NIGERIA’S RISK OUTLOOK

 

It is possible that Nigeria will return to positive growth in 2017 following the economic contraction the country experienced in 2016. However, this rebound will be far from spectacular. Indeed, we have made a downward revision of our forecast, projecting 1.7% growth rather than the 2.8% we had previously envisaged. This compares to an estimated 1.7% contraction last year, and we do expect that the economy will continue to improve in Nigeria.

However, the continued imposition of capital controls will weigh on growth and the improvement will be slow.

In line with our own and consensus expectations, the Central Bank of Nigeria (CBN) maintained its benchmark interest rate at 14.00% at its meeting on January 24, and we expect that this level will be maintained until 2018. While hiking the key policy rate would be a positive for investor sentiments, given that this would push real interest rates into positive territory, we expect that government’s pressure will prevent the bank from raising the benchmark rate further. 

Meanwhile, worries over high inflation will preclude any cuts to the interest rate despite the government's stated desire for cheaper borrowing costs.

As oil revenues pick up, we expect that fiscal policy will become an increasingly important determinant of Nigeria's economic growth in 2017, especially as foreign investment will make only a tentative return. While it will provide some stimulus, we do not expect that the planned expansionary budget will be realised in full.

Key Risks

The biggest risk to our forecasts is if the authorities do not devalue the naira as we currently expect. This would entail a slower rate of real GDP growth than we currently anticipate.

While we believe that security risks Nigeria faces on a number of fronts will eventually be contained, if the situation significantly deteriorates into a more intense level of conflict, this would potentially affect investment, exports, and growth.

Power sector reforms are crucial for long-term productivity gains. If these are slowed or stalled, this would lead to lower long-term trend growth than we currently expect.

Macroeconomic Forecasts (Nigeria 2015-2018)

Indicator                                                                         2015  2016e 2017f2018f

Real GDP growth, % y-o-y 2.7 -1.7 1.7 3.8

Nominal GDP, USDbn486.1 342.9 304.7 337.0

Consumer price inflation, % y-o-y, eop 9.6 18.5 13.0 10.0

Exchange rate NGN/USD, eop199.30 315.33 375.00 350.00

Budget balance, % of GDP -1.6 -3.0 -2.7 -2.6

Current account balance, % of GDP -3.2 -4.0 -2.7 -1.8

e/f = BMI estimate/forecast. Source: National Sources