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Economic and Financial Outlook: 2016-2020

FSDH Research

1

Economic and Financial Markets Outlook (2018 – 2022):

Strong Growth Prospect with Downside Risks

FSDH Research

February 09, 2018


FSDH Research

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Contents

Executive Summary: ........................................................................................................................................................ 4

1.0 Global Economic Growth: .......................................................................................................................................... 5

1.1 Global Bond Market: .............................................................................................................................................. 6

1.2 Risks to the Global Economic Growth Outlook: ..................................................................................................... 7

1.3 Implications for the Nigerian Economy: .................................................................................................................. 7

1.4 Global Commodity Markets: ................................................................................................................................... 8

1.5 Global Oil Price: ..................................................................................................................................................... 9

1.6 FOMC Rate Decision: .......................................................................................................................................... 11

2.0 The Nigerian Economy: ........................................................................................................................................... 12

2.1 Purchasing Managers’ Index (PMI): ..................................................................................................................... 12

2.2 Real Gross Domestic Product (GDP): .................................................................................................................. 13

2.3 Opportunities: ....................................................................................................................................................... 17

2.4 Risks: ................................................................................................................................................................... 18

3.0 External Reserves: ................................................................................................................................................... 19

4.0 Foreign Trade: ......................................................................................................................................................... 20

5.0 Foreign Exchange Rate: .......................................................................................................................................... 24

6.0 Public Debt:.............................................................................................................................................................. 26

7.0 Unemployment Rate: ............................................................................................................................................... 28

8.0 Nigeria’s Importation Update: ................................................................................................................................... 30

9.0 Inflation Rate: ........................................................................................................................................................... 32

9.1 Implications: ......................................................................................................................................................... 33

9.2 Risks to the Single Digit Inflation Rate: ................................................................................................................ 34

10.0 The FGN Medium-Term Expenditure Framework 2018 - 2020: ............................................................................. 35

10.2 Implications: ....................................................................................................................................................... 37

11.0 Interest Rate: ......................................................................................................................................................... 38

12.0 Equity Market: ........................................................................................................................................................ 42

12.1 The Secondary Market: ...................................................................................................................................... 42

12.2 Equity Market Drivers in 2017 ............................................................................................................................ 42

12.3 Outlook for 2018 ................................................................................................................................................ 43

12.4 Sectoral Performance and Outlook: ................................................................................................................... 44

12.4.1 Banking: ...................................................................................................................................................... 44


FSDH Research 3

12.4.2 Consumer Goods ........................................................................................................................................ 44

12.4.3 Industrial Goods .......................................................................................................................................... 45

12.4.4 Oil and Gas ................................................................................................................................................. 45


FSDH Research 4

Executive Summary:

FSDH Research forecasts a Real Gross Domestic Product (GDP) growth rate of 3.16% in

2018 and 4.09% in 2019

Agriculture, Trade, and Mining & Quarrying sectors, with forecast growth rates of 4%, 2% and

3.2% respectively, would lead to the growth in 2018. Other leading sectors of the economy

that would contribute to the growth are: Information and Communication (I&C): 2.2%; Real

Estate: 2.5%; Construction: 4% and Manufacturing: 1%

The growth in the equity market has created additional wealth that would stimulate effective

demand in the economy. Some light manufacturing activities are also taking place –

stimulating demand for raw materials from Agriculture sector. The current crude oil price above

US$65/b will encourage investment activities in the oil and gas sector. Trade sector would also

benefit from the expected increase in the consumer purchasing power

The major opportunities in the growth projections are: Investment opportunities to increase

production activity and to create value addition across most of the profitable segments of the

agriculture value chain; Import substitution strategies in agro-allied industries; manufacturing

sector should receive a boost following the relative stability in the foreign exchange market;

FGN and state governments to sign more Public Private Partnership (PPP) deals to promote

infrastructure development; a rebound in the corporate and infrastructure bond markets, and

real estate sector should attract more investments as the economy improves

The major downside risks to the growth are: the rising social unrest in some parts of the country

may affect economic activities and lead to escalating inflation rate; external factors that can

lead to a significant drop in the crude oil price may have adverse impact on the economic

activities in Nigeria and possible capital flight out of Nigeria if there are excessive interest rate

increase in the advanced economies. Although we do not expect any political instability in the

country, electioneering activities may slowdown economic activities and exert upward

pressure on prices

The outlook of the equity market remains positive in 2018 as FSDH Research expects the

macroeconomic environment in Nigeria to strengthen further. Thus we forecast a growth of

27.43% in 2017, lower than the growth of 42.30% recorded in 2017. We expect a strong rally

in the first half of the year 2018. We see investment opportunities in the Banking, Building

Materials and Consumer Goods sectors of the market

FSDH Research expects the Monetary Policy Committee (MPC) of the Central Bank of Nigeria

(CBN) to ease monetary policy as inflation rate declines and exchange rate remains stable.

This development will lead to growth in credits to the private sector, rebound in the activities

in the corporate bond market, increase in the issuance of commercial paper and a growth in

the equity market. We expect the average yields on the fixed income securities to drop

substantially lower in 2018 than the levels attained in 2017.


FSDH Research 5

1.0 Global Economic Growth: The short-to-medium term outlook of the global economy is positive. The World

Bank Global Economic Prospects (GEP), January 2018 edition notes that the broad

base adjustments upturn would be sustained. It however recognises some downside

risks. The World Bank expects global growth rate at 3.1% in 2018 and 3% in 2019. The

IMF also released a global growth rate forecast of 3.9% in 2018 and 2019.

The World Bank report notes that most regions will experience growth in 2018. The

major drivers of growth are: the rebound in global investments, favourable financing

cost, rising profits, and improved business sentiments across both advanced

economies and emerging market and developing economies (EMDEs).

The GEP states that although near-term growth could surprise on the upside, the global

outlook is still subject to the substantial downside risks which are: the possibility of financial

stress, increased protectionism, and rising geopolitical tensions.

World Bank suggests that policy initiatives to lift physical and human capital, encourage

labour force participation, and improve institutions could help raise potential growth and

reduce inequality.

Table 1: GDP Growth Rate (Actual Vs Forecast)

Global/Region/Country 2015A 2016A 2017E 2018F 2019F 2020F

World 2.8% 2.4% 3.0% 3.1% 3.0% 2.9%

United States 2.9% 1.5% 2.3% 2.5% 2.2% 2.0%

Japan 1.4% 0.9% 1.7% 1.3% 0.8% 0.5%

Euro Area 2.1% 1.8% 2.4% 2.1% 1.7% 1.5%

Emerging and Developing Economies China 6.9% 6.7% 6.8% 6.4% 6.3% 6.2%

India 8.0% 7.1% 6.7% 7.3% 7.5% 7.5%

Sub-Saharan Africa 3.1% 1.3% 2.4% 3.2% 3.5% 3.6%

Nigeria 2.7% (1.6%) 1.0% 2.5% 2.8% 2.8%

South Africa 1.3% 0.3% 0.8% 1.1% 1.7% 1.7%

Source: World Bank Global Economic Prospects, January 2018

The short to medium term

outlook of the global economy

is positive.

The major downside risks are

the possibility of financial stress,

increased protectionism, and

rising geopolitical tensions.


FSDH Research 6

1.1 Global Bond Market:

The prices of government bonds appreciated in more countries that we monitored

in 2017 than they depreciated. The 7.60% April 2021 Russia Government Bond recorded

the highest Year-on-Year (YoY) price increase of 4.57% to 107.10 as at end-December

2017. This was followed by the 16.39% January 2022 Nigeria Government Bond which

recorded a YoY price increase of 4.57% to 107.10. The Argentina, Egypt and the Nigeria

Bonds closed the year at negative real yields. The real yield on the Kenya Bond remains

the most attractive in terms of real yield, as at end of the year amongst the countries

we monitored.

FSDH Research expects the yields across the world to increase in 2018 with the planned

monetary policy normalisation in the advanced economies.

Table 2: Summary of Key Indicators

S/N Indicators Argentina China Egypt India Kenya Nigeria Russia South Africa Turkey USA

1 Bond Price 120.00 98.62 104.00 103.60 101.18 107.10 104.00 99.41 87.90 97.58

2 Bond Yield 1.17% 3.82% 15.65% 7.19% 12.35% 14.03% 6.32% 7.89% 11.74% 2.23%

3 Bond Price YoY Change (1.38%) (4.91%) 2.45% (2.77%) 4.16% 4.57% 5.91% 3.62% (1.46%) 0.20%

4 Bond Yield YoY Change (0.42%) 0.96% (0.88%) 0.50% (1.11%) (1.64%) (1.95%) (0.72%) 0.63% 0.04%

5 Real Yields (21.94%) 2.02% (6.25%) 2.31% 7.85% (1.87%) 3.82% 3.29% 0.54% 0.03%

6 Volatility 8.32 1.62 3.16 0.76 1.70 2.10 1.11 1.19 2.56 0.73

7 FX Rate YoY Change* 14.73% (6.73%) (2.06%) (6.34%) 0.65% 12.41% (6.67%) (10.96%) 7.23% 12.39%

8 Inflation Rate 23.10% 1.80% 21.90% 4.88% 4.50% 15.90% 2.50% 4.60% 11.20% 2.20%

9 Policy Rate 26.25% 4.35% 18.75% 6.00% 10.00% 14.00% 7.75% 6.75% 8.00% 1.50%

10 Debt to GDP 54.20% 46.20% 92.30% 69.50% 55.20% 18.60% 17.00% 51.60% 28.30% 106.00%

11 GDP Growth Rate 2.70% 6.80% 4.90% 6.30% 4.40% 1.40% 1.80% 0.80% 5.10% 2.30%

12 Nominal GDP (US$) 546bn 11,199bn 336bn 2,264bn 70.53bn 405bn 1,283bn 295bn 858bn 18,569bn

13 Current Acct to GDP (2.60%) 1.80% (5.90%) (0.70%) (5.20%) (1.80%) 1.80% (3.30%) (3.80%) (2.60%)

*-ve means appreciation while +ve means depreciation

Sources – Bloomberg, Central Banks, Trading Economics and FSDH Research Analysis

The prices of government

bonds appreciated in more

countries that we monitored in

2017 than they depreciated.

Source: Trading Economics

23.10%

1.80%

21.90%

4.88% 4.50%

15.90%

2.50%

4.60%

11.20%

2.20%1.17%

3.82%

15.65%

7.19%

12.35%14.03%

6.32%7.89%

11.74%

2.23%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Argentina China Egypt India Kenya Nigeria Russia South Africa Turkey USA

Selected Countries: Inflation Rate vs Bond Yield

Inflation Rate Bond Yield


FSDH Research 7

1.2 Risks to the Global Economic Growth Outlook:

Monetary policy normalisation in the major advanced economies

Possible drop in commodity prices, particularly for the emerging and developing

economies

U.S. Dollar appreciation and the negative impact on emerging and developing

economies.

1.3 Implications for the Nigerian Economy:

The expected increase in the U.S Fed Rate could have a negative impact on

foreign capital inflows into Nigeria

The increase in the interest rate in the international financial market may lead to

higher interest expense on FGN borrowings from the international market

U.S. Dollar appreciation may lead to a drop in the crude oil price, which will lower

the revenue accruable to the Federal Government of Nigeria (FGN). Thus, the

fiscal deficit that the FGN will run in 2018 may increase.

More deliberate policies to reduce dependency on oil revenue in Nigeria are

required. The growth areas are Manufacturing, Information Communication and

Technology (ICT) and Agriculture. The catalyst to the growth of these sectors is the

development of modern and functional infrastructure. The FGN should implement

its fiscal policy contained in its Economic Recovery and Growth Plan (ERGP). The

implementation of the plan would assist in diversifying the Nigerian economy away

from oil revenue, create a sustainable foreign exchange stability, and also assist in

lifting aggregate demand in the domestic economy.

More deliberate policies to

reduce dependency on oil

revenue in Nigeria are required.

The expected increase in the

U.S Fed Rate could have a

negative impact on foreign

capital inflows into Nigeria.


FSDH Research 8

1.4 Global Commodity Markets:

According to the World Bank, commodity prices of industrial commodities strengthened in

Q3 2017, while most agricultural prices remained broadly stable. In the oil market,

inventories continue to fall because of strong demand, Organization of Petroleum Exporting

Countries (OPEC) production cut, and stabilizing U.S. shale oil production. World Bank

projects an average crude oil price at US$56/bbl in 2018 from US$53 per barrel (bbl) in

2017.

Most of the commodity price should appreciate in 2018 except Iron Ore. However, there is

no sharp increase in the price that can result to rising inflation rate. Thus the impact of

imported inflation in Nigeria is small. The stable prices should also encourage

investments.

Table 3: Commodity Price Forecast in Nominal U.S. Dollars

Commodity Unit 2014A 2015A 2016A 2017A 2018F 2019F 2020F

Coal, Australia $/mt 70.1 57.5 65.9 85.0 70.0 60.0 55.0

Crude Oil (average) $/bbl 96.2 50.8 42.8 53.0 56.0 59.0 60.0

Natural Gas, US $/mmbtu 4.37 2.61 2.49 3.00 3.12 3.25 3.38

Cocoa $/kg 3.06 3.14 2.89 2.05 2.11 2.17 2.24

Palm Oil $/mt 821 623 700 720 732 745 758

Maize $/mt 193 170 159 155 159 162 166

Rice, Thailand, 5% $/mt 423 386 396 400 403 406 409

Wheat, US, HRW $/mt 285 204 167 175 179 184 188

Aluminum $/mt 1,867 1,665 1,604 1,950 1,968 1,987 2,005

Copper $/mt 6,863 5,510 4,868 6,050 6,118 6,187 8,257

Iron Ore $/dmt 97.0 55.9 58.4 70.0 57.0 50.0 50.8

Gold $/toz 1,266 1,161 1,249 1,250 1,238 1,226 1,214

Source: Commodity Markets Outlook, World Bank – October 2017

World Bank projects an

average crude oil price at

US$56/bbl in 2018.

600

650

700

750

800

850

40

60

80

100

2014 2015 2016 2017 2018 2019 2020

Crude Oil vs. Palm Oil

Crude Oil (average) $/bbl Palm Oil $/mt

1.5

2.5

3.5

4.5

5.5

2014 2015 2016 2017 2018 2019 2020

Natural Gas vs. Cocoa

Natural Gas, US $/mmbtu Cocoa $/kg

Source: Commodity Markets Outlook, World Bank – October 2017

The impact of imported inflation

in Nigeria is small.


FSDH Research 9

1.5 Global Oil Price:

A combination of improving global economic outlook, and crude oil production cut

sustained the appreciation in crude oil price in 2017. FSDH Research expects these

factors to sustain the crude oil price in 2018. The OPEC Reference Basket (ORB)

increased by 20.96% to US$64.47/b as at 29 December, 2017 from US$53.3/b as at end-

December 2016. The Bonny Light also increased by 20.42% to US$67.45/b at end-

December 2017, from US$56.01/b at end-December 2016. We note that most forecasts

point to a stronger oil demand in 2018 than in 2017. This will lead to a marginal

increase in the crude oil price.

According to the U.S. Energy Information Administration (EIA), the total crude oil demand

in 2018 should be 100.11mb/d while supply is 100.34mb/d, leading to excess supply of

0.23mb/d. Non-OPEC producers are expected to supply 60.69mb/d, leaving 39.65mb/d for

OPEC members to fill. We note that the supply from the Non-OPEC members will not

satisfy the global demand. Thus, OPEC will still be relevant in influencing the global oil

price.

Table 4: Global Demand and Supply for Oil (mb/d)

2016 2017E 2018F 2019F

World Oil Demand 95.57 98.39 100.11 101.76

World Oil Supply 96.44 97.97 100.34 102.11

Excess Supply/Demand 0.87 0.42* 0.23 0.35

Non-OPEC Supply 56.85 58.66 60.69 61.98

Demand Gap to Fill by OPEC 39.59 39.31 39.65 40.13

Sources: U.S Energy Information Administration (EIA); FSDH Research Analysis

95.57 98.39 100.11

56.85 58.66 60.69

43.7454.15 59.74

0

50

100

150

2016 20117E 2018F

Crude Oil Demand vs Supply

World Demand Non-OPEC Supply

Brent Crude Price

40.00

45.00

50.00

55.00

60.00

65.00

70.00

Bonny Light Prices (Jan. 2017-Dec