25 January 2016, Lagos – Private sector investment in the country may be constrained by currency market challenges and the higher risk environment, analysts at Afrinvest Wes Africa Limited have said.
The analysts, in the company’s Nigerian Economy and Financial Market 2015 Review and 2016 Outlook report, noted that the gains from the successful conduct of the general elections last year was offset by poor monetary policy responses, delayed fiscal policy pronouncements and relentless decline in oil prices.
They said the weakness in the system was reflected in the pace of Gross Domestic Product growth, which slowed from 6.22 per cent in 2014 to 3.96 per cent, 2.35 per cent and 2.84 per cent in the first, second and third quarters of 2015 respectively.
“With lower oil prices further impeding government revenue, we believe looming fiscal crisis (if not averted) may constitute a major threat to social stability in 2016 notwithstanding efforts to shore up revenue via diversification into non-oil sources.”
The analysts were of the view that non-oil revenue projections in the proposed 2016 budget may be optimistic given the subdued outlook for consumption spending and corporate earnings amid policy constraints in the system.
Afrinvest Research estimates GDP to grow by 3.5 per cent in 2016 as against three per cent in 2015, while forecasting headline inflation to average 9.6 per cent in 2016 as pressure on foreign exchange rate lingers.
The analysts said, “In the monetary policy space, we believe the series of policy pronouncements and reversals have significantly eroded confidence in the system. As a result, we recommend policy harmonisation with the fiscal team and the use of forward guidance as well as clear communications of well thought-out policy actions to reduce uncertainty in the domestic investment environment.
“On the basis of a bearish outlook for oil prices and the impact on balance of payments and external reserves, we believe a devaluation of the naira is only a matter of time. Hence, we project at least a 25 per cent adjustment of the naira to N265.50/$1.00 during the first half of 2016.”
According to them, with policy normalisation in the United States and increasing pressure on domestic macroeconomic variables, it is expected that the CBN will reverse its “dovish position on interest rate which should see Monetary Policy Rate rise by 100bps to 12 per cent in the course of the year.”
They said, “Nigeria’s fiscal and monetary policy responses to the weaker oil price environment have only served to exacerbate the cloud of investor uncertainty, thus, amplifying the financial market rout. The local stock market depreciated 17.4 per cent year on year in 2015 and 21.3 per cent as of January 18, 2016.
“While a blurry fiscal direction as well as instability in the global oil market kept investors watching, the scale and frequency of policy reversals by the apex bank have effectively doused any remaining morsel of investor optimism towards investing in Nigeria in the present time despite enticingly depressed asset prices. This has been amplified by the position to sustain an unrealistic exchange rate at the official/interbank market relative to the parallel market.”