March 17, 2020/Cordros Report

In line with our expectation, headline inflation rose by 7bps to 12.20% y/y (Cordros’ est.: 12.30% y/y) in February. We attribute the uptick to the unfavourable base from the corresponding period of last year. We recall that lower energy prices, especially in H1-19, had driven focal temperance across both the food and the core basket.

Though in line with our expectations, the magnitude of the price increase was somewhat slower than our initial thoughts. Pointedly, the headline month-on-month number moderated by 8bps, the first slower pace of price growth witnessed since the announcement of the closure of the land border in August 2019. The key takeaway for us is that the initial reaction from border closure-induced price hikes appears to have dissipated. To underscore the preceding, the headline month-on-month print of 0.79% was 41bps below the five-year historical average for the month of February, supporting the view that the impact of tighter market supply, occasioned by the border closure, has thinned out.

Short-Term Outlook

For March, softer price increase expectations from robust market supply underpins our slower food inflation forecast (-4bps to 0.83% m/m). Elsewhere, the recent naira weaknesses are not expected to bleed over to either the core or food basket in the short term as the CBN continues its aggressive supply of FX for eligible imports across its different strata of FX windows. Thus, core inflation is expected to print 0.71% m/m, a 2bps lower than the previous months. Tying it all together, headline inflation is expected to print 1.79%, cascading to 12.20% y/y.

Medium-Term Outlook

For the next few months, the recent precipitous decline in crude oil prices, which now questions the CBN’s ability to keep the naira range-bound, poses a fresh upside risk to both the core and food baskets, and by extension, the headline inflation. We expect the CBN to explore all available options, including ‘gun-boat’ tactics, to defend the currency. However, we believe that the lack of substantial fiscal buffers and foreign investors continued aversion towards naira assets, will eventually force the CBN to reprice the currency should oil price sustain its downward spiral.

Assuming, the border remains shut through 2020 and the proposed electricity price hike is implemented in April, we expect inflation to hit 15.89% in December, and average 13.21% over 2020FY. However, currency devaluation is now the key upside risk to our forecast. On our estimates, a 10% devaluation will move the naira closer to its fair value.

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