July 9, 2018/InvestmentOne Report
While the agreement by OPEC & non-OPEC allies to loosen supply caps in H2 2018 could put downward pressure on oil prices, we expect only a slight decline from current levels (US$79.44 per barrel). With this said, we see the relative stability in oil production levels despite the temporary shut-in at the Trans-Forcados facility aiding GDP growth in Q2 2018. On the other hand, weak consumer spending could be encouraged by the recently signed budget by the President thus supporting the growth in the non-oil sector in the near term.
We could see FAAC disbursements significantly above the widely mooted self-sustainability quota of NGN709billion in the coming months on the back of the recent rise in Brent oil prices as well as the seasonal jump in tax revenues in June/July. The potential rise in revenues and the recent refinancing of local debt should see the nation’s debt service to revenue ratio trend south.
We should see headline inflation maintain its downward trajectory for the coming months, on the back of the high base effect of H1 2017, relative stability in the local currency and the administrations continued efforts to increase the availability of petroleum products. However, we could see upward pressure on consumer prices in H2 2018 as the benefits of the base effect fades, implementation of the 2018 budget, increase in national minimum wage and election spending.
Despite the pressures on the local currency in recent months, we expect the accretion to foreign exchange reserves over the last 12months (up 57% y/y to US$47.62billion), potential for offshore borrowings to finance the 2018 budget deficit, stability in oil production and higher oil prices (y/y) to provide the CBN enough ammunition to support the Naira at both the parallel market and the IEFX window. Nonetheless, we could see demand pressures increase in H2 2018 due to capital flight on the possible increase in political risk as we move closer to the 2019 elections.
Despite the intention of the monetary authority to reduce the benchmark interest rate as headline inflation moves closer to its single digits target, the authority may have to consider the implication of the recent hike in rate by the US FED (to 2.00% from 1.75%) on the country’s economy. Therefore, the ability of the Monetary Policy Committee to reduce rate may be limited given the more hawkish stance of the US FED with the possibility of two more hikes before the end of the year. On the other hand, we believe the opportunities to cut the MPR may be slim post July 2018 given the potential for headline Inflation to trend upwards.
In the absence of positive news flow, we could see the equities market remain somewhat volatile. The lackluster performance witnessed in May 2018 could spill over into Q3 2018, which is usually the slowest quarter of the year in regards to activity levels as portfolio managers break for the summer. However, we point out the recent sell-off, which has restored attractive upsides on our top picks, presents a decent entry opportunity for investors with a medium to longer term horizon.