May 4, 2018/InvestmentOne Update
Recent surge in Brent oil prices to (above USD70/barrel) and stability in oil production levels at around 1.8mbpd (excl. condensates) should be supportive of oil sector performance. This combined with the resilience seen in business confidence, rising consumer demand and lower yield environment could be a positive for economic activities in the near term. Nevertheless, further delays in the passing of the budget could hinder its full implementation and its impact on GDP performance.
The gains from the oil sector and the tax developments should be supportive of government revenues in the near term. Moreover, the extension of the VAIDS deadline to June 2018 may lead to a further increase in the tax net as well as the revenue target set at N305 billion. This should further translate to a higher tax to GDP ratio from the current level of about 6% and the government’s spending capacity over the medium to longer term. Furthermore we believe tax revenues may see significant increments compared to last year on the back of growth in oil sector as well as tax initiatives. This may have been partly responsible for the 51% y/y rise in tax revenues in Q1 2018 to N1.17 trillion. While we expect the budget to be passed in May 2018 given the recent trends, we highlight the delays in the passage of the budget as a concern, particularly its effects on the capital expenditure plans, which constitute about 28% of the 2018 budget.
Given our view of a stable NGN/USD rate and the administrationâs increased efforts to improve the availability of petroleum products nationwide, we see headline inflation continue to slow in the near term. Consequently, we could see the increase in consumer prices fall to 12.50% y/y for the month of April 2018 before proceeding to 11.40% y/y for the month of May 2018.
With the bullish sentiment in the global oil market and domestic oil production levels remaining stable at 1.8million barrels per day, we expect the nation’s reserves to continue to increase. Accretion to reserves should also see support from the recent USD2.4billion currency swap with China, aimed at reducing the use of USD in bilateral trade and offshore financing of the N2trillion deficit in the proposed 2018 budget. Strengthening of the country’s FX reserves should be supportive of CBN’s FX policy and foreign investor confidence. Nonetheless, we highlight the possible increase in US Shale production and its negative impact on Brent oil prices could pose a downside risk while the much discussed re-inclusion of Nigerian Government bonds in the J.P. Morgan GBI-EM Index could be a positive for foreign currency inflows.
While the headline inflation for April is like to print around 12.50%, we are of the view the Monetary policy is more likely to reduce the Monetary Policy Rate in July 2018 by as much as 100bps to 13.00%. However, given the recent moderation in yields in the secondary fixed income market and the need to offer real returns despite inflation moderating, we could are unlikely to see a significant decline in yields in the near term. As a result, we expect CBN to continue to issue 245-day OMO bills at stop rates around 12% levels (13.20% equivalent yield). With this said, we re-iterate that the possible re-inclusion of Nigerian Government bonds in the J.P. Morgan GBI-EM could be a positive for yield contraction.
We could see the equities market remain volatile in the near term. Despite the recent moderation in yields in the fixed income market. Our view is premised on the absence of positive news flow to drive the All Share Index’s performance. While investor focus could be on the 2019 elections, we point out the potential implementation of the updated PFA investment guidelines, re-inclusion of Nigerian Government bonds in the J.P. Morgan GB-EMI and the much discussed IPO of MTN Nigeria as possible catalyst for the equities markets performance in the medium term.