29 June 2018 ( Lagos )

Country’s current account to wax strong as exports continue to outstrip imports

Trade developments in the first half of 2018 were dominated by Nigeria’s refusal to sign on to the African Continental Free Trade Area and the Economic Partnership Agreement, two seminal multilateral trade agreements, a decision the President attributed to concerns over dumping. 

For the rest of the year, analysts expect the country’s current account to wax strong as exports continue to outstrip imports. Current account surplus has risen for four consecutive quarters since Q2’17. Exports should be powered by steady crude oil sales, on the back of a positive outlook for crude oil prices and volumes. 

Imports should also remain steady albeit slightly dampened by continued import substitution. A stable foreign exchange market and rising aggregate demand should spur imports. Analysts also note a recent uptick in petroleum imports (29% of Q1’18 total imports vs average of 18% across last eight quarters), a development that could partly be attributed to smuggling as a result of the arbitrage created by the current implicit subsidy regime. They foresee this uptick persisting through the year and inflating imports. 

Looking at the ubiquity of oil & gas products in Nigeria’s trade profile, it would be uncontroversial to say that the aforementioned trade agreements would have had very little impact in the near-term. The government has maintained its focus on export diversification, but analysts are yet to see this reflected in Nigeria’s trade profile as non-oil exports are still small in both absolute and proportional terms. 

Caution: tepid foreign sentiment ahead 

Nigeria’s capital imports have recovered strongly in recent quarters, rising from a low of $0.7 billion in Q1’16 to $6.3 billion in Q1’18, the highest since the 2014 oil price crash. However, analysts foresee this momentum slowing in the coming quarters as foreign portfolio inflows take a dip. 

On one hand, relatively high yields (and a less dovish monetary policy outlook than at the start of the year), improving macroeconomic conditions, and low equity valuations all indicate an attractive capital market environment. On the other hand, rising global interest rates as the Federal reserve persists with monetary tightening, and pre-election jitters are likely to induce capital reversals in H2’18. 

Meanwhile, analysts do not anticipate much help from government external borrowing even ahead of the elections. The Federal Government borrowed $4.8 billion in the external debt market in 2017 (for budget financing and debt rebalancing), while 2018 Budget estimates indicate external borrowing under $2.5 billion range. Finally, they note that H2’18 capital imports would not have the weak base support of H1’18 when looking at a y/y comparison and even expect H2’18 to compare unfavorably to H1’18. 

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Thursday, 28 June 2018, in Lagos, Nigeria.