It has been another monumental year for the Nigerian economy which continued to display resilience against domestic and external headwinds.
The healthy combination of easing inflationary pressures, foreign exchange stability and rising commodity prices initially stabilized Nigeria’s macro fundamentals. With domestic conditions clearly improving and foreign investor appetite increasing, expectations were elevated over the Central Bank of Nigeria (CBN) cutting interest rates to stimulate further growth. The outlook for Nigeria looked highly encouraging up until mid Q2 2018 when economic growth slowed for the first time since the end of the recession. The deceleration in growth acted as a critical wakeup call to speed up efforts in diversifying away from oil reliance.
However, sentiment was dented further by the repeated delay of the 2018 budget which was finally passed in June 2018. Although Nigeria managed to hold its ground during the first half of 2018, it must be kept in mind that the nation found itself vulnerable to external shocks – namely an appreciating Dollar and oil price volatility. An appreciating Dollar, global trade tensions and prospects of higher US interest rates punished many emerging markets in 2018 with Nigeria falling into the category. Although the Naira witnessed stability despite an appreciating Dollar, this came at a heavy price to the CBN in the form of falling external reserves.
Global trade tensions presented a significant risk to Nigeria, especially when considering how the United States and China remain its biggest trading partners. With a trade war threatening global economic growth and demand for commodities, this presented challenges to Nigeria which remained heavily depended on earnings from oil exports. While there was scope for the CBN to cut interest rates to boost growth, this window of opportunity was missed when inflationary pressures returned.
Focusing on macro fundamentals, the picture looks somewhat encouraging with GDP expected to rise 2% in 2018. Signs of Non-Oil sectors contributing to growth will be a welcome development that highlights how Nigeria remains on a quest to break away from oil reliance. With Nigeria’s economic resilience potentially stimulating investor risk appetite, the Nigerian Stock Exchange has the opportunity to rebound in 2019. Although manufacturing production decreased 1.7% in September, a rebound could be in the cards as increased government spending ahead of the presidential elections boosts economic growth.
In regards to CBN policy, falling oil prices are seen weighing on the Naira’s peg against the Dollar on the official exchange. This may complicate the CBN’s effort to defend the Naira on the parallel markets in 2019. While a weaker Dollar could limit capital outflows, falling oil prices are poised to shave government revenues.
Focusing on oil prices, the outlook remains tilted to the downside amid oversupply fears and concerns over weaker oil demand. With markets struggling to find signs of the oil market rebalancing following OPEC and Russia’s deal to cut production by 1.2 million barrels per day and global growth fears fuelling concerns over falling demand, oil prices remain fundamentally bearish. Severely depressed oil prices have raised concerns over Nigeria’s ability to move forward with the 2019 budget which pegged oil prices at $60 per barrel. With falling oil prices eroding government revenues, Nigeria’s Excess Crude Account (ECA), which has already depleted by roughly 73% in three weeks, is seen falling further.
Although the short-term outlook paints a gloomy picture, as we enter the New Year there is still some light at the end of the tunnel. With diversification in motion, government spending expected to increase and infrastructure developments in the pipeline, the longer-term outlook remains bright.