07 August 2018 ( Lagos ): Despite Purchasing Managers’ Index numbers indicating steady economic momentum at the start of the quarter, July brought early warning signs of the challenges the Nigerian economy could face in the rest of the year. Annual inflation moderated once again in June, but the m/m pace accelerated further (from 1.1% to 1.2%) as food price pressure intensified. This triggered a more hawkish Monetary Policy Committee (MPC) stance than expected as 3 of 10 members actually voted to hike interest rates in late July, though the majority vote was a “HOLD”.
In addition, Nigeria’s political machinery moved up the gears, starting with gubernatorial elections in Ekiti State where the APC candidate defeated the PDP candidate and incumbent State Deputy Governor, and ending with a string of high profile defections from the APC, Nigeria’s ruling party. Even with a few green shoots such as the resumption of Bonny Light loadings, the political dynamics are threatening to overshadow Nigeria’s precarious economic momentum.
Key stories in the month
MPC holds rate while showing hawkish tilt… The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to hold all monetary policy tools at the previous levels. However, three out of ten members voted to hike interest rates amid concerns over the sustainability of current price and exchange rate stability. Analysts note that this is a pivot towards a hawkish leaning at the MPC, but do not anticipate any rate hike in the near future given the unconvincing economic growth seen so far.
Inflation falls, but may rise soon… Nigeria’s headline inflation moderated once more (11.6% y/y to 11.2% y/y) but registered above Vetiva and Consensus estimates of 11.1% y/y and 10.9% y/y respectively. This deviation was driven by higher m/m inflation (from 1.1% to 1.2%) amid further pressure on food prices. Specifically, m/m Food Inflation rose from 1.3% to 1.6%, and once again, this could be attributed to accelerating domestic prices as m/m Imported Inflation remained flat at 1.2%. This inflationary pressure is expected to intensify as government and campaign spending ramp up, and analysts foresee an uptick by August.
MPC hints at unconventional monetary policy measures… The Monetary Policy Committee (MPC) of the apex bank floated prospective measures to unlock credit growth to the real sector at their July meeting. Specifically, the CBN Governor encouraged credit-constrained large corporates to issue commercial papers which the apex bank may purchase, a policy not too dissimilar from the quantitative easing approach employed by central banks in the developed world. Whilst this may enhance credit growth, analysts note that direct financial intermediation by the central bank is not ideal (lest the apex bank’s balance sheet gets too large) and quantitative easing has had fairly mixed results in the developed world so should be approached with caution. The apex bank may also consider a differentiated cash reserve ratio (CRR) regime to enable banks direct more lending to employment-elastic sectors at a single-digit interest rate. Whilst this should lower the cost of funds for these sectors, high interest rate is arguably not the primary reason for low credit supply to the real sector. Therefore, efforts to address information asymmetries in Nigeria’s credit market must remain a primary concern.
Nigeria will finally join the ACFTA… Nigeria executed a U-turn on the African Continental Free Trade Area Agreement as the Presidency suggested that the largest economy in Africa would actually be party to the deal. Nigeria had previously passed on the opportunity to ratify the agreement in March, citing concerns over the effects of dumping on local industry. However, while hosting South Africa President Cyril Ramaphosa, President Buhari confirmed that he would ratify the agreement once he had completed consultations with key business groups.
NASS sends PIGB to Aso Rock… News sources suggested that the National Assembly has transmitted the Petroleum Industry Governance Bill (PIGB) to the Executive. This comes as a surprise considering that after initially transmitting it to the Presidency in April, NASS recalled the PIGB after a review by the Directorate of Legal Services of the National Assembly found “fundamental issues” with the Bill. The Bill was returned to the relevant Senate committee on Petroleum Industry and Governance and it is unclear what amendments—if any—the committee have made to the PIGB.
IMF raises Nigeria’s 2019 GDP growth forecast… In the International Monetary Fund (IMF) July 2018 World economic Outlook, Nigeria enjoyed a revision to its 2019 economic growth forecast as the Fund now expects the country to grow by 2.3% y/y, 0.4 percentage points ahead of the April 2018 forecast of 1.9%. This sizable revision was driven by a stronger oil price outlook as the Fund projects Brent crude price to average $70/bbl in 2019 (previous: $62/bbl).
Political transfer window in full swing as big names exit APC… The carousel of Nigerian politics was in full swing by month-end as the Senate President of the country, Bukola Saraki, exited the ruling All Progressives Congress (APC) amid rumours that he would be joining the People’s Democratic Party (PDP) in order to launch his 2019 Presidential bid. Saraki’s defection came hot on the heels of a series of exits from APC, including sixteen Senators. Moreover, this shift had legislative repercussions as it eroded the APC majority in the Senate. Conventional wisdom points towards more defections from the APC as disgruntled politicians make their play ahead of the 2019 elections.
