The Nigerian economy is on track to achieve an economic growth of 2% this year, according to latest report from Rencap.
Last September, Rencap wrote that Nigeria was witnessing a pedestrian recovery dragged back by a weak non-oil sector that is still reeling from the worst recession in over two decades.
In their latest report, they take another shot at the economy but this time the outlook is a lot better.
They expect the Central Bank of Sub-Saharan African (SSA) economies to start to loosen up their hold on interest rates. Nigeria for example has held monetary policy rate, rate at which the CBN lends money to banks, at 14% for over 2 years. Economists believe rate cuts help boost spending as lending cost will be cheaper.
In 2018, we see brisker growth, monetary easing and a start in the rebuilding of savings in Sub-Saharan Africa (SSA). We expect the recovery to be driven by Nigeria, where we now forecast 2.9% growth, vs 2.0% previously, owing to a more accommodative policy stance, a stronger external sector and more balanced growth as the consumer recovers.
Their interest rate outlook is also buttressed by a positive outlook for inflation rate, interestingly because of stable exchange rates and more food. They singled out Ghana for balancing their budget in 2017.
We also expect SSA inflation, on average, to fall back to the single digits, owing to more stable commodity currencies and improved food output in East Africa. This is in part why we expect monetary policy easing in Nigeria, Kenya and Ghana. A dry spell in southern Africa is the upside risk to SSA inflation.
Although we see stronger commodity prices and growth moderately narrowing budget and current account deficits, they will still be wide vs the 2000-2017 average. We think progress made in restoring fiscal credibility in Ghana in 2017 is positive for macro stability over the medium term. However, we expect delays in fiscal adjustment to restrain growth in Kenya – where credit growth is likely to remain sluggish – and Zambia.
Faster growth, monetary easing
They expect Ghana to grow at a faster pace than other countries in SSA and will likely grow at an impressive 7%. Nigeria on the other hand will have what it termed the “most impressive recovery”. They are targeting 2.9% from 0.8%, which is about 300% rise.
We think Ghana should be among the strongest growth performers, with growth of c. 7%, and of SSA’s biggest economies, Nigeria should record the most impressive recovery, to 2.9% in 2018 vs 0.8% in 2017E (revised up from 0.7%). We expect a moderate slowdown in SSA inflation in part because most of the FX adjustments to reflect lower commodity prices are behind us. The naira, as a result, is now cheap: 12% undervalued according to this analyst’s real effective exchange rate (REER) model.
It is interesting to note that they predict that the exchange rate will hold at N360/$1, which is great for the economy.
We think a stronger external sector implies FX stability in the short term, so we revise our YE18 forecast to NGN360/$1, vs NGN373/$1 previously. This supports softer inflation of 11-12% in 2018. We see Ghana’s softening to c. 10% in 2018, and expect better rains in Kenya to help keep inflation within the central bank’s 2.5-7.5% target range. We expect monetary policy easing on the back of lower inflation, particularly in Ghana and Nigeria. Other than Angola, where we expect tightening following the kwanza devaluation, we see most countries holding their policy stances.
Rebuilding savings
Nigeria is currently running a budget deficit, which means that it has not yet been able to balance its budget. Nigeria will need to save to balance that budget.
SSA countries, particularly commodity exporters, should begin to rebuild savings in 2018, on the back of improving prices. That said, we expect the narrowing of twin deficits to be moderate, implying they will still be significantly wider in 2018 than the 2000-2017 average. East Africa is the sub-region where we project the widest current account (C/A) deficits, with Rwanda and Kenya at 10% and 8% of GDP, respectively, in 2018. On the upside is Nigeria, where we project a bigger C/A surplus of 2.8%.
Fiscal credibility
They conclude by opining that an improved oil revenue will be useful in improving Nigeria’s non-oil revenue drive.
We believe fiscal credibility will separate countries that will see macroeconomic stability and sustainable growth over the medium term from those that will not. We think Ghana has made progress in restoring fiscal credibility, by keeping its FY17 budget deficit within target, amongst other fiscal reforms. We are concerned about Zambia and Kenya, where we think delayed fiscal adjustments may serve as a restraint on growth. Stronger commodity prices may help mitigate malaise on the fiscal reform front in some commodity-exporting countries. In Nigeria, improving fiscal oil revenue may complement ongoing efforts to mobilise non-oil fiscal revenue.
The RENCAP article was written by Yvonne Mhango of rencap.com
