• Nigeria’s GDP growth is expected to be lower than 3% in 2023. The lower growth projection is driven by weak oil production volumes, high inflation which has weakened consumer demand and the FX depreciation. Already as at Q2, financial books of large corporates in the manufacturing sector have shown significant losses due to exchange rate depreciation. We expect this trend to continue for the rest of the year. Large corporates are also expected to devise strategies to cope with the exchange rate adjustments.

Inflation

• The removal of fuel subsidy drove up prices of food and other items. With oil price approaching US$100 pb, there is the possibility of further increase in petrol prices in Q3 and Q4. Alternatively, the government will have to re-introduce subsidies in order to prevent further increase in petrol price. This scenario is likely, although, the amount spent on subsidies is expected to remain far below what was obtainable in the previous administration. Other factors such as infrastructure deficit, supply chain bottlenecks, port charges, etc. are still evident and will continue to drive up prices in the medium term.

• Despite the exchange rate unification, FX inflows into Nigeria are lagging. On the other hand, the demand for foreign currency remains high thereby creating pressure on the exchange rate. In addition, limited access to FX in the official market (delays, backlogs, documentation requirements) are incentivizing players to purchase FX in the black market.
• On a positive note, the government removed the peg on the official exchange rate in June 2023. This suggests some level of commitment to exchange rate reforms. The President is also at the forefront of wooing investors with the Nigeria-India Business Summit as an example. To win back investor’s confidence, we believe that the government must intensify its efforts in curtailing oil theft in the short term and provide a clear roadmap to improve FX inflows and management in the medium to long term to assure top institutional investors. In the immediate term, we expect the Naira to continue to face pressure in the official market.

• The removal of fuel subsidies and FX reforms will improve government finances: The government has been the major beneficiary of these twin reforms of subsidy and FX. Inflow into the FAAC account has increased from about N800 billion monthly to over N1.7 trillion since the implementation of both reforms. This higher inflow will improve fiscal deficit and debt sustainability ratio in the short term. It could also slow down the pace of debt accumulation in Q3 and Q4 of 2023. In a scenario where subsidy returns, we believe the subsidy payments are likely to be lower than what was paid in the previous administration, especially as a significant part of the price burden has been transferred to households and businesses at fuel pumps. However, the return of subsidies will raise concerns from private sector players, particularly potential investors in the midstream oil and gas industry, and this could slow investment in the sector.
   
• Government effectiveness: How and what these fiscal gains will be spent on are major areas of concern. This is partly because the government has yet to embark on any major budget reform. Such reforms could begin in Q4, when the preparation of the 2024 budget will commence. With the significant growth in government revenue, a N30 trillion 2024 budget will not be surprising. However, we expect to see the prioritisation of capital projects in the budget and key sectors like education and health care.
   
• The high cost of governance remains a pending issue that needs to be resolved. With an average of 20.9% of actual FGN budget expenditures allocated to capital projects in the last two years, it is imperative for the new administration to prioritise budgetary reforms. The government must reduce the over-bloated cost of governance – particularly overheads and transfers – to ensure enough funds are available for infrastructure and other development purposes. In addition, there must be significant efforts to block leakages and ensure transparency of government finances in the new administration.

• For the first time since the rate hike began in May 2022, the CBN MPC, in July 2023, raised the MPR at a slower pace by 0.25 percentage points. Interestingly, looking at the voting patterns of the MPC members, 6 members voted to raise the MPR, while 5 members voted to hold the MPR. This suggests that more MPC members are tilting towards a hold, following the limited effectiveness of the MPR in curtailing inflation.
• With this and ahead of the MPC meeting in September 2023, we expect the MPC to either hold or raise rates by a smaller magnitude to 19%. We believe a raise is more likely.

A new CBN Governor is on the way

• With the nomination of Mr Yemi Cardoso as the new CBN Governor, investors and other stakeholders will look forward to how the CBN will be managed and repositioned to achieve key goals of price stability, exchange rate and financial stability. Key areas of interest will include the CBN Governor’s views towards interest rate management, exchange rate management, cryptocurrency, the true position of the reserves and the apex bank’s role in financing government (Ways & Means) and development financing.
• Currently, very little can be said about the proposed Governor’s position on these issues. However, we expect to see a pragmatic and engaging CBN Governor who will work to win the confidence of investors and other stakeholders.