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Nigeria: Economic OutlookTop 10 themes for 2018
PwC Nigeria Economics
February 2018
PwC February 2018
2Nigeria: Economic Outlook
Disclaimer
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.
No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law.
PricewaterhouseCoopers Limited, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
PwC February 2018
3Nigeria: Economic Outlook
Contents
Theme 1 Oil prices still lower for longer
Theme 2 Economy growth gets a boost from high oil prices
Theme 3 Inflation declines sharply, driven mainly by base effects
Theme 4 Monetary Policy Rate set to fall, and then rise
Theme 5 Government’s fiscal deficit expands above budget
Theme 6 The exchange rate depreciates in the I&E window
Theme 7 Stable investment climate supports increase in FPI and FDI
Theme 8 PMS Deregulation Scenarios
Theme 9 Pre-election season gets underway
Theme 10 Three Emerging Scenarios for economic growth
3Nigeria: Economic Outlook
PwC February 2018
Oil prices still lower for longer
4Nigeria: Economic Outlook
Source: IEA, OPEC, PwC Analysis
0
20
40
60
80
100
120
Oil, Brent (USD/bbl)
Oil output freeze by OPEC and some non-OPEC countries
• An extension of the oil production cut agreement through 2018 should provide a floor for prices at USD55/bbl
• A balanced oil market will keep the oil price at USD60/bbl, 10% higher than 2017
• Rising US shale output remains a key supply risk which would cap oil prices around USD70/bbl
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
Economic growth gets a boost from high oil prices
5Nigeria: Economic Outlook
Sources: NBS, PwC Analysis
• Exports are likely to outpace imports on strong oil export revenues and shrinking import demand
• Real GDP growth to reach 2.0%y/y on improvements in net exports and domestic demand
• Investments will benefit from an improving investment climate. However, some of this growth will be offset by uncertainty usually associated with election cycles in Nigeria
-4%
-2%
0%
2%
4%
6%
8%
2014 2015 2016 2017e 2018f
Contribution to Real GDP growth
Private household consumption Investment
Government Expenditure Net exports
Inventory GDP
6.3%
2.7%
-1.5%
0.7%2.0%
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
Inflation declines sharply, driven mainly by base effects
6Nigeria: Economic Outlook
• Food inflation moderates to 14.0% y/y - the lowest since June 2016, mainly a reflection of improved food output in H2’18
• Headline inflation decelerates 4.3 ppt to an average of 12.2% y/y, driven by base effects from the relatively high inflation rates in H1’17
• Core inflation slows to 11.2%y/y as the impact of base effects more than offsets inflationary pressures from stronger consumer demand and higher transport costs
0%
5%
10%
15%
20%
25%
2014 2015 2016 2017 2018F
Average annual inflation rates (y/y)
Headline Core Food
Sources: NBS, PwC Analysis Note: The inflation figures quoted refer to the average for the year
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
200bps reduction in MPR in March 2018
200bps increase in September 2018
Projections
0%
2%
4%
6%
8%
10%
12%
14%
16%
Ja
n-0
9
Ju
n-0
9
No
v-0
9
Ap
r-10
Sep
-10
Feb
-11
Ju
l-11
Dec
-11
Ma
y-1
2
Oct
-12
Ma
r-13
Au
g-1
3
Ja
n-1
4
Ju
n-1
4
No
v-1
4
Ap
r-15
Sep
-15
Feb
-16
Ju
l-16
Dec
-16
Ma
y-1
7
Oct
-17
Ma
r-18
Au
g-1
8
Monetary Policy Rate (MPR)
150bps increase in MPR 16 months prior to April 2011 elections
100bps increase in MPR 15 months prior to March 2015 elections
Monetary Policy Rate set to fall, and then rise
7Nigeria: Economic Outlook
Sources: CBN, PwC Analysis
• We expect only one rate cut in 2018 which would likely be capped at 200bps. The need to keep rate differentials attractive means OMO issuances would become more aggressive
• To offset the impact of pre-election spending and currency volatility, we expect a 200bps increase in the MPR to 14% at the September meeting
• Moderating inflation, exchange rate stability and a fragile economic recovery provide room for a rate cut
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
Government’s fiscal deficit expands above budget
8Nigeria: Economic Outlook
Source: Budget Office, PwC Analysis
• Consequently, debt service to revenue expands to 45%, higher than the projected 31% in the budget
