5 February 2018

Nigeria: Analysts Foresee Slowdown in Investment Inflows

Analysts at CSL Stockbrokers Limited have predicted a slowdown of investment inflows into the country this year, ahead of the 2019 elections.

Also, the investment bank anticipated declines on domestic debt yields, which would make the securities not as attractive as they were in 2017. Furthermore, analysts at the firm held the view that longer-term investors were likely to remain relatively cautious until there is more clarity on the direction of policy after the February 2019 election.

They stated this in a report on the 2018 economic outlook for the country.

According to the Lagos-based firm, the outlook for the availability of foreign exchange (forex) and the naira's exchange rate in 2018 is the major question occupying the minds of investors in Nigerian assets.

The introduction of the Investors' and Exporters' Window (quoted as the Nigerian Autonomous Exchange Rate Fixing or NAFEX) in April significantly improved participants' access to forex, helping to attract large inflows to the debt markets in particular as investors have become confident that they would be able to access forex to repatriate capital. However, expectations that treasury bills yields would fall in 2018 has stoked fears that a slowdown or reversal in portfolio flows will cause a 'rush to the door', leading to renewed shortages of forex in the system and potentially to rationing of forex supplies.

"The short answer is that we do not think that such a scenario is likely and we believe that participants will retain unhindered access to forex via I&E window in 2018 for three major reasons. "Firstly, we are relatively sanguine on the outlook for both oil prices and production in 2018, believing that output will come in at around the 1.8 million barrels per day mark and that prices would average US$61/bbl, which bodes well for the supply of oil dollars, historically the most important source of forex for the economy.

"Secondly and perhaps most importantly, we believe that the Central Bank of Nigeria (CBN) will remain willing and able to ensure participants' continued access to the I&E window.

"On the willingness side, CBN officials have repeatedly extolled the success of I&E window in monetary policy communiqués and in interviews with the press."

Turnover on I & E window has risen steadily since its introduction in April 2017 and has hit US$26 billion. This forex window is largely the reason for the improvement in broad sentiment in the economy, over recent months.

However, the CSL Stockbrokers report anticipated that treasury bills yields would start falling as the CBN begins to loosen monetary policy,

They predicted a relatively small 200 basis points cuts to the monetary policy rate (MPR) as high inflation and depreciatory pressures keep the policy-makers cautious, with risks skewed towards policy being kept tighter if inflation proves stickier than we currently anticipate.

Lower interest rates will stimulate lending as demand for credit increases in tandem with improving sentiment across the economy, they added.

They also anticipated that recurrent spending would exceed the amount targeted in the budget and that the government will rely on local debt markets to finance this additional spending.

"Treasury issuance will therefore remain robust and this, along with continued relatively tight monetary policy, will support treasury instrument yields.

"We are expecting yields on three-month bills to end 2018 at 10 per cent, while six months and 12 months will end the year at 14 per cent and 16 per cent respectively, in our view.

"Although the short-end will likely dip into negative real territory based on our forecasts, we believe that carry trade will remain attractive to foreign investors given that the currency is unlikely to depreciate by more than five per cent over the course of the year as the CBN will have the resources to intervene to prevent more significant depreciation. "Furthermore, nominal interest rates in Nigeria are attractive relative to regional peers and will remain so based on our outlook," it added.

Oil and GDP Outlook

While the firm held the view that the Nigerian economy would continue to gather momentum over the course of 2018 owing to an improving outlook for both oil and non-oil sector, with respect to oil production, it pointed out that a reduction in militant attacks has seen output rise over the course of 2017.

The resumption of operations at the 250,000bpd Forcados export terminal following the end of a force majeure boosted production towards 1.8mbpd, which is where output was expected to remain for much of 2018 with a boost coming later in the year from the onset of output from Total's 200,000bpd Egina offshore field.

"We are also expecting oil prices to be higher in 2018 than in 2017 as the market will remain fairly tight on the back of an extension of the OPEC production agreement.

"Our baseline assumption is that prices will average US$61/bbl in 2018, up from an average of around US$53/bbl in 2017.

"This high price/higher production scenario will provide the authorities with the resources to implement expansionary fiscal spending.

"Although we expect total public expenditure to come in below the amount targeted in the 2018 budget, we nonetheless expect spending to increase robustly relative to 2017, which will boost activity in the non-oil sector.

Furthermore, the forecast real GDP growth of three per cent, below the official budget estimate of 3.5 per cent and well below Nigeria's potential growth rate.

Related to this, the report pointed out that credit growth remains in negative territory, deeply so if one strips out the revaluation effect that currency depreciation has had on forex loans. This is a major reason for the non-oil sector's relative weakness (the non-oil economy contracted by 0.8% 2017 and has been very weak for of the last two and half years.

Export revenues were expected to continue to rise over the course of 2018 as both oil prices and production head higher. Brent crude oil prices were estimated to average US$61/bbl range during the year up from a low of US$43/bbl in 2016, thanks to a tightening in global markets on the back of OPEC production cuts.

"Production will remain beholden to militancy. Risks have risen since the Niger Delta Avengers (NDA) announced on November 3 an end to a ceasefire with the government.

"Even so, we are cautiously optimistic that increases seen since March 2017 will be sustained. The expected onset of production at Total's Egina offshore block is likely to add 200,000 bpd to output. "Furthermore, the decision by the NDA to end the ceasefire could well be a tactic to pressure the government to speed up the 16-point agenda to support the delta region, which was the basis for the militants agreeing to lay down their weapons.

"With elections in February 2019 fast approaching, the NDA is no doubt conscious of its increased leverage.

"The 2018 budget made an allowance for continued stipend payments to militants and we believe the government will do all its in power in the lead up to the 2019 election to ensure as little disruption as possible, even if it means throwing more money at the problem.

Indeed, it noted that high inflation and relative currency stability over the course of the year means that domestic manufacturers would have lost competiveness and therefore increased demand will be met with higher imports as opposed to increased domestic production of goods.

For the same reason, there is unlikely to be a significant pick up in non-oil exports despite the CBN's desires to stimulate import substitution and non-oil exports, it added.

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