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First half economic outlook appears hazy despite oil price rebound – Analysts

By Emeka Anaeto, Economy Editor

Amidst dramatic positive turn in oil prices in the international market some economy analysts have indicated that a positive rub-off on Nigerian economy would not come in the short term.

crude-oil-pipe-702x336-436x336Economists at the Financial Derivatives Company Limited, said the inflationary pressures which had sustained over thirteen months consecutively, would remain in the months ahead, due to the persistent scarcity of petroleum products, among other key factors.

However they noted that the currency swap initiative between Nigeria and China is expected to dampen domestic prices, as China accounts for 25.6 per cent of Nigeria’s import, hence a moderating influence on imported inflation, especially  as China’s inflation remained flat at 2.3 per cent in March, 2016.

But economy researchers at ARM Investments said their earlier identified tripod of inflation drivers coming into 2016 (higher electricity tariff, Naira volatility and petroleum products scarcity) dominated inflation discuss thus far in 2016, adding that lingering fuel scarcity bolsters their expectation for continued pressures on prices within the second quarter.

Consequently, they projected a 57 basis points rise in headline inflation to 13.4 per cent for April 2016 with a target full year 2016 average now at 12.79 per cent. Last month’s headline inflation rate was 12.8 per cent, a near 4-year high.

In its economic outlook for first half 2016, the economists at ARM Investments stated that output will also remain depressed as growth challenges show no sign of abating

“Going forward, we retain bearish outlook on overall gross domestic products, GDP, on the back of extended delays in the passage of 2016 budget which was meant to signpost a kick-start of stimulatory fiscal spending that would have supported production in non-oil segments of the economy. Consequently, we retain our 2016 GDP forecast of 2.9 per cent year-on-year.”.

Further, they stated, “whilst we expect currency issues to keep importation reasonably constrained, oil exports is likely to be pegged-back by incessant downtime at strategic pipelines such as Trans Forcados, with organisations such as Seplat Petroleum, already bracing up for significant down-time over the first half of the year”.

This, according to them, increases prospects for renewed balance of payment pressures over the rest of 2016.

As a result, they said that the huge parallel market premium in the foreign exchange market which resulted from the decision of the Central Bank of Nigeria, CBN, to administratively peg exchange rate in its officially controlled market segment in the face of sharp depreciation in the parallel market, would persist.

“In all, as the CBN keeps its grip of the peg, we expect further market dislocation to result in sustained increase in parallel market premium”.

On the stock market ARM analysts said, “over the rest of first half 2016, whilst oil prices show signs of finding a bottom, current foreign exchange market illiquidity should continue to stymie foreign interest on the domestic bourse”.

Thus, they advised that domestic investor considerations should play a pivotal role in charting equity market outlook in the second quarter (Q2), 2016.

However, on this wise, they reasoned that the recent twist in monetary policy and resultant rise in interest rates raises the hurdles for quoted companies while driving heightened domestic investor sensitivity to stock fundamentals.

On balance, they see lagged economic policy response to the tepid economic landscape as driving a bearish market outlook in the Q2, 2016.

“Our base case was for a weak macroeconomic landscape on account of the oil price shocks to combine with current foreign exchange restrictions to temper foreign participation in Nigerian equities, leaving domestic considerations to exert greater influence on market outlook.

“On a sector basis, we anticipated the planned fiscal stimulus would be positive for FMCGs (fast moving consumer goods companies) and cement stocks with the latter aided by modest valuation multiples.

“Going forward, whilst oil prices have posted a quicker recovery than we expected, subsisting glut and still unclear prospects for an output freeze leave room for further price volatility in Q2, 2016.

“Combined with current foreign exchange restrictions, we see an extension of net short foreign portfolio investments (FPIs) positions on Nigerian equities in Q2, 2016.

“In summary, a weak macroeconomic backdrop, delay in fiscal policy execution and onset of tight monetary policy underpin a beleaguered outlook for the broader equity market leaving a stock selection focused approach in Q2 2016”.


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