11 October 2018 : Market optimism over Nigeria’s economic recovery received a blow in September following a International Monetary Fund (IMF) statement that the nation was performing poorly.
Although at the start of the year the economic outlook looked incredibly encouraging with Nigeria coming out of a recession, the latest IMF report planted a seed of doubt over that recovery. The nation’s GDP rate in 2018 was revised downwards from 2.1% with tepid growth expected next year. While there could be some truth behind the IMF’s gloomy predictions, it is worth noting they were likely based on trade tensions and stress in emerging markets weighing heavily on global sentiment.
According to the IMF, Nigeria’s projected economic growth may not be enough to create jobs for the country’s robust population while inflation is expected to rise to 13.5% in 2019. Although the weak GDP growth witnessed in Q2 added to the factors that have stimulated fears over the economy, there is still some light at the end of the tunnel.
Nigeria’s macro fundamentals were mostly mixed during the third trading quarter with inflation dipping to a 11.14% low before rebounding to 11.24% in August. While consumer prices continued to stabilize, the manufacturing and non-manufacturing PMI remained in expansionary territory. With foreign exchange reserves hovering around the $46 billion level thanks to higher oil prices, there was noticeable stability in the Naira. The mixed data, external factors, and looming election risk resulted in the Central Bank of Nigeria (CBN) maintaining status quo for the whole of Q3.
It will be interesting to see if the central bank is able to act during the final trading quarter of this year. Higher US interest rates have sparked capital outflows while global trade tensions continue to weigh on sentiment. Although inflationary pressure has eased, pre-election spending could end up driving consumer prices higher, ultimately complicating the CBN effort to cut interest rates. While the idea behind a rate cut was to stimulate Nigeria’s economic growth, such a strategy may end up widening the interest rate differentials between the Fed and CBN – consequently accelerating capital outflows.
Outside of Nigeria, the bullish sentiment towards the US economy, prospects of higher US interest rates and safe-haven flows have boosted the Greenback. An appreciating Dollar remains very bad news for emerging markets, with Nigeria on the list. With the US firing on all cylinders and the Fed expected to raise interest rates in December and three more times in 2019, EMs remain threatened by capital outflows.
Looking at oil, the commodity had an explosive start in October, with Brent Crude accelerating past $86 and West Texas Intermediate doing its best to catch up but falling behind by roughly $10. Even with reports of the US considering waivers on Iran oil sanctions, the outlook points to further upside. With oil markets heavily supported by trade policy changes in the US and geopolitical risk factors, this is good news for oil-dependent nations. A steady appreciation in oil is likely to support Nigeria which currently remains reliant on oil exports for a chunk of its government revenues.
As we head deeper into the final trading quarter of 2018, investors will be paying very close attention to domestic economic data, central bank policy, and GDP figures. With the IMF trimming Nigeria’s growth outlook this year and for 2019, this could be a wakeup call for the government to boost its efforts in diversifying the nation from oil reliance. There needs to be a stronger push on agriculture developments and reinforcing infrastructure to create a stable and sustainable macroeconomic environment. With the near-term outlook for oil prices bullish and the Naira witnessing stability against the Dollar, Q3 growth could offer markets a pleasant surprise. It will be interesting to see if positive growth during the third quarter is enough to encourage the CBN to cut interest rates before 2019.
Source: Lukman Otunuga, Research Analyst at FXTM
Reporting for EasyKobo on Thursday , 11 October 2018 in Lagos, Nigeria
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