October 15, 2018/Cordros Report
In our H2-2018 outlook report, we had projected FY-2017 GDP growth at 2.63% y/y, anchored on the fact that businesses will remain uncompetitive due to the absence of meaningful reforms and lack of positive policy implementation to drive sturdy non-oil GDP growth. In this report, we cut our growth estimate for FY-2018 to 1.9% y/y, driven by slower-than-previously expected oil sector growth, flood-induced cutback in Agriculture output, and the absence of structural reforms to propel sturdy manufacturing sector growth even as the FX market remains stable.
Meanwhile, inflation resumed uptick in August (+9bps to 11.23% y/y), as the impact of base effect induced gains waned. Notably, amidst sustained FX stability, the renewed pressure stemmed from food inflation which jumped 31bps to 13.16% y/y, while core inflation (-17bps to 10.02% y/y) sustained its deceleration, driven by stable energy and electricity prices. With the gains from base effect already dissipated, together with our expected higher m/m inflation over Q4-18 compared to 2017, we expect the year-on-year headline CPI to sustain upward trajectory through the rest of the year. We now look for headline CPI of 11.54% y/y in September and 12.71% in December (FY-2018 average: 12.37% y/y).
On currency, as foreign sell-off of naira assets continues into Q3-2018, with consequent increased demand for FX at the I&E window, the CBN stepped up its intervention across its different FX windows. Against that backdrop, FX reserve depleted by USD3.48 billion over Q3 (Q2-2018: USD1.5 billion increase), leaving the naira within our projected band of NGN353-NGN365/USD and NGN363-NGN368/USD at the I&E and parallel markets. going forward, we expect the elevated dollar sale by CBN to persist on the back of sustained pent-up FX demand occasioned by continued offshore sell-offs. In any case, with our views of sturdy CBN inflow (driven by higher crude oil price and prospects of USD2.8 billion Eurobond), combined with strong FX reserves (USD43.9 billion), we believe the CBN has more than enough legroom to keep the naira at current level through the rest of the year.