Investor confidence over the recovery of Nigeria’s economy received a solid boost in November after the nation’s gross domestic product expanded 1.4% during the third quarter of 2017.
Economic growth was powered by a rise in crude oil production, while an increase in agricultural output also played a leading role.
With the country showcasing its reliance on the global stage once again, analysts say markets’ players across the world are likely to remain optimistic over the longer-term outlook.
Nigeria’s economic recovery is evident in the growth recorded in the latest GDP figures, improving macro fundamentals and easing inflationary pressures, although much attention is still being directed towards inflation figures and the Central Bank of Nigeria, for further clues on when interest rates will be cut in 2018.
Head Analyst at FXTM, Lukman Otunuga, noted that the positive sentiment towards the Nigerian economy was slightly impacted after Moody’s downgraded the nation’s sovereign issuer rating to B2, with a stable outlook.
According to Moody’s, Nigeria’s efforts to increase non-oil revenue have so far proven largely unsuccessful with “key structural weakness persisting.”
Lukman noted that although Nigeria has worked hard to place itself in a stable position where it could shield itself from some external risks, more work is needed as fiscal strength remains weak.
“The mantra remains that the successful implementation of structural reforms is one of the key ingredients for Nigeria to shine on the world stage.”
Nigeria annual inflation eased for the ninth straight month at 15.91 per cent in October which pointed to further signs of price stability.
The Purchasing Manager Index also remained in expansionary territory at 55.00, amid growing demand for goods and services.
With consumer prices stabilising and economic conditions improving, the Central Bank of Nigeria is on course to cutting benchmark interest rates in an effort to support growth further.
There have been numerous discussions about the Senate approval of a massive $5.5 billion external loan request by President Muhamad Buhari and analysts say with recent Moody’s downgrade adding to the mix, borrowing could become more expensive for the Nigerian government.
“It is widely known that $3 billion of the loan will be from international capital markets, while $2.5 billion through a Eurobond or Diaspora. While the intention of the government is to use the loan to finance the deficit in the 2017 budget, a portion will be used to fund capital projects such as the Mambilla Hydro Project and the construction of a second runway at the International Airport in Abuja. With investors seeing that the money will be used for infrastructure developments, this is likely to support positive sentiment,” Otunuga stated.
Looking ahead, markets will be paying very close attention to Nigeria’s 2018 budget; named as one of “consolidation”.
With the mammoth N8.6 trillion budget expected to consolidate the positive gains of the 2017 budget and help Nigeria’s economic growth recovery strategy to materialise, 2018 onwards could be very interesting.
The government is also expected to reinforce infrastructure and bolster investment in agriculture which could result in Nigeria attaining food security while reducing imports.
With economic growth projected to reach 3.5% and inflation stabilising around 12.4%, the budget, if implemented correctly, has the ability to grant Nigeria economic stability.
An interesting part of 2018’s budget which is likely to boost investor sentiment, was the noticeable fall in dependence on oil revenues.
With oil revenues of N2.442 trillion and non-oil revenues of N4.165, global investors can see Nigeria’s efforts to break away from the chains of oil reliance.
The government had based the 2018 budget on crude oil benchmark prices of $45 per barrel, with oil production estimated at 2.3 million barrels a day.
WTI Crude is currently trading around $58, amid investor expectations of major crude exporters extending production cuts beyond March 2018.
While an extension of the OPEC deal to limit production could send prices higher short-term, the rising US output is likely to limit upside gains.
With oil prices still vulnerable to downside risks amid oversupply concerns, this will impact oil export-dependent nations, with Nigeria falling into the category. If OPEC requests the currently exempted Nigeria, to join the production cut deal, this could impact their budget.
On foreign exchange, the naira depreciated to N360.65 per dollar in the Investor and Exporter (I&E) Foreign exchange window on Wednesday.
“I believe the recession that gripped the Nigerian economy was a serious wakeup call and marked a critical turning point for the nation to diversify away from oil, while heavily focusing on other sustainable sources of growth. This has been a tough year for the nation but with economic growth recovering and inflation stabilising, Nigeria can proudly stride across the 2017 finish line,” Otunuga stated.