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Nigeria failed to consolidate on recovery from recession -Report

Nigeria was expected to have consolidated its recovery from recession with improvements on its GDP. This was especially so with continued improvements on its oil production.

Given the continued adoption of a conciliatory stance by the government in the Niger Delta, the Africa FICC said, “we are biased towards oil production averaging 2.11mbpd in 2018 (2017e: 1.91mbpd). On-streaming of Total’s 200-250kbpd Egina oil field poses upside to production forecasts.

“Furthermore, we expect the telecommunications sector to exit recession in Q2 2018 as subscriber growth recovers from the regulatory induced line disconnections that drove the sector into recession in 2017.

“In addition, we expect the positive trends in manufacturing PMI to increasing reflect in manufacturing GDP. Alongside higher oil prices, we expect improved oil output to drive adoption of expansionary fiscal and monetary policies which accommodate a higher level of economic activity in the non-oil sector. In all we look for headline 2018 of 2.6% from 0.8% in 2017.”

Set against a largely stable currency backdrop, sizable base effects and softening domestic food prices, Nigeria was projected for an extension of current disinflationary trends over the first half of 2018. Having deferred electricity tariff adjustments to July 2019, “we see limited appetite for the Muhammadu Buhari administration to allow an upward adjustment in the official petrol pump price, to capture changes in crude oil prices, ahead of the elections. In the absence of a formal subsidy regime, we see likely inflationary pressures from intermittent spells of petrol supply shortfalls. However, these are likely to be a side-show to the inflation story in 2018 due to existence of large base effects and forecast average inflation to slow to 12% (2017: 16.5%),” the body stated.

Indeed, in 2018, Nigeria’s government plans to spend a record NGN8.6trn (up from NGN7.4trn) with capital spending set to account for 30% of budget.

On the revenue side, the government projects a 30% y/y rise in fiscal revenues to NGN6.6trn with oil revenues at N2.4trn assuming average oil price of USD45/bbl, oil production of 2.3mbpd and an exchange rate of NGN305:USD1.

Though stronger oil sales suggest higher fiscal revenues, it is doubtful if Nigeria can achieve its projected non-oil receipts and the credibility of the implementation of capital spending.

Consequently, it was estimated that only an 11% y/y rise in projected fiscal receipts to NGN4.6trn relative to budget forecasts was a as we are less optimistic over fiscal projections for independent and other revenues. On the expenditure side, in line with historical patterns, we are not convinced on the FG’s credibility with regards budget implementation and assume only 75% execution. We expect capital expenditure to bear the brunt of fiscal containment and assume only 30% implementation which, in our view, will result in a fiscal deficit of NGN2.1trn (1.6% of GDP).

A report on Proshare.com stated that, “A combination of higher prices and improved production cascade into stronger exports outlook (2018e: up 14% to USD57bn). In line with the pick-up in economic growth and improved FX liquidity, we see a recovery in import growth following two years of contraction on account of FX curbs.

“We estimate imports at USD56.8bn for 2018 (up 12% y/y). After a slowdown in 2016 on account of CBN capital account curbs, remittance flows have returned to trend levels (2017e: up 7% y/y to USD21.2bn) following greater flexibility and we expect improving global economic picture to drive modest increases in the item over 2018 to USD22bn. However, we view the resurgence in imports as driving a moderation in the current account surplus to 2.2% of GDP in 2018 (2017e: 2.7%, 2016: 0.6%).”

Given the size of oil receipts to fiscal revenues (~75% of total revenues) and exports (over 90%), the report stated that steep declines in oil prices and resumption in militant attacks on oil installations pose downside risks to oil exports with adverse implications for economic growth, fiscal balances and the exchange rate.

It said ahead of the February 2019 elections, it forecasts increasing political risk premiums on NGN assets which would diminish foreign interest in Nigerian financial markets.

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