March 6, 2018/InvestmentOne Research
In the near term, we expect activities in the oil sector to continue to have a strong influence on the nationâs GDP performance given the on-going improvement in production levels and the stability in Brent oil price (averaged US$65.73/barrel in February). This combined with the recent rebound in consumer demand should be a positive for economic activities going forward.
Gains from the oil sector and the Voluntary Income Asset Declaration Scheme should continue to be supportive of government revenues in the near term. Furthermore, with the administration commencing the refinancing of local debt, we could start to see a reduction in the countryâs debt service to revenue ratio towards the c.31% target set in the proposed 2018. Although, this should be a positive for the government’s spending capacity, the delay in passing of the N8.6trillion 2018 budget is still a concern, especially with the negative impact it may have on economic activities and the likelihood of higher cost of offshore borrowing on the back of expected US Fed rate hikes.
The country’s FX reserves, up +4.08% m/m in February and +9.23% year to date to US$42.35billion (30-day moving average), should continue to trend upward on the back of the US2.5billion Eurobond issuance, rising domestic oil production and global oil demand. While the strengthening of the nationâs external position should be a positive for investor confidence and consequently capital importation (surged +138.65% y/y to US$12.22billion in full year 2017), we could see a moderation going forward on the back of concerns regarding 2019 elections and the potential for heightened political risk. Nonetheless, we expect the strengthening of FX reserves to absorb likely demand pressures from foreign investor outflows in H2 2018 resulting in a fairly stable local currency.
The stability of the Naira and the benefits of the high base effect of H1 2017, as a result of the surge in food prices, should bode well for a further moderation in headline inflation in 2018. However, we highlight that the majority of this may take place in H1 2018 as election spending and the possible increase in the national minimum wage in Q3 2018, could pressure consumer prices. Furthermore, lingering scarcity of PMS could also be a negative for our outlook.
The slide in headline inflation could lead to the CBN shifting to a more accommodative monetary policy. While this and the refinancing of local debt with offshore borrowings portends to a decline in yields in the fixed income space, we highlight the need to continue to maintain foreign investor inflows in defense of the Naira. This may limit the potential moderation in yields in the fixed income space particularly with the possibility of increased political risk. As such, we see scope for only a c.100basis point decrease in yields in the fixed income space, majority of which may be on short dated instruments. Nonetheless, we point out that the inability for the Monetary Policy Committee to form a quorum could cloud policy direction as well as dampen foreign investor interest in naira denominated assets.
Although the decline in yield in the fixed income market should be a positive for equities market, we expect the Nigerian Stock Exchange to retrace post earnings season, in the absence of a positive catalyst, as focus shift towards 2019 elections.