Consumers May Frontload Festive Purchases On Border Concerns
Inflation accelerates at fastest pace in 36 months
By CardinalStone Research,
By CardinalStone Research,
According
to the National Bureau of Statistics (NBS), headline inflation rose by 36bps to
a seventeen-month high of 11.61% YoY in October 2019. Driven by the paciest
inflation acceleration in 36 months, the current reading is also ahead of both
Bloomberg consensus of 11.20% YoY and our forecast of 11.40% YoY.
Unsurprisingly, the surge in price level was driven by food inflation pressures
(+58bps to 14.09% in October), which coincides with closures of key land
borders across the country. We believe the pass-through from border closures
muted the impact of an otherwise above-average main harvest and a 7bps
moderation in core inflation to 8.88% YoY.
Nigerians
may endure more purchasing power erosion in the coming months. In our view,
frontloaded festive demand may further bloat food prices and overall inflation
reading in November and December. On this wise, the country may be set to
witness another surge in food inflation during a main harvest season that could
be worse than that of 2018. This is likely to translate to further erosion of
consumers’ purchasing power, which had already been shaved by the combined
impact of naira depreciation and weak wage growth in recent years. According to
NBS, the highest price increases were recorded in bread & cereals, fish,
meat, potatoes, and yam tuber food classes amongst others. We, however, believe
this price pressure could extend to some non-food items as traders adjust to
the reality of the rising cost of living. On balance, we expect the recent
uptick in inflation to subsist in the near term and forecast inflation at
11.82% YoY in November, contributing to an average inflation forecast of 11.40%
in 2019.
Figure 1: :
Food inflationary pressure is likely to intensify in coming months
The
expected surge in inflation may further reduce the allure of treasuries. The
36-bps jump in October headline inflation suggests a prevailing real yield of
-1.68% on the one-year treasury bill (9.93%). The recent OMO ban restricting individuals
and local corporates has catalyzed into robust demand for government bills,
driving yields down by as much as 400 bps on the 360-day paper since the
announcement of the ban. For us, this negative real yield is likely to expand
further on expected hikes in electricity tariffs and VAT, reducing the real
return in fixed income instruments. Akin to the case in 2016, expanding
negative real yield could force domestic fund managers (such as Pension Fund
Administrators – PFA) to further explore other investment options in the coming
months.
In addition, we believe the level of system liquidity, the direction of inflation, and the aggressiveness (or otherwise) of government’s “non-CBN” domestic fiscal borrowings are likely to determine the pace of yield moderation in the coming year.
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