Executive Summary: Nigeria Reopens For Business

Global Economy and Banking Landscape
The Performance of the global economy was mixed in 2016 with as growth prospects dampened at the start of the year by geopolitical tensions and a slow burning banking crisis in Europe before gaining momentum later on. Risk in the global landscape remained heightened by geopolitical tensions as two notable events sent shock waves across markets - the outcome of the Brexit vote and the election of Donald Trump as President of the United States. However, the tensed atmosphere in the first half of 2016 has given way to reinvigorated confidence following respite in downside risks associated with the US elections, Brexit uncertainty and concerns of slower growth in China. Furthermore, underlying the renewed optimism across regions are expectations of an expansionary fiscal policy in the US, stronger commodity prices favourable to commodity exporting nations and better than expected growth and policy support in China.

At the start of 2017, global optimism was further elevated by the International Monetary Fund’s (IMF) projection that global growth will rise from 3.1% in 2016 to 3.4% in 2017 and 3.6% in 2018. Despite initial scepticism on the capability of President Donald Trump to push through his pro-growth expansionary fiscal plan, the IMF remains bullish on growth outlook, revising 2017 global growth forecast upwards to 3.5% at its April Spring meetings whilst leaving projection for 2018 (+3.6%) unchanged.

However, the IMF trimmed Sub-Saharan Africa’s (SSA) growth projection by 20bps while stating that many of the largest non-resource-intensive countries in the region will find it increasingly difficult to sustain growth through higher public capital spending in the face of rising public debt. The region is projected to grow 2.6% in 2017 (relative to 1.4% recorded in 2016), driven by a rebound in Nigeria, South Africa and Angola – the region’s largest economies - which faced a challenging 2016 due to low commodity prices. Nigeria is forecast to grow 0.8% in 2017 relative to a 1.5% contraction in 2016 while South Africa is also expected to grow 0.8%, faster than the 0.3% actual in 2016. Justifying the improved growth prospect, Nigeria and South Africa exited recession in Q2:2017 with 0.6% and 2.5% GDP growth respectively. Angola is also expected to rebound 1.3% in 2017, with the major driver being the non-oil sector.

Despite the apparent synchronised expansion in growth across regions, there still exist major downside risks such as geopolitical tension, protectionism and political populism in advanced economies and policy tightening by systemic central banks. Against this backdrop, we review developments in the global socio-political space, especially with regards to the increasing influence of political populism, prospects of sustained higher oil prices vis a vis the OPEC production cuts and finally the impact of the gradual shift in policy outlook of systemic central banks from largely dovish to a more hawkish stance on emerging markets.

In addition, we examine developments in global banking regulation and innovations across topics ranging from risk management and banking regulation in a period of increasing FinTech innovations, to discussions surrounding the possibility of the “Glass-Steagall Act” coming back into play in the U.S. as well as the role digital technologies and advanced analytics will play in creating the invisible banks of the future.

Domestic Macroeconomic Highlights
Nigeria’s erstwhile predominantly positive macro story suffered a setback between 2014 and 2016 as macroeconomic indicators came under pressure and underperformed medium term trends and frontier market peers. This period could best be described as the “lean years” which perhaps has been one of the most challenging for policy makers since the return to democratic rule in 1999. As with most emerging and frontier market crises, Nigeria’s economic miseries were at first triggered by a current account imbalance and widening fiscal deficits which were a direct consequence of the fall in global oil prices which began in 2014. As the tide went out on commodities, Nigeria’s structural vulnerabilities - hitherto ignored by policy makers and global fund managers caught in the euphoria of the “Africa Rising” narrative – became more obvious, with the effect on the business cycle amplified by underwhelming policy responses which sapped investor confidence and led to a currency crisis.

The resumption of militancy in the oil producing Niger Delta region in February 2016 was the straw that broke the camel’s back. The result was that the business cycle reached a trough when GDP shrank for the first time in more than two decades, unemployment rate peaked, inflation surged to double-digits, risk crystalized in the banking sector and asset prices fell across board.

