Nigeria’s economic metrics seen to trend positive in 2017 on forex availability, stable oil prices

Barring plunges in oil prices and production cuts, major indicators of the Nigerian economy may be trending towards improvement in 2017, according to the International Monetary Fund (IMF), research analysts, the central bank and most government officials.

Though the country’s per-capita GDP fell to around $1,740 in first quarter 2017, from over $3,000 in 2014, the IMF is optimistic about the profile of the Nigerian economy, forecasting it to have the third-fastest GDP growth acceleration of any Frontier market in 2017, which it expects to repeat in 2018.

The National Bureau of statistics (NBS) first quarterly report for 2017 revealed that Nigeria is still in a recession with Q1 2017’s growth rate of -0.52%, officially representing the fifth consecutive quarter of contraction for Africa’s largest economy. Nominal GDP (values not adjusted for inflation) for the quarter stood at ₦26.028 trillion (up from ₦22.235 trillion) in Q1 2016, resulting in a Year-on-Year (YoY) GDP growth of 17.06%, which is significant.

Economic watchers and research analysts are also optimistic.

SBM Intel, an Africa-focused market intelligence and communications consulting firm said the “Q1 GDP shows path to growth”, adding that though the outcome of the economy was worse than it’s projection for the quarter, there seem to be some positive from the fact that the figures are indicating that the haemorrhaging has stopped, thus clearing the path to growth.

Despite the drop in GDP in the first quarter of the year, the central bank still expects Africa’s biggest economy to return to growth by the end of the third quarter, thanks to higher foreign exchange inflows.

Rising from the May 2017 monetary policy meeting last week, Emefiele said the recession would be over by the end of the third quarter. “We have seen various positive signs of the economy,” he said.

The CBN governor also said the bank was pushing to end the spread between the black market and official foreign exchange rates, pointing to a rally in the naira after a new trading window launched a month ago attracted foreign inflows worth $1.1 billion.

“We think most metrics in Nigeria will be demonstrating improvement in 2017, providing oil prices/production do not plunge. We are cautiously positive on equities and bonds at an exchange rate around NGNG400/$,” say analysts at Renaissance Capital (RenCap) Cyprus Ltd.

The analysts at RenCap noted that investment spending in the 2016 budget reached perhaps NGN600bn, and the government aims to push this to NGN2,240bn via the 2017 budget, which would see positives in the economy.

“At around NGN400/$, the naira currently offers a 5% discount to our estimated fair value (this discount will likely disappear due to inflation over 2017), while we think equities and naira bonds are cheap,” they said adding that after spending most of the past fortnight in Nigeria, at Renaissance Capital’s 8th Annual Pan-Africa 1:1 Investor Conference in Lagos and the 10th African Finance Corporation’s (AFC) infrastructure-focused conference in Abuja, they believed they have learnt enough to justify a more optimistic stance towards Nigerian assets.

In February, the analysts had argued that when greater FX flexibility came to Nigeria, investors might only enter the market at an exchange rate of NGN450-500/$, thinking that investors would need a ‘Nigeria FX risk premium’ of at least 10-20% to compensate for the potential risk that FX flexibility might be short-lived.

“But we were wrong to only look at investing in Nigeria through the FX prism. We should have also considered whether bonds and equities were cheap or expensive. What has become evident in recent weeks is that naira bonds yielding 18% and equities are cheap enough that investors are prepared to buy the naira even with just a small discount to the NGN375/$ fair value estimate of our 22-year REER model. Note due to inflation we estimate that fair value will depreciate to NGN410-415/$ by mid-2018,” they posited.

The catalyst of this new optimism is the introduction of the new investor and exporter (I&E) FX window on 24 April, which finally gave portfolio investors a currency market they could access after two years of market-destroying FX illiquidity.

“After a hesitant start, foreign inflows began to pick up, and the stock market reacted sharply at the time of our Lagos conference. Media reports suggest $600mn has flowed into Nigeria over four weeks (a fair amount has flowed out too),” the said.

The I&E rate currently varies from bank to bank, with recent estimates putting the exchange rate range from around NGNG370/$ to NGN425/$. The large range is because so far banks are barred from trading with each other in this FX window.

For RenCap, comments last week by Yemi Osinbajo, acting president, that “the market should determine everything”, may see all Nigeria exchange rates converging to a market-determined rate. They however warned that for now investors should cautiously assume the I&E window remains the only accessible window until the 2019 elections

“The most obvious threat to the I&E window is a collapse in oil production and/or oil prices; in that scenario, we cannot be sure the Central Bank of Nigeria (CBN) would continue supplying FX to this window. But potentially, investors would meet their own supply and demand needs, presumably at a much weaker exchange rate.

“Whatever scenario unfolds, the key point is that the FX barrier to investing in Nigeria has now been removed. As a consequence, investors can now focus on the reform priorities of the government,” they averred.

Other developments that bolster their optimism is government investment in railways, ongoing focus on special economic zones to boost manufacturing, under advice from a former World Bank chief economist Justin Lin, and the Power Sector Recovery Programme, being partly funded by the World Bank.

Equally, the Ease of Doing Business reforms being canvassed by the finance ministry, the ongoing anti-corruption campaign, and the Ministry of Finance proposed tax amnesty plan to gather revenue and encourage future tax collection, are specific reforms that would transform the economy.

By Business a.m. live staff