Government and Economy

MACROECONOMIC ENVIRONMENT – STABLE, STRONGER

The domestic economy has maintained its trajectory of positive growth in 2018. Notwithstanding, Gross Domestic Product (GDP) growth, in real terms, slowed to 1.95% year-on-year in Q1-2018, down by 16-basis points from 2.11% in Q4-2017.  Expectedly, the oil sector buoyed by stable oil prices, and stronger domestic production hitting 2.0million barrels per day in Q1-2018 compared to 1.95million barrels per day in Q4-2017, was the key GDP growth driver. In our view, weak recovery of the non-oil sector remains a downside to stronger GDP growth in 2018 as the non-oil sector recorded modest 0.76% growth year-on-year, in real terms, in Q1-2018 compared to 0.72% year-on year in Q4-2017.

Despite the current fragility and the prolonged period taken for rebalancing in the domestic economy, real growth of the non-oil sector in Q1-2018 was driven by Agriculture (Crop Production), Financial Institutions & Insurance and Manufacturing, and these sectors could be the bright spots for accelerating non-oil sector recovery amidst strengthening oil sector growth and improving macroeconomic and business environment in H2-2018 environment.

Consumer Price Index (CPI) published by the National Bureau of Statistics showed 11.61% headline inflation year-on-year in May 2018, representing the 16th consecutive decline in the CPI since January 2017 and 0.87% decline month-on-month, when compared to 12.48% in April 2018. The decline in May was attributed mainly to the sustained easing in the prices of food products, and base effect from the 2017 CPI figures.

It is expected that the base effect to continue in the coming months, hence our inflation model forecasts further, albeit subtle, moderation in the headline inflation to c.11% for June 2018.

The sustained decline in year-on-year inflation brings the Central Bank of Nigeria (CBN) closer to its single-digit inflation target and perhaps, could strengthen the argument for possible rate cut in the second half of the year 2018 as pointed out in our earlier publications. However, with expected expansionary fiscal activities as the Federal Government begins 2018 Budget implementation, anticipated electioneering spend especially towards the end of the year could elevate inflationary pressures in the coming period and remains a key risk to the declining trend in inflation.

The streamlining of the country’s FX windows contributed to the stabilization of FX rates in the first half of 2018 amid healthy accretion to the nation’s foreign reserves ($47.6billion: June 13, 2018). The SME, Retail and Investors & Exporters windows have been key for exchange rate normalization in 2018, all trading within NGN360/USD – NGN363/USD range as at June 2018. Sustained improvements in FX distribution through bank branches was key for shifting demand away from the parallel market consequently narrowing the gap between the official and parallel markets to NGN57.00 as at June 2018 from NGN195.00 as at year end 2016.

The Naira-Yuan swap agreement between Nigeria and People’s Republic of China is positive for NGN/USD exchange rate stabilization in the medium term as aggregate demand for US Dollar (USD) for international trade settlements will be diversified into the Chinese Yuan (CNY). The improving FX situation buoyed by the currency swap deal will be key to the revival of the domestic non-oil sector especially the Manufacturing and Trade sectors in H2-2018. In the subsequent section, we explore further the implications of the Naira-Yuan swap deal for Small and Medium Scale businesses in Nigeria.

Friday, July 6th, 2018

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