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Economic landscape: 2017 in review

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Egwim

Nigeria’s economy emerged from recession in 2017. The national accounts for Q4 2017 show an acceleration in growth from 1.4 per cent y/y in the previous quarter to 1.9 per cent.

The acceleration was in part a reflection of improved stability in the Niger Delta since the oil economy expanded by 8.4 per cent y/y, and therefore on the political leadership for responding to local sensitivities.

It was also driven by an improvement in the non-oil economy which expanded by 1.5 per cent y/y, following the previous quarter’s contraction of -0.8 per cent.

As for full year 2017, the economy grew by 0.8 per cent y/y compared with a contraction of -1.6 per cent in 2016.

Oil’s share of real GDP amounted to just 7.2 per cent in Q4 2017, which makes it the fifth largest sector in the economy after agriculture, trade, information and communications and manufacturing. Through its linkages across other sectors, however, the indirect oil economy may be as large as 40 per cent of GDP.

In the non-oil economy, the decent y/y growth posted by transportation and storage (double-digits) and construction may indicate some reward for the FGN for its infrastructure spending. Sectors more responsive to consumer spending (such as information and communications) disappointed.

The one sector which did not enjoy a q/q boost in the fourth quarter is agriculture; it contracted by -6.4 per cent due to the harvesting cycle.

Given that this is the final year before the next presidential election, it is possible that the current administration will execute on policies that could fetch quick wins. On that note, the FGN is likely to step up the pace of its fiscal expansion, notably with capital releases.

This fiscal stimulus will be a primary driver that should sustain the upward trend in GDP growth.

The inflation report for December showed end-year 2017 inflation at 15.4 per cent y/y. The driver was a steep decline in food price inflation from 20.3 per cent to 19.4 per cent y/y.

While the trend in the core measure has broadly reflected the softening of demand during the recession, food prices have remained stubbornly high because of supply factors, notably insecurity and a pick-up in food exports.

Headline inflation is expected to slow down steadily in the coming months (until June/July) on the back of positive base effects.

This trend should prompt the monetary policy committee, once it has solved the issue of quorum, to trim the policy rate.

As for the exchange rate, fx has been available and the rate has been broadly stable. Turnover on NAFEX (both sides of trades) is now generally more than US$1bn per week, and manufacturers can meet their import needs.

Offshore portfolio investors have returned, and the two Eurobond roadshows in 2017 were not affected by investor concerns around the fx policy.

As at end-2017, the interbank/official rate closed at N305 while the rate on NAFEX, which is independently managed and operated, settled around N360.

There is very little domestic pressure to change the current exchange rate system and it is unlikely an official adjustment (i.e. devaluation) will occur in the run-up to the elections.

Gross external reserves, which include the balance in the excess crude account (ECA), stood at $38.77bn at end-December. An end-year accumulation was largely due to the FGN’s successful Eurobond roadshow in November, which raised $3.0bn.

In addition to this, the recovery in oil export revenues (through the NNPC’s share of production) as well as the CBN’s fx reforms in H1 2017 also attracted substantial autonomous inflows.

Reserves at end-December covered 14.4 months’ merchandise imports, and 9.7 months when imports of services is included. The calculations are based on the balance of payments for the 12 months through to September 2017.

The debate should move on from whether Nigeria has an adequate external buffer to whether it is maximizing the revenue accruing from its reserves.

Shedding some light on the fiscal side, based on data from the CBN’s Economic Report Fourth Quarter 2017, it is clear that the fiscal branch of the FGN’s diversification agenda experienced limited success.

Gross non-oil revenue in 2017 amounted to N3.24trn, and so well below the target for the full year implied in the CBN’s commentary, of N5.34trn. Meanwhile, gross oil revenue in the same period of N4.11trn was far closer to target due to the recovery in oil production and prices.

Looking to 2018, there is a more positive outlook for the economy, with the oil economy maintaining an upward trend in growth due to improved production.

Given that this happens to be a pre-election year, some additional fiscal stimulus from government is expected. This should assist with boosting economic growth.

Egwim is a macroeconomist and fixed income analyst at FBNQuest Merchant Bank.


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