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NIGERIA MAY ECONOMIC REPORT - Market blues cloud May picture

The month of May brought contrasting perspectives of how the Nigerian economy has fared recently. Capital inflows for the Q1’18 period came in strong at $6.3 billion, supported by an improving economic outlook and stable foreign exchange market. In contrast, economic growth in the same period was tepid – recorded at 2.0% y/y vs 2.1% y/y in the previous quarter – weighed by weakness in key sectors such as agriculture and trade. More positively, annual inflation continued its downward trend, falling from 13.3% y/y in March to 12.5% y/y in April as base effects continued to support disinflation. Despite moderating inflation and weak growth, the Monetary Policy Committee (MPC) eschewed a rate cut at their May meeting amid fears of inflationary pressures from sizable fiscal injections in the second half of the year, particularly with the 2018 Budget remaining unpassed at the start of June. Finally, purchasing managers’ index readings showed another economic expansion in May, albeit at a slightly slower pace.                                                                               

The Nigerian equity market shed 8% in May as it slumped into negative territory for the year (ytd return: -0.4%) amid a 12% m/m dip in market turnover to ₦4.7 billion. There was widespread bearish sentiment in the market through the month as foreign investors applied sell pressure even as domestic institutional players remain cautious. In the fixed income market, the yield curve shifted c.60bps higher as market sentiment also turned bearish. The upward trend in yields was partly driven by the Central Bank of Nigeria decision to hold interest rates at their May meeting and body language which suggests that a rate cut may not happen till after the 2019 elections. Compounding the dim outlook, Nigeria’s economic prospects for the year have been slightly dampened amid sluggish growth in non-oil sectors of the economy. With election season also imminent, the short-term outlook compels caution in the market, and May could be the first of many months of little joy for the markets.