Heading into 2020, key macroeconomic indicators such as inflation, global/domestic growth, interest rate, foreign exchange/ external reserves are top of mind for investors in their investment decision.
Specifically, inflation will be a key variable to watch in 2020 given recent fiscal pronouncements and relationship with interest rates according to a report by Rand Merchant Bank Nigeria (RMBN).
Nigeria’s inflation accelerated by 11.61 percent in October compared with 11.24 percent recorded in September, according to the latest data from the National Bureau of Statistics (NBS).
This is the highest figure since May 2018. Overall, inflation in October was triggered by an increase in food prices.
An Increase of 58 basis points was recorded for food inflation which stood at 14.1 percent in October while the non-food inflation rate declined marginally to 8.88 percent from 8.94 percent in September.
According to the NBS, food inflation was caused by increases in prices of “Bread and cereals, Oils and fats, Meat, Potatoes, yam and other tubers, Fish and Vegetables”.
Although inflation moderated from January to August 2019, inflationary pressures kicked in from September, largely as a result of the closure of land borders.
“The outlook for inflation remains bleak, given the continued land border closure, approaching the festive season and proposed tax increase in addition to new taxes/charges,” analysts at FSDH Merchant Bank said.
To shore up government revenue, the government has proposed several taxes and charges for 2020, which could result in higher prices. Some of these taxes include VAT, Communication Tax, Online Tax, Toll Charge, Taxes on Carbonated soft drinks, among others.
The analysts said Challenges of poor power supply, bad roads, and poor road networks persist and they are traditional sources of inflation in Nigeria.
Continued closure of land borders will result in higher prices of affected commodities such as rice, and poultry products.
In August, President Muhammadu Buhari ordered the partial closure of Nigeria’s border with the Benin Republic to curb smuggling of rice and other commodities, and also directed the Central Bank of Nigeria (CBN) to stop providing dollars to import food items in a bid to ramp up local farm production and attain full food security.
With a proposed 2020 budget of N10.3 trillion, government spending poses a risk to inflation. An increase in the minimum wage to N30,000, if implemented across states, is also expected to result in higher prices, FSDH analysts said.
Inflation rate has trended upward for two consecutive months to reach 11.6 percent in October. When compared with the MPR, an upward movement in the Inflation rate narrowed the real interest rate margin to +1.9 percentage points (pp) in October from +2.5 in August.
FSDH inflation report revealed that for the 364-day Treasury bill, real interest rate margin which was +3.4 percentage points in January 2019 fell to +0.9 in October, owing to falling interest rates and rising inflation.
The recent increase in inflation rate coupled with inflationary pressures are huge concerns for monetary authorities.
“This rules out the likelihood of a reduction in Monetary Policy Rate (MPR) at the November MPC meeting, especially given the improved 2.3 percent GDP growth figure in 2019 Q3,” the analysts said.
Global economic recovery is on the horizon, but there are some risks. Risks to global growth forecasts according to Gbenga Sholotan, head, RMBN stockbrokers research include: weaker-than-expected commodity prices, global policy uncertainty; Trade wars, geopolitical tensions, while Risks to Nigeria’s growth forecasts include: fiscal tightening, monetary and fiscal regulatory uncertainty, and broader security challenges.
Sholotan said interest rates are likely to go up as CBN attempts to attract Foreign Portfolio Investment (FPI) flows to keep a stable Naira and deliver real return to investors as inflation trend upwards.
On foreign exchange sustained intervention of US$210.0 million weekly by the CBN has kept rates stable said Ike Chioke, group managing director, Afrinvest West Africa.
External reserves declined to $39,95 billion as at November 21, 2019, support about 11 months of import cover (goods) – Weakest in 3 years.
