January 27, 2023/CSL Research

Last week, we published our expectations for the economy and financial markets for 2023. The past few years have been particularly difficult for the country, characterised by systemic failures in governance, widespread insecurity, and slow economic growth punctuated by two recessions. In our view, 2023 is a critical year for Nigeria.

Two events that we believe will be game changers are the choice of leadership and the commencement of the Dangote refinery. On the political front, Nigerians will again head for the polls in February. While our core view is that the 2023 election will be held without extensive violence, we do not eliminate the possibility of pockets of violence post elections.

Major decisions around subsidies, fiscal responsibility, and FX liberalisation must be taken to avert an economic collapse. Nigeria’s hope of attaining self-sufficiency in the local domestic oil refining space might just rest largely on the operations of the Dangote refinery.

The refinery, which has one of the largest production capacities in the world, operating at full capacity would more than meet Nigeria’s domestic fuel requirements with excess capacity for export and we expect a positive impact on foreign exchange supply. While we note that achieving self-sufficiency in local refining capacity might not reduce the cost of petrol significantly, it would at least boost the availability of the product and bring a lasting end to the persistent issue of fuel scarcity in the country.

For the economy, we forecast GDP growth of 3.1% driven by both the oil and non-oil sector as we expect a reversal in the fortunes of the oil sector. We forecast production will reach 1.6mbpd in 2023 and oil price will average US$85/bbl. Headwinds to the Naira will likely persist as foreign inflows remain uninspiring, and demand pressure remains heightened. We expect the exchange rate at the I&E window to depreciate to N510.00/US$ and the wide
parallel market premium to persist.

The CBN joined the hawkish parade in 2022, hiking the policy rate by 500bps to 16.5%. In 2023, we believe the CBN will maintain its rate hike stance in H1, though at a slower pace and will likely keep rate constant in the second half of the year. In 2023, we project inflation to moderate by 71bps to 18.20%, aided largely by base effect, especially in H2-2023. Nevertheless, we still expect some price triggers from electricity tariff hikes, PMS price adjustment, persistent currency pressure and climate-related shocks.

Foreign investors have in the past few years shown apathy towards Nigerian equities and we do not expect any significant comeback this year, at least until FX concerns are addressed directly, or indirectly through positive news like commencement of operations at the Dangote refinery. Activities at the Nigerian equities market remain dominated by institutional investors with 72% (56% local institutions and 16% foreign) share of transaction value as at November 2022.

While transaction volumes from local institutional investors are expected to remain resolute, we expect a sizeable portion of investments to go to the fixed income market. Though still real negative, fixed income rates are expected to rise and will not be ignored by investors. That said, we believe the valuations of many stocks remain very attractive. Within our coverage universe, we have Buy ratings on FBNH, UBA, Access,Zenith, Guaranty Trust Bank, Dangote Cement, MTNN, Cadbury and Okomu.