Month: May 2017

In this Economic Update: April 2017, we discuss recent developments in currency and fixed income market and our expectation for same over the near term.

• Sustained dollar sales to keep naira range-bound: As part of efforts to ensure currency stability at the parallel market, the apex bank introduced a special FX window for Small and Medium Scale Enterprises (SMEs) which would allow SME applicants to access $20,000 per quarter for the payment of eligible imports. The foregoing, as well as a follow-up doubling of weekly dollar sales to BDCs to $40,000 weekly, fueled improvement in CBN’s FX supply to ~$1.9 billion, by our estimate (+58% MoM) to help keep the parallel market rate at N385/$.  Given investors’ reference to parallel market rate as the anchor for fair valuing the naira, we expect the apex bank, boosted by accretion in the reserves (+19.4% Year to date to $30.9 billion in April) to sustain its FX sales. Impact of this should leave the naira range-bound at the parallel market.

• Yields to remain elevated on liqudity strain: Over the prior month, the apex bank intensified its liquidity mop-up measures via higher OMO issuances (+16.4% MoM to N151.5 billion) as well as increased dollar sales which drove average overnight rate 32pps higher MoM to 52.50%. The effect of the foregoing also underpinned yield uptrend across bond instruments (+27bps MoM to 15.99%). At the other end though, an influx of N654 billion bond maturities tapered effect of sustained monetary tightening and drove moderation in T-bill yields (-34bps MoM to 20.4%), leaving naira yield curve 4bps lower MoM at 18.12%. Going forward, with CBN’s shift in focus to persisting MoM inflation reading effectively nullifying arguments for YoY inflation-induced tilt to monetary easing, FX market activities now assumes principal importance in determining interest rate trajectory. In the near term therefore, the introduction of a market-driven FX window for Investors and Exporters, whose rates are a shadow of the parallel FX market, should incentivize CBN into sustaining sizable FX supply and aggressive OMO issuances, with the liquidity sapping effect of the duo leaving short term interest rates elevated.

• Base effects and naira gains to drive inflation lower: Largely reflecting high base effect from 2016, YoY headline inflation declined for the second consecutive month in March 2017 to 17.3% YoY (-53bps from prior reading) with both core and food readings moderating. On a MoM basis however, both core and food inflation printed higher in the review month. Over the near term, we expect impact of high base effect to continue to dictate core inflation and overall headline trajectory despite concerns on the food inflation front. Precisely, high base effect from the 45% hike in PMS prices in May 2016 should leave YoY core reading subdued with recent gains from Kerosene, and Diesel prices leaving sizable scope for sustained decelerations. However, we are less sanguine on the food side of things over the near term owing to recent pressures from higher transactions and transportation costs. That said, the more recent retrace in energy prices, owing to naira appreciation, suggests that pressures from the transport front would be less impacting in coming reading. Furthermore, with FEWSNET’s report already indicating favourable output from April’s dry season harvest, scope for gradual moderation in food pressures remain on the cards. Against this backdrop, we now look for headline reading of 16.7% YoY for April.

In this edition of our quarterly Nigeria strategy report, we take an in-depth look at economic indicators on the global and domestic scenes over Q1 17 as well as isolate influences of more recent developments on our outlook for the rest of Q2 17.

The ever-reverberating twist in global economy was again the toast of discuss over the past quarter, with investors ruminating over fledging recovery in advanced economies and what turned out to be a mixed growth picture for Africa. On the former, a combination of healthy jobs data and rising inflation in the US, export-led growth in Japan, as well as a shock economic expansion in the Euro zone appears to have catapulted economic growth expectations across DMs to a place of relative comfort. Elsewhere though, dour outlook for soft commodities and broadly expanding oversupply picture appear to have thrown a spanner into works across emerging and frontier economies with Sub-Sahara Africa (SSA) indisputably on the receiving end. Expectedly, the IMF swiftly revised its 2017 growth expectation lower for the region.

Against this backdrop, this report seeks to distil possible pass-through to the Nigerian market fettered by a three-quarter old economic recession for which emerging forward indicators have failed to provide tangible hopes for forbearance despite sustained gains in oil prices and a CBN-induced improvement in FX liquidity. On the issue of currency, the apex bank’s reversion from a celebrated entry into a fully float regime to a controlled float in less than 3 months is hardly news. Thus, our research focuses more on the sustainability of ongoing market interventions as well as a realistic fair value for the naira.

By way of linkage, we also investigate the implications of currency developments on overall inflation basket with keen attention paid to an over six month’s old food demand pressures from neighbouring West Africa. Perhaps adding more strength to our enquiry is the conscious effort made to situate Nigeria’s economic dilemma in the context of its volatile socio-political environment that could very easily revert to boiling point if the shenanigans embroiled in the last two gubernatorial elections and the characteristic unpredictability of the Niger Delta is anything to go by.

Read detailed report here