April 5, 2018/InvestmentOne Report
In the near term, we expect activities in the oil sector to continue to have a strong influence on the nation’s GDP performance given the on-going improvement in production levels and the stability in Brent oil price. 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 and 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 country’s debt service to revenue ratio towards the c.31% target set in the proposed 2018 budget. Although, this should be a positive for the government’s spending capacity, the delay in passing of the 2018 budget is still a concern while the US Federal Reserves rate hikes could pressure the cost of offshore borrowing.
The stability of the Naira and the benefits of the high base effect of H1 2017, 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 in H2 2018. Furthermore, lingering scarcity of PMS could also be a negative for our outlook.
The country’s FX reserves should continue to trend upward on the back of rising domestic oil production and global oil demand. While the strengthening of the nation’s external position should be a positive for investor confidence and consequently capital importation, 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. Although the timing of the passing of the proposed 2018 budget remains uncertain, plans to borrow offshore to part finance the N2trillion deficit and the possible re-inclusion of Nigeria in the JP Morgan GBI-EM Index could see FX reserves rise beyond our US$50billion outlook for Q2 2018.
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 in H2 2018. As such, we see scope for only a 100basis point decrease in yields in the fixed income space, majority of which may be on short dated instruments. Nonetheless, we highlight a faster than expected hike in interest rates by the US Federal Reserve remains a downside risk while the potential re-inclusion of Nigeria in the JP Morgan GBI-EM Index poses an upside risk.
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. With this said, the much discussed IPO of MTN Nigeria as well as the possible re-inclusion of Nigeria in the JP Morgan GBI-EM index could be a positive for foreign investor sentiment, participation and consequently the NSE-ASI performance in Q2 2018.