Subdued Economic and Financial Market Performance in H1:2016

Broadly in line with our expectation, financial market performance in H1:2016 stayed volatile as the actions and inactions of fiscal and monetary policy authorities to lingering challenges in the economy led to weaker data. The equities market benchmark index touched a 3-Year low in January and remained subdued for most of H1:2016 but closed at 3.3% YTD following the flexible exchange rate policy framework introduced by the CBN while average yield on FGN bonds rose from 9.8% in January to 14.0% in June as macroeconomic fundamentals worsened.

Specifically, the pace of GDP growth weakened from 2.1% in Q4:2015 to -0.4% in Q1:2016, recording the first contraction in 13 years. The economy is expected to enter a technical recession by second quarter as we anticipate Q2:2016 GDP growth to further contract. Also, inflation rate touched a year- high of 15.6% in May-2016 from 9.6% in December 2015 while unemployment rate worsened to 12.1% in Q1:2016 amidst weakening corporate earnings releases. A combination of weaker export proceeds and constrained import resulted in the economy recording the first trade deficit in 39 months.

The poor macroeconomic and financial market performance mainly echoed the consequences of:

  • Sustained pressure in the currency market due to collapse of the interbank market as supply and demand gap widened,
  • Persistent scarcity of petrol and worsened energy crisis in the country from January to May,
  • Delayed budget implementation as well as lack of fiscal impulse to stimulate domestic spending and
  • Sub-National fiscal crisis with close to 26 States unable to pay salaries.

In a belated attempt to arrest the deterioration in the system, the Federal Ministry of Petroleum Resources deregulated the downstream petroleum sector in May 2016, a move that dramatically resolved months of fuel scarcity in the country. This was followed by passage of the 2016 Budget even as the Monetary Policy Committee (MPC) voted for the removal of the official peg on exchange rate in its last sitting in May 2016; ushering in a new FX regime which was launched barely two weeks to the end of H1:2016. Interestingly, global oil prices gained traction, rallying 72.7% YTD (from US$28.9/b as at December 2015 to US$49.9/b on 30th June 2016). However, gains from this rally is doubtful given the impact of production distortions by the Niger Delta Avengers on domestic crude export proceeds.

Although the significance of the recent effort of the government to salvage the economy may not translate into a sharp swing in the tide of things in the short-term due to huge confidence deficit impeding the system, we anticipate the overall impact of recent policy actions to be positive for the economy in the medium to long term.

We are quite positive about H2:2016 and beyond given the quantum of reforms that have been introduced over the last six months. The economy is gradually shifting towards a market based system in the allocation of scarce resources given the liberalization of the downstream oil & gas sector and the introduction of flexibility in the foreign exchange market. In addition, the implementation of the 2016 budget, which is meant to reflate the economy and set it on a growth path, is one of the recovery catalysts we envision for H2:2016. Amidst our positivity however, we remain cautioned by the fact that it may take a while to regain investor confidence and earn market credibility especially with the new FX policy. As our interactions with key market dealers suggest, investors are still keeping their fingers crossed, studying and timing a perfect time of entry.