Dampness in Springtime… IMF Trims Growth Forecasts

The International Monetary Fund (IMF) released its revised World Economic Outlook for 2016 this week just in time for the 2016 IMF-World Bank spring meetings which commenced earlier today. The report titled, “Too Slow for too long” expectedly painted a grim picture of the global economic condition with the 2016 global growth forecast trimmed by 0.2% to 3.2% while growth forecasts across a broad spectrum of regions were also revised downward. The revision came against a backdrop of factors which have heightened uncertainty and subdued growth outlook. This includes: slowdown and structural rebalancing in China with a feedback loop in the commodity market and global trade; low commodity prices fuelling terms of trade and fiscal imbalances in commodity-exporting, emerging and developing countries as well as volatile financial markets and geopolitical tensions in Middle East and Europe.

In the revised forecasts, the Advanced Economies block is projected to grow by 1.9%, at par with 2015 growth but 0.2% lower than earlier forecast in January. The Emerging Markets & Developing Countries (EM &DCs) are projected to grow by 4.1%, slightly higher than 4.0% in 2015 but 0.4% lower than January forecast. Although the IMF acknowledged the proactive accommodative monetary policy measures taken by systemically important central banks to support growth with positive knock-on impacts in the financial markets, it also noted the elevated downside risks of tightening financial condition and possibility of increased net capital outflows in emerging markets, spill over of slower growth in China, political and economic developments in the US and Europe as headwinds.

We particularly note the steep 1.0% cut in Sub-Saharan Africa growth forecast to 3.0% (a 17-year low) which implies the IMF expects growth in the region to decelerate to the slowest pace since 1999 when the East Asian debt crisis triggered a recession in emerging markets. Although central banks and sovereign authorities in SSA have built up substantial foreign reserves and have relatively lower foreign borrowings, the current situation in SSA still bears close similitude with the East Asian crisis in terms of rising imbalance in terms of trade and currency volatility. The 2 largest economies in the region, Nigeria and South Africa had their growth forecasts trimmed by 1.8% and 0.1% to 2.3% and 0.6% respectively.

In consonance with current realities, Afrinvest Research has revised its 2016 Nigeria growth forecast to 2.0%. We note that:
The current level of oil prices is not enough to significantly alter the terms of trade to favour Nigeria as other foreign capital inflow sources have ebbed due to misaligned monetary policy and uncertain fiscal policy. While the recent rally in oil prices above US$40.0/b offers fresh hope, we note that the uptick is more grounded in sentiment than fundamentals, hence may be short-lived if recent efforts by OPEC and non-OPEC oil exporters do not materialize.
While cost-saving fiscal reforms have gained traction, equally important long term fixes to structural shortages of FX and petroleum products are yet to be made. These have much more impact on private consumption and investment which historically drive economic activities in Nigeria. If these shortages are long-drawn, the fiscal impulse from an expansionary budget may be muted.

The bi-lateral agreements being drawn with Chinese government and agencies – currency swaps and loan deals – could, to a great extent strengthen balance of payments and fiscal positions but details are still sketchy and we remain conservative on the potential economic gains that could accrue. Despite the short-term dim outlook, we remain long-term bullish on Nigeria to reap dividends of its demographics and resource advantage. The current administration remains pro-reform and more than ever before, there has been intense focus on diversifying revenue sources at every strata of government and build fiscal resilience. The excuses justifying some weak responses would eventually be overcome by economic realities which would favour real sector productivity. For long term investors, we think valuations of assets in the country are cheap once the necessary and inevitable exchange rate adjustment is made.