June 29, 2021/Cordros Report
More than one year after the pandemic struck, the scars are yet to heal fully. Though administration of vaccines, and consequent phased reopening of economies, has helped rescue economies from the troughs in the prior year, divergence in the evolution of the pandemic and pre-existing macroeconomic frailties has made the path to recovery uneven. As a result, policymakers are confronted with the delicate task of navigating the recovery phase appropriately to ensure it transcends into a broad-based, inclusive and sustainable growth. We analysed the economy and financial market within this context and make recommendations for investments.
We are optimistic that low base effects, improved activities in the contact-facing sectors and recovery in the oil sector will sustain the recovery that kicked off in the last quarter of the prior year. Despite persistent security challenges in food-producing states, we expect headline inflation to moderate in H2-21 driven primarily by the high base effect. In addition, we see scope for improvement in liquidity conditions in the FX market given the knock-on effects of the rally in oil prices and the proposed Eurobond issuance on the FX reserves. We believe this will put the apex bank better positioned to step up its intervention across the various segment of the FX windows.
On monetary policy, we believe the body language of the MPC in the three meetings held so far this year suggests that its short-term objective is to support economic recovery despite the stubbornly high inflation and imbalances in the external sector. Consequently, we do not see the Committee tweaking any monetary policy parameters at its July and September meetings. However, we envisage a 50bps hike in the MPR at the November meeting as the MPC shifts to a tightening phase.
Finally, we do not envisage any significant divergence from historical trends in the spending pattern of the government. We believe a substantial revenue generated will be directed towards recurrent expenditure and debt servicing, while capital expenditure will be financed mainly by borrowings. However, we are slightly positive on non-oil revenue given the sustained implementation of the 50% increase in VAT that commenced last year, improvement in tax administration framework and the pass-through impact of the rebound in economic activities on non-oil revenue items.
Click here to read full PDF copy of report
