Nume Ekeghe
Analysts at Access Pensions Limited have predicted that with persistently elevated inflation, limited fiscal space, upcoming general elections and various economic occurrences would suggest that the interest rate environment will remain high all through 2023.
They stated this in a report titled, “Nigeria 2023 Outlook: A game of two halves for 2023 as Nigeria reaches another political inflection point,” released over the weekend.
Also, they predicted that foreign portfolio investors would continue to abstain and divest from Nigeria pending the direction of a new government as well as predicting that Nigeria’s Gross Domestic Product (GDP) growth for the year would hover around 3 to 3.5 per cent.
According to them, “In terms of investment opportunities, we view the combination of inflation remaining sticky at elevated levels around 18-20 per cent, the potential for further Naira adjustments and large government borrowing requirements with limited fiscal recourse to Central Bank of Nigeria (CBN) financing as suggestive of a high-interest rate environment over 2023.
“After two years of unorthodox monetary policy, we expect the CBN will look to tighten policy to bring down inflation and stabilize the currency by raising the returns for holding Naira. For equity markets, while a smooth transition of power is positive for investment outlook, we expect offshore investor appetite for Nigerian equities to remain weak pending a credible adjustment in the Naira and increased flexibility in the exchange rate system.” This leaves equity market outlook, as has been the case over the last three years, dependent on the activities of domestic institutional investors.”
The report reiterates that U.S. Dollars repatriation trade will continue to support valuations for dual-listed stock while consumer names may continue to struggle under the weight of an inflationary environment.
On Nigeria’s growth prospects, the analysts stated, “In between the election and transition, we expect economic activities to muddle through the year and see real GDP growth around at 3-3.5 per cent in 2023, flattered by a recovery in oil output from the depressed theft driven levels of 2022 and stabilization in the non-oil sector. Against this backdrop and clarity on the political scene after the elections, we think the CBN could look to improve USD supply within the official segment and tolerate some weakening in the IE window exchange rate towards levels north of N500/$. In the face of potential adjustments to petrol prices and persisting Naira weakness, we expect inflation to remain elevated over 2023 which will likely see the CBN retain a hawkish stance on interest rates over the year.”
The reported added that a large fiscal deficit will continue to require higher domestic borrowings but without the option of Ways & Means financing from the CBN.
“The last budget of the Buhari tenure follows the trend of debt-powered fiscal expansionism with a record expenditure plan set at N21trillion. To fund the record outlay, the FGN projects total revenues at N9.7trillion split across oil (N1.92 trillion) and non-oil (N8.9 trillion) predicated on a benchmark crude price of $70 per barrel and production levels of 1.69mbpd. Pending a clean break from the petrol subsidies currently funded via the crude-for-refined product swap we think revenues are likely to tail projections, as such financing requirements will remain large in the face of potentially reduced funding from the CBN. The latter point reflects the likely conclusion on the planned securitization of Ways & Means debt. Our view on high global interest rates suggests limited recourse to Eurobond markets.
“After the bear market gloom of 2022 driven by widespread hikes in interest rates across the world, financial markets will look for signs of the impact of these measures on economic activity. Meanwhile, commodity prices are expected to moderate, with crude markets likely to grapple with excess supply as weak economic growth forecasts for major advanced economies will adversely impact crude consumption. For Nigeria, whichever way the elections pan out, we think focus will quickly shift towards decisions on key economic issues: insecurity, foreign exchange policy and petrol subsidies which could bring near-term inflation. Given Nigeria’s weak fiscal position, however, our base case scenario is for a partial adjustment to petrol pump prices in 2023 alongside further weakening of the official exchange rate. In response to the elevated inflation levels, we expect monetary policy to remain tight, which alongside large government borrowings, speaks to a higher interest rate environment.”
