Q2-2016 Outlook | Nigeria – Late start to weigh on growth

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc)

We revise our growth forecasts downwards; now see 2 percent growth in 2016 (previously 4 percent). Our supposed conservative growth forecasts in January turned out to be optimistic. We over-estimated the ability of President Buhari’s administration – which floundered for most of Q1. With the issues around the unprecedented 6 trillion naira 2016 budget only near resolution in May – five months into the year, it is fair to say that even 2 percent growth in 2016 may turn out to be optimistic. Thus, the risks to our growth forecasts are to the downside. What are the issues? Foreign exchange remains scarce. With no indication on future policy direction, uncertainties on this front remain. Fuel is also scarce – although supply eased in the first week of May, we are skeptical about sustainability, in Q2 at least – and power shortages continue, due to gas supply disruptions and scanty rains. Then there is the issue of security. Just as some progress was being made by the Nigerian Army in tackling the terrorist group, Boko Haram, other security threats have arisen: Fulani herdsmen from the northern parts of the country (authorities allege they are foreigners) have been engaged in wanton killings of rural farmers in the south, residents of which are now contemplating arming themselves. With emoluments for former Niger Delta militants cut, there are renewed agitations in that part of the country as well; evident in increased oil and gas pipeline vandalization. President Buhari has been slow to react to the new security threats. If Nigerian authorities succeed in getting their acts together however, the medium term growth outlook may be better. The IMF believes any economic recovery over the medium term would be modest in any case. In the absence of a substantive economic management team, we do not see a quick turnaround.

Nigeria Macro Forecasts 2016 2017 2018
Real GDP, % change 2.0 3.0 4.0
Inflation, % change 12.5 13.0 12.4
Current Account Balance (% GDP) -3.0 -2.0 -1.5
Fiscal Balance (% GDP) -5.0 -4.0 -4.0
USD:NGN* 250 300 350
Source: Macroafricaintel Research, *year-end

Business executives have been quite vocal about current economic difficulties but choose to endure in light of the country’s long term potential. Furthermore, the much-anticipated National Economic Council retreat in March turned out to be anti-climactic, largely ignoring key issues of interest; especially the clearly sub-optimal foreign exchange policy of the CBN. More puzzling, President Buhari’s economic philosophy – economic diversification mostly – seems out of sync with the policies of his government. It is very difficult to be optimistic about the Nigerian economy right now. With monetary and fiscal policies in such shoddy form amid a continuing oil slump and strained finances, Standard & Poor’s put Nigeria on a negative outlook in March, making it all but likely a subsequent assessment in September would be a downgrade. In late April, Moody’s downgraded the country’s credit rating to B1 from Ba3 on what it considers a lower for longer bearish crude oil market. We are not surprised by these developments, having highlighted this possibility in our commentary. Expectedly, authorities have chosen to abandon Eurobond issuance plans, on cost considerations mostly. Instead, Nigerian authorities are looking to China. President Buhari secured more than US$6 billion worth of investments during his trip there in April. He also re-negotiated loans agreed with the Chinese by previous Nigerian administrations, especially that of President Goodluck Jonathan. These loans could be about US$13 billion, in our view; based on an assumed 85 percent Chinese funding: There is the US$12 billion 1,402-kilometre Lagos-Calabar railway line project and the US$8.3 billion Lagos-Kano railway modernization project (contract was initially signed in 2006). There is also talk of a US$4-5bn currency swap agreement with the People’s Bank of China (PBOC), albeit the CBN already signed one with the Industrial and Commercial Bank of China (ICBC). Authorities are yet to reveal when and if any deal has been struck with the PBOC. They have also not revealed the amount of renegotiated Chinese loans.

We think the Central Bank of Nigeria (CBN) would hike rates further in May, by 100 basis points to 13 percent, and may devalue the naira later in the year, albeit reluctantly. It is quite clear that keeping the naira artificially strong – in the interbank market at least – has not been helpful for the Nigerian economy. Inflation has risen into the double-digits and essential commodities are scarce. With the central bank getting to determine who gets foreign exchange, political patronage around the issue is on the rise. There have also been numerous instances where foreign exchange acquired officially was diverted to the parallel market for arbitrage purposes. As further naira devaluation also supports the economic diversification objective of the authorities, we think the CBN has little choice but to change course. In a surprise move, the monetary policy committee (MPC) of the CBN hiked its policy rate by 100 basis points to 12 percent in March, signaling a departure from its hitherto unorthodox approach. The move – predictable under normal circumstances – came as inflation rose into the double-digits, 12.8 percent in March, far above the upper bound of the CBN’s target inflation band of 6-9 percent. We expect headline inflation to be about 13 percent on average in Q2. We have also revised our annual inflation forecasts upwards: 12.5 percent in 2016 (previously 10.6 percent) and 13 percent in 2017 (previously 8.4 percent). The consequent negative real interest rates would warrant further policy tightening. Thus, we expect the CBN to increase its policy rate by another 100 basis points to 13 percent at its only MPC meeting this quarter in May. We also think it is reasonable to expect that a more flexible exchange rate regime would also come about in due course. In this regard, President Buhari’s intransigent stance on the naira is a major constraint, as he continues to insist further naira devaluation would not be beneficial for majority of Nigerians. As we think an overvalued naira is not sustainable, we retain our view of naira devaluation, albeit timing is uncertain. Our end-2016 forecast for the US dollar exchange rate remains 250 naira, a 26 percent devaluation from the current level of 199. Speculations remain on what the CBN’s new foreign exchange framework would look like when it is announced. A 2-tier system and a wider exchange rate band have been mooted. While much bolder actions would be required, a framework would at least provide some predictability.

Nigeria Q2 2016 Q3 2016 Q4 2016 Q1 2017
Policy Rate, % 13.0 14.0 15.0 15.0
Source: Macroafricaintel Research

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