You are here

Opinion: Will Nigeria Shock the Global Arena in H2?

PrintPrintEmailEmail
Lukman Otunuga

The largest economy in Africa has certainly had a presence in the third quarter of 2017. Investors across the globe are becoming increasingly optimistic over Nigeria’s economic outlook, as the nation mitigates internal risks, while breaking away from oil reliance.

Signs of recovery and momentum can already be viewed across Gross Domestic Growth and falling inflation, while foreign exchange has experienced an evolution.

With the ingredients for Nigeria to rattle the global arena in H2 already bubbling in the cauldron, an economic rebound by the end of the year is becoming a firm possibility.

As we head into the final trading month of Q3, market players will closely scrutinise core data such as inflation and GDP, which have the ability to boost sentiment further, if both exceed market expectations.

Nigeria’s foreign exchange crisis remains an obstacle on the road to recovery. While the timely implementation of the Investors and Exporters (FX) Window is likely to boost confidence over Nigeria’s outlook, this is only the first step.

With the NAFEX increasing the supply of foreign exchange into the largest economy in Africa, investors are likely to be magnetized, consequently adding another layer of stability to the FX markets.

The Central Bank of Nigeria may be commended on its ability to unify some of their multiple exchanges, by letting dealers quote the Naira levels used in trades, but more transparency is still needed.

For Nigeria to abolish its multiple exchanges and truly have an official exchange rate, it will require an official devaluation, which President Muhammadu Buhari has repeatedly rejected.

While a devaluation of the Naira is likely to accelerate inflation and punish Nigerians at home, it will increase transparency and ultimately boost foreign direct investment, which could in turn fuel economic growth.

Speaking of the Naira, the local currency currently trades around 370 to the Dollar on the parallel exchange.

Although the implementation of NAFEX has weakened prices noticeably, the currency still continues to hold ground against a broadly weaker Dollar. Further intervention by the Central Bank of Nigeria, coupled with confidence over Nigeria’s economic recovery, is likely to support the local currency further this year.

Market players will continue to evaluate the Federal Reserve’s ability to raise US interest rates, which have the power to strengthen the Dollar - consequently punishing emerging market currencies.

While Nigeria has taken steps to shield itself from internal shocks, the threat of capital outflows from a resurgent Dollar is still an issue that cannot be overlooked. Focusing on the technical outlook, repeated Dollar weakness could send the USDNGN towards 350 on the parallel markets.

With inflation in Nigeria following a negative trajectory, economic fundamentals stabilizing and foreign exchange displaying early signs of transparency, the Central bank of Nigeria is likely to remain in sharp focus.

While the intricate combination of falling oil prices, decelerating economic growth and a currency crisis initially encouraged the CBN to remain on standby, the current economic landscape has morphed for the better.

The clock is ticking for the central bank to make a move with an interest rate cut, as cooling inflation and improving core fundamentals indicate signs of stability.

The outlook for oil remains a significant economic factor for Nigeria, especially when considering how the commodity impacts the nation’s government revenues and stability of foreign exchange markets.

WTI Crude has struggled to maintain gains in August, with prices pressured below $50, as the oversupply concerns weighed on sentiment. This has been an interesting and volatile period for oil markets, with the commodity trapped in a tough tug of war, as conflicting data attracts both the bulls and bears.

Despite OPEC’s optimism over the production cut deal continues to spark speculative boosts in prices, reports of compliance slumping in July and output jumping to a 2017 high in the same month, excited bears.

This battle of attrition may be coming to a finale, with oil’s bearish action suggesting that investors are becoming increasingly skeptical of the cartel’s ability to rebalance the markets.

Nigeria has the ability to bounce back from an economic deceleration and break away from oil reliance but the right steps must be taken.

The developments in August are already highly encouraging with the implementation of NAFEX increasing foreign exchange transparency and putting investors at ease. As we head into the final month of Q3, market players are likely to become more dependent on data to gauge the nation’s economic health.

Sentiment towards the Nigerian economy continues to improve amid the stabilizing fundamentals, with the Central Bank of Nigeria cutting interest rates to support growth further if all the boxes are ticked.

Section