July 19, 2022/CSL Research
Except for our outlook on inflation, our main views on the macroeconomy from the start of the year have played out. In our 2022 outlook, we argued that the risk of FX depreciation will likely persist due to capital reversal from emerging markets (EMs) and frontier markets (FMs), necessitating a rate hike by the CBN to reduce the risk of capital flight. This has largely played out, with the CBN increasing rates by 150bps at its May MPC meeting, albeit higher and earlier than we expected. We forecast another 100bps rate hike before year end as inflation continues to rise. Average treasury bill yields were down in Q1 2022 but began to rise in Q2 2022 as investors priced in inflationary pressure. We expect a modest expansion in yields in H2 and forecast yield on 365-day Treasury bills to reach 9.5% by the end of the year.
Looking ahead, we are increasingly skeptical that the CBN will allow the rate at the I&E window to depreciate towards our initial NGN455.00/US$ target for the end of the year. We have therefore altered our end-2022 forecast to NGN435/US$, implying relative stability. Fundamental market pressures are clearly turning depreciatory and are likely to remain so over the remainder of the year amid declining investment inflows and fiscal expansion. However, the rate is clearly being heavily managed by the CBN. As such, the rate for the rest of the year depends more on the CBN’s willingness and ability to maintain it at its current level than on fundamental or valuation pressures.
We retain our 2022e real GDP growth forecast at 2.8%, despite a better than expected turn out in Q1 2022. Nigeria’s Gross Domestic Product (GDP) grew by 3.11% y/y in real terms in the first quarter of 2022 (Q1 2022), sustaining growth for the sixth consecutive quarter since the recession in 2020. However, looking ahead, we expect decreasing oil production due to previous underinvestment and theft to continue to cap export growth. Security concerns affecting food production, rising inflation, and increasing funding cost and a focus on election activities, are also expected to restrict output growth in H2. Global oil prices have remained elevated due to supply constraints in the market amidst below quota production by OPEC+. We forecast oil prices will average US$90/bbl. in H2.
Inflation has grown more rapidly than we were expecting since the outbreak of the conflict between Russia and Ukraine and its impact on commodity prices such as oil and gas, fertilizer, wheat, corn, and barley. In June 2022, the headline inflation rate increased to 18.6% y/y, the highest since February 2017. We expect inflation to continue to rise in H2 2022 as the major drivers of food and core inflation remain. Overall, we expect headline inflation to average 20.67% in H2 compared with 16.72% in H1 and we expect headline inflation to close the year at 20.97% in December 2022.
The revised government expenditure for 2022 was estimated at an all-time high of N17.31 trillion. Revenue projected at N9.96 trillion will likely underperform estimate. The fiscal deficit has surpassed the target by an average of c.65% over the last 5 years due to ambitious revenue estimates and volatile crude oil prices. We project oil revenue will significantly fall short of target. We expect Increased borrowings on the domestic market either though additional bonds or Ways and Means to finance the larger shortfall.
Activities around bellwether stocks will likely lead to a positive close
We began 2022 noting that save for expectations of corporate actions and positive news around the heavy weighted stocks on the exchange, which could drive activities in the stock market, the narrative for 2022, appeared largely negative. This has played out in the first half of the year, as the current positive ytd return has been driven mainly by corporate actions and announcements around bellwether stocks and we believe these will continue to drive activities in the second half of the year.
Foreign investors remained apathetic towards Nigerian equities in H1, and we believe this sentiment will worsen in H2 given more uncertainties as the election draws closer and the worsening FX liquidity situation. Repatriation of funds has been difficult for FPIs in the last two years and the situation appears set to worsen in H2. We believe favourable FX outlook and clarity on FX repatriation policy, both of which appear far-fetched in 2022 remain major catalysts for FPIs to return to the market.
We believe the valuations of many stocks remain very attractive. Within our coverage universe, we have Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, Lafarge Africa, MTNN, and Nigerian Breweries. Essentially, we believe current valuations present attractive entry opportunities.
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