How Tinubu reforms impact naira, GDP growth, and inflation forecasts

The reforms of the Tinubu administration have changed our initial views on the macro economy.

Based on recent FX changes, we have revised our year-end forecast for the Naira to N785.77/US$ from N510/US$.

In the short term, we believe that there will still be a moderate disparity between the FX rates at the parallel market and the I&E window as more demand continues to go to the parallel market and supply remains constrained.

Reform Impact and High-Interest Rates Dim Growth Prospects
Price pressures and the need to attract foreign portfolio investors (FPIs) amidst elevated interest rates in advanced countries have remained at the front burner for the monetary policy committee, as they have clearly prioritized these concerns over growth.

Though a spike in inflation numbers implies a widening of the negative real interest rate and should call for more aggressive rate hikes, we do not believe the monetary authorities will be willing to raise the policy rate much higher than current levels given the new administration’s perceived bias for low-interest rates.

Going into H2, we forecast at most a 150bps rise in rates till the end of the year.

Nigeria’s Real GDP grew by 2.31% in Q1 2023, lower than the growth rate of 3.11% y/y in Q1 2022 due to the impact of the Naira cash crunch and the election-induced slowdown in economic activities.

We believe the new reforms and the prevailing high-interest rate environment will suppress growth in the non-oil sector while production in the oil sector has not improved as expected.

We revise our 2023 real GDP forecast down to 2.8% y/y from 3.1% previously.

Inflationary Pressures Intensify
Contrary to our earlier projection of a moderation in inflation rate in 2023 to 18.20%, aided largely by base effect, recent price triggers from PMS price adjustment, currency pressure from the unification of the exchange rate, and likely rise in electricity tariffs make us believe inflation numbers are set to rise significantly.

Beyond this, other policies such as the implementation of new import duties on selected goods and new taxes from the Finance Act will also contribute significantly to a rise in headline inflation in the near term.

Overall, we forecast headline inflation will reach a peak of 29.8%.

In the second half of 2023, we project the current account (CA) balance will remain positive, riding the gains from an improved export condition.

Specifically, we expect the devaluation of the currency at the official window to result in an increase in export value and a decrease in imports as imports become more expensive.

More insights
Again, we may likely see an improvement in the country’s fiscal position. The government expenditure for 2023 was estimated at an all-time high of N21.8 trillion.

Given expected savings on subsidy, the impact of the currency devaluation on FX revenue and expectations of growth in tax revenue from new taxes introduced in the new Finance Act, the target budget deficit of N11.34tn may as an exception to the recent pattern, not be exceeded.

The country’s fiscal deficit has surpassed the target by an average of c.65% over the last 5 years due to ambitious revenue estimates amidst volatile crude oil prices.

We believe the valuations of many stocks remain attractive despite recent gains. Within our coverage universe, we maintain Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, Lafarge Africa, DangCem, and MTNN.

Though many of these stocks have been re-rated following significant price increases over the past weeks, we still believe sustained interest in the stock market will lead to a further re-rating of these stocks.

NTB and FGN Bonds Experience Heightened Demand
Moreover, apart from GTCO which is currently trading at a PBV of 1.0x, all the tier-one banks are still trading at a significant discount to their book values (Access 0.4x, FBNH 0.6x, UBA 0.5x, Zenith 0.7x)

Liquidity in the fixed-income market improved in H1 2023 to N67.5bn (+47.15% y/y from N45.9bn in H1 2022) as investors positioned themselves in instruments with attractive yields.

The Nigerian Treasury Bill (NTB) average yield settled at 6.16% in H1 2023 (compared with 3.67% in H1 2022) with buy interest at the mid-end of the curve in the secondary market.

Demand across all tenors of the Federal Government of Nigeria (FGN) Bonds was relatively heightened in the period as the average yield settled at 11.77% compared with an average yield of 10.37% in H1 2022.

Based on expectations of only a moderate increase in the MPR in H2, we forecast that yields may expand by 100 basis points (bps) at the mid and long ends of the curve.

Real GDP: Economic growth to slow in H2
We revise our 2023e real GDP growth forecast down to 2.8% from our earlier forecast of 3.1%. Nigeria’s Gross Domestic Product (GDP) growth fell to 2.31% in Q1 2023 from 3.11% recorded in Q1 2022, and 3.52% in Q4 2022 according to the National Bureau of Statistics (NBS).

The decline in the country’s growth rate was attributed to the adverse effects of the Naira cash crunch which disrupted economic activities during the quarter.

The service sector was the major driver of the country’s GDP, recording a growth of 4.35% and contributing 57.29% to the aggregate GDP.

The agriculture sector declined by -0.90%, lower than the growth of 3.16% recorded in Q1 2022, as the sector continues to be hampered by incidences of insecurity.

Growth of the industry sector improved to 0.31% relative to -6.81% recorded in Q1 2022. Despite this, the agriculture and the industry sectors contributed 21.66% and 21.05% to the aggregate GDP in the quarter under review.

The oil sector which has been in recession improved to -4.21% in Q1 2023 compared with -26.04% in Q1 2022, as crude oil production improved during the quarter.

The NBS pegged the average daily oil production for Q1 2023 at 1.51mbpd, higher than the daily average production of 1.49mbpd recorded in the same quarter of 2022 and higher than the Q4 2022 production volume of 1.34mbpd.

The oil sector contributed 6.21% to the total GDP in Q1 2023, down from the figure recorded in the corresponding period of 2022 and up from the preceding quarter, where it contributed 6.63% and 4.34% respectively.

The non-oil sector grew by 2.77% in Q1 2023. This rate was lower by 3.30ppts compared to the rate recorded in the same quarter of 2022 and 1.6ppts lower than Q4 2022.

We believe that the decline in Nigeria’s economic growth rate in Q1 was largely due to the Naira scarcity and the 2023 general elections which disrupted economic activities in the country.

The improvements seen in the fortunes of the oil sector can be attributed to improved production volumes as the country reaped the benefits of its aggressive clampdown on crude oil theft.

The average crude oil production volume (with condensates) of 1.52mbpd was reported in Q1 2023 with an average price of US$83.97/bbl. Oil production slowed down in Q2 2023 with an average production volume of 1.38mbpd and an average price of US$77.73/bbl.

We have revised our forecast for production for FY 2023 to 1.48mbpd from 1.6mpbd previously.

However, we expect the devaluation of the currency to lead to improved output numbers for the oil sector and as such we retain our forecast that the oil sector will exit a recession in 2023.

The manufacturing sector grew modestly by 2.4% in 2022, reflecting the negative impact of CBN’s hawkish rendition, especially in the second half of the year.

In fact, the sector contracted by 1.91% in Q3 2022, the first contraction since covid hit in 2020.

Though at a slower pace, the CBN has maintained its hawkish stance and the fortunes of the sector appeared to have worsened with the latest reforms of the new administration such as the fuel subsidy removal and the unification of the exchange rates at the various windows.

In Q1 2023, the growth rate reduced to 1.61% compared with 2.83% in Q4 2022 and believe conditions will worsen in H2.

However, we expect the service sector to maintain its growth pace in the second half of 2023, supported by gains from ICT.

In our view, the rollout of the 5G network and the growing expansion of mobile money should drive ICT output. Elsewhere, we expect trade to positively impact on the services sector, profiting from an improved export position.