Afrinvest expects currency pressure, devaluation this year

The dark clouds are gathering, indicating further currency pressures and an imminent devaluation of the naira in 2020, according to Afrinvest West Africa Limited.

Aside from weak oil prices and capital flows, which would be the fundamental drivers of currency movements, there has been an aggressive liquidity build-up in the economy. The latter is due to an expansion in credit and large amounts of Open Market Operation (OMO) maturities without high-yielding investment outlets.

“In our view, this could lead to increased demand for imports, which would depress the current account balance,” Victor Ndukauba, deputy managing director, Afrinvest West Africa Limited said.

The firm on Friday unveiled its Economic and Financial Market Outlook 2020 titled ‘Nigeria in the new decade: nothing ventured, nothing gained’.

Looking ahead, Afrinvest forecast real GDP growth to expand to 2.4 percent in 2020, driven by a moderate expansion in the oil and non-oil sectors.

“We downgraded our 2019 growth forecast to 2.2 percent in August from the initial 2.5% due to weaker-than-expected performance in the non-oil sector in H1:2019,” Ndukauba said.

In 2019, the company anticipated a faster pace of recovery but the economy struggled due to lack of support from fiscal and monetary policies. In Q1:2019, growth moderated to 2.1 percent (vs. 2.4% in Q4:2018). This was sustained as growth was flat at 2.1 percent in Q2:2019 before rising faster at 2.3 percent in Q3:2019. The oil sector supported growth in 2019 through a slower contraction of 1.5 in Q1 (vs. -1.6% in Q4:2018) and a significant improvement of 7.2 percent and 6.5 percent in Q2 and Q3:2019 respectively. The non-oil sector could not sustain its positive momentum from 2018 as broad-based performance remained weak. Non-oil sector growth slowed to 2.5 percent in Q1 (vs. 2.7% in Q4:2018), 1.6 percent in Q2 but slightly recovered to 1.8 percent in Q3:2019.

On inflation, the firm said in 2020, new and familiar headwinds to consumer prices abound. The proposed increase in Value Added Tax (VAT) to 7.5 percent from 5.0 percent, which it expects to be implemented in Q1:2020, would result in rising prices. The likely adoption of a new electricity tariff, as well as continued insecurity in the food-planting Middle-Belt, also poses downside risks to consumer prices. The expansion in money supply following aggressive credit growth in the banking system and the new minimum wage could incite price pressures. In our base case, we assume the adoption of a new electricity tariff in April 2020, a new VAT of 7.5 percent, sustained land border closure and insecurity in the Middle-Belt. In this instance, “we project inflation to rise to 12.7 percent”.

Ola Belgore, managing director, Afrinvest Asset Management Limited, said investment strategy for 2020 is premised on expectations of yield volatility in the local and Eurobonds markets as well as the SSA Eurobonds market. Since yields in these markets are likely to remain relatively higher than global levels and hence attractive, he said Afrinvest expects significant trading activities in these markets in 2020 as investors – local and foreign – explore profitable opportunities by riding the yield curve.

“In the equities market, we expect a bullish equities market performance in 2020 and we see room for alpha return given low valuation levels after two consecutive years of negative performances,” he said.