Worst Over, Slight Gains Anticipated in H2

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July 8, 2024/CSL Research

Except for our views on the exchange rate, our macroeconomic forecasts at the start of the year have tracked well. We believe that the Naira will not show significant appreciation in the official market in the latter half of the year, although we expect less volatility. Expectations of additional foreign exchange from the World Bank, coupled with plans to issue a dollar-denominated local bond, should arm the CBN with the FX needed to support the Naira during periods of heightened seasonal demand. Furthermore, the scaling up of operations at the Dangote refinery, which we expect to marginally reduce dollar demand for imports, should also offer some support. Consequently, for our base case, we expect the Naira/US dollar exchange rate to close 2024 at N1448.71/US$. However, cautious optimism around emerging market assets and the lack of sustained stability in the FX market are likely to limit foreign exchange inflows into the country. In a worst-case scenario, if the CBN is unable to source the required FX to support the currency, we foresee the Naira deteriorating to a low of N1670.71/US$.

Nigeria’s GDP grew by 2.98% y/y in real terms in Q1 2024. This growth rate was higher than the 2.31% recorded in the first quarter of 2023 due to the low base in that quarter but lower than the 3.46% growth rate in the fourth quarter of 2023. We have slightly reduced our forecast GDP growth rate to 3.32% from 3.37% previously. We anticipate that the prevailing high-interest rate environment and FX pressures will suppress growth in the non-oil sector. Additionally, we expect the Information and Communications Technology (ICT) sub-sector, a significant contributor to the service sector, to continue its downward trajectory. However, we believe the scaling up of operations at the Dangote refinery will provide some support to the economy in the second half of the year.

In H2 we expect to see a moderation in headline inflation rates due to base effect and the decelerating impact of energy and currency pressures. We believe that the expected executive order for a six-month suspension of import duties on staple food items, drugs and other essential items will further contribute to the anticipated decline in the nation’s Headline Inflation rate. We project inflation will moderate to 26.72% by year end, averaging 30.96% for FY 2024.

Price pressures and the need to attract foreign portfolio investments (FPIs) remain top priorities for the monetary policy committee. Although we expect a slight moderation in inflation for June (33.93%) and July (32.56%), we believe the marginal decline will be insufficient to allow for a shift in monetary stance considering the CBN’s year-end target of 21.4%. Additionally, weak capital inflows are likely to keep the Naira pressured ahead of the next MPC meeting, prompting the MPC to implement a final rate hike of 50-100 basis points (bps) for the year. After this anticipated adjustment, we expect the CBN to maintain the MPR for the remainder of the year.

In the second half of 2024, we project the current account (CA) balance will remain positive, riding the gains from an improved export condition. Nigeria has faced persistent budget deficits in recent years, with federal government expenditure surpassing revenue. For 2024, the budget deficit stands at N9.18 trillion and the country’s total public debt has grown to N121.67 trillion (US$91.46 billion) by March 2024, up from N97.34 trillion (US$108.23 billion) in December 2023. Debt-to-GDP ratio as of FY 2023 stood at 41.5%, above the DMO benchmark. The reintroduction of petrol subsidies in 2024 is expected to worsen fiscal expenditure, likely necessitating further borrowing. We forecast debt to GDP ratio to reach 51.5% at the end of FY 2024, higher than the IMF forecast of 46.5%.

The equities market is expected to close 2024 on a positive note with an expected growth rate of 34.15%. We remain cautious about the potential for better performance in the second half of the year. While banks’ capital-raising activities may provide a temporary boost, we expect the market to return to current levels afterward due to tight system liquidity. Apart from corporate actions and announcements, we do not foresee significant drivers of market performance in the latter half of the year, as we do not anticipate a sharp decline in fixed income rates. Additionally, foreign portfolio investments (FPIs) are likely to remain subdued until there is sustainable stability in the FX market. Despite these challenges, many stocks remain attractively valued for investors with a mid-to-long-term perspective. Within our coverage universe, we maintain Buy ratings on UBA, Access Bank, Zenith Bank, Guaranty Trust Bank, Lafarge Africa, MTN Nigeria, UACN, Unilever, Okomu, and Presco.

In the second half of 2024, we anticipate a slight moderation in the general yield curve for the Nigerian fixed income market. This expectation is based on several factors, including higher base effects and lower foreign exchange volatility, which should improve confidence and liquidity. Additionally, the Debt Management Office (DMO) is under less pressure to raise funds, having already secured over ₦12 trillion of the estimated ₦20 trillion projected for the debt markets this year. Reflecting this reduced pressure, the third quarter bond issuance calendar has been adjusted downwards from ₦100-150 billion to ₦80-130 billion, aligning with our expectations. We forecast a moderate 50-100bps moderation across the yield curve in H2.

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