Sigma Pensions Limited, a Pension Fund Administrator (PFA) has seen a consolidating recovery of the economy in 2022, but with large persistent fiscal and external imbalances.
According to the PFA, investment landscape in 2022 will be shaped by normalization in global economic growth and tighter global monetary policy; OPEC+ to complete crude oil market rebalancing, while oil prices stays range bound;
Sigma, a PFA that provides retirement planning, investment management and pension administration services to over 700,000 working Nigerians and retirees, says the country’s growth will stabilize, but twin deficits to persist; wider FX market premiums due to limited dollar supply and import demand suppression, as well as higher fuel prices to reignite inflationary pressures.
Incorporated in 2004, Sigma is majorly owned by Actis, a leading emerging market private equity firm.
Dave Uduanu, chief executive officer of Sigma Pensions Limited commenting on the Company’s 2022 outlook said, in 2022, focus will shift to equitable access to global vaccine stockpiles which should help provide some bulwark against fresh mutations of the COVID-19 virus.
He noted that as the world returns to normalcy, supply chain bottlenecks and their implications for inflation as well as growing policy focus on climate change and investment in renewable energy will have profound implication for economic policy and financial market performance.
Rising inflation looks set to drive tighter global monetary policy while the onset of fiscal consolidation to deal with the costs of the pandemic could induce higher tax rates.
On the home front, Uduanu said, Nigeria heads into the penultimate year of President Muhammadu Buhari’s second term with an ambitious fiscal expenditure plan and strong reform proposals.
According to the outlook report, funding the large fiscal deficit and coping with potential aftershocks of renewed attempts at reforming energy subsidies present downside risks to inflation and interest rates.
Other details of the report follows: With large vaccine deliveries now in place, Nigeria’s fight against COVID-19 has devolved to one against vaccine hesitancy. We expect vaccine mandates for government agencies to come into force over 2022 which should increase vaccination coverage across the population.
On the economic front, we expect Nigeria’s economic growth to stabilize around 3.4 percent in 2022, reflecting improvements across Telecoms, trade, manufacturing, and oil.
The removal of NIN restrictions should provide some upside to Telecoms growth, and we expect improvement in FX supply to bolster manufacturing GDP.
We expect the oil sector to exit recession in 2022 as Nigeria’s crude production rebounds from the 1.6mbpd low base in 2021 towards a range of 1.8-1.85mbpd and as most OPEC+ curbs are removed by May 2022.
Given our price and production expectations, we expect Nigeria’s external balance to improve as oil export receipts normalize to trend levels amid persisting import demand suppression on account of the CBN’s currency policy.
On this wise, we view a combination of limited offshore inflows due to the negative real yield regime and subsisting USD demand pressure to continue to underpin Naira weakness across FX markets. Limited dollar supply within the official IE window will continue to drive the persistence of a wide parallel market premium. Over the year, we expect the CBN to adjust the IE exchange rate towards NGN450-460/$.
On inflation, the recently announced plan to remove fuel subsidies (testament to the large fiscal revenue strain) if carried out will result in higher petrol prices in H2 2022 and by extension a resurgence in inflation towards 16 percent levels from 14% region in HI 2022. Fiscal imbalances loom large for the second consecutive year with the Federal Government proposing another record deficit (NGN6.2trillion) to be financed via large foreign and domestic borrowings.
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A large fiscal borrowing plan and higher political risk premiums ahead of the 2023 general elections is bearish for Naira risk assets
In 2022, the large fiscal borrowing requirements amid less liquid financial system conditions relative to the last two years suggests ample scope for heightened market expectations about higher interest rates. Furthermore, likely stronger USD demand will convince the CBN of the need to tighten monetary conditions as with the trend across global central banks to manage FX reserve depletion. Against this backdrop, we think the current bearish trends in the fixed income will likely persist over 2022. For equity markets, we see bearish trends dominating market sentiments as the fixed income optionality becomes available to investors after a two-year hiatus and as political risk premiums on Naira risk assets heighten ahead of the 2023 general elections. Nevertheless, we expect domestic institutional investor support in bellwether names to continue to curtail downside to the overall market.
Key Risks:
Key risks to our 2022 outlook are the emergence of a more deadly variant of the COVID-19 virus which triggers widespread national and mobility lockdowns in a repeat of 2020.
This could cascade into economic recessions, collapse in commodity prices and renewed policy accommodation. Closer home, we see the adoption of ultra-unorthodox monetary policy by the CBN in a bid to deliver low interest rates for fiscal deficit financing as likely to drive significant impact on Naira assets. Lastly, as the 2023 general elections draw into sight, the dark cloud of heightened political risk premiums over Nigerian capital markets also present downside risks in the event of significant deterioration in the polity environment.
Conclusion
In summary, despite the emergence of new variants of the COVID-19 virus, we view higher vaccine coverage and the existence of drugs as supportive of further normalization in global economic activity in 2022.
Rising inflation expectations from a mix of supply bottlenecks and stimulus fuelled demand is likely to drive a withdrawal of global monetary stimulus and incite interest rate hikes which will underpin higher USD interest rates.
We expect OPEC+ to complete its phased increments in oil output over H1 2022 which should drive a reset in crude oil prices towards USD65-70/bbl.
For Nigeria, despite supportive oil prices, we continue to view the subsisting external and fiscal imbalances as underpinning the need for policy reforms. While emerging pressures on the fiscal and FX fronts should naturally drive renewed urgency towards reducing large subsidies and FX rate misalignments, the onset of the 2023 electioneering season is likely to lead to continued policy inertia which will cascade into half-hearted attempts at reforms.
While we expect the economy to muddle through, on-going pressures along the exchange rate and the need to fund the large fiscal deficit present upside risks to interest rates which we view as having bearish implications for Naira risk assets in 2022. However, the transmission of macroeconomic pressures to financial markets is unlikely to be linear with more stable trends across economic indicators in the first half to be followed by greater room for negative swings in the second half as pressures from the large imbalances induce greater need for steep policy adjustments.
