Higher oil prices, FX reserves, lower interest rates to boost Nigeria’s economic outlook in 2018
The Nigerian economy is expected to thrive in 2018 on the back of higher oil crude oil prices, rising external reserves and an expected reduction in interest rates.
Brent crude prices broke through the US$67 price on December 26, the highest price attained by crude oil since May 2015, boosting the country’s oil revenue prospects, the main plank on which government revenues are built.
The benchmark for crude oil price in the 2018 budget has been fixed at US$44.5, well below the current average price of the country’s benchmark Brent crude. Even tough Nigeria is expected to cap production at 1.8 million barrels per day, excluding condensates, instead of 2.3 million barrels per day projected in the 2018 budget, the higher oil prices will compensate for the shortfall in volumes.
The high oil prices is expected to boost external reserves which stood at $37.92 billion as of December 22, up 10.1 percent from its November levels according to figures from the Central Bank of Nigeria (CBN). The country’s external reserves have climbed by nearly 50 percent since last December helping to strengthen the capacity of the CBN to stabilize the naira.
“We retain our favourable outlook for the exchange rate amid sustained stability in global crude oil prices which should result in further build-up in foreign reserves as well as CBN’s continued intervention to meet demand at the interbank foreign exchange market,” analysts at Cowry Asset Management said in a note to investors.
At the CBN window of the interbank market, the naira gained marginally by N0.05k to close at N306.00k per dollar on Friday from N306.05k/$ traded on Thursday at the inter-bank market, data from FMDQ show.
But at the investors and exporters foreign exchange window, the naira firmed to N360.33k on Friday, gaining N0.27k over N360.60k traded the previous day.
Strengthened by the build-up in reserves, the CBN has continued to intervene in the interbank market to support the naira.
Isaac Okorafor, acting director, corporate communications at the CBN, said the interventions were meant to boost liquidity, trade and ease of remittances for legitimate personal commitments.
Analysts are already optimistic that the CBN interventions will sustain the stability in the Naira achieved in most of 2018 and boost economic growth.
“I expect that the country will maintain the growth momentum through the first half as improved investors’ confidence could attract foreign inflows,” said Ayodeji Ebo, managing director and CEO of Afrinvest Securities Limited.
“But the second quarter may be slow because of election related issues as we may not see new policies,” said Ebo.
Fitch ratings, United Kingdom-based rating agency has said that forecast growth for the country in 2018 would be 2.6 per cent, which is higher than the 2.10 percent growth projections for the economy than the International Monetary Fund (IMF). The World Bank had projected a growth rate of 1 percent.
But Johnson Chukwu, management director and CEO of Cowry Asset Management Limited has expressed the hope that a rate cut by the Central Bank would invigorate the other sectors of the economy.
“We expect construction activities will increase this year on the back of increased government spending, which will result in job creation. We expect demand for consumer goods to increase as the demand for other sectors to increase,” said Chukwu.
Nigeria exited its first recession in 25 year as the economy expanded by the expanded percent 1.4 percent in the second and third quarter of 2017 an improvement over 0.72 percent in the second quarter.
Also, inflation fell to 15.90 percent in November 2017, from 18.90 percent as at January.
Investor confidence has been restored after currency controls policy put in place by the central bank led to capital flight in 2016.
Foreign Portfolio Investment (FPI) increased year on year by 259.14 percent to N2.77 bn in the third quarter of 2017, according to the National Bureau of Statistics (NBS) helping the stock market to become the third best performing market globally. This is even as analysts project that the stock market boom will continue in 2018.
The all-share index crossed 38,000 points on Friday, the last trading day of 2017, with stocks climbing 42 percent for 2017 – its biggest gain since 2013. Traders foresee another 10 percent rise next year, to as high as 42,000 points.
“Stocks could go up to 42,000 points next year. We still see interest in stocks which we think will continue into the first quarter,” a stockbroker at Chapel Hill Denham said.
But the rally will depend on the strength of 2017 earnings reported in the first quarter, the broker said. Weaker-than-expected profits might curtail the rally, and the run-up to 2019 elections may create uncertainty as well.
Foreign investors returned to Nigerian assets after the central bank in April lifted currency controls in a bid to attract inflows and support the naira. The currency moves helped propel stocks and increased its dollar reserves.
Government plan to pay down on its Treasury bill holdings to drive down interest rates is also expected to act as incentive for yield searchers to turn to the capital market in 2018. The federal government has already paid off N198 billion worth of treasury bills last month instead of rolling them over, to lower what it pays to borrow. That fuelled speculation about the outlook for official interest rates.
The central bank kept rates at 14 percent for more than a year to battle inflation and support the naira. Analysts now expect rates to fall by 100 basis points next year, which could lead investors to switch to equities from bonds.
Banking stocks have outperformed last year, rising 72 percent. Consumer goods shares rose 35 percent. Analysts expect mid-tier lenders such as Fidelity Bank, FCMB and Diamond Bank, to lead the market in 2018.
Pension fund manager Adeniyi Falade, who has around 200 billion naira under management, said he saw value in mid-tier lenders and plans to rotate funds out of money market to equities.
“We anticipate further gains for the Nigerian bourse amidst a positive outlook for FX earnings … which would buoy company earnings … as well as our expectation of lower interest rates in 2018,” analysts at Vetiva Capital said.
Chief executives of some of Nigeria’s largest and most innovative companies are also confident about the growth prospects of the country in 2018.
A survey of 13 CEOs conducted by BusinessDay to measure their level of optimism on a scale of 1 to 10, with one being the least optimistic and ten being very optimistic showed more than 80 percent being very optimistic.
The CEOs who came from diverse sectors including McKinsey & Company, Accenture, All On, Alpha Africa Advisory, Halogen Securities, United Capital, Signal Alliances, Fine and Country, Unilever, Avon HMO, Sahara Group, McKinsey Global Institute (MGI) and the Lagos Business School.
Most said their optimism is drawn from relative stability of oil prices, implementation of the FG economic recovery and growth plan, Nigeria being out of recession and rise in FDI with improvement in ease of doing business.
The country is out of recession and there are significant reforms which has encouraged investors leading to a rise in foreign portfolio and direct investments,” said Toyin Sanni, CEO of investment firm, United Capital.
“All these is raising optimism that 2018 would be far better,” Sanni said.
But analysts caution that delay in the passage of this year’s budget by the National Assembly over additional spending combined with a complicated foreign exchange market and inability of government to narrow budget deficits could undermine growth projections in 2018.
President Muhammadu Buhari presented a record 8.6-trillion naira ($28.16 billion) budget for 2018 while experts note that the implementations of the budget in the first quarter of the year will be critical in spurring growth in 2018.
While the country’s debt to GDP ratio of 18.40 percent is the one of the lowest in the world, Flitch said it expected higher revenue to drive a narrowing of federal government deficit to 3.40 percent in 2018 as oil production rises and the overall economy recovers.
Federal Government’s total debt ticked up by 6.0 percent to N20.373 trillion in the third quarter 2017, according to the Debt Management Office (DMO).
Experts hope the positive economic growth will trickle down to the common man as vast majority of Nigerians live in poverty while a decrepit infrastructure continues to undermine industrialization.
The country’s unemployment rate increased to 18.80 percent in third quarter (Q3) of 2017 from 14.20 percent the corresponding period of 2016, latest data from the National Bureau of Statistics (NBS), a challenge that higher economic growth would helpfully ameliorate.
Bala Augie and Hope Moses-Ashike
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