Kayode Tokede
Analysts at Vetiva Africa Research have forecasted a 2.7 per cent Year-on-Year (YoY) increase in Nigeria’s economy, driven by volatile oil production, sustained growth in Active GSM lines, and slight depreciation in the Naira.
The forecast is in line with the International Monetary Fund (IMF) output growth for 2022 to 2.7 per cent from 2.6 per cent projected in October 2021.
While presenting Second Half (H2 2022) macroeconomic outlook for the Nigerian economy, Vetiva’s SSA Economists, Ibukun Omoyeni and Angela Onotu appraised the fallout of the Ukraine-Russia tensions and monetary policy normalization – rising inflation, tight financing conditions, risk-off sentiments, and a slowdown in global growth.
According to them, “We note that both warring countries are key commodity exporters, and supply disruptions would reverberate globally. With inflation reaching new highs, the Fed’s increasingly hawkish stance, combined with a stronger dollar, poses new challenges for emerging and frontier markets.”
The Pan-African research team appraised the impact of the Russian war on African Economies.
According to the report, “the warring economies (Russia and Ukraine) are responsible for 3.6per cent of African imports. Despite the little exposure to Ukraine and Russia, constrained supply from these economies means prices of these commodities, most of which are essential, will be elevated.”
While the war places immense pricing and external strain on African economies, the economists noted that, “economies with floating currencies and volatile fuel prices would be adversely affected (Ghana and South Africa), while we could see the increased fiscal strain on economies that operate fuel subsidy regimes (Nigeria, Kenya, and Angola).”
On Nigeria’s upcoming general elections, the report noted that, “A trip down memory lane shows that despite increased voter registrations, the voter turnout ratio has declined steadily since 2003”. The report however noted that “Beyond voter turnouts, a cursory glance at the economic outcomes of previous elections shows one clear fact – economic performance is tied largely to the performance of the oil sector.”
The report attributed the recent decline in the oil sector to crude theft adding that, “an attack on one of Nigeria’s major onshore (land) terminals – Escravos – was responsible for the historic decline in Q1’22.”
While acknowledging subsequent recovery in crude transport via the terminal, the economists cautioned, “we do not downplay the risk of further disruptions. Although Nigeria has just 5 land/onshore terminals (compared with over 20 offshore terminals), these land terminals are responsible for c.40 per cent of oil transport.”
On overall growth, Vetiva expects the Nigerian economy to grow by 2.7 per cent y/y in 2022, driven by “supportive base effects, volatile oil production, sustained growth in Active GSM lines, and slight depreciation in the Naira.”
On inflation, they said, “we see considerable risks from global food shortages, sustained fuel shortages, another energy crisis, higher power tariffs, and weaker exchange rates. Amid these varying outcomes, our base estimate for inflation is 17.50 per cent y/y in 2022.”
On monetary policy, Vetiva penned down a 100 to 200bps rate hike in H2’22. “From our historical analysis of rate hikes under the current CBN Governor’s tenure, we see a sync in historical trends – monetary policy normalization & geopolitics on the global scene, domestic oil shocks, and slowing growth on the domestic scene. This gives credence to our prognosis that the apex bank could increase the benchmark rate by 100bps – 200bps in H2’22 (to 14 per cent – 16 per cent).”
Presenting their outlook for exchange rates on a scenario basis, the economists see room for a slight depreciation in the Naira towards N440/$ in the Investors & Exporters Window.
“We believe adopting a moving NAFEX rate helps prevent the Naira from being grossly overvalued before critical adjustments are made. Overvaluation of the NAFEX (six per cent) is lower than the defunct de-facto peg of N379/$ (17per cent). Thus, we do not see room for any significant downward adjustments in the official value of the Naira (as it was in 2016), ”they said.
