Post on 30-Apr-2018
Economic and Financial Outlook: 2016-2020
FSDH Research
1
Economic and Financial Markets Outlook (2018 – 2022):
Strong Growth Prospect with Downside Risks
FSDH Research
February 09, 2018
Economic and Financial Outlook: 2016-2020
FSDH Research
2
Contents
Executive Summary: ........................................................................................................................................................ 4
1.0 Global Economic Growth: .......................................................................................................................................... 5
1.1 Global Bond Market: .............................................................................................................................................. 6
1.2 Risks to the Global Economic Growth Outlook: ..................................................................................................... 7
1.3 Implications for the Nigerian Economy: .................................................................................................................. 7
1.4 Global Commodity Markets: ................................................................................................................................... 8
1.5 Global Oil Price: ..................................................................................................................................................... 9
1.6 FOMC Rate Decision: .......................................................................................................................................... 11
2.0 The Nigerian Economy: ........................................................................................................................................... 12
2.1 Purchasing Managers’ Index (PMI): ..................................................................................................................... 12
2.2 Real Gross Domestic Product (GDP): .................................................................................................................. 13
2.3 Opportunities: ....................................................................................................................................................... 17
2.4 Risks: ................................................................................................................................................................... 18
3.0 External Reserves: ................................................................................................................................................... 19
4.0 Foreign Trade: ......................................................................................................................................................... 20
5.0 Foreign Exchange Rate: .......................................................................................................................................... 24
6.0 Public Debt:.............................................................................................................................................................. 26
7.0 Unemployment Rate: ............................................................................................................................................... 28
8.0 Nigeria’s Importation Update: ................................................................................................................................... 30
9.0 Inflation Rate: ........................................................................................................................................................... 32
9.1 Implications: ......................................................................................................................................................... 33
9.2 Risks to the Single Digit Inflation Rate: ................................................................................................................ 34
10.0 The FGN Medium-Term Expenditure Framework 2018 - 2020: ............................................................................. 35
10.2 Implications: ....................................................................................................................................................... 37
11.0 Interest Rate: ......................................................................................................................................................... 38
12.0 Equity Market: ........................................................................................................................................................ 42
12.1 The Secondary Market: ...................................................................................................................................... 42
12.2 Equity Market Drivers in 2017 ............................................................................................................................ 42
12.3 Outlook for 2018 ................................................................................................................................................ 43
12.4 Sectoral Performance and Outlook: ................................................................................................................... 44
12.4.1 Banking: ...................................................................................................................................................... 44
Economic and Financial Outlook: 2018-2022
FSDH Research 3
12.4.2 Consumer Goods ........................................................................................................................................ 44
12.4.3 Industrial Goods .......................................................................................................................................... 45
12.4.4 Oil and Gas ................................................................................................................................................. 45
Economic and Financial Outlook: 2018-2022
FSDH Research 4
Executive Summary:
FSDH Research forecasts a Real Gross Domestic Product (GDP) growth rate of 3.16% in
2018 and 4.09% in 2019
Agriculture, Trade, and Mining & Quarrying sectors, with forecast growth rates of 4%, 2% and
3.2% respectively, would lead to the growth in 2018. Other leading sectors of the economy
that would contribute to the growth are: Information and Communication (I&C): 2.2%; Real
Estate: 2.5%; Construction: 4% and Manufacturing: 1%
The growth in the equity market has created additional wealth that would stimulate effective
demand in the economy. Some light manufacturing activities are also taking place –
stimulating demand for raw materials from Agriculture sector. The current crude oil price above
US$65/b will encourage investment activities in the oil and gas sector. Trade sector would also
benefit from the expected increase in the consumer purchasing power
The major opportunities in the growth projections are: Investment opportunities to increase
production activity and to create value addition across most of the profitable segments of the
agriculture value chain; Import substitution strategies in agro-allied industries; manufacturing
sector should receive a boost following the relative stability in the foreign exchange market;
FGN and state governments to sign more Public Private Partnership (PPP) deals to promote
infrastructure development; a rebound in the corporate and infrastructure bond markets, and
real estate sector should attract more investments as the economy improves
The major downside risks to the growth are: the rising social unrest in some parts of the country
may affect economic activities and lead to escalating inflation rate; external factors that can
lead to a significant drop in the crude oil price may have adverse impact on the economic
activities in Nigeria and possible capital flight out of Nigeria if there are excessive interest rate
increase in the advanced economies. Although we do not expect any political instability in the
country, electioneering activities may slowdown economic activities and exert upward
pressure on prices
The outlook of the equity market remains positive in 2018 as FSDH Research expects the
macroeconomic environment in Nigeria to strengthen further. Thus we forecast a growth of
27.43% in 2017, lower than the growth of 42.30% recorded in 2017. We expect a strong rally
in the first half of the year 2018. We see investment opportunities in the Banking, Building
Materials and Consumer Goods sectors of the market
FSDH Research expects the Monetary Policy Committee (MPC) of the Central Bank of Nigeria
(CBN) to ease monetary policy as inflation rate declines and exchange rate remains stable.
This development will lead to growth in credits to the private sector, rebound in the activities
in the corporate bond market, increase in the issuance of commercial paper and a growth in
the equity market. We expect the average yields on the fixed income securities to drop
substantially lower in 2018 than the levels attained in 2017.
Economic and Financial Outlook: 2018-2022
FSDH Research 5
1.0 Global Economic Growth: The short-to-medium term outlook of the global economy is positive. The World
Bank Global Economic Prospects (GEP), January 2018 edition notes that the broad
base adjustments upturn would be sustained. It however recognises some downside
risks. The World Bank expects global growth rate at 3.1% in 2018 and 3% in 2019. The
IMF also released a global growth rate forecast of 3.9% in 2018 and 2019.
The World Bank report notes that most regions will experience growth in 2018. The
major drivers of growth are: the rebound in global investments, favourable financing
cost, rising profits, and improved business sentiments across both advanced
economies and emerging market and developing economies (EMDEs).
The GEP states that although near-term growth could surprise on the upside, the global
outlook is still subject to the substantial downside risks which are: the possibility of financial
stress, increased protectionism, and rising geopolitical tensions.
World Bank suggests that policy initiatives to lift physical and human capital, encourage
labour force participation, and improve institutions could help raise potential growth and
reduce inequality.
Table 1: GDP Growth Rate (Actual Vs Forecast)
Global/Region/Country 2015A 2016A 2017E 2018F 2019F 2020F
World 2.8% 2.4% 3.0% 3.1% 3.0% 2.9%
United States 2.9% 1.5% 2.3% 2.5% 2.2% 2.0%
Japan 1.4% 0.9% 1.7% 1.3% 0.8% 0.5%
Euro Area 2.1% 1.8% 2.4% 2.1% 1.7% 1.5%
Emerging and Developing Economies China 6.9% 6.7% 6.8% 6.4% 6.3% 6.2%
India 8.0% 7.1% 6.7% 7.3% 7.5% 7.5%
Sub-Saharan Africa 3.1% 1.3% 2.4% 3.2% 3.5% 3.6%
Nigeria 2.7% (1.6%) 1.0% 2.5% 2.8% 2.8%
South Africa 1.3% 0.3% 0.8% 1.1% 1.7% 1.7%
Source: World Bank Global Economic Prospects, January 2018
The short to medium term
outlook of the global economy
is positive.
The major downside risks are
the possibility of financial stress,
increased protectionism, and
rising geopolitical tensions.
Economic and Financial Outlook: 2018-2022
FSDH Research 6
1.1 Global Bond Market:
The prices of government bonds appreciated in more countries that we monitored
in 2017 than they depreciated. The 7.60% April 2021 Russia Government Bond recorded
the highest Year-on-Year (YoY) price increase of 4.57% to 107.10 as at end-December
2017. This was followed by the 16.39% January 2022 Nigeria Government Bond which
recorded a YoY price increase of 4.57% to 107.10. The Argentina, Egypt and the Nigeria
Bonds closed the year at negative real yields. The real yield on the Kenya Bond remains
the most attractive in terms of real yield, as at end of the year amongst the countries
we monitored.
FSDH Research expects the yields across the world to increase in 2018 with the planned
monetary policy normalisation in the advanced economies.
Table 2: Summary of Key Indicators
S/N Indicators Argentina China Egypt India Kenya Nigeria Russia South Africa Turkey USA
1 Bond Price 120.00 98.62 104.00 103.60 101.18 107.10 104.00 99.41 87.90 97.58
2 Bond Yield 1.17% 3.82% 15.65% 7.19% 12.35% 14.03% 6.32% 7.89% 11.74% 2.23%
3 Bond Price YoY Change (1.38%) (4.91%) 2.45% (2.77%) 4.16% 4.57% 5.91% 3.62% (1.46%) 0.20%
4 Bond Yield YoY Change (0.42%) 0.96% (0.88%) 0.50% (1.11%) (1.64%) (1.95%) (0.72%) 0.63% 0.04%
5 Real Yields (21.94%) 2.02% (6.25%) 2.31% 7.85% (1.87%) 3.82% 3.29% 0.54% 0.03%
6 Volatility 8.32 1.62 3.16 0.76 1.70 2.10 1.11 1.19 2.56 0.73
7 FX Rate YoY Change* 14.73% (6.73%) (2.06%) (6.34%) 0.65% 12.41% (6.67%) (10.96%) 7.23% 12.39%
8 Inflation Rate 23.10% 1.80% 21.90% 4.88% 4.50% 15.90% 2.50% 4.60% 11.20% 2.20%
9 Policy Rate 26.25% 4.35% 18.75% 6.00% 10.00% 14.00% 7.75% 6.75% 8.00% 1.50%
10 Debt to GDP 54.20% 46.20% 92.30% 69.50% 55.20% 18.60% 17.00% 51.60% 28.30% 106.00%
11 GDP Growth Rate 2.70% 6.80% 4.90% 6.30% 4.40% 1.40% 1.80% 0.80% 5.10% 2.30%
12 Nominal GDP (US$) 546bn 11,199bn 336bn 2,264bn 70.53bn 405bn 1,283bn 295bn 858bn 18,569bn
13 Current Acct to GDP (2.60%) 1.80% (5.90%) (0.70%) (5.20%) (1.80%) 1.80% (3.30%) (3.80%) (2.60%)
*-ve means appreciation while +ve means depreciation
Sources – Bloomberg, Central Banks, Trading Economics and FSDH Research Analysis
The prices of government
bonds appreciated in more
countries that we monitored in
2017 than they depreciated.
Source: Trading Economics
23.10%
1.80%
21.90%
4.88% 4.50%
15.90%
2.50%
4.60%
11.20%
2.20%1.17%
3.82%
15.65%
7.19%
12.35%14.03%
6.32%7.89%
11.74%
2.23%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Argentina China Egypt India Kenya Nigeria Russia South Africa Turkey USA
Selected Countries: Inflation Rate vs Bond Yield
Inflation Rate Bond Yield
Economic and Financial Outlook: 2018-2022
FSDH Research 7
1.2 Risks to the Global Economic Growth Outlook:
Monetary policy normalisation in the major advanced economies
Possible drop in commodity prices, particularly for the emerging and developing
economies
U.S. Dollar appreciation and the negative impact on emerging and developing
economies.
1.3 Implications for the Nigerian Economy:
The expected increase in the U.S Fed Rate could have a negative impact on
foreign capital inflows into Nigeria
The increase in the interest rate in the international financial market may lead to
higher interest expense on FGN borrowings from the international market
U.S. Dollar appreciation may lead to a drop in the crude oil price, which will lower
the revenue accruable to the Federal Government of Nigeria (FGN). Thus, the
fiscal deficit that the FGN will run in 2018 may increase.
More deliberate policies to reduce dependency on oil revenue in Nigeria are
required. The growth areas are Manufacturing, Information Communication and
Technology (ICT) and Agriculture. The catalyst to the growth of these sectors is the
development of modern and functional infrastructure. The FGN should implement
its fiscal policy contained in its Economic Recovery and Growth Plan (ERGP). The
implementation of the plan would assist in diversifying the Nigerian economy away
from oil revenue, create a sustainable foreign exchange stability, and also assist in
lifting aggregate demand in the domestic economy.
More deliberate policies to
reduce dependency on oil
revenue in Nigeria are required.
The expected increase in the
U.S Fed Rate could have a
negative impact on foreign
capital inflows into Nigeria.
Economic and Financial Outlook: 2018-2022
FSDH Research 8
1.4 Global Commodity Markets:
According to the World Bank, commodity prices of industrial commodities strengthened in
Q3 2017, while most agricultural prices remained broadly stable. In the oil market,
inventories continue to fall because of strong demand, Organization of Petroleum Exporting
Countries (OPEC) production cut, and stabilizing U.S. shale oil production. World Bank
projects an average crude oil price at US$56/bbl in 2018 from US$53 per barrel (bbl) in
2017.
Most of the commodity price should appreciate in 2018 except Iron Ore. However, there is
no sharp increase in the price that can result to rising inflation rate. Thus the impact of
imported inflation in Nigeria is small. The stable prices should also encourage
investments.
Table 3: Commodity Price Forecast in Nominal U.S. Dollars
Commodity Unit 2014A 2015A 2016A 2017A 2018F 2019F 2020F
Coal, Australia $/mt 70.1 57.5 65.9 85.0 70.0 60.0 55.0
Crude Oil (average) $/bbl 96.2 50.8 42.8 53.0 56.0 59.0 60.0
Natural Gas, US $/mmbtu 4.37 2.61 2.49 3.00 3.12 3.25 3.38
Cocoa $/kg 3.06 3.14 2.89 2.05 2.11 2.17 2.24
Palm Oil $/mt 821 623 700 720 732 745 758
Maize $/mt 193 170 159 155 159 162 166
Rice, Thailand, 5% $/mt 423 386 396 400 403 406 409
Wheat, US, HRW $/mt 285 204 167 175 179 184 188
Aluminum $/mt 1,867 1,665 1,604 1,950 1,968 1,987 2,005
Copper $/mt 6,863 5,510 4,868 6,050 6,118 6,187 8,257
Iron Ore $/dmt 97.0 55.9 58.4 70.0 57.0 50.0 50.8
Gold $/toz 1,266 1,161 1,249 1,250 1,238 1,226 1,214
Source: Commodity Markets Outlook, World Bank – October 2017
World Bank projects an
average crude oil price at
US$56/bbl in 2018.
600
650
700
750
800
850
40
60
80
100
2014 2015 2016 2017 2018 2019 2020
Crude Oil vs. Palm Oil
Crude Oil (average) $/bbl Palm Oil $/mt
1.5
2.5
3.5
4.5
5.5
2014 2015 2016 2017 2018 2019 2020
Natural Gas vs. Cocoa
Natural Gas, US $/mmbtu Cocoa $/kg
Source: Commodity Markets Outlook, World Bank – October 2017
The impact of imported inflation
in Nigeria is small.
Economic and Financial Outlook: 2018-2022
FSDH Research 9
1.5 Global Oil Price:
A combination of improving global economic outlook, and crude oil production cut
sustained the appreciation in crude oil price in 2017. FSDH Research expects these
factors to sustain the crude oil price in 2018. The OPEC Reference Basket (ORB)
increased by 20.96% to US$64.47/b as at 29 December, 2017 from US$53.3/b as at end-
December 2016. The Bonny Light also increased by 20.42% to US$67.45/b at end-
December 2017, from US$56.01/b at end-December 2016. We note that most forecasts
point to a stronger oil demand in 2018 than in 2017. This will lead to a marginal
increase in the crude oil price.
According to the U.S. Energy Information Administration (EIA), the total crude oil demand
in 2018 should be 100.11mb/d while supply is 100.34mb/d, leading to excess supply of
0.23mb/d. Non-OPEC producers are expected to supply 60.69mb/d, leaving 39.65mb/d for
OPEC members to fill. We note that the supply from the Non-OPEC members will not
satisfy the global demand. Thus, OPEC will still be relevant in influencing the global oil
price.
Table 4: Global Demand and Supply for Oil (mb/d)
2016 2017E 2018F 2019F
World Oil Demand 95.57 98.39 100.11 101.76
World Oil Supply 96.44 97.97 100.34 102.11
Excess Supply/Demand 0.87 0.42* 0.23 0.35
Non-OPEC Supply 56.85 58.66 60.69 61.98
Demand Gap to Fill by OPEC 39.59 39.31 39.65 40.13
Sources: U.S Energy Information Administration (EIA); FSDH Research Analysis
95.57 98.39 100.11
56.85 58.66 60.69
43.7454.15 59.74
0
50
100
150
2016 20117E 2018F
Crude Oil Demand vs Supply
World Demand Non-OPEC Supply
Brent Crude Price
40.00
45.00
50.00
55.00
60.00
65.00
70.00
Bonny Light Prices (Jan. 2017-Dec. 2017)
Sources: U.S Energy Information Administration (EIA); Reuters; FSDH Research Analysis
We note that most forecasts
point to a stronger oil demand in
2018 than in 2017. This will lead
to a marginal increase in the
crude oil price.
OPEC will still be relevant in
influencing the global oil price.
Economic and Financial Outlook: 2018-2022
FSDH Research 10
42.8
52.8
56.0
59.0
43.7
54.2
59.761.4
42.7
52.7
59.9
56.4
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
2016A 2017A 2018F 2019F
Crude Oil Price Actual and Forecast (mb/d)
World Bank EIA IMF
Sources: U.S Energy Information Administration (EIA); World Bank and IMF
Economic and Financial Outlook: 2018-2022
FSDH Research 11
1.6 FOMC Rate Decision:
The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (The Fed)
raised the Federal Funds Rate (Fed Rate) to a range of 1.0%-1.50%, at its December
2017 meeting from 1.0%-1.25%. The yields in the Treasury notes increased following the
increase. Although the FOMC maintained rate decision in January 2018, market
expectation is that the FOMC will raise the Fed Rate between two or three times in 2018.
Implications of the Expected Rate Hike:
Decrease in global financial liquidity flow
Increase in the cost of funds from the international debt market
Portfolio realignments amongst global portfolio managers
Possible capital reversal from emerging markets and impact on foreign exchange
market depending on the magnitude of the increase.
Increase in the yields on the Dollar denominated fixed income securities
FSDH Research observed fairly strong correlation between the movements in
yields in the U.S and in Nigeria. Looking at the relationship between the two
countries, we believe the 5-year yield in Nigeria should trade at 15.88%. This
means that the bond at the moment is trading at a yield that is below the equilibrium
point. We expect the yield to increase higher than the current level of 13.33%.
The U.S. Fed raised the funds
rate to a range of 1.0%-1.50%,
at its December 2017 meeting.
0.15%
0.35%
0.55%
0.75%
0.95%
1.15%
1.35%
1.55%
1.75%
U.S Fed Rate (Jan. 2017 - Dec. 2017)
1.7
1.8
1.9
2
2.1
2.2
2.3
2.4
02-J
an-1
7
02-F
eb-1
7
02-M
ar-1
7
02-A
pr-1
7
02-M
ay-1
7
02-J
un-1
7
02-J
ul-1
7
02-A
ug-1
7
02-S
ep-1
7
02-O
ct-1
7
02-N
ov-1
7
02-D
ec-1
71.75% May 2023 U.S Treasury Note
Source: Thomson Reuters
Looking at the relationship
between the two countries, we
believe the 5-year yield in
Nigeria should trade at 15.88%.
Economic and Financial Outlook: 2018-2022
FSDH Research 12
2.0 The Nigerian Economy: 2.1 Purchasing Managers’ Index (PMI):
The Purchasing Managers’ Index (PMI) report that the CBN published for the month of
December 2017 shows improved business activities in both the manufacturing and non-
manufacturing sectors. At 59.3 and 62.1 points, the Composite Manufacturing PMI and
Composite Non-Manufacturing PMI respectively attained the highest levels since January
2015. For the CMI; the Production Level, New Orders, Supplier Delivery Time, Employment
Level, and Raw Material Inventories grew at a faster rate in December 2017. For the
Composite Non-Manufacturing Index (CNMI); Business Activity, New Orders, Employment,
and Inventories grew at a faster rate in December 2017 than in November.
The expansion in the PMI is an indication of the strong growth we expect in the
Nigerian economy in 2018. This will stimulate financing and investing opportunities
in the economy.
The PMI shows improved
business activities in the
manufacturing and non-
manufacturing sectors.
40
45
50
55
60
65Purchasing Managers' Index
Manufacturing Composite PMI Non- Manufacturing Composite PMI
Source: Central Bank of Nigeria
The expansion in the PMI is an
indication of the strong growth
we expect in the Nigerian
economy in 2018.
Economic and Financial Outlook: 2018-2022
FSDH Research 13
2.2 Real Gross Domestic Product (GDP):
FSDH Research forecasts a Real Gross Domestic Product (GDP) growth rate of
3.16% in 2018 and 4.09% in 2019. Our forecast for 2018 is slightly higher than the
forecasts of the World Bank and International Monetary Fund (IMF) of 2.5% and 2.1%
respectively. However, with the population growing at 2.75%, the country requires growth
rate in excess of 5% to substantially improve the wellbeing of Nigerians. Agriculture, Trade,
and Mining & Quarrying sectors, with forecast growth rates of 4%, 2% and 3.2% would
drive the 3.16% growth rate in 2018. Other leading sectors of the economy that would
contribute to the growth are: Information and Communication (I&C): 2.2%; Real
Estate: 2.5%; Construction: 4% and Manufacturing: 1%. FSDH Research expects the
GDP Per Capita to recover slightly in 2018.
Agriculture, with a growth of 3.06%; Mining and Quarrying: 25.44% and Other Services:
1.72% were the three leading sectors that contributed to the growth rate of 1.40% recorded
in Q3 2017. The increase in the supply of foreign exchange has improved economic
activities across other sectors of the Nigerian economy. FSDH Research has observed
increased activities in Agriculture, Mining and Quarrying (oil and gas),
manufacturing, Trade, Real Estate and I&C in the last few months. The growth in the
equity market has created additional wealth that would stimulate effective demand in the
economy. Some light manufacturing activities are also taking place – stimulating demand
for raw materials from Agriculture sector. The current oil price will encourage investment
activities in the oil and gas sector. Trade sector would also benefit from the increase in
consumer purchasing power.
FSDH Research forecasts a
Real Gross Domestic Product
(GDP) growth rate of 3.16% in
2018 and 4.09% in 2019.
FSDH Research expects the
GDP Per Capita to recover
slightly in 2018.
69.02 67.93
68.61
70.79
73.68
386
370 364 365
370
300
310
320
330
340
350
360
370
380
390
400
65.00
66.00
67.00
68.00
69.00
70.00
71.00
72.00
73.00
74.00
75.00
2015A 2016A 2017E 2018F 2019F
Real GDP(N'trn) vs Real GDP Per Capita (N'000)
Real GDP Real GDP Per Capita
2.7% 3.0%3.7%
6.8%
8.8%
9.6%
10.1%
10.2%
15.9%
29.2%
Contribution to Real GDP (Q3, 2017)
Financial & Insurance ConstructionProfessional Services Real EstateManufacturing Information & CommunicationAll Other Sectors Mining & Quarrying
Sources: National Bureau of Statistics and FSDH Research
Some light manufacturing
activities are also taking place
– stimulating demand for raw
materials from Agriculture
sector.
Economic and Financial Outlook: 2018-2022
FSDH Research 14
Key Developments that Will Shape Activities in the Nigerian Economy in 2018:
I. Improvement in crude oil price and production: The current crude oil price will
encourage investment activities in the oil and gas sector.
II. Implementation of the Economic Recovery Growth Plan (ERGP) of the FGN:
The fiscal policy plan of the FGN to stimulate economic activities in the non-oil
sector is crucial for achieving a sustainable economic growth.
III. Development of Key Infrastructure: Critical steps to improve the state of
infrastructure in Nigeria will boost the GDP growth rate. Development of
appropriate transportation system for efficient transportation of goods and services
and people across the country will stimulate economic activities. Appropriate
strategies to develop affordable housing units for Nigerians will help bridge the
housing deficit and also generate economic activities. The country needs to
increase power generation to support growth and make Nigeria an attractive
investment destination. FSDH Research notes that the FGN is adopting some
measures. However, more involvements of private sector in the development of
these growth enhancing infrastructure will stimulate growth.
IV. Rising Cases of Social Unrest in the Country: FSDH Research has noticed
rising cases of social unrest in some parts of the country. This can affect economic
activities and lead to escalating prices of goods and services.
V. Global Economic Outcome: The global economic outlook is positive; and we
expect it to have a positive effect on the demand for oil, which will impact economic
activities in Nigeria.
Table 5: Real GDP
Year 2016A 2017E 2018F 2019F 2020F 2021F 2022F
GDP (N’trn) 67.93 68.62 70.79 73.68 77.40 81.62 85.99
Real Growth Rate (1.58%) 1.01% 3.16% 4.09% 5.05% 5.45% 5.36%
Sources: NBS, FSDH Research
Appropriate strategies to develop
affordable housing units for
Nigerians will help bridge the
housing deficit and also generate
economic activities.
The global economic outlook is
positive; and we expect it to
have a positive effect on the
demand for oil, which will
impact economic activities in
Nigeria.
The current oil price will encourage
investment activities in the oil and
gas sector.
Economic and Financial Outlook: 2018-2022
FSDH Research 15
Our Broad Expectations on Specific Drivers of Activities in 2018-2022:
Agriculture: FSDH Research expects Agriculture to continue to drive
growth in the forecast period as the sector attracts more investments from
government partnerships and private sector operators. In addition to
providing food for the Nation and replacing imported food, we expect it to
supply the needed raw materials to the manufacturing sector. The good
soil and weather conditions should support the growth in the sector.
Trade: The rising purchasing power of consumers will boost activities in
this sector. The finance sector is equally positioned to reengineer this
sector to enable it maximise its potentials. The foreign exchange rate
stability should also increase trading margins.
Manufacturing: The manufacturing sector should receive further boost,
as leading macroeconomic indicators suggest renewed business and
consumer confidence in the Nigerian economy. This sector has the
capacity to employ large number of people thereby generating
employment opportunities. Oil refinery has so far contributed little to the
growth of this sector. However this story is about to change with the
Dangote refinery starting operation during the forecast period.
Information and Communication: Telecommunications dominated
activities in this sector. The Global System for Mobile Communications
(GSM) companies and Internet service providers are the major drivers.
We expect that there will be an adjustment to the tariff in the sector within
the forecast period and this will attract investments. As the economy
adopts more technology to deliver value, we expect telecommunications
sector to receive a boost.
Construction and Real Estate: Initiatives of the FGN to partner with the
private sector to develop infrastructure should stimulate activities in this
sector. The stability in the foreign exchange rate should also attract foreign
investors to the real estate. The growth in wealth on account of the growth
in the stock market will lead to more investment in the real estate.
The tables 6, 7 and 8 show the growth outcomes we expect in the different sectors of the
Nigerian economy. They also show where we expect opportunities given the relative size
of the economy.
Agriculture is expected to continue
to drive growth.
Economic and Financial Outlook: 2018-2022
FSDH Research 16
Table 6: Real GDP at 2010 Constant Prices (N’bn)
2016A 2017E 2018F 2019F 2020F 2021F 2022F CAGR *
Agriculture 16,607 17,112 17,797 18,544 19,286 20,019 20,760 3.79%
Mining And Quarrying 5,760 6,599 6,810 7,151 7,580 8,262 8,964 7.65%
Manufacturing 6,302 6,326 6,389 6,709 7,245 7,934 8,648 5.41%
Electricity, Gas ,Steam And Air Conditioning Supply
232 251 257 265 284 305 328 5.96%
Water Supply, Sewerage, Waste Management And Remediation
104 116 128 137 148 162 177 9.36%
Construction 2,521 2,357 2,451 2,549 2,753 2,987 3,226 4.20%
Trade 11,669 11,435 11,664 12,154 12,822 13,463 14,163 3.28%
Accommodation And Food Services
619 576 636 700 763 824 890 6.23%
Transportation And Storage 809 792 836 882 926 979 1,035 4.20%
Information And Communication 7,859 7,748 7,918 8,156 8,401 8,653 8,869 2.04%
Arts, Entertainment And Recreation
147 171 188 202 223 245 269 10.68%
Financial And Insurance 2,028 2,056 2,091 2,112 2,176 2,252 2,342 2.43%
Real Estate 4,904 4,786 4,906 5,126 5,331 5,545 5,766 2.74%
Professional, Scientific And Technical Services
2,536 2,563 2,621 2,654 2,707 2,789 2,872 2.09%
Administrative & Support Services
14 15 15 16 16 17 17 3.07%
Public Administration 1,570 1,523 1,582 1,614 1,710 1,804 1,922 3.43%
Education 1,519 1,440 1,557 1,650 1,765 1,898 2,040 5.04%
Human Health And Social Services
476 470 499 519 545 576 621 4.53%
Other Services 2,257 2,280 2,440 2,538 2,715 2,905 3,080 5.31%
Total 67,931 68,615 70,786 73,678 77,397 81,618 85,989 4.01%
Sources: NBS, FSDH Research, * Compound Annual Growth Rate (2016 – 2022)
Table 7: Sectoral Real Growth Rate (%)
2016A 2017E 2018F 2019F 2020F 2021F 2022F Average *
Agriculture 4.11% 3.04% 4.00% 4.20% 4.00% 3.80% 3.70% 3.84%
Mining And Quarrying -14.45% 14.57% 3.20% 5.00% 6.00% 9.00% 8.50% 4.55%
Manufacturing -4.32% 0.38% 1.00% 5.00% 8.00% 9.50% 9.00% 4.08%
Electricity, Gas ,Steam And Air Conditioning Supply
-15.00% 8.19% 2.70% 3.00% 7.00% 7.50% 7.50% 2.98%
Water Supply, Sewerage, Waste Management And Remediation
9.27% 12.21% 10.00% 7.00% 8.00% 9.50% 9.50% 9.35%
Construction -5.95% -6.50% 4.00% 4.00% 8.00% 8.50% 8.00% 2.86%
Trade -0.24% -2.01% 2.00% 4.20% 5.50% 5.00% 5.20% 2.81%
Accommodation And Food Services -5.32% -7.03% 10.50% 10.00% 9.00% 8.00% 8.00% 4.74%
Transportation And Storage 0.39% -2.05% 5.50% 5.60% 5.00% 5.70% 5.70% 3.69%
Information And Communication 1.95% -1.41% 2.20% 3.00% 3.00% 3.00% 2.50% 2.03%
Arts, Entertainment And Recreation 3.72% 16.70% 10.00% 7.60% 10.00% 10.00% 10.00% 9.72%
Financial And Insurance -4.54% 1.42% 1.70% 1.00% 3.00% 3.50% 4.00% 1.44%
Real Estate -6.86% -2.40% 2.50% 4.50% 4.00% 4.00% 4.00% 1.39%
Professional, Scientific And Technical Services
0.80% 1.03% 2.30% 1.25% 2.00% 3.00% 3.00% 1.91%
Administrative & Support Services -0.69% 1.14% 4.00% 2.80% 3.50% 3.50% 3.50% 2.54%
Public Administration -4.58% -2.99% 3.90% 2.00% 6.00% 5.50% 6.50% 2.33%
Education 1.35% -5.20% 8.10% 6.00% 7.00% 7.50% 7.50% 4.61%
Human Health And Social Services -1.79% -1.27% 6.30% 4.00% 5.00% 5.70% 7.70% 3.66%
Other Services 4.93% 1.01% 7.00% 4.00% 7.00% 7.00% 6.00% 5.28%
Real GDP Growth Rate 1.58% 1.01% 3.16% 4.09% 5.05% 5.45% 5.36% 3.22%
Sources: NBS, FSDH Research; * Average ( 2016 – 2022)
Economic and Financial Outlook: 2018-2022
FSDH Research 17
2.3 Opportunities:
Increased global economic growth should sustain high oil price
Investments opportunity to increase production and to create value addition across
most of the profitable segments of the agricultural value chain
Import substitution strategies in agro-allied industries
Manufacturing sector should receive a boost following the relative stability in the
foreign exchange market
We expect FGN and state governments to sign more Public Private Partnership
(PPP) deals to promote infrastructure development
Construction activities should continue to grow – Road, Rail, etc.
We expect a rebound in the corporate and infrastructure bond markets
Real estate sector should attract more investments as the economy improves.
Table 8: Contribution to GDP (%)
2016A 2017E 2018F 2019F 2020F 2021F 2022F Average * Agriculture 24.45% 24.94% 25.14% 25.17% 24.92% 24.53% 25.44% 24.94%
Mining And Quarrying 8.48% 9.62% 9.62% 9.71% 9.79% 10.12% 10.98% 9.76%
Manufacturing 9.28% 9.22% 9.03% 9.11% 9.36% 9.72% 10.60% 9.47%
Electricity, Gas ,Steam and Air Conditioning Supply
0.34% 0.37% 0.36% 0.36% 0.37% 0.37% 0.40% 0.37%
Water Supply, Sewerage, Waste Management And Remediation
0.15% 0.17% 0.18% 0.19% 0.19% 0.20% 0.22% 0.19%
Construction 3.71% 3.44% 3.46% 3.46% 3.56% 3.66% 3.95% 3.61%
Trade 17.18% 16.67% 16.48% 16.50% 16.57% 16.50% 17.35% 16.75%
Accommodation And Food Services 0.91% 0.84% 0.90% 0.95% 0.99% 1.01% 1.09% 0.96%
Transportation And Storage 1.19% 1.15% 1.18% 1.20% 1.20% 1.20% 1.27% 1.20%
Information And Communication 11.57% 11.29% 11.19% 11.07% 10.85% 10.60% 10.87% 11.06%
Arts, Entertainment And Recreation 0.22% 0.25% 0.27% 0.27% 0.29% 0.30% 0.33% 0.27%
Financial and Insurance 2.98% 3.00% 2.95% 2.87% 2.81% 2.76% 2.87% 2.89%
Real Estate 7.22% 6.98% 6.93% 6.96% 6.89% 6.79% 7.07% 6.98%
Professional, Scientific And Technical Services
3.73% 3.73% 3.70% 3.60% 3.50% 3.42% 3.52% 3.60%
Administrative & Support Services 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%
Public Administration 2.31% 2.22% 2.23% 2.19% 2.21% 2.21% 2.35% 2.25%
Education 2.24% 2.10% 2.20% 2.24% 2.28% 2.33% 2.50% 2.27%
Human Health And Social Services 0.70% 0.68% 0.71% 0.70% 0.70% 0.71% 0.76% 0.71%
Other Services 3.32% 3.32% 3.45% 3.44% 3.51% 3.56% 3.77% 3.48%
Sources: NBS, FSDH Research; * Average ( 2016 -2022)
Nigerians have developed taste for
locally produced goods and
services as against imports.
Economic and Financial Outlook: 2018-2022
FSDH Research 18
2.4 Risks:
The rising social unrest in some parts of the country may affect economic activities
and lead to escalating inflation rate
External factors that can lead to a significant drop in the crude oil price may have
adverse impact on the economic activities in Nigeria
There could be capital flight out of Nigeria if there are excessive hikes in the
interest rates in the advanced economies.
Economic and Financial Outlook: 2018-2022
FSDH Research 19
3.0 External Reserves: The external reserves grew substantially in 2017 compared with the figures in 2016.
The growth provided stability for the foreign exchange rate. According to the CBN, the
30-Day Moving Average of Nigeria's external reserves as at 29 December, 2017 stood at
US$38.77bn, representing an increase of US$12.93bn or 50.04%, compared with
US$25.84bn at the end-December 2016. The major drivers of the growth in the external
reserves are:
Increase in crude oil price and production
Increase in capital inflows as a result of the implementation of the Investors’ and
Exporters’ Foreign Exchange Window (I&E Window).
Going forward, FSDH Research expects the growth in the external reserves to
continue. The main drivers are:
Increase in oil production, export and price
Capital inflows – Both Foreign Direct Inflows (FDI) and Foreign Portfolio
Inflows (FPIs)
Expected drop in imports due to import substitution in various sectors
Growth in non-oil exports
Our forecast external reserves in 2018 – 2022 are shown in the table below:
Table 9: External Reserves 2017-2022 (US$’bn)- End Periods: Actual vs Forecast
Year 2017A 2018F 2019F 2020F 2021F 2022F
External Reserves 38.77 42.64 46.05 48.82 52.23 54.85
Sources: CBN and FSDH Research
Increase in crude oil price and
production and capital inflows
led to the growth in external
reserves.
25.84
28.1229.65 30.30 30.86 30.33 30.29 30.84
31.83 32.4933.83
34.95
38.77
20.00
25.00
30.00
35.00
40.00
External Reserves (US$bn) - End Periods
Source: Central Bank of Nigeria
Economic and Financial Outlook: 2018-2022
FSDH Research 20
4.0 Foreign Trade: The positive developments in the crude oil markets and the improved confidence in
the outlook of the Nigerian economy have improved Nigeria’s external sector
position. The latest data from the National Bureau of Statistics (NBS) confirms this
position. The data from the last seven quarters shows that Nigeria recorded the highest
trade balance (exports higher than imports) and capital flows in Q3 2017.
The increase in the price of crude oil in the international market and improved crude
oil production in Nigeria led to a significant improvement in Nigeria’s external sector
position in Q3 2017. During the period, Nigeria’s trade balance exceeded the N1trn mark
for the first time since Q3 2014 to stand at N1.22trn.
The total value of merchandise trade as at Q3, 2017 increased by 3.94% to N5.92trn from
Q2, 2017. Total exports accounted for 61% of the total trade while total imports accounted
for 39%. The crude oil exports dominated the exports at 83.17% while non-crude oil exports
accounted for 16.83%. The huge contribution of crude oil exports to the total exports
revealed the vulnerability of the external sector to changes in the oil market.
Top on the list of the imported goods in Q3 2017 are: Machinery and Transport Equipment;
Mineral Fuels; Boilers, Chemicals and Related Products; Food and Live Animals;
Manufactured Goods; amongst others.
The implementation of the Economic Growth Recovery Plan (ERGP) of the FGN; stability
in the foreign exchange rate; and the efforts of the CBN to boost agricultural products would
boost exports in 2018.
FSDH Research expects the following factors to influence the foreign trade performance
in the short-to-medium term:
The improved global economic condition and outlook
The FGN efforts to improve the business environment
The import substitution strategy of the FGN via growing non-oil exports
Exports of refined petroleum products from the proposed Dangote Refinery
Nigeria will continue to import basic inputs and machinery for manufacturing
companies.
The Nigerian external sector
has improved.
The data from the last seven
quarters shows that Nigeria
recorded the highest trade
balance and capital flows in Q3
2017.
Economic and Financial Outlook: 2018-2022
FSDH Research 21
Source: National Bureau of Statistics
1.69 2.36 2.46 2.31 2.29 2.60 2.35
1.44
1.79 2.32 2.98 3.01
3.10 3.57
(1.00)
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2016 2017
External Trade Position (N'bn)
Imports Exports Trade Balance
Economic and Financial Outlook: 2018-2022
FSDH Research 22
Table 10: Foreign Trade Statistics (N’bn)
Year Imports Exports Trade Balance Total Trade
2016A 8,818 8,527 (290) 17,345
2017E 9,523 13,391 3,868 22,914
2018F 10,094 15,911 5,817 26,006
2019F 10,347 17,528 7,182 27,875
2020F 10,554 18,978 8,425 29,532
2021F 10,712 20,764 10,052 31,476
2022F 10,819 22,613 11,794 33,432
Sources: NBS, FSDH Research
Table 11: Analysis of Exports (N’bn)
Year Total Exports Crude Exports Non-Oil Exports
Crude Oil Exports to
Total Exports
Non-Crude Oil Exports
to Total Exports
2016A 8,527 6,997 1,531 82.05% 17.95%
2017E 13,391 10,987 2,404 82.05% 17.95%
2018F 15,911 12,975 2,936 81.55% 18.45%
2019F 17,528 14,206 3,322 81.05% 18.95%
2020F 18,978 15,306 3,673 80.65% 19.35%
2021F 20,764 16,683 4,080 80.35% 19.65%
2022F 22,613 18,101 4,512 80.05% 19.95%
Sources: NBS, FSDH Research
-290
3,868
5,817
7,182
8,425
10,052
11,794
-2000
0
2000
4000
6000
8000
10000
12000
14000
2016A 2017E 2018P 2019F 2020F 2021F 2022F
Trade Balance N'bn
Source: National Bureau of Statistics
Economic and Financial Outlook: 2018-2022
FSDH Research 23
Our estimate shows that Nigeria would record a favourable balance of trade balance
in 2018. Our forecast for total merchandise trade for Nigeria in 2018 is N26trn, we expect
this figure to increase to N33.43trn in 2022. Favourable exports will be the main driver.
Implications:
We expect the trade balance to contribute to the stability of the foreign exchange
market
There would be financing opportunities in the exports led sectors of the economy
Economic and Financial Outlook: 2018-2022
FSDH Research 24
5.0 Foreign Exchange Rate: The foreign exchange market witnessed relative stability in 2017. The CBN’s policy
of the I&E Window, increase in crude oil price, increase in foreign reserves and
increase in foreign capital inflow aided the stability of the foreign exchange rate.
The value of the Naira traded at N500/US$ at the parallel market of the foreign exchange
market before the implementation of the I$E Window. The average premium between the
inter-bank and parallel market rates reduced from N156.91 as at 01 January-21 April 2017
to N57.50 on 29 December, 2017.
Year-on-year, the value of the Naira depreciated marginally by 0.33% to close at N306/US$
at the inter-bank market at end-December 2017, compared with end-December 2016. At
the parallel market, it appreciated significantly by 35.08% to close at N363.50/US$ at end-
December 2017, compared with end-December 2016. The highest rate recorded at the
inter-bank and parallel markets in 2017 were N315/US$ and N520/US$, respectively. The
lowest values were N304.50/US$ and N362/US$, respectively.
The I & E window recorded a turnover of US$25.66bn in 2017. The increase in the FX
supply has helped the stability in the foreign exchange and consequently increased the
foreign investors’ confidence in the Nigerian economy. However, there is the need to
harmonise the foreign exchange rates in the country. This will led to an efficient market.
The foreign exchange market
witnessed relative stability in
2017.
614
1,316 1,513
2,258
3,681
4,219 4,534
4,084
3,633
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Investors' and Exporters' Forex Window Turnover (US$'mn)
270.00
320.00
370.00
420.00
470.00
520.00
570.00
Exchange Rate Movement in the US$ vs Naira (Jan. 17 - Dec. 17)
Inter-bank Parallel Market
Source: FMDQ
Economic and Financial Outlook: 2018-2022
FSDH Research 25
Under a managed float foreign exchange system, it is difficult to forecast the foreign
exchange rate. However, we believe the following factors will drive the foreign exchange
rate in the short-term.
From the table above, we believe the foreign exchange rate may trade between N345/US$
– N361/US$ in 2018. The accretion to the external reserves, slow growth in imports in the
presence of strong growth in exports, increased capital inflow, the expected drop in inflation
rate in Nigeria while inflation rate is expected to rise in the advanced countries including
U.S are the factors that may lead to an appreciation in the value of the currency going
forward. The foreign exchange rate may appreciate going forward.
Table 12: Our View of the Important Determinants of Foreign Exchange Rate in Nigeria
Indicators Favourable/Fair Not Favourable
Balance of Payment (BoP) Position
Balance of Trade
Oil Price Forecast /Crude Oil Production
Militants in the Niger Delta
Fiscal Position – Debt Sustainability
Fiscal Position – Fiscal Deficits/GDP
Fiscal Position – Interest Cover
Political Stability
Possibility of FOMC Increasing Rate
The External Reserve Position
Inflow of FDIs, FPIs and Others in 2018-2022
Source: FSDH Research
Table 13: Foreign Exchange Rate Forecasts (2018 - 2022)
Year 2018F 2019F 2020F 2021F 2022F
Lower Band (US$/N) 361.00 351.98 343.18 338.03 332.96 Higher Band (US$/N) 345.00 336.38 327.97 323.05 318.20 Source: FSDH Research
Economic and Financial Outlook: 2018-2022
FSDH Research 26
6.0 Public Debt: Available data from the Debt Management Office (DMO) shows that Nigeria’s total
debt stock (addition of external and domestic debt) as at September 2017 stood at
N20.37trn. This represents an increase of 17.36% from the end-December 2016 figure of
N17.36trn. A breakdown of the debt stock shows that external debt stood at N4.69trn or
23.04% of the total debt stock, while domestic debt stock stood at N15.68trn or 76.96% of
the total debt stock. The debt-to-GDP for 2016 stood at 16.92%. FSDH Research
estimates a debt-to-GDP ratio of 17.26% to end year 2017. This means that Nigeria’s
debt portfolio still has wide fiscal sustainability space; as the debt-to-GDP ratio is below
the applicable critical limit of 40% that the government sets for the economy.
Although the Debt-to-GDP ratio is low at about 17.26%, Debt service-to-revenue for
Approved Budget 2017 is 32.65%. The Medium Term Expenditure Framework (MTEF)
(2018-2020) projects debt service-to-revenue of 35.95% for 2018; and 37.46% for 2019
and 2020.
The DMO has a strategic objective to increase the proportion of the external debt in the
total debt stock. This will enable the FGN reduce interest expenses and reduce the
crowding out effect of high government borrowing in the domestic market.
The table below identifies the factors that will drive the public debt in our forecast period.
Factor with increase (+) means that they will increase the public debt. Factor with decrease
(-) will reduce the public debt.
Table 14: Determinants of Public Debt
S/N Factors Impact
1 Increase in oil price Decrease (-)
2 Increase in oil production Decrease (-)
3 Decrease in oil price Increase (+)
4 Decrease in oil production Increase (+)
5 Drop in FDIs and FPIs Increase (+)
6 Drop in taxation Increase (+)
7 Increase in inflation rate Increase (+)
8 Low investors’ confidence Increase (+)
9 Increase in FDIs and FPIs Decrease (-)
10 Expansionary fiscal policy Increase (+)
Source: FSDH Research
The DMO has a strategic objective to increase the proportion of the external debt
in the total debt stock.
Although the Debt-to-GDP ratio is low at about 17.26%, Debt service-to-revenue for Approved Budget 2017 is
32.65%.
Economic and Financial Outlook: 2018-2022
FSDH Research 27
Most of the factors point to the fact that public debt will increase in the forecast
period. We expect the FGN to continue with her public debt restructuring plans of
replacing domestic debt with external debt. FSDH Research expects the interest
expense-to-revenue to drop during the forecast period as the FGN intensifies its
effort to increase tax revenue.
We also expect the interest rate and yields on fixed income securities to trend
downwards because of the public debt portfolio rebalancing of the FGN and her
improved revenue generation.
While Nigeria has one of the lowest debt-to-GDP among the selected countries, it
has one of the lowest revenue-to-GDP. We also note that ratio of the interest
expenses to FGN portion of the federal allocation is very high. This leaves little
resources to develop the economy. It also shows why the FGN will continue to
borrow at high level.
Table 15: Public Debt - N’bn
Total Debt Domestic Debt Foreign Debt
Foreign/Total Debt
Debt to GDP
2015A 126,037 104,922 21,115 16.75% 13.24%
2016A 173,600 138,811 34,789 20.04% 16.92%
2017E 207,452 161,501 45,951 22.15% 17.26%
2018F 239,607 181,622 57,985 24.20% 17.07%
2019F 264,646 198,961 65,685 24.82% 16.20%
2020F 289,126 216,469 72,657 25.13% 15.18%
2021F 309,365 230,477 78,888 25.50% 13.94%
2022F 324,833 240,766 84,067 25.88% 12.57%
Sources: DMO and FSDH Research
Most of the factors point to the
fact that public debt will
increase in the forecast period.
17% 28%46% 52%
68% 70%89% 96% 106%
250%
0%
50%
100%
150%
200%
250%
300%
Debt-to-GDP
Sources: Trading Economics; NBS; DMO, FSDH Research
0.99
1.20
0.45 0.68
1.22
2.60
2.08
0.55 1.10
1.85
0%
20%
40%
60%
80%
100%
-
1.00
2.00
3.00
2015 2016 Mar-17 Jun-17 Sep-17
Interest Payment vs Share of FGN Allocation (N'trn)
Interest Payments
FGN FAAC Allocation
Ratio of Interest payment to FGN Allocation
Economic and Financial Outlook: 2018-2022
FSDH Research 28
7.0 Unemployment Rate: According to the NBS, the unemployment rate increased to 18.8% in Q3 2017, from
14.2% and 16.2% in Q4 2016 and Q2 2017, respectively. A total of 33.9 million people
were either unemployed or underemployed in the labour force in Q3 2017, compared with
31.3 million in Q2 2017.
The unemployment report showed that the economically active population or working age
population (persons within ages 15‐64) increased from 110.3million in Q2 2017 to
111.1million in Q3 2017. In Q3 2017, the labour force population (i.e. those within the
working age population willing, able and actively looking for work) increased to 85.1million
from 83.9million in Q3 2017, representing an increase of 1.43%. The total number of people
in full employment (at least 40 hours a week) declined from 52.7 million in Q2 2017 to 51.10
million in Q3 2017. The misery index, which is the sum of unemployment and inflation rate
stood at 34.78% in Q3 2017. This is an indication of a weak purchasing power in the country
which affects both financing and investment growth.
The NBS added that 26.04mn persons within the working age population decided
not to work for various reasons in Q3 2017.
A combination of fiscal and monetary policy measures to lower inflation rate are required.
Meanwhile the urgent development of the sectors of the Nigerian economy that are labour
intensive will address the high unemployment rate. Such sectors are:
Agriculture
Construction
Manufacturing
Real Estate
Table 16: Labour Force Statistics
Labour Force
(million)
Full Time Employed (million)
Under Employed (million)
Unemployed (million)
Unemployment Rate
Under Employment Rate
Q2 2017 83.94 52.70 17.70 13.59 16.20% 21.10%
Q3 2017 85.09 51.10 18.00 15.99 18.80% 21.20%
Source: National Bureau of Statistics
A total of 33.9 million people were either unemployed or underemployed in the labour force in Q3 2017, compared
with 31.3 million in Q2 2017.
Economic and Financial Outlook: 2018-2022
FSDH Research 29
24.86%
29.80%
31.74%32.78%
31.70%32.28%
34.78%
20.00%
22.00%
24.00%
26.00%
28.00%
30.00%
32.00%
34.00%
36.00%
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2016 2017
Misery Index in Nigeria
Sources: NBS, FSDH Research
Economic and Financial Outlook: 2018-2022
FSDH Research 30
8.0 Nigeria’s Importation Update: The capital inflow into Nigeria in Q3 2017 recorded a substantial increase compared
with the past few quarters, as investors’ confidence on the short-to-medium term
outlook of the Nigerian economy continues to improve. The total capital inflow as at
Q3 2017 was US$6.85bn, more than the total inflow in 2016. The growth in the capital
inflow as at Q3 2017 was mainly driven by significant increase in both Foreign Portfolio
Investments (FPIs) and Other Investments (OIs).
The inflows has increased the valuation of equity and led to a drop in yields in fixed income
securities. FSDH Research expects the capital importation to continue to flow provided
there are appropriate policies to attract investors.
Table 17: Nigeria Capital Importation – Investment Type (US$’mn)
2016 2017 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Total
Foreign Direct Investment - Equity 173.7 184.21 340.64 344.57 1,043 210.10 274.07 117.47 602
Foreign Direct Investment - Other Capital 0.73 0.08 - 0.07 0.88 1.28 0.30 0.13 2
Portfolio Investment - Equity 201.69 279.81 201.12 176.44 859 101.99 614.05 1,932.07 2,648
Portfolio Investment - Bonds 1.5 - 369.00 25.40 396 - 57.87 115.43 173
Portfolio Investment - Money Market Instruments 67.85 57.5 350.20 82.37 558 211.61 98.59 719.91 1,030
Other Investments - Loans 241.81 520.19 561.10 917.01 2,240 369.28 747.47 956.69 2,073
Other Investments - Other Claims 23.66 0.38 0.06 3.02 27 14.00 - 303.40 316
Total 710.97 1,042.17 1,822.12 1,548.88 5,124 908.27 1,792.34 4,145.10 6,846 Sources: National Bureau of Statistics (NBS)
The total capital inflow as at Q3
2017 was US$6.85bn, more than
the total inflow in 2016.
271 337
920284 314
771
2,767
265521
561
920
383
747
1,260
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2016 2017
Total Capital Inflow (US$'mn)
FDI FPI Others
Source: NBS
Economic and Financial Outlook: 2018-2022
FSDH Research 31
Table 18: Capital Importation into Nigeria (US$ million)
FDIs FPIs Others Total
2011 1,753 4,513 1,637 7,904
2012 2,000 13,488 1,129 16,616
2013 1,279 17,369 2,670 21,318
2014 2,277 14,917 3,557 20,751
2015 1,447 6,005 2,191 9,643
2016 1,044 1,813 2,267 5,124
2017* 603 3,852 2,391 6,846
Sources: NBS and CBN * YTD September; FDI – Foreign Direct Investment; FPI – Foreign Portfolio Investment
7.90
16.62
21.3220.75
9.64
5.12
6.85
0.00
5.00
10.00
15.00
20.00
25.00
2011 2012 2013 2014 2015 2016 Sep-17
Capital Importation into Nigeria (US$mn)
Figure as at September 2017 was
higher than FY 2016
Sources: CBN and NBS
Economic and Financial Outlook: 2018-2022
FSDH Research 32
9.0 Inflation Rate:
The inflation rate recorded persistent decline in 2017. The base effect from previous
year’s Consumer Price Indices and stability in the foreign exchange rate led to the
consistent drop in the inflation rate in 2017. The inflation rate dropped to 15.37% in
December from 18.72% in January 2017.
Our forecast shows that the inflation rate in 2018 would drop to an average of
10.62%, compared with an average of 16.55% in 2017. This is based on the
assumption that there is no increase in the Premium Motor Spirit (PMS) pump price
and electricity tariff. However, we believe it may be difficult to maintain these prices
at the current levels given the current economic realities. However, political and
social considerations may have overriding effect on the possible impacts of these
decisions on the economic realities. Inflation rate may shift between 2% to 3% if
there’s an adjustment to the electricity tariff and PMS pump price.
The following factors will influence inflation rate in 2018:
Positive factors to lower inflation rates:
The availability of foreign exchange to meet consumption and production
purposes
The expected lower interest rate environment in 2018 than in 2017
Improved oil production and local substitution strategy
Increased local food production
Negative factors to raise inflation rates:
Further disruption to food production in some food producing areas in Nigeria
Moderate growth in global commodities prices
Possible increase in electricity tariff and PMS pump price.
Our monthly inflation rate forecast between January and December 2018 is shown on the
table 19 below:
Our forecast shows that the inflation rate in 2018 would decelerate to average of 10.62%, compared with an
average of 16.55% in 2017.
The inflation rate dropped to 15.37% in December from 18.72% in January 2017.
Inflation rate may shift between 2% to 3% if there’s an adjustment to the electricity
tariff and PMS pump price.
Economic and Financial Outlook: 2018-2022
FSDH Research 33
Our Yearly average inflation rate forecast between 2018 and 2022 is shown on table 20
below:
9.1 Implications:
The expectation of a drop in the inflation rate in 2018 should support expansionary
monetary policy to stimulate economic growth recovery
Yield on fixed income securities to trend downwards.
Table 19: Inflation Rate Forecast
Month Inflation Rate Adjusted Inflation Rate*
Jan-18 15.04% 15.04%
Feb-18 14.16% 16.34%
Mar-18 13.11% 15.29%
Apr-18 12.17% 14.35%
May-18 10.93% 13.11%
Jun-18 9.94% 12.12%
Jul-18 9.34% 11.52%
Aug-18 8.86% 11.04%
Sep-18 8.68% 10.86%
Oct-18 8.45% 10.62%
Nov-18 8.24% 10.42%
Dec-18 8.54% 10.72% *The adjusted inflation rate assumes PMS and electricity tariff increase;
Source: FSDH Research
Table 20: Average Inflation Rate
Year 2016A 2017A 2018F 2019F 2020F 2021F 2022F
Average Inflation 15.62% 16.55% 10.62% 9.03% 9.05% 9.01% 8.98%
Sources: NBS, FSDH Research Analysis
Source: FSDH Research Analysis
14.2%13.1%
12.2%
10.9%9.9%
9.3% 8.9% 8.7% 8.4% 8.2% 8.5%
15.0%
16.3%15.3%
14.3%
13.1%12.1%
11.5% 11.0% 10.9% 10.6% 10.4% 10.7%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Inflation Rate Forecasts
Without Electricity Tariff and PMS Price Adjustments
With Electricity Tariff and PMS Price Adjustments
The expectation of a drop in the inflation rate in 2018 should support expansionary monetary
policy.
Economic and Financial Outlook: 2018-2022
FSDH Research 34
9.2 Risks to the Single Digit Inflation Rate:
1. Geopolitical Tensions: Unforeseen or on-going geopolitical tensions could
disrupt the flow of international trade and create shortage of commodities around
the globe leading to increase in international prices. This may come to Nigeria in
the form of imported inflation.
2. The Rising Unrest in some Parts of the Country: The current unrest in some
parts of the country may lead to food shortage and escalating prices.
3. The Generation Elections in 2019: If not controlled the electioneering may
increase inflation rate.
4. The increase in the Electricity Tariff: Current realities suggest that the variables
used to arrive at the electricity tariff have changed. Thus an upward review of the
electricity tariff is imminent as the current tariff is not cost reflective. An upward
review in the tariff may cause inflation rate to rise except the increase in electricity
generation offsets the increase in tariff.
5. Increase in the PMS Pump Price: The current exchange rate and the price of
crude oil at the international market may make the landing cost of PMS higher than
the pump price. An increase in the pump price is in line with current realities. This
will affect the attainment of single digit inflation rate
There are certain risk factors to the attainment of single digit inflation rate.
Economic and Financial Outlook: 2018-2022
FSDH Research 35
10.0 The FGN Medium-Term Expenditure Framework 2018 - 2020: The 2018-2020 Medium -Term Expenditure Framework (MTEF) and the Fiscal Strategy
Paper (FSP) that the Federal Government of Nigeria (FGN) released on 20 October, 2017
will focus on some areas which we believe are critical in raising the revenue generating
capacity of the Nigerian economy. The MTEF/FSP forms the basis on which the FGN’s
yearly budgets are developed.
The major focus of the 2018-2020 MTEF/FSP is to achieve the following:
Broaden revenue receipts by identifying and plugging revenue leakages
Improve the efficiency and quality of capital spending
Place greater emphasis on critical infrastructure
Rationalise recurrent expenditure and
Fiscal consolidation to maintain the fiscal deficit below 3% of the GDP
FSDH Research’s analysis of the data that the International Monetary Fund (IMF) released
shows that Nigeria recorded the lowest average revenue to GDP ratio 11% between 2010
and 2016 among some selected countries. Some of the reasons for the low performance
are:
Revenue leakages; weak infrastructure and institutions
Inadequate structures to unlock revenue from agriculture, which is the largest
contributor to the country’s GDP
Overreliance on one product (crude oil) as the source of revenue.
Some of the effects of this situation are widespread poverty and income inequality; and
unsustainably high debt service to revenue. Thus, concerted polices and efforts are
required to address these challenges in order to develop the Nigerian economy.
Nigeria has low revenue to GDP
ratio
11%18% 19% 22% 24%
27% 27% 28%31% 31% 33% 36% 36% 37%
60%
0%
10%
20%
30%
40%
50%
60%
70%Ratio of Government Revenue to GDP (2010A - 2016A) -
Average
Source: IMF
Economic and Financial Outlook: 2018-2022
FSDH Research 36
The MTEF projects a benchmark crude oil price of US$45 per barrel for 2018 (US$44.5 in
2017 budget); crude oil production estimate of 2.3mbd (2.2mbd in 2017); and an average
exchange rate of N305/US$ same as in 2017. It projects a GDP growth rate at 3.5% in
2018. The MTEF expects inflation rate to end the year 2018 at 12.42% lower than 15.74%
for 2017.
Based on these assumptions, estimated aggregate revenue for the FGN for 2018 is
N6.61trn, 30% higher than N5.08trn approved in the 2017 budget. The oil revenue is
projected to contribute N2.44trn. Non-oil revenues (Companies Income Tax, Value Added
Tax, Customs and Excise Duties, and Federation Account Levies) are estimated at
N1.39trn; Independent Revenue: N847.95bn; Recoveries: N512.44bn; and Others
(including mining): N1.42trn.
The proposed expenditure for 2018 is N8.61trn, 15.74% increase over 2017 of
N7.44trn. Adjusting the proposed expenditure by the projected inflation rate to end the
year, it represents a marginal growth in real terms. The aggregate expenditure comprises:
Statutory Transfers: N456.46bn; Debt Service: N2.01trn; Sinking Fund: N220bn; Recurrent
Expenditure: N3.14trn; Special Intervention Programme: N350bn and Capital Expenditure
of N2.43trn. This fiscal plan will result in a deficit of N2trn for 2018, which is about 1.77%
of GDP.
Table 21: FGN Medium-Term Expenditure Framework 2018 - 2020:
Indicators 2016A 2017B 2018P 2019P 2020P
Oil Production (mbd) 1.82 2.2 2.3 2.4 2.5
Oil Price Benchmark (US$) 42.09 44.5 45.0 50.0 52.0
Exchange Rate (N/US$) 305 305 305 305 305
Inflation Rate 18.55% 15.74% 12.42% 13.39% 9.90%
GDP Growth Rate 1.58% 1.50% 3.50% 4.50% 7.00%
Fiscal Deficit to GDP 2.34% 2.18% 1.77% 2.08% 1.67%
Debt Service to Revenue 47% 32.73% 30.48% 36.53% 37.47%
Deficit to FGN Revenue 81.81% 46.34% 30.35% 40.95% 32.96%
Source: Budget Office of the Federation (BOF). A: Actual, B: Budget, P: Projected
The MTEF expects inflation rate
to end the year 2018 at 12.42%
lower than 15.37% for 2017.
Adjusting the proposed
expenditure by the projected
inflation rate to end the year, it
represents a marginal growth in
real term.
The ratio of the proposed fiscal
deficit in 2018 to GDP is 1.77%.
Economic and Financial Outlook: 2018-2022
FSDH Research 37
FSDH Research notes that the expected average oil production is aggressive, while
the expected average exchange rate is conservative. In addition, the expected capital
expenditure of about N7.22trn between 2018 and 2020 is not sufficient to lift the economy
from the current infrastructure deficit. FSDH Research reiterates that a functional
infrastructure is critical for the economy to generate revenue and since government is
constrained by funds to address this, it is imperative to develop other constructive and
innovative ways to fund the infrastructure. The rough estimate of the infrastructure
expenditure gap in Nigeria at the moment is about N30trn.
10.2 Implications:
We expect the CBN to adopt an accommodative monetary policy stance going
forward
We expect the yields on the NTBs to trend downwards
The yields on the FGN bonds may increase to the region of 15%
There may be improvements in the fiscal position of the FGN if crude oil price and
production are sustained.
2.362.95 2.65
2.25
5.085.65
6.336.83
7.44
8.608.98 9.08
1.67%
1.50%
1.70%
1.90%
2.10%
2.30%
2.50%
2.70%
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
2017B 2018P 2019P 2020P
2017B-2020P MTEF Estimates - N'trn
Deficit Revenue Expenditure Deficit-to-GDP
2.2
2.3
2.4
2.5
44.5
45
50 52
2.00
2.10
2.20
2.30
2.40
2.50
2.60
40
42
44
46
48
50
52
54
2017B 2018P 2019P 2020P
Estimates of Crude Oil Parameters (2017B-2018P)
Oil Output (mbd) Oil Price Benchmark (US$)
FSDH Research notes that the
expected average oil production
is aggressive, while the
expected average exchange
rate is conservative.
Source: Nigerian Budget Office
Economic and Financial Outlook: 2018-2022
FSDH Research 38
11.0 Interest Rate: The yields in the fixed income securities remained high between Jan – May 2017
reflecting the risk inherent in the economy when it was in recession. However, the
yields dropped from June through December 2017 reflecting the improvement in the
macroeconomic environment.
FSDH Research observed the highest drop on the yield on 364-Day NTB. The drop in the
yield was also higher than the drop in the inflation rate during the year. Thus the real yield
was higher on the 364-Day NTB in January 2017 than the December 2017.
The Nigerian Interbank Offered Rates (NIBOR) declined across all the tenors to close the
year 2017. The average NIBOR on the 30-Day, 90-Day and 180-Day decreased by 0.70%,
1.15% and 3.21% respectively. The decrease was as a result of the relative availability of
liquidity in the system.
The CBN maintained the Monetary Policy Rate (MPR) at 14% throughout the year
and retained the symmetric corridor of -5% and +2% around the MPR. It also retained
the CRR at 22.50%; and maintained the Liquidity Ratio (LR) at 30%. In April 2017, the CBN
introduced the Investors’ and Exporters’ foreign exchange window, this initiative inspired
confidence from the foreign investors leading to an increase in foreign capital inflows.
Table 22: Yields Vs Inflation Rate - 2017
NTBs Yields vs. Inflation Rate
Average January Average December Change RY* January RY* December
91-Day NTB 14.45% 13.45% (1.00%) (4.26%) (2.45%)
182-Day NTB 19.02% 16.42% (2.60%) 0.31% 0.52%
364-Day NTB 22.95% 18.46% (4.49%) 4.24% 2.56%
Inflation Rate 18.72% 15.90%
FGN Bonds Yields vs. Inflation Rate
Average January Average December Change RY* January RY* December
16.00% FGN Jun 2019 16.27% 14.49% (1.78%) (2.45%) (1.41%)
16.39% FGN Jan 2022 16.08% 14.14% (1.94%) (2.64%) (1.76%)
10.00% FGN Jul 2030 16.26% 14.25% (2.01%) (2.46%) (1.65%)
30-Day NIBOR 16.95% 16.25% (0.70%) (1.77%) 0.35%
90-Day NIBOR 18.61% 17.46% (1.15%) (0.11%) 1.56%
180-Day NIBOR 22.34% 19.14% (3.21%) 3.63% 3.23%
*RY: Real Yield. Sources: NBS, FMDQ, FSDH Research
The NIBOR declined across all
the tenors to close the year 2017.
FSDH Research observed the highest drop on the yield on
364-Day NTB.
Economic and Financial Outlook: 2018-2022
FSDH Research 39
The average NIBOR in 2017 was higher than what was recorded in 2016. The average
NIBOR in 2017 stood at 26.40%, 18.31%, 20.50% and 22.78% for overnight, 30-Day, 90-
Day and 180-Day respectively. In 2016, the average NIBOR stood at 12.32%, 12.89%,
14.69% and 16.51%, respectively.
Although the yields in the fixed income dropped from June 2017 through December, the
average yields on the Nigerian Government Treasury Bills (NTBs) were higher in 2017 than
2016. The 91-Day, 180-Day and 364-Day NTB were 13.93%, 18.49% and 21.93% in 2017
compared with 10.94%, 13.66% and 16.73% respectively in 2016. The average yields in
2017 on the 7-year, 10-year and 20-year FGN Bond stood at 15.91%, 15.72% and 15.76%
respectively, compared with 13.30%, 13.73% and 14.04% respectively in 2016.
FSDH Research expects the Monetary Policy Committee (MPC) of the CBN to
commence monetary policy easing in early 2018. The MPC may achieve this via an
adjustment to the asymmetric corridor around the MPR or reduce the CRR. The
monetary policy easing will stimulate lending to the real sector of the economy
which will boost GDP growth.
The major drivers of interest rates and yields in 2018 would be:
The inflation rate – actual and expectation
Fiscal deficit financing
Realignment of the debt profile in favour of foreign debt
Realignment of the debt profile in favour of long tenored debt
Expectation of favourable oil price and production
Fiscal cautions
Electioneering considerations.
Bond Market:
o FSDH Research believes that the average yield on the FGN Bond will be lower in
2018 than in 2017, the yields should increase in the first half of the year 2018. The
yield should drop in the second half of the year when inflation rate drops to single
digit all things being equal.
o We expect more activities in the corporate bond market and commercial papers in
2018 because of the drop in the yield on the NTBs.
FSDH Research expects the MPC
of the CBN to commence monetary
policy easing in early 2018.
FSDH Research believes that the
average yield on the FGN Bond will
be lower in 2018 than in 2017.
Economic and Financial Outlook: 2018-2022
FSDH Research 40
Treasury Bills (TBs):
o FSDH Research expects the average yields on the NTBs to drop lower in 2018
than 2017. Our expectations is that the yield will drop below the current levels as
shown on the table below.
o The following factors will be the major drivers of yields in 2018:
Expected drop in inflation rate
The FGN’s strategy to issue longer dated bond against the short dated
The plans to increase the issue of foreign debt
Foreign currency stability.
Fixed Deposits:
o We also expect the fixed deposit rate to drop in line with drop in the NTB yield.
Our forecast monthly average interest rate on the 90-Day Fixed Deposit, FGN Bonds and
the yields on the Treasury Bills are presented on the tables 23, 24 and 25 below.
Table 24: FGN Bond Yields – Monthly Average Actual vs Forecast
2017 - Actual 2018 - Forecast
Month Jul-21 Mar-27 Apr-37 Jul-21 Mar-27 Apr-37
Jan-A 16.42% N/A N/A 13.40% 13.43% 13.33%
Feb 16.38% N/A N/A 13.16% 13.66% 14.16%
Mar 16.12% 15.90% N/A 14.61% 14.81% 14.91%
Apr 16.19% 15.97% 16.12%
14.67% 14.82% 15.02%
May 16.36% 16.27% 16.10% 15.43% 15.33% 15.53%
Jun 16.35% 16.23% 15.98% 14.44% 14.34% 14.54%
Jul 16.27% 16.23% 16.16% 13.84% 13.84% 14.04%
Aug 16.51% 16.54% 16.56% 13.36% 13.36% 13.56%
Sep 16.34% 16.31% 16.25% 13.18% 13.18% 13.38%
Oct 15.01% 15.02% 14.87% 13.25% 13.25% 13.45%
Nov 14.96% 14.95% 14.65% 13.04% 13.04% 13.24%
Dec 14.06% 14.11% 13.92% 13.34% 13.34% 13.54%
Average 15.91% 15.75% 15.62% 13.81% 13.87% 14.06% Sources: FMDQ, FSDH Research A – Actual, N/A – not yet traded
Table 23: 90-Day Fixed Deposit Rates Forecasts - 2018
Month JanA-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
Rate 14.00% 13.79% 13.59% 13.14% 13.08% 13.04% 12.44% 11.96% 11.78% 11.55% 11.34% 11.64%
Source: FSDH Research, A - Actual
Expectation of lower inflation rate,
FGN’s strategy to issue longer
dated bond and plans to issue
foreign debt will lower the yields on
NTBs.
Economic and Financial Outlook: 2018-2022
FSDH Research 41
.
Our forecast yearly average yields on the treasury bills and the FGN Bond are presented
on the table below:
We note that the interest rate and the yields on the tables 23, 24, 25 and 26 above are
based on the inflation rate without the adjustment for a hike in PMS pump price and
electricity tariff for the periods. If the PMS pump price and electricity tariff increase, the
inflation rate forecast will increase and this will increase yields in the market.
Table 25: Treasury Bill Yields – Monthly Average Actual vs. Forecast
2017 - Actual 2018 - forecast
91day 182day 364day
91day 182day 364day
Jan-A 14.45% 19.02% 22.95%
12.72% 14.86% 16.33%
Feb 14.23% 18.81% 22.69%
12.59% 14.63% 16.25%
Mar 14.08% 18.81% 22.81%
12.39% 14.48% 15.11%
Apr 14.05% 18.94% 23.23%
11.94% 13.67% 14.17%
May 13.97% 18.79% 23.02%
11.88% 12.83% 12.93%
Jun 13.97% 19.05% 20.81%
11.84% 12.44% 12.74%
Jul 13.93% 19.11% 22.80%
11.24% 11.84% 12.64%
Aug 13.82% 19.02% 22.73%
10.76% 11.36% 12.16%
Sep 13.65% 18.67% 21.02%
10.58% 11.18% 11.98%
Oct 13.62% 16.68% 18.56%
10.35% 10.95% 11.75%
Nov 13.45% 16.42% 18.46%
10.14% 10.74% 11.54%
Dec* 13.45% 16.42% 18.46%
10.44% 11.04% 11.84%
Average 13.89% 18.31% 21.46% 11.40% 12.50% 13.29% Sources: FMDQ, FSDH Research *No NTB auctions in December 2017, the yields here are for November 2017, A - Actual
Table 26: Yearly Average Interest Rates Forecast (2018 – 2022)
Year Average Inflation 91 NTB 182 NTB 364 NTB
5yr FGN Yields
10yr FGN Yields
20yr FGN Yields
Prime Lending
Rate
90 -Day Deposit
Rate
2018F 10.62% 11.40% 12.50% 13.29% 13.81% 13.87% 14.06% 20.85% 12.60%
2019F 9.03% 9.88% 10.03% 11.83% 11.93% 12.53% 12.98% 19.32% 11.08%
2020F 9.05% 9.55% 10.05% 11.85% 11.95% 12.55% 13.00% 18.99% 10.75%
2021F 9.01% 9.51% 10.01% 11.81% 11.91% 12.51% 12.96% 18.96% 10.71%
2022F 8.98% 9.48% 9.98% 11.78% 11.88% 12.48% 12.93% 18.92% 10.68%
Source: FSDH Research Analysis
If the PMS pump price and
electricity tariff increase, the
inflation rate forecast will increase
and this will increase yields in the
market.
Economic and Financial Outlook: 2018-2022
FSDH Research 42
Our forecast
yearly average
12.0 Equity Market:
12.1 The Secondary Market:
The improving macroeconomic environment and the policy of the CBN to improve
liquidity in the FX market had positive impacts on the equity market in 2017. The NSE
ASI closed 2017 at 38,243.19 points, representing an appreciation of 42.3% (a gain of
41.98% in US$). The following stocks recorded the highest return in terms of capital
appreciation in 2017: Dangote Sugar (227%), International Breweries (195%), Fidelity
Bank (193%), Fidson Healthcare (189%) and Dangote Flour Mills (186%). Similarly, the
market capitalization gained by 47.18% (a gain of 46.85% in US$) to close the year 2017
at N13.61trn (US$44.50bn).
12.2 Equity Market Drivers in 2017
The increase in the price of crude oil
The increase in Nigeria’s crude oil production
The Nigerian economy’s exit from recession
The introduction of the Investors’ and Exporters’ (I&E) Foreign Exchange window
Stability in the foreign exchange market
The drop in the yields on fixed income securities
Growth in the external reserves
Improved corporate earnings.
The improving macroeconomic environment and the policy of the CBN to improve liquidity in the FX market had positive impacts on the equity market in 2017.
-3.12% -2.72%
0.74% 0.95%
14.52%12.27%
8.23%
-0.95%-0.18%
3.50% 3.45%0.79%
42.30%
-4.00%
6.00%
16.00%
26.00%
36.00%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
Monthly NSE ASI Change 2017
Source: The NSE
Economic and Financial Outlook: 2018-2022
FSDH Research 43
12.3 Outlook for 2018
The outlook of the equity market remains positive in 2018 as FSDH Research expects
the macroeconomic environment in Nigeria to strengthen further. We expect a strong
rally in the first half of the year 2018. The quarterly analysis of the equity market in the last
seven years shows that it appreciated consistently in Q2. We attribute the appreciation in
Q2 to the release of the Full Year earnings and corporate actions during the period.
Looking ahead into 2018, we believe the following factors will drive the market:
Increase in crude oil price at the international market and increase in local
production
The expected drop in the yields on fixed income securities leading to portfolio
realignment towards the equity market
Improvements in the external position of the country through increase in external
trades and capital inflows
Increase in the external reserves providing further stability for the foreign
exchange market
Improved corporate earnings and actions
Increased participation of the foreign portfolio investors
Table 27: Quarterly Equity Market Trend Analysis (2011-2017) – NSE ASI Analysis
NSE ASI 2011 2012 2013 2014 2015 2016 2017
Q1 -0.60% -0.38% 19.44% -6.25% -8.40% -11.65% -5.05%
Q2 1.46% 4.59% 7.84% 9.64% 5.39% 16.96% 29.79%
Q3 -18.44% 20.43% 1.16% -3.00% -6.69% -4.27% 7.01%
Q4 1.76% 7.95% 12.97% -15.90% -8.25% -5.16% 7.91%
FY -16.31% 35.45% 47.19% -16.14% -17.36% -6.17% 42.30% Sources: NSE and FSDH Research Analysis,
The outlook of the equity market
remains positive in 2018 as FSDH
Research expects the
macroeconomic environment in
Nigeria to strengthen further.
Economic and Financial Outlook: 2018-2022
FSDH Research 44
12.4 Sectoral Performance and Outlook:
The banking sector recorded the highest performance in 2017 followed by consumer
goods.
12.4.1 Banking:
The NSE Banking Index recorded the highest appreciation in 2017, growing by
73.32%.The improvements in the price of crude oil and production had a positive impact
on the loans extended to the oil and gas sector. The stability in the foreign exchange also
had a positive impact on the operations of the companies in the sector. Analysts and
investors see this positive developments for growth in future earnings and corporate
actions. FSDH Research expects the continued improvement in the macroeconomic
environment to boost the performance of the banking sector in 2018. We see investment
opportunities for the tier two banks in the sector.
12.4.2 Consumer Goods:
The improvements in consumer purchasing power and the stability in the foreign exchange
market in 2017 had positive impacts on the consumer goods sector. Despite the increased
supply and stability in the foreign exchange market, companies continue to substitute
imported inputs for local inputs where available. FSDH Research expects that as consumer
purchasing power grows, the consumer goods sector will grow in 2018. FSDH Research
expects the improvements in the macroeconomic environment and the growth in the equity
markets to have positive impacts for consumers and firms income in 2018. This should
help to stimulate effective demand for consumer goods. Consequently, firms should
expand production leading to increased profit and corporate actions for investors.
5.8%10.4%
23.8%
37.0%
73.3%
0.0%
20.0%
40.0%
60.0%
80.0%
NSE Oil and Gas NSE Insurance NSE IndustrialGoods
NSE ConsumerGoods
NSE Banking
NSE Sectoral Indices Performance in 2017
The NSE Banking Index recorded
the highest appreciation in 2017,
growing by 73.32%.
The improvements in consumer
purchasing power and the stability
in the foreign exchange market in
2017 had positive impacts on the
consumer goods sector.
Source: The NSE
Economic and Financial Outlook: 2018-2022
FSDH Research 45
12.4.3 Industrial Goods:
The FGN’s drive to bridge the infrastructure deficit through the involvement of the private
sector will be one of the major drivers for the industrial goods sector in 2018. This will
create investment opportunities in the sector. Specifically, we see opportunities in building
materials and construction.
12.4.4 Oil and Gas:
The increase in the price of crude oil and production boosted activities in the upstream oil
and gas industry. This should increase profitability and make the sector attractive to
investors. However, the current high crude oil price and the unwillingness of the FGN to
adjust the PMS pump price leading to a shortage of products may lower the profitability in
the sector. This will make this sector less attractive.
Looking at the developments in the international and in the domestic markets, we
expect the equity market to grow by 27.43% in 2018.
The FGN’s drive to bridge the
infrastructure deficit through the
involvement of the private sector
will be one of the major drivers for
the industrial goods sector in
2018.
Looking at the developments in
the international and in the
domestic markets, we expect the
equity market to grow by 27.43%
in 2018.
Economic and Financial Outlook: 2018-2022
FSDH Research 46
A cursory look at some of the selected stock markets performance shows that all
stock markets we monitored appreciated in 2017. The GSE All-Share Index was the
best performing market at 52.72%, followed by the NSE All-Share Index with an
appreciation of 42.30%. The Shanghai Stock Exchange Composite Index recorded the
lowest appreciation of 6.56% during the period.
Table 28: Some Selected Stock Market Indices as at December 2017
North/Latin America YTD Change
Dow Jones Industrial Average 25.08%
S&P 500 Index 19.42%
NASDAQ Composite 28.24%
Brazil Stock Market Index (Ibovespa) 26.86%
Europe
Swiss Market Index 14.14%
FTSE 100 Index (UK) 7.63%
CAC 40 Index (France) 9.26%
DAX Index (Germany) Deutsche Boerse AG 12.51%
SMSI Index (Madrid, Spain) 7.59%
Africa
NSE All-Share Index 42.30%
FTSE/JSE All-Share Index (S/A) 17.47%
GSE All-Share Index (Ghana) 52.72%
Nairobi All-Share Index (Kenya) 28.39%
Asia/Pacific
NIKKEI 225 Index (Japan) 19.10%
BSE 30 Index (India) 27.91%
Shanghai Stock Exchange Composite Index 6.56%
Hang Seng Index (Hong Kong) 35.99%
Source: Financial Times
A cursory look at some of the
selected stock markets
performance shows that all stock
markets we monitored
appreciated in 2017.
Economic and Financial Outlook: 2018-2022
FSDH Research 47
Looking at the outlook for 2018, we are proposing the following fund allocation model for
investors. This is very important as investors navigate through the challenging markets
ahead.
Table 30: Stock Watchlist
Stocks Max Entry Price 52 Week Low 52 Week High Target Price
Access Bank 11.25 5.93 12.97 15
Cadbury 13.95 7.41 17 17
Dangote Cement 238.5 149.26 273 300
Dangote Sugar 19.00 5.71 22.01 23
FBN Holdings 13 2.96 14.75 17
Fidelity Bank 3.02 0.77 3.99 3.7
Flour Mills 33 17.2 35.47 43
Lafarge Africa 50 34.5 63 60
Nestle Nigeria 1,450 570 1,556 1,856
Nigerian Breweries 135 112.82 193 165
PZ Cussons 21.6 11.04 27.3 27
Transcorp 1.93 0.69 2.55 2.5
United Bank for Africa 12.5 4.75 13 17.5
Zenith Bank 29 13.3 33.51 38
Source: NSE; FSDH Research
Table 29: Asset Allocation
Asset Class Fund Allocation
Equities 30%
Fund Placement 12.5%
Treasury Bills 12.5%
Real Estate Investment Trust (REIT) 5%
Bonds 20%
Collective Investment Schemes 15%
Total 100%
Source: FSDH Research
Economic and Financial Outlook: 2018-2022
FSDH Research 48
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Table 31: Summary of Forecast (2018 - 2022)
Economic Indicators 2017A 2018F 2019F 2020F 2021F 2022F
Nominal GDP (Ntrn)* 120.19 140.33 163.35 190.45 221.87 258.51
Real GDP (N'bn)* 68.61 70.79 73.68 77.40 81.62 85.99
Real GDP Growth Rate* 1.01% 3.16% 4.09% 5.05% 5.45% 5.36%
Import (N'trn)* 95.23 10.09 10.35 10.55 10.71 10.82
Export (N'trn)* 13.39 15.91 17.53 18.98 20.76 22.61
Trade Balance (N'trn)* 3.87 5.82 7.18 8.43 10.05 11.79
Total Trade (N'trn)* 22.91 26.01 27.88 29.53 31.48 33.43
Public Debt (N'trn)* 20.75 23.96 26.46 28.91 30.94 32.48
Debt/GDP (%)* 17.26% 17.07% 16.20% 15.18% 13.94% 12.57%
Average Inflation (%) 16.55% 10.62% 9.03% 9.05% 9.01% 8.98%
91 NTB (%) 13.89% 11.40% 9.88% 9.55% 9.51% 9.48%
364 NTB (%) 21.46% 13.29% 11.83% 11.85% 11.81% 11.78%
5Yr FGN Yields (%) 17.85% 13.81% 11.93% 11.95% 11.91% 11.88%
Prime Lending Rate 22.89% 20.96% 19.32% 18.99% 18.96% 18.92%
90-day Deposit Rate 15.09% 12.60% 11.08% 10.75% 10.71% 10.68%
Exchange Rate (N/US$) – Lower Band
355.55 345 336.38 327.97 323.05 318.20
Exchange Rate (N/US$) – Upper Band
383.28 361 351.98 343.18 338.03 332.96
NSE 42.30% 27.43% 16.60% 25.32% 18.47% 17.72%
Sources: FSDH Research, NBS, DMO, CBN, FMDQ and NSE * - Estimate