Indeed, Naira devaluation is probably the most potent weapon against the prosperity of Nigerians. Nigeria’s migration from a potential industrial power house with bustling social affluence, to a subdued and stumbling economy clearly began with the adoption of IMF’s Structural Adjustment Programme during Babangida’s regime: the chorus from International Agencies, at that time, was also that falling oil prices with an unserviced debt burden and the consequent restriction of trade credit to Nigeria, were the products of an allegedly overvalued Naira exchange rate.
IN addition to projecting GDP growth rate of above 2.3 percent but Wale Olusi, Head of Research, United Capital Plc, averred that the expectation of naira devaluation will not materialise in 2020, but rather harmonisation of the official rate exchange rate and the Investors & Exporters window exchange rate.
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He said: “In 2020, the outlook for the Nigerian economy hangs on a framework of a well-intended but slightly uncoordinated policy outline. Notably, the recent amendment of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews of the Tax Acts via the finance bill, will support the implementation of the 2020 Budget and beyond in the face of sharp rising debt profile. Also, a lower yield environment, triggered by the CBN’s recent mix of heterodox policy actions, will not only ease the cost of rolling over government borrowings but also stimulate domestic private sector investment.
“On the back of the above, GDP growth is expected to sustain a gradual uptick in 2020, anticipated to expand above 2.3 percent, faster than 2019 but below 3.0 percent.
On trajectory of the inflation rate and impact on the Monetary Policy Rate (MPR), he said: “Inflationary pressure will persist due to supply shortages and the shutdown of the border, given the direct impact on food prices. Again, increased money supply by the CBN may keep the core inflation sub-index elevated due to pressure on FX. In all, we expect the headline inflation rate to average 11.9 percent in 2020, higher than 11.4 percent in 2019, in the absence of further structural changes that may trigger a fresh uptick in m/m inflation. While the benchmark interest rate (MPR) may be kept unchanged or reduced marginally, we imagine that the CBN will sustain its recent framework of heterodox policy mix until conditions necessitate policy normalization. Hence, interest rates in the fixed income market may remain low, especially in first half of 2020 (H1-2020).
On the exchange rate and capital flows in 2020, Olusi said: “We expect the CBN to continue to support the naira at N360-N365/$1 levels, by selling Open Market Operation (OMO) bills to FPIs (Foreign Portfolio Investors) as a strategy to preserve the reserves at decent levels. At the current run rate, this can be sustained for another 7 to 9 months, all things being equal. Nevertheless, we acknowledge the growing concern about an impending devaluation of the naira. In our opinion, while a currency devaluation is unlikely in the immediate-term, there is a possibility for the harmonization of the official rate from N305.5/$1 to something very close to the I&E window rate of N360.0/$1, in the medium term. Hence, the adjustment may not really affect the market rate by more than a spread of 2% to 5% to the official rate. Overall, our outlook for the naira is stable in the near term with a potential harmonization in the medium – to – long term.”
On the outlook for the fixed income and equities market, Olusi said: “Notably, a quick sequence of monetary policy actions, particularly those relating to sales of CBN’s OMO bills announced since Jul-19, changed the dynamics in the Nigerian financial market in H2-19. While the currency market remained broadly stable, supported largely by the CBN’s sustained FX intervention, the equities market tumbled 14.6 percent year-on-year (y/y). Also, the average yield in the fixed income market moderated from 14.5 percent in Dec-18 to 9.7 percent in Dec-19
“2020 is a different playing field for capital market players. The fixed income market will be a corporate/ private issuer market due to the buoyant level liquidity and the low yield environment. Yields on FGN T-bills are projected to stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in H1-20. Hence, interest in riskier assets, mostly corporate papers, will increase. The rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in Q1-20 while preserving the stock of reserves above the $30.0bn threshold. Overall, we expect the sovereign yield curve to remain normal in H1-20. However, this may reverse to a hump-shaped curve from Q3-20.
“For equities, the continued auction of high yield OMO bills to FPIs may keep foreign interest in local equity market tepid amid fears of a naira devaluation and confidence deficit in the economy. Again, FPIs are likely to continue their flight to safety by swapping/ selling equities for low-risk OMO bills. Yet, our outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch.
From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity. However, this will not be enough to trigger a major rally in the absence of the demand from FPIs. Overall, our base case scenario, sees equities market return at +5.3 percent in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity.
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