Nigeria to retry having a national carrier… Nigeria launched a new national air carrier called Nigeria Air which would commence operations at the end of the year. The new airline is structured as a public-private-partnership with the government targeting a maximum stake of 5% in the medium term, though it has been silent on the details of private partners. The launch of Air Nigeria comes amid ongoing challenges across many African national carriers such as South African Airways. Despite the skepticism that trailed the launch, the success of the airline may hinge on a minimum level of government involvement given previous failed attempts at national carriers.
Issue in focus: Nigeria continues to go a-borrowing
Nigeria’s debt situation is a slight but relevant worry. Data from the Debt Management Office (DMO) shows that the debt-GDP ratio has increased from 13.2% in 2015 to 20.0% in 2018, below the recommended (but unapproved) DMO threshold of 25.0%, and also below the 56.0% international threshold for peer countries. Furthermore, debt servicing (% government revenues) has remained stubbornly high, registering 30% in Q1’18 (based on estimated revenues and realized figures were likely lower). Analysts note that there is a significant opportunity cost of spending such a large chunk of revenues on servicing debt. However, the deciding factor would be whether the government has utilized the borrowed funds for productive investment that would reap dividends—and generate revenues—in the medium term. The composition of debt has also changed significantly, from a 84:16 domestic:external split to a 70:30 split, in line with government’s target of achieving a 60:40 split by 2020. Whilst the shift towards external debt has been positive in terms of reducing interest rate costs and private sector crowding out, analysts cannot completely shake the risk of currency depreciation bloating Nigeria’s external debt balance.
Global review…
July was a bearish month for global oil prices, with Brent crude price dipping 7% in one day (July 11), the largest daily loss in two years. This decline came amid an expected increase in OPEC production—spearheaded by Saudi Arabia—and Libya lifting the Force Majeure on major exports. In addition, concerns that the brewing trade war would hit global economy growth and oil demand further pressured prices. Brent crude price still remains above most estimates (July average of $75/bbl vs. new IMF forecast of $70/bbl), but analysts expect it to dip further as OPEC production expands in the coming months.
The U.S.-China war took another turn during the month as the U.S. lashed out at China for alleged currency manipulation as the Yuan hit a 13-month low against the dollar. President Trump was particularly vocal about his dissatisfaction with China’s exchange rate policy vis a vis the U.S., a sentiment perhaps supported by IMF research which suggests the dollar is currently overvalued based on the concentration of current account surpluses in the world. U.S. Fed monetary tightening has not helped matters as the dollar continued to strengthen through the month.
The IMF released its July 2018 World Economic Outlook (WEO) and maintained its 3.9% y/y growth forecast for the global economy while highlighting that risks to global growth were mounting. The Fund downgraded its 2018 GDP growth forecast for Advanced Economies (2.5% y/y to 2.4% y/y) on the back of downgrades in the Euro Area (2.4% y/y to 2.2% y/y) and Japan (1.2% y/y to 1.0% y/y) as U.S. growth is expected to remain sturdy. The IMF also maintained its 2018 outlook for Sub-Saharan economies, even with expected capital reversals in the near-term, and raised the region’s 2019 forecast by 0.1 percentage points as Nigeria’s GDP forecast was raised from 1.9% y/y to 2.3% y/y for the year.
Meanwhile, the odds of a hard Brexit increased slightly in a turbulent month for British politics following Boris Johnson’s resignation as Foreign Secretary, the third highest ranking role of government and the most related to the UK’s ties with Europe. Two years after the Brexit vote, the effects on the economy have been mixed.
Whilst analysts have observed the expected decline in investment and acceleration in inflation (as a result of the weakness of the pound), household spending has grown modestly, and unemployment sits at a 40-year low of 4.2%. Analysts further note that although initial GDP growth was sturdy, economic momentum has slowed in the last year and the UK now lags the rest of the G7. Some progress has been made in the last two years, most especially in agreeing to a transition period after official Brexit in March 2019, but major decisions such as whether to remain in the Single Market or Customs Union and how to avoid a hard Irish border have merely been deferred.
What to look out for in August…
- On the 13th of August, the Organization of Petroleum Exporting Countries (OPEC) would release its monthly report showing oil production across the group. The figures would give further clarity on the extent to which OPEC nations are able to ramp up production following the agreement to increase the joint production ceiling by one million barrels per day.
- Party primaries for Nigeria’s 2019 Elections commence on the 18th of August. That may signal the closure date of Nigeria’s unofficial political “transfer window” as aspirants settle on their chosen parties after a raft of moves.
- Nigeria’s Q2’18 Gross domestic product data would be released by the National Bureau of Statistics on the 20th of August.
- Nigeria’s Q2’18 Capital Importation data would be released by the National Bureau of Statistics on the 22nd of August.
Reporting for EasyKobo on Tuesday ,07 August 2018 in Lagos, Nigeria
Source: Michael Famoroti from Vetiva Capital Management Limited