Inauguration of Fiscal Cabinet...Policy Clarity Tops Expectations

The much awaited inauguration of the Federal Executive Council (FEC) finally took place on Wednesday, 11th 2015 with the ministerial-designates allocated portfolios. As expected, the number of ministers was pruned down to 36 from 42 whilst some ministries were merged to give a total of 25 ministries from 29. This aligns with the objectives of the government to reduce administrative overheads to conserve resources in a period of declining oil prices, which resulted in a 30.7% Y-o-Y decline (to N3.5tn) in revenues accruing to the federation account in the first half of the year.

The President opted for Mrs. Kemi Adeosun, a seasoned investment banker, immediate past Commissioner of Finance in Ogun State, South West Nigeria and public finance expert to be the Minister of Finance. Dr. Okechukwu Enelamah, earlier tipped to become the Minister of Finance, was instead selected to Head the Ministry of Industry, Trade and Investment where he is expected to drive policies to resuscitate manufacturing and attract direct and portfolio capital. The other Ministers expected to form the core economic team of the President and drive economic policy initiatives include the Ministers of Budget & National Planning (Sen. Udo Udoma) and Power, Works and Housing - Mr. Babatunde Fashola, the former governor of Lagos State.

Although we are moderately bullish on personalities of the aforementioned ministers to drive policy initiatives, the fact that the appointments were delayed for 5 months in a period of deteriorating macroeconomic fundamentals has set expectations high for them. Important policy decisions lie ahead and the market would expect the Finance Minister to work out a co-ordinated policy framework along with monetary authorities to respond to the macroeconomic challenges of slow growth, heightened inflationary pressure, declining reserve buffers and exchange rate uncertainty.

The new Minister of Finance during her screening at the Senate backed the CBN's FX administrative measures in the FX market. The President, at the swearing-in ceremony also restated his support for the CBN, noting that, "the CBN has also implemented country-specific and innovative policies that have helped to stabilize the exchange rate and conserve our reserves''. It remains to be seen how the current CBN's strategy will be balanced with the expected expansionary Fiscal 2016 budget.

Already, investors in the fixed income market are already pricing in a possible tightening of liquidity by the CBN post-cabinet inauguration, resulting in sell-down pressure across FGN-bond tenors towards the end of the week. Although there has been no official communication from the CBN on resumption of OMO auctions, we do not foresee any monetary policy tightening in the short term given the deteriorating macroeconomic fundamentals. Third quarter GDP growth figures is likely to be below the 2.4% recorded in the 2nd quarter. Ahead of the release of October inflation data by the Nigerian Bureau of Statistics (NBS) next week, we forecast the Headline Index to grow by 9.5% Y-o-Y, pressured by both food and core indices. Administrative FX measures have pushed many importers to the parallel market where the exchange rate is more expensive and we expect a pass-through effect on consumer prices for October. Given this, a tighter monetary policy and continued use of administrative tools in managing FX (affecting businesses) will worsen growth profile. Hence, we remain bullish on the fixed income market as we expect liquidity to remain robust.

An improvement in equities market performance - which has been bearish of recent -- may be long-drawn-out as investors continue to wait on further policy clarity from the Fiscal authorities and a review of the current FX policy of the CBN. Analysis of relative valuation of equities across frontier and emerging markets relative to Nigeria suggests that investors' reactions have been majorly spurred by weak companies' earnings necessitated by challenging macroeconomic environment. Current valuation puts Nigeria's P/E at 18.55x relative to Frontier and Emerging Markets' P/E of 4.88x and 12.49x. In our view, the market awaits a plethora of signals for a major turnaround in sentiments for equities; chief of which would include, optimal pricing of FX rate, clearer fiscal policy direction and reinstatement of investor confidence in monetary and fiscal policy managers.