• Monday, February 26, 2024
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2014 seen as tale of two halves for investors


For investors in Nigerian assets, 2014 will likely be a tale of two halves. The Nigerian economy may expand by about 6 percent; Inflation may remain in single digit up until June, while the Naira may also remain stable until Central Bank Governor Lamido Sanusi leaves office sometime in mid 2014 but beyond then all bets are off.

Investors, who profited as equities in the Nigerian Stock Exchange (NSE) All Share Index (ASI) rose by 47 percent in 2013 may have some cause for pause in the New Year on the prospect of less U.S. stimulus and a more competitive political space, which while positive in the long run, will bring uncertainty in the medium term.

“We believe the CBN will work hard to maintain currency stability around 160/$ until June 2014. This should be reassuring for investors over the coming two quarters,” Renaissance Capital (RenCap) analysts, led by Charles Robertson, the investment banks global chief economist said in a note released Dec.18.

“However there is no reassurance on the second half (2H) 2014 outlook. It remains unclear who will be the next CBN governor. Politics is getting messier. The 2014 budget is not passed. We see good reason to favour Nigeria in the coming quarter, but we continue to be cautious on the second half,” RenCap noted.

Yields on 10-year FGN bonds due 2022 extended their gain to 13.20 percent on Monday. They are up 51 basis points since Dec 2, as the impact of the US Feds announcement that it will cut its bond-purchase stimulus programme begins to get felt.

nse-4The Feds policy had boosted asset prices and spurred record capital inflows to emerging and frontier markets like Nigeria.

A pull-back of the Quantitative Easing (QE) policy may lead to a reversal of some of those flows, as well as a roll back of some of the gains made by the Central Bank (CBN) especially in the latter half of 2014.

“While inflation slowed to single digit in 2013, this could be put at risk by higher pre-election spending, FX volatility (exacerbated by QE tapering), and investor concerns about CBN succession,” said Razia Khan, head of Africa research at Standard Chartered Bank, in a ‘2014 outlook’.

“We expect inflation to end 2014 just above 12 percent.”

The naira, which strengthened 3.9 percent against the dollar in 2012 and was one of the continent’s best performers, retreated 3.1 percent in 2013 to N161 per dollar; according to Dec. 30 interbank FX market data from the FMDQ.

Khan says she expects the mid-point of USD-NGN implicitly shifting to 160 in 2014, from a 3 percentage-point band above or below 155 per dollar, effectively moving the highpoint of the range to N164.8 per dollar.

A risk for the naira in the second half of 2014 would be frontloaded speculative demand for the greenback, by investors, importers or citizens worried about naira stability.

This may already be happening as the value of domiciliary/dollar deposits in Nigerian banks spike.

First Bank of Nigeria alone may have up to $1 billion in dollar deposits held by Nigerians, said Samira Mensah, associate director, Financial Institutions ratings at Standard & Poor’s, in a Nov. 27 interview with BusinessDay.

On the fiscal side, the government projects a budget deficit of 1.9 percent of gross domestic product (GDP) for 2014, little changed from a year earlier, with a reduction in spending to N4.5tn in 2014 from N5tn in 2013.

Analysts however say the rise of a stronger political opposition may likely result in pressure for increased spending.

The expected GDP re-basing, (another positive for the first half of 2014) would cut the debt ratio to 13 percent of GDP and external debt below 2 percent of GDP.

On the flip side, Nigeria’s dollar reserves and fiscal buffers have been falling, with the Excess Crude Account (ECA), falling to $3 billion from $10 billion and FX reserves down 9.7 percent from its 2013 highs to $43.7 billion (Dec. 27).

Analysts see the trend continuing into the second half of 2014.

“The problem today is that with only $3 bn in the ECA, there is much less room for things to go wrong,” said Robertson.