Coronation Merchant Bank has released its research report on Nigeria’s economic outlook for the year 2019. The report titled “A Tale of Two Halves” projected positive outlook for Nigeria in areas covered by the research.
The Coronation report research on Oil prices, foreign exchange, and interest rates, with a forecast of a possible interest rate cut.
On Oil Prices
Coronation research forecasted an average of US$58.00/bbl for 2019, stating projections for oil price is fundamental to the forecast of foreign exchange and interest rates in Nigeria. The projection on oil in the report was encouraged by the recently-realised calm in the oil futures market; derived in part from the Saudi production cut.
While reacting to the report, the Head of Coronation Research, Guy Czatoryski said;
“We forecast an average US$58.00/bbl for 2019. An average much below this means the CBN will have to keep rates very high and could even challenge the Naira/US dollar exchange argument.
“An average much about US$60.00/bbl means the CBN will have confidence its reserve position, and will be able to cut rates later in the year”
Foreign exchange rates
Naira fixed income instruments will be found credible by foreign portfolio investors if the oil price trends at US$58.00/bbl or more for 2019. According to the report, an average of US$500 million will be supplied to the FX market per month by the Central Bank of Nigeria, starting with FX reserves of US$43 billion, the CBN will have few problems defending the ₦365.29/US$1 rate in 2019.
The CBN is likely to continue its current interest rate policy in 2019 given the forecast by Coronation on oil price outlook.
“The continuity is to offer risk-free naira at a level attractive to foreign investors – 17.39 per cent at the moment. The spread over domestic inflation (November: 11.28 per cent) is sufficient in our view. This points to a range of rates from 17.00 per cent to 19.00 per cent if inflation spikes up around election time.” The report stated.
Possible interest rate cut
If oil prices trend substantially over US$60.00/bbl for more than a quarter in 2019, and the CBN’s FX reserves remain strong, interest rate cuts will be in the offing in Q4, we believe, or even in Q3. If inflation has by then trended down towards the CBN’s target of 6.00 per cent-9.00 per cent, these cuts could be deep.
Interest rate cut is likely to occur in Q4 or even Q3 if the oil prices trend substantially over US$60.00/bbl for more than a quarter in 2019, and the CBN’s FX reserves remain strong, the report stated. In Czatoryski’s view;
“An average much about US$60.00/bbl means the CBN will have confidence its reserve position, and will be able to cut rates later in the year, in Q4, less likely Q3.The current rate of ₦365.29/US$1, or close to it, is likely to prevail this year. The CBN’s policy is to defend the rate and with reserves at US$43.0bn, it is in a strong position to do so.
“Inflation has proved stubborn and has trended at around 11.00% over the past few months. But if inflation trends, in 2019, towards the CBN’s target band of 6.00% to 9.00%, then it will help the CBN cut rates in order to stimulate the economy.”
CBN is expected to be more cautious with rates in H1 of the year due to the general elections of February and March. The report stated that one electoral outcome could bring a market-friendly administration and relaxation of exchange controls.
“We are agnostic on politics. However, there is some evidence that in the period after general elections (2011 and 2015) yields in the T-bill market tend to fall. This might help persuade the CBN to cut OMO rates later in the year.”
Forecast on Banks
The seven Nigerian banks covered by the report have a buy signal due to historically low valuations.
“A catalyst could come from the political sphere; from steep interest rate cuts; or a pick-up in growth. At such low valuations, portfolio managers need to think about bank stocks’ upside risk, in our opinion.” report says.
Coronation research is conducted by the Coronation Merchant Bank, a leading investment and corporate bank offering products and services in Wealth Management, Asset/Fund Management, Global Markets, Securities Trading and Trust Services. It was initially founded as Associated Discount House Limited (ADHL) in 1993 by a consortium of reputable financial institutions. The bank obtained a merchant banking license and foreign exchange license in 2015. The Bank was named the ‘Best Investment Bank in Nigeria at the 2018 World Finance Awards‘.