Nigeria’s
GDP growth expanded by an impressive 1.92% in the final quarter of 2017 which
elevated full year 2017 growth to 0.82% when compared to the -1.58% seen in
2016. The combination of recovering oil prices easing inflationary pressures
and foreign exchange stability, stimulated the nation’s economic recovery.
Africa’s
largest economy has yet again shown the global arena its unyielding resilience
and ability to reach the 3.5% growth target estimated by the Federal
Government. If the current momentum holds and economic data continues to follow
a positive trajectory, 2018 could be a year to remember for the nation.
Digging
deeper into Nigeria’s GDP figure for Q4, growth was fueled by crude oil
production, natural gas, metal ores, construction, transportation, trade,
electricity and gas production. A highly encouraging takeaway is how economic
growth was derived from other sustainable sources. It is likely that Nigeria’s
visible effort to break away from the grips of oil reliance has positively
impacted their economic outlook – ultimately boosting investor sentiment.
Focusing
on other core economic metrics, inflationary pressures are slowly becoming a
theme of the past in Nigeria. It must be kept in mind that inflation dropped
for the 13th consecutive month in January settling at 15.13% ,while foreign exchange reserve’s
gained 4.15% in the past month to reach $41.8 billion. With the economy
attracting a grand $12.2 billion in investment inflows during 2017, it is not
difficult to comprehend why sentiment towards Nigeria is turning increasingly
bullish.
There
is a suspicion that the combination of easing inflationary pressures and
improving economic outlook is encouraging the Central Bank of Nigeria to cut
rates sooner than anticipated. A rate cut has the ability to stimulate economic
growth and push GDP closer to the 3.5% target this year.
Taking
a peek into the foreign exchange, a strong degree of Naira stability was
witnessed in February with the local currency steadily appreciating against the
Dollar. While the Importers and Exporters window has played a role in the
Naira’s steady price action, another factor could be the overall positive
sentiment. Although the Naira has scope to appreciate further, external risks
revolving around the Dollar and Oil prices must not be overlooked. A resurgent Dollar has the ability to punish
emerging market currencies with the Naira being no exception.
Recent
developments concerning Federal Reserve Chairman, Jerome Powell, should be closely watched as we enter the new
trading month. Hawkish comments from Powell have already fueled market
speculation of the Federal Reserve raising US interest rates four times this
year. The allure of higher interest rates and appreciating Dollar could spark
capital outflows from Nigeria consequently pressuring the Naira.
With
regards to Oil, the outlook still remains somewhat cloudy as investors grapple
with a selection of fundamental themes impacting the commodity. While the
bull’s argument for oil to stabilize is likely based on OPEC’s production cuts,
risk’s associated with risk production from U.S Shale continues to empower the
bears. While we have repeatedly said that Nigeria could continue benefiting
from oil prices short term, lessons from the past have proven that this is not
a long term solution. With Oil prices vulnerable to heavy losses amid soaring
U.S Shale production, it remains highly encouraging that Nigeria is making
efforts to diversify from oil reliance.
As we
head into the final trading month of the first quarter of 2017, markets will be
heavily focusing on the developments surrounded the 2018 budget. For Nigeria to
maintain the strong momentum, it is critical that the 2018 budget is approved.
This will reduce uncertainty and boost investor confidence ultimately
supporting the nation further.
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