure. The latter effect underpins our view that monetary policy status quo will persist until the elections. Impending elections are also likely to induce greater economic uncertainty and distract policy and governance at the tail-end of the year, neither of which is positive for confidence or investment. In terms of electoral activities, we do not anticipate any unusual changes to peace and stability, even as we expect militant activity to increase ahead of the 2019 polls.                                                                        

Despite an improving macroeconomic environment and a semblance of policy stability, Nigeria’s financial markets would likely be steered by the fallout of electoral activities and rising global interest rates. The equity market has been hit by pre-election jitters, with foreign investors moving to the sidelines, and is expected to perform tepidly in H2’18. Comparable multiples with peers suggest the Nigerian equity market remains undervalued and we maintain a strongly positive post-election outlook on Nigerian equities. Meanwhile, as late budget passage, pre-election spending, and food price pressure induce higher inflation at year-end, we project a 100bps yield uptick in H2’18. Beyond 2018, the government’s shift from the domestic debt market, Nigeria’s potential re-inclusion into the JP Morgan Bond Index, and retreating inflation provide a case for longer-term yield moderation.