Month: March 2017

In this economic update report, we discuss developments in Nigeria’s macroeconomic environment and financial market over February as well as delineate our expectations for the coming period.

CBN’s new FX policy: a change of heart?: In February 2017, the CBN announced a raft of FX policy measures which includes the commencement of dollar sales for personal and business travel allowances as well as foreign education and medical fees. In addition, the CBN announced the removal of the 60:40 FX allocation rule in favour of manufacturing companies, and reduced the tenor on its currency forwards to 60-days (vs 180-days previously) even as it signaled a desire for greater intervention to clear unfilled orders in the interbank FX market.

Going forward, we think, in view of a higher foreign reserve, the CBN is unlikely to entertain conversations around shifting the naira peg in the near term while it continues its interbank interventions in a bid to shrink parallel market premiums. Farther out, we see the upper rate limit on CBN’s intervention sales (i.e. the 20% band around the interbank peg of N305/$) as the next level for the USDNGN.

Inflation – Base effects come into view: In line with the pattern in the last three months, pressures in the food basket largely accounted for the uptick in headline inflation as thinning domestic grain supply pushed Nigerian cereal prices over 132% higher YoY. On other fronts, despite broadly higher energy prices (Kerosene: +87.1% MoM, LPG: +39.4% MoM, Diesel: +22.6% MoM and PMS: +1.4% MoM), core inflation slid for the second consecutive month (-19bps MoM to 17.85%) in January.

Going forward, base effects from the 45% hike in electricity tariffs in February 2017 pose hurdles to CPI readings. Thus, while naira weakness should continue to stoke higher food prices, we see downward pressure on inflation numbers from the elision of the 2.3% MoM base effects from electricity tariff increase in February 2016. This backdrop informs our call for a 153bps MoM moderation in overall headline reading to 17.2% YoY (+/- 50bps) in February.

Fallout from FX interventions halt bullish run on the naira yield curve: The naira yield curve trended higher in February (+16bps MoM to 17.31%) as system liquidity tightened following CBN’s Secondary Market Intervention Sales (SMIS) which drove overnight money market rate to 133.3% (from 6.9% at the end of January). The SMIS helped offset impact of lower paper supply (as the CBN net issued N92 billion in OMO paper in February vs N701 billion in January 2017) which had resulted in the mounting liquidity at the short end that drove bullish sentiment in the T-bill market over the first few weeks of the month.

Ahead of the March 2017 MPC meeting, our views regarding potential declines in inflation raise scope for an end to current hawkish monetary policy stance. That said, CBN’s move to raise FX supply, which has been accompanied by increased liquidity mop-ups, could yet drive “a no change decision” at the meeting. Taking a cue from the July 2016 hike, the apex bank could leave MPR unchanged and lower the clearing rates at its OMO auctions to lower the naira yield curve. Given limited clarity on the emerging FX policy, we see strong scope for the CBN to adopt this position.

Read more on our economic update here

Insights from the Nigeria Strategy Report H1 2017:

Global economic growth decelerated for the second consecutive year in 2016 as emerging economies continued to grapple with the impact of commodity price shocks to their external accounts and growth across developed economies remained largely sub-par. Though growth picked up in the US and Japan in the second half of the year, subsisting political concerns, particularly Brexit, weighed on economic activities across Europe. In response, global central banks responded to the lacklustre growth with increased monetary stimulus which pushed yields across developed world close to record lows for a sizable part of the year.

However, the emergence of Donald Trump as the US President elect and rising voter backlash against globalization ensured FPI flows to EM fell to its lowest in eight years even as US bond yields rose. Closer to home, growth in SSA economies more than the broader EM class stagnated which resulted in IMF’s downgrade of its 2016 growth forecast for the region to a 20-year low of 1.4% YoY. Unsurprisingly, the current account pressures fed sizable exchange rate weakness and by extension rising inflation. The dour economic landscape in SSA largely mirrored activities in the continent’s biggest economy, Nigeria, where GDP contracted over the three quarters of 2016—first of its kind in 25 years—inflation printed at an eleven-year summit, unemployment surged to a record high of 13.9% in Q3 16, while negative trade balance over the last thirteen months is the longest on record.

Output weakness stemmed from both the oil and non-oil sectors with contraction in the latter reflecting cutback in government spending (states and FG), negative real wage growth of consumers, FX supply challenges and factory downtime from incessant disruptions to gas supply. With regards to oil, persisting militant attacks on oil installations ensured the country’s oil production fell to multi-decade lows of 1.5mbpd in Q3 16 which together with lower oil prices underpinned the fastest pace of oil GDP contraction in 48 years in Q3 16. Events at the oil sector were also instrumental in perpetuating the deficit in the trade balance while it’s knock-down effect on FX reserves induced further currency depreciation in H2 16, making the naira one of the worst currency performers in the world. Predictably, impact of naira depreciation reverberated to headline inflation as increased cross border exports and import substitution by domestic manufacturers weighed on domestic supply of food.

Download full report here