February 4, 2016/Cordros Research

GLOBAL

Growth – A Weak Recovery

Generally, the 2016 global economic recovery was modest. The IMF’s forecast was for 10bps growth contraction to 3.1%, before a modest recovery to 3.4% in 2017. Undoubtedly, the unanticipated results of the US Presidential election in the second half of 2016, and the on-going Brexit effects, clearly magnify the uncertainty about global outlook ahead of 2017.

Markets – The Bulls on the Run

Activities were predominantly bullish across markets in 2016, despite a disappointing start to the year. With the exception of the CSI 300, stock indices closed higher across our universe of coverage; buying momentum was generally stronger in the second half than the first half.

NIGERIA

Growth – After the Recession

In its most recent World Economic Outlook, the International Monetary Fund (IMF) projected Nigeria’s economy to grow by 0.8% in 2017. Output growth from the oil sector will significantly support the recovery. Non-oil sector will also thrive on (1) the flow of improved oil revenue, (2) less disruptive impact of forex, (3) comparatively higher budgetary spending, (4) increasing private and government focus on agriculture, and (5) improvement in gas supply to manufacturing plants.

Fiscal Policy: 2017 – Another ‘Big’ Budget

Nigeria increased 2017 revenue budget by 28% and expenditure budget by 20% more than the 2016 budgets. The policy objective of the budget, a build up from 2016, is to revamp the economy from recession and set a path for steady growth. While the proposed spending programme is suitable for Nigeria’s economic condition, the concern is that the execution is premised on a seemingly ambitious funding target, which suggests to us that the risk of another under-implementation is looming.

Interest Rate – Time to Call it Quits?

We expect the MPR will be lowered by 100bps to 13.00%, from 14.00%, in 2017, with or without considerable improvement in foreign capital inflows. Our prognosis is hinged on the expected moderation in inflation rate, the anticipated rebound of GDP growth to the positive value, and the growing pressure from the business community.

Exchange Rate – Peg; Ok Float; No Peg

The political interference in the Nigeria’s forex policy cannot be over-emphasised and, indeed, blurs the visibility of the CBN’s forex policy direction. That said, fundamentally, it is noteworthy that compared to the last two years, the naira is poised to benefit from a stronger current account in 2017. While the optimal decision required of the CBN is the fundamental adjustment of the management of the exchange rate mechanism to reflect the reality of demand in the system, it is likely that the USD/NGN will trade within the tight range of N305-N305.25 for most of the 2017.

Inflation – The Veil of Base Effect

Our model estimates put the headline inflation at an average of 13.5% best case, and 15.6% bear case, respectively taking into consideration (1) base effects and (2) the risk of the emergence of structural shocks.

Equities: Underweight Equities – No Sign of Appreciation

We are underweight Nigerian equities for the third year in a row, given the weak prospect for improvement in the broader economy, especially the policy environment. Externally, there are concerns about tail risks revolving around world politics, a rising dollar, and higher interest rates in the U.S. On the scale, developments in the domestic economy are expected to have greater implication for risk assets over the year.

Fixed Income – Mixed Yield Patterns

Going forward, the expected moderation of the headline inflation rate and a less hawkish monetary policy, are indications of lower fixed income yields on the horizon. However, pending the second half where we expect inflation to reach a comfortably low level sufficient for the monetary authorities to keenly consider interest rate reduction, we expect the FGN’s activity in the debt market, in view of the potential sizeable domestic borrowing programme, to have upside impact on yields over H1-2017.