Nigeria's H2 Macroeconomic outlook

Against the backdrop of a pessimistic global outlook for 2019, we maintain our growth forecast for the Nigerian economy at 2.1% y/y in 2019. We expect growth from the non-oil sectors, led by the information and communication sector as the adoption of information and communication technology (ICT) by the country’s teeming population continues. However, we believe growth in the real sectors will remain subdued due to structural problems.

Despite increased uncertainty in the oil market, we raise our oil price forecast to average US$68/bbl in 2019 from US$60/bbl at the start of the year. For the rest of the year, we anticipate that crude supply in the global market will continue to remain tight on the back of OPEC+ production cuts and continued supply disruptions from the shaky-five (Iran, Venezuela, Libya, Angola, and Nigeria).

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Through H1-2019, the naira remained relatively stable at both the parallel market and I&E window at c.N360/US$. The accommodative monetary policy stance adopted by the US Fed limited the outflow of capital from emerging markets and eased pressure on local currencies, the Naira inclusive. In addition, higher oil prices and the negligible growth in imports which reduced demand for the dollar, fuelled accretion in reserves to support the Naira. Looking ahead, we expect the Naira to remain stable at c.N360/US$ for the rest of the year, supported by our optimism around global oil prices and portfolio flows for the rest of the year.

On account of expectations of a stable Naira exchange rate, we expect the inflation to average 11.1% in 2019 (2018: 12.1%) supported by a slackening in price pressure on both the food and core sub-indices, compared to 2018.

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With respect to monetary policy, we anticipate a further rate cut of no more than 50bps before the end of the year. Though the decision by the MPC to lower the MPR in March, signals the adoption of a pro-growth approach, we see a need for the MPC to loosen cautiously to sustain portfolio flows to the economy.

Digital Banking

In the last few years, the country’s fiscal profile has been characterised by colossal expenditure plans, optimistic revenue assumptions and substantial shortfalls in revenue which have had to be financed by both local and foreign borrowings. We note that with the factors that pose a downside risk to the country’s fiscal profile still in place (over-reliance on oil revenue, inefficient tax system, inadequate investment in the oil sector and a volatile Niger-Delta region) a shortfall in government revenue estimate for 2019 is almost unavoidable.

In addition, high cost of subsidies as well as the implementation of the new minimum wage, will further stretch the government’s purse and could cause fixed income investors to demand a higher yield for their investments thereby worsening the government’s fiscal profile.

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