06 December 2018 : The Nigerian economy was exposed to an array of risk factors during H2 ranging from severely depressed Oil prices, falling external reserves, geopolitical tensions, and prospects of higher US interest rates.

With economic growth staging a fragile rebound and heavy hitters such as the IMF even downgrading growth forecasts from 2.1% to 1.9%, some may feel Nigeria’s growth prospects remain quite discouraging. Recent reports from the World Bank predicting growth to hover slightly below 2% due to an underinvestment in human capital is likely to rub salt into the wound. With the recent decline in Oil prices negatively impacting government revenues and possible complications to properly enact the 2019 budget, all signs point to tough times ahead.

However, the fact that Nigeria remains on the path to diversifying away from Oil reliance suggests there is still some light at the end of this dark tunnel. It must be kept in mind that the largest economy in Africa has all the required ingredients needed to positively surprise global markets in the coming years. With a population of near 200 million, a youthful workforce and an incredible abundance of natural resources that seem to be underexploited, agricultural development may be the medicine to Nigeria’s illness. If the nation is able to elevate the agriculture sector to a respectable point of self-sufficiency, this will be the first step in creating a stable and sustainable macroeconomic environment.  This is part of the government's increased efforts to develop infrastructure to stimulate growth further.

The presidential elections in February will certainly be a double-edged sword for the Nigerian economy. Economic growth has the potential to expand next year thanks to increased government spending ahead of the elections. However, increased spending will inevitably rekindle inflationary pressures ultimately forcing the Central Bank of Nigeria (CBN) to re-evaluate its monetary policy stance. While speculations were initially rife over the CBN cutting interest rates in an effort to support growth, rising interest rates in the United States and Dollar strength resulted in the CBN missing the window of opportunity. With the new minimum wage in Nigeria likely to stoke inflationary pressures and falling Oil prices weighing on the Naira’s peg against the Dollar, higher interest rates may be enforced to maintain reserves.

Focusing on foreign exchange, the Naira’s stability against the Dollar remains the product of repeated intervention by the CBN. Higher Oil prices during the third trading quarter helped the CBN defend the Naira against an appreciating Dollar. With market conditions changing drastically and Oil weakness currently a dominant market theme, the CBN may face difficulties supporting the Naira.

As we head into the final trading month of 2018, the outlook for the Nigerian economy is poised to remain heavily influenced by Oil prices, the Dollar, global trade developments and pre-election jitters. Although consumer prices in Nigeria eased in October to 11.26%, government spending, and the new minimum wage are seen rekindling inflationary pressures. With the Fed expected to raise interest rates in December, Nigeria is at risk of experiencing capital outflows. Oil prices remain gripped by concerns over excessive supply in the markets and fears of falling demand – themes that may translate to falling government revenues and vulnerable Naira exchange.

Investors will be keeping a very close eye on the pending GDP report for Q3 which should provide fresh insight into the health of the largest economy in Africa. Sentiment towards the nation could end the year on a positive note if economic growth during the third trading quarter meets or exceeds expectations.

Reporting for EasyKobo on Thursday , 06 December 2018 in Lagos, Nigeria

Source: Lukman Otunuga, Research Analyst at FXTM