The global outlook remains foggy with the IMF projecting a growth of 3.2% in a blue-sky scenario for both FY:2024 and FY:2025 – a rate below the pre-pandemic average of 3.8% (2000 – 2019). The outlook reflects the divergent recovery across regions given limited success in curbing inflation in developing economies, contrasting effective monetary policy transmission in AEs.
Domestically, Nigeria’s economy demonstrated resilience despite numerous challenges. The oil sector grew for the second consecutive quarter in Q1’2024 by 5.7% y/y, consolidating its exit from a 14-quarter-long recession that begun in Q2’2020, and increasing its share in the overall GDP to 6.4%. Meanwhile, the non-oil sector grew modestly by 2.8%, with a slowdown in trade and ICT sectors’ growth. Inflation reached a three-decade high of 34.2% y/y in June 2024, driven by food shortages, depreciating Naira, rising energy costs, and imported inflation. The Naira depreciated significantly from ₦907.11/USD to ₦1,505.30 in six months, despite CBN’s stabilisation efforts. As part of its stability efforts, the CBN raised the MRP to 26.25%, leading to higher inter-bank lending rates and liquidity challenges.
Given the weak signal on government capacity to stem the current tides in the near term, we have revised upward our average inflation rate forecast for the year to 31.7% (from 24.7% projected at start of the year), despite expectation of modest price pressure declaration in H2 largely due to high base-year effect and cushion from green harvest. Concurrently, we anticipate an MPR hike ceiling of 27.0% (previous: 19.7%) for the rest of H2, as tightening beyond that could devastate the already fragile macroeconomic environment. Additionally, we see the pressure on the Naira persisting throughout H2, owing to limited supplies amid dependence on costly inorganic sources for reserve build-up. Hence, we see the NAFEM rate hovering within ₦1,450.00/$ to ₦1,630.00/$ throughout H2. In addition, Nigeria is set to face significant fiscal and economic challenges with the recent increase in the national minimum wage to ₦70,000.
Shifting gears, the Nigerian equities market kicked off 2024 on a strong footing, with the NGX-ASI returning a 33.8% gain in H1. Outperforming our initial full-year projection of a 14.8% gain, the bourse’s performance was mostly driven by the beginning of the year portforlio positioning in January. However, this momentum was dampened by additional rate hikes, lacklustre corporate releases, and mixed reactions to bank recapitalisation announcement. Looking ahead, we have revised our market projections to align with the current dynamics. For FY 2024, we now project a 40.6% gain in our base-case scenario, considering the possible impact of the fixed-income yield environment, fiscal policy direction, and ongoing banking recapitalisation efforts as well as impact of potential new listings.
Meanwhile, the fixed income space posted a bearish outing due to aggressive monetary tightening by the CBN and substantial domestic issuances. Across market segments, yield repriced higher to close at 21.9% and 18.7% for benchmark T-bills and FGN bonds. Looking ahead, our outlook is slightly bearish, hinged on improvement in macroeconomic dynamics and a slowdown in debt issuances by the FG. Nonetheless, we anticipate potential yield moderation in H2:2024, driven by expected rate cuts in advanced market, deceleration in global inflation, and a restrictive stance by the CBN. We are of the view that the apex bank might adopt a less aggressive tightening pace given that inflation, MPR, and interest rates would peak soon.
Afrinvest
