Nigeria’s Economy| Outlook for 2014

IMF forecasts stronger global growth in 2014 and 2015

 
World output grew 2.9% in 2013 from 3.2% in 2012 according to the recent IMF report on World Economic Outlook (WEO) released on January 21, 2014. Global activity strengthened during the second half 2013, driven by higher inventory demand in the advanced economies and export rebound in emerging and developing markets. The growth momentum is expected to progress into 2014 and beyond.
 

Global equities in a losing spree as U.S Fed wields the big stick

 
Global equities came under pressure at the beginning of the
year having been stretched after a 2013 bull run, combined with investors re-evaluating the QE tapering threat. Though the U.S economy stood resilient and corporate performances were mixed (but impressive on balance), equities market performances in advanced markets remained minute. Better job data raised investors' agitations on the speed of the QE wind-down. After a poor run in 2013, emerging market stocks also opened 2014 trading on a bearish note, with weak Chinese manufacturing data released during the period complicating issues.
 

Going into February, developed market stocks are likely to gradually overcome the U.S Fed-induced pressure, particularly on persistently strong U.S economic data and the Euro government's commitment to a progressive recovery. Stable corporate earnings would also boost market recovery. However, less is expected of emerging market stocks as the recovery in advanced economies and the scale-back of U.S QE would continue to influence capital reversal away from local assets. The recent spree of interest rate hikes may temper the wave of outflow, but what is unclear is how much they will support the markets.
 

Crude oil price weakened by supply concerns

 
It was a challenging month in the crude oil market as investors laid their bets cautiously amidst supply concerns. Having shed about 0.3% (for Brent crude prices) in 2013, the commodity opened trading in 2014 with a m/m loss of 3.14% as a combination of factors weighed on prices.
 

In terms of outlook, the factors affecting Brent crude oil prices appear more to the downside.
 

Gold: How sustainable is the recovery?

 
After a drastic fall in 2013 (28% price decline), gold seemed to find have its allure as a true store of value. The price of the commodity rallied by 3.56% to US$1,247.91/ounce in January on the back of both technical and fundamental factors.
 

The sustainability of the current price upturn is hinged on the demand outlook from Asia and the Fed's QE tapering. 

NIGERIA

Politics and Security

 
Finally, the timetable for the 2015 general elections was released on January 25, 2014. For the first time since the return to civil rule in 1999, Nigeria's general elections will hold in February, a decision taken by the Independent National Electoral Commission (INEC) at the end of its 4-days retreat. That being said, political events in the last thirty days have been sour (and at the expense of the country), beginning with various incidents of brawl and physical engagements between the ruling People's Democratic Party (PDP) and the All Progressive Congress (APC) – the strongest opposition - in Rivers state.
 

After a brief period of quietness, security crisis has erupted in the North again, with incidents of bomb blasts and mass killings making headlines almost on a day-to-day basis. The principal architect remains the Boko Haram sect.
 

Inflation rate up to 8% in December 2013; 100bps left of CBN's 2014 upper target

 
The Consumer Price Index (CPI) which measures inflation rose by 8% year-on-year in December 2013, representing 10bps increase from 7.9% in November. This represents the second (by same 10bps) uptick in a row after the headline figure fell to a five-year low in October 2013.
 

Monetary Policy Committee begins implementation of hawkish proposal; increased public sector CRR to 75% 

At the finale of the first Monetary Policy Committee (MPC) meeting held 20th and 21st January 2014, the MPC members decided to; (1) Retain the monetary policy rate (MPR) at 12% +/-200 basis points and liquidity ratio (LR) at 30% (2) Increase the public sector cash reserve ratio (CRR) from 50% to 75%, while private sector CRR was retained at 12%. (3) Take immediate steps to redress the supply-demand imbalance in the Bureau de Change (BDC) segment while maintaining focus on anti-money laundering (AML) activities.
 

Suspicious movements in the foreign reserve point of CBN interventions

 
We traced the decline in the foreign reserve to increased funding at the RDAS, and probable CBN interventions at the inter-bank currency market during the period of late December and early January. We believe the major source of pressure on the foreign reserve stems from increased funding of the official window in recent times (since the re-opening of the official window in 2014). 

THE CAPITAL MARKET 

Equities: The January effect defied after four years

 
Coming into 2014, the equities market already appeared exhausted (as stated in our Nigeria 2014 Outlook: Economy and Market; Beyond the Rhetoric) hence, expectations were very conservative. Notwithstanding, somewhere lied the belief that the bourse will still post a positive return, anyhow, in January, to move the trend which started in 2010 to five years in a row.
In reviewing market drivers for the month of February, there appear to be more factors that may lead to the downside rather than upside performance.
 

Fixed Income

 
The T-Bill market got an early January boost from the liquidity surge in the system stemming from the redemption of N1trillion worth of AMCON bonds on the 31st of December 2013, the inflow of about N290billion from FAAC (we have discounted the 50% CRR from the gross sum), and a maturity of a significant amount of OMO bills. However, the rally came to a halt as contagion emanating from worries about the investment case for emerging markets filtered into the Nigerian fixed-income market.

Implementation of 75% CRR, slowdown in foreign inflows, and OMO sales should push T-Bill yields higher in February.

The bond market largely followed the trend seen in the T-Bill market, initially benefitting from the high level of liquidity in the system but also coming under pressure later in the month as offshore investors withdraw capital and sort the Dollar.

Our outlook for the bond market is less bearish. Although we expect the average yield to move higher in February, we see more resilience in this market giving the fact that it has better immunity to the CBN's main high frequency liquidity management tool (OMO sales).
 

No respite for the Naira in January

 
For the exchange rate, a combination of elevated demand (for physical transaction purposes), the early close of the official window (on 18 December 2013), and the tapering of QE weighed on the Naira (it lost against the US Dollar (-1.29%) and Pound (-0.97%) but strengthened against the Euro (+0.87%)).

We expect a continuation of Naira weakness in February as improving economic data from the US and the tapering of QE sustains outflows seen in recent times.

 

Credit: Proshare