After a period of strength, the rapid sell-off in crude oil in November and December 2018 amid a testy political climate is driving a cautious outlook regarding Nigeria’s macroeconomic environment in 2019.
The Chief Investment Officer, Sigma Pensions Limited (Sigma), Mr. Pabina Yinkere said: “In our view, the investment landscape for the coming year will be shaped by relatively lower oil prices, the pace of monetary policy normalisation in developed markets and the 2019 general elections in February.”
Sigma Pensions Limited (Sigma) is one of the leading Pension Fund Administrators (PFAs) in Nigeria, providing pension administration and investment management to working Nigerians and retirees. They shared their outlook of the economic and investment landscape for 2019.
For much of 2018, Nigeria’s financial markets struggled under the weight of heightened political risk ahead of the 2019 polls. Also, a fresh concern over crude oil prices in a less accommodative global financial environment presents headwinds to the domestic investment landscape.
In 2019, Yinkere noted that “Nigeria’s large dependence on crude oil for Foreign Exchange (FX) reserves and fiscal revenues positioned her poorly in a soft crude oil price environment, which we envisage over the year.”
The implications of a less supportive current account balance for key economic variables are central in analysts’ thoughts around the macro economy, policy responses and asset price movements.
Yinkere also said “the central point from our review of the global macroeconomic environment is that in contrast to 2018 when stronger oil prices underpinned a favourable external balance for Nigeria, the reverse is likely to be the case in 2019.
“We adopt a pessimistic view on oil amid a growing supply-demand imbalance reflecting a mix of rising US Shale oil production and subdued global economic growth and its implications for oil consumption,” he said.
Accordingly, the analysts think any OPEC rebalancing will struggle to clear a building over-supply picture and expect the benchmark Brent crude oil prices to average between USD55-60/bbl (2018 average: USD71.7/bbl).
Given the large role of oil in Nigeria’s exports, their cynicism about oil prices feed through to a weaker view on the current account balance in 2019.
On the global front, they think US monetary policy will continue on the path of normalisation and envisage further rise in US bond yields curbing the quantum of foreign portfolio inflows to emerging/frontier markets.
Overall, the balance of payments is likely to present headwinds to Nigeria’s economic performance in 2019 and in particular the exchange rate.
Speaking on the 2019 elections, Yinkere said, “We think the election is going to be keenly contested. Nevertheless, as the election matches both candidates by ethnicity and religion, we see limited risk of an outbreak of widespread post-election violence. Given the time lag between the election in February and transition on May 29, we foresee economic policy inertia which will weigh on business and investment outlook in H1 2019 with implications for economic growth. Overall, we see Gross Domestic Product (GDP) growth of 2.3% over the year.
“On the currency front, while we see the Central Bank of Nigeria (CBN) maintaining the peg ahead of the elections, we think afterwards, the CBN will be under less pressure to hold the line on the currency amid a weakening current account,” he further stated.
He also envisaged a weakening of the exchange rate to around NGN382-390/$ as we approach the end of the year.
With no expected changes to key prices (fuel, electricity and the exchange rate) over H1 2019, inflation is likely to remain within the 12% band, the analysts posited.
However, in the second half of the year, Yinkere said, “we see upside risks to inflation on account of likely currency pressures as well as possible increments to fuel and electricity prices. Consequently, we expect inflation to average 13% over 2019 (2018e: 12.2%).
He opined that, higher interest rates will drive outperformance over equities in 2019.
“Our views about a less supportive external environment over 2019 imply a downside potential to the exchange rate. Nevertheless, we think the CBN will continue to defend the currency, at least over H1 2019, which will inform the continuation of a tight monetary policy,” he added.
The analyst said: “Over most of 2019, we think the tight policy stance will drive a focus on liquidity sterilisation which could push front-end interest rates to as high as 18% and support bond yields above 15%. Set against this high hurdle and in view of low foreign participation until clarity emerges on the political front, we think Nigerian equities will struggle for investor attention for much of 2019.
“For equities, we think Tier 1 banks with liquid balance sheets and low term deposit share of balance sheet funding will outperform other banks, as banks with these features are well positioned to benefit from the high interest rate environment,” Yinkere said.
For non-banks, the analyst believes that post-election and a de-risking of the political premiums on Naira assets will favour multinational names in the Fast Moving Consumer Goods (FMCG) sector where valuations appear attractive following the sell-off across the stock market over the last year.
“From a market fundamentals perspective, while we remain bearish on FMCG names in view of weak consumer purchasing power, we see tactical opportunity for playing some highly defensive names with cheap valuations presently,” he said.
For construction materials like cement, they experts said likely fiscal policy inertia in H1 2019 will lead to a slowdown in overall capital expenditure projects as well as building activities – thus dimming revenue outlook for the sector.
For the oil and gas sector, they noted that a lower oil price outlook switches the dynamics of the industry in favour of downstream companies. “Also, our views regarding likely fuel price adjustments in H2 2019 imply potential earnings expansion in these downstream companies.”
Key risks to analysts’ 2019 outlook are the emergence of a more bearish case in crude oil prices and a protracted conclusion to the 2019 elections.
The analysts therefore concluded that the Nigerian economy faces another round of oil-induced pressure over 2019. However, focus is likely to be on the elections and less on economics.
They said, in a bid to keep economic variables in a neutral state, monetary policy will shoulder the burden of delivering an economic policy response to the developing external environment and will tilt towards a contractionary stance.
“We think fiscal policy response will likely be delayed until much later in the year, whichever way the elections go. Given likely foreign reservation towards Naira assets in general, our investment strategy prioritises a focus on assets with high correlation to interest rates over most of 2019,” The economists said.
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