• Fiscal deficit widens by 67% to NGN3.4 trillion (2.4% of GDP). We expect that the deficit will be funded by an increased issuance in the domestic bond market
• We expect revenues to underperform budget by c.34% as a shortfall in non-oil revenues offsets the impact of the strong recovery in oil revenues
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
0.9%1.7%
2.2%
2.6%2.4%
0%
1%
2%
3%
-
3
6
9
2014 2015 2016 2017E 2018F
NG
N't
ril
lio
n
Federal Government expenditure, revenue and fiscal deficit (% of GDP)
Expenditure (LHS) Revenue (LHS) Deficit (RHS)
PwC February 2018
Recent history suggests that election cycles are associated with increased foreign exchange demand
9Nigeria: Economic Outlook
Source: CBN, PwC Analysis
-
10
20
30
40
50
60
Ja
n-1
0
Ju
n-1
0
No
v-1
0
Ap
r-11
Sep
-11
Feb
-12
Ju
l-12
Dec
-12
Ma
y-1
3
Oct
-13
Ma
r-14
Au
g-1
4
Ja
n-1
5
Ju
n-1
5
No
v-1
5
External Reserves (USD’ billion)
A sharp 24% decline between January 2010 and May 2011
A sharp 30% decline between January 2014 and May 2015
140
150
160
170
180
190
200
Ja
n-1
0
Ju
n-1
0
No
v-1
0
Ap
r-11
Sep
-11
Feb
-12
Ju
l-12
Dec
-12
Ma
y-1
3
Oct
-13
Ma
r-14
Au
g-1
4
Ja
n-1
5
Ju
n-1
5
No
v-1
5
Interbank Rate (NGN/USD)
A mild 4% depreciation between January 2010 and May 2011
A significant 23% depreciation between January 2014 and May 2015
Note: The extent of depreciation in the exchange rate depends on the broad macro-economic environment during the election season
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
The exchange rate depreciates in the I&E window
10Nigeria: Economic Outlook
Source: CBN, PwC estimates
With the outlook on the oil price and level of reserves accretion (USD40.6 billion*), we expect that the CBN would maintain the exchange rate peg of NGN305/USD at the CBN window
1
In H2’18, we estimate a 7% exchange rate depreciation in the I&E window to NGN386/USD, as FX demand increases and foreign investments slow ahead of the 2019 elections
2
Overall, the CBN maintains its multiple exchange rate regime, sustaining its intervention in the various FX markets
3 150
250
350
450
550
Exchange rate (Official vs I&E Window vs Parallel market
Parallel Market (NGN/USD) Interbank (NGN/USD)
I&E Window (NGN/USD)
7% depreciation in exchange rate
Projection
*External reserves data is as at January 30 2018
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
Stable investment climate supports increase in FPI and FDI
11Nigeria: Economic Outlook
Source: CBN, NBS, PwC estimates
FPI increases moderately, due to strong foreign investor interest. However, we expect a slowdown in FPI in H2’18, driven by uncertainty ahead of the elections
FDI advances slightly, driven by a favourable investment climate and broad macroeconomic stability
Key risks to foreign investment include :• Declining interest rate differentials as
advanced economies continue to tighten policy rates
• Political instability ahead of the 2019 elections drives uncertainty around government policies
Key Considerations
-
1,000
2,000
3,000
4,000
2014 Qrt.Avg.
2015 Qrt.Avg.
2016 Qrt.Avg.
Q1'17 Q2'17 Q3'17
Foreign Investment, 2014 - Q3'2017 (USD'million)
Foreign Portfolio Investment Foreign Direct Investment
1
2
3
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
PMS Deregulation scenarios: petrol prices will likely be maintained at NGN145/litre
12Nigeria: Economic Outlook
Source: PPPRA, PwC estimates
Exchange rate (NGN/USD)
Oil price (USD/bbl.)
50 60 70 80
285 144 164 184 205
325 160 183 206 229
365 176 202 228 254
405 192 221 250 278
Fuel subsidy
• NNPC continues to be the sole importer of petrol. Intermittent scarcity in the supply of petrol persists.
• Impact on headline inflation is marginal. Estimate remains around 12.2% y/y in 2018, in line with our projection
Scenario A
Full Deregulation
• The exchange rate assumption is marked to NAFEX; petrol prices increase by at least 57%
• Marketers resume importation of petrol, with improved supply
• Headline inflation accelerates to 15.0% y/y in 2018, 180bps above our baseline estimate
Scenario B
• The grey area in the table are the possible retail prices of petrol per litre, given changes in exchange rate and oil price
• Note: The estimates are based on PPPRA’s previous petrol pricing template as at May 2016, margins are held constant
How much could Nigerians pay for petrol?
Estimated retail price of PMS under a full deregulation scenario
Current administered price
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
New parties, defections and political truces; the pre-election season gets underway
13Nigeria: Economic Outlook
Source: NBS, PwC estimates
*No of Parties:
68
Presidential elections:16 February 2019
What we know…
Emerging three horse race?
Parties
?
All Progressives Congress
Peoples Democratic Party
A new coalition?
New alliances are being formed by prominent politicians and old guards to upset the
dominance of the APC and PDP
• Zoning implies the sharing or rotation of public office based on region, ethnicity or religion aimed at reducing domination or marginalization of a group(s) of people
The zoning principle
Unwritten rule
• Reviewing election results from the past 2 presidential election cycles, we observed a shift in the voting pattern of voters in the South-West and the North-Central states in the 2o15 elections
• The question is, which states will swing in 2019?
What does historical data tell us?
* As at January 2018 PwC Analysis
Which states will swing in 2019?
Niger
Niger
CPCMuhammadu Buhari
PDPGoodluck Jonathan
ACN Nuhu Ribadu
APCMuhammadu Buhari
PDPGoodluck Jonathan
2011 Presidential Election
2015 Presidential Election
Note: CPC and ACN merged into APC in 2013
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
A stable political environment key to sustaining Nigeria’s economic recovery
14Nigeria: Economic Outlook
Our AssumptionsOil price
(USD/bbl.)Oil
Production (mbpd)Structural reforms
Scenario 1: Accelerated Policy reforms 60 2.2Fast-paced implementation of structural reforms, particularly those related to the business environment
Scenario 2: Weak policy implementation 60 2.2Sluggish implementation of structural reforms, with the drive for import substitution progressing at a slow pace
Scenario 3: Heightened political risk 60 1.7Political tension accelerates in the wake of 2019 general elections, negatively impacting policy implementation
Source: NBS, PwC estimates
-2%
0%
2%
4%
6%
8%
2017 2018 2019 2020 2021 2022
Real GDP Growth
Scenario 1
Scenario 2
Scenario 3
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
Lower oil prices, disruptions to crude oil production, and political instability are the major near term risks
15Nigeria: Economic Outlook
Risks DescriptionPotential
impactLikelihood of
occurrenceTime horizon
Lower oil prices • Failure of OPEC members to comply with production cuts
agreement and increasing shale productionShort to medium term
Slowdown in key economies
Monetary policy normalization
• Slowdown in economies with strong trade relations with Nigeria,particularly China, the UK , the US and India
• Ongoing monetary policy normalization in the US could lead to a reversal of foreign capital and restrict further flows
Short to Medium term
High inflation• Pre-election and 2018 budget spending
• Adjustment of petrol prices and power tariff
Short to Medium term
Oil production disruption
• Attacks on oil and gas facilities by militant groups in the Niger Delta region
Short to Medium
Political risk/Heightened insecurity
• Pre-election uncertainties could elevate political tensions, and leadership succession could hamper policy continuity
• Continuous insurgency in the Northern region
Medium term
Short to Medium term
Low Medium High
Oil price Economic Growth Inflation Rate Interest Rate Fiscal Finances Exchange Rate Investment Petrol Supply: Scenarios 2019 Elections Three Emerging Scenarios Nigeria's Risk Matrix
PwC February 2018
16Nigeria: Economic Outlook
Abbreviations
APC All Progressives Congress
ACN Action Congress of Nigeria
BBl Barrel of Crude Oil
CBN Central Bank of Nigeria
CPC Congress for Progressive Change
FDI Foreign Direct Investment
FPI Foreign Portfolio Investment
GDP Gross Domestic Product
I&E Investors and Exporters Window
MPC Monetary Policy Committee
MPR Monetary Policy Rate
NAFEX Nigerian Autonomous Foreign Exchange Rate Fixing
NBS National Bureau of Statistics
NGN Nigerian Naira
NNPC Nigerian National Petroleum Corporation
OMO Open Market Operation
PDP People’s Democratic Party
PPPRA Petroleum Products Pricing Regulatory Agency
USD United States Dollar
PwC February 2018
Contacts
Adedayo AkinbiyiSenior Manager & EconomistPwC [email protected]
Andrew S. NevinPartner & Chief EconomistPwC [email protected]
Razaq FataiJunior EconomistPwC [email protected]
Adedayo BakareJunior EconomistPwC [email protected]
Thank you
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific
professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers
Limited (a Nigerian limited liability company, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in
reliance on the information contained in this publication or for any decision based on it.
© 2018 PricewaterhouseCoopers Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Limited (a Nigerian limited liability company), which is a member firm of PricewaterhouseCoopers
International Limited, each member firm of which is a separate legal entity. Please see www.pwc.com/structure for further details.