July 20, 2023/FBNQuest
Fast-paced start with bold economic reforms
President Bola Tinubu has assumed office with a commitment to driving economic growth. His administration implemented transformative changes immediately. Fuel subsidies were eliminated to confront fiscal challenges. Simultaneously, sweeping reforms revamped the foreign exchange (fx) market, uniting fragmented market segments, eliminating trading restrictions, and bridging the gaping chasm between the official and parallel market rates. These actions aim to attract investments and stimulate economic growth. We are optimistic that the policy reforms investors have embraced will steer the nation towards a positive growth trajectory and lay the foundation for sustainable growth.
Ambitious growth targets likely to be tempered by headwinds to consumer spending
The administration has set a target of 6% average GDP growth over the next four years. However, the target has challenges. Rapidly rising consumer prices contribute to a contraction in household consumption and a drag on economic activity. Reduced consumer spending could also result in a slowdown in private investment in the near term. Consequently, achieving the ambitious target seems doubtful. Considering the constraints to consumer spending, we anticipate growth of 2.9% in 2023 and rising to an average of between 3.5% to 5% over 2024-27F.
FX supply deficit driving exchange rate volatility
Despite the CBN’s floating of the naira, a large supply deficit remains in the fx market. Therefore, we expect substantial volatility in the naira exchange rate, at least in the near term. Also, we do not see an increase in liquidity from foreign portfolio investors as they will likely remain on the sidelines until they can repatriate a substantial proportion of their trapped fx funds, estimated at roughly USD3bn. In this context, we see an end-year rate of NGN825/USD.
Likely pause in MPC’s rate hikes: inflation to remain elevated
We expect the MPC to pause its rate hike cycle at its Jul ’23 meeting to assess the effectiveness of prior rate hikes. Therefore, we see the policy rate unchanged at 18.5%. However, monetary policy will remain tight. We expect a year-end inflation rate of c. 28.2%.
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