However, compared to the economic despondency of 2016 which saw the economy slip into a recession, business and investment confidence started to garner steam in Q1:2017 as hope brightened that the business cycle had reached a trough and the economy was set to fully reverse course. Q1:2017 GDP figures and corporate earnings already signalled that the much expected recovery was afoot. Second Quarter GDP numbers further confirmed the recovery was on course with the economy exiting a 4-Quarter long recession with a mild GDP growth of 0.6%. The rebound in growth was driven by both oil and non-oil sectors.

The realities underlining the cyclical recovery displayed by the economy were shaped by three key themes:
i.    Rebound in oil exports which marked a turning point in macroeconomic stability,
ii.    Pro-market FX policy Reforms implemented by the Central Bank of Nigeria (CBN), and
iii.    New efforts by Fiscal and Monetary Authorities at tackling deep-seated structural challenges.

We extensively reviewed these themes – focusing on their sustainability and associated downside risks. On this basis, we have made projections on key macroeconomic variables including GDP growth, price level, fiscal and monetary policy as well as downside risk of polity instability as the 2019 elections approach.

Our Outlook on Growth: Low Base Push to Nudge Economy Out of Recession
Against the backdrop of a recovery in the domestic oil sector, reforms in the FX market and renewed efforts at tackling deep-seated structural bottlenecks, we are more optimistic on near term growth. We expect growth to accelerate in Q3:2017 and Q4:2017, driven by improved oil output and anticipated positive knock-on effects of higher crude exports on Non-oil GDP, following a boost in FX liquidity and fiscal spending. However, a major downside risk is the recently reported incidence of flooding in the Agrarian North Central region which is a strategic agricultural belt. Although government agencies are still taking stock of the extent of damage to farmlands and infrastructure, we have prudently taken this into consideration in our growth forecast for FY:2017. Hence, we retain our FY:2017 growth forecast at 1.2% but raise FY:2018 projection by 10bps to 2.6%.

Price Level: High Base Effect Subduing Inflation despite Renewed Pressure on Food Prices
In line with consensus expectation, high base effect kicked in from February to moderate Nigeria’s headline inflation rate after it peaked in January 2017. However, the pace of moderation has been rather underwhelming, with actual monthly inflation persistently above consensus forecasts since February. The negative inflation surprises are essentially due to renewed pressure on food prices which has continued to drive food inflation higher to offset moderation in the Core Index.

With the economy already running out of base effect price level moderation, inflation numbers may start to trend northward yet again. Taking this into consideration, we have adjusted our year end inflation rate projection upward from 14.5% to 16.3%. Our outlook for 2018 also remains conservative as we expect the government to slowly begin to deregulate the pricing of petroleum products ahead of the scheduled opening of private refineries between 2019 and 2020. The Multi Year Tariff Order (MYTO) for electricity pricing may also be revisited before the election cycle starts in mid-2018 after which such unpopular policies could be difficult to implement. Thus, we forecast inflation to remain in double digits in 2018, but trending downwards to the 12.0% - 13.0% range due to the high base effect of food prices.

Polity Stability: Secessionist Agitation Fractures Polity despite Gains on Security
Nigeria enjoyed some measure of polity stability just after the 2015 elections as the military consolidated on gains in fighting the insurgency in the North East region, eventually pushing back the Boko Haram terror group from towns and localities to their redoubt in the Sambisa Forest. However, the polity has been tense since mid-2016, partly due to militants’ uprising in the Niger Delta and economic hardship brought on by the recession. The latter has had more impact on polity stability as secessionist groups in the South East, led by the Indigenous People of Biafra (IPOB), have capitalized on economic conditions to ramp up calls for secession.

To further complicate the plot, the impact of climate change – which has ravaged grazing fields in Northern Nigeria – has increased incidences of trespassing in farmlands in North Central and Southern Nigeria by nomadic Fulani cattle herdsmen searching for greener pasture. This has heightened ethnic tension and driven up incidences of violent clashes between host communities and herdsmen. Hence, the stage for a potentially contentious election cycle in 2019. Thus, we highlight polity uncertainties as downside risks to watch out for.

Afrinvest Banking Sector Report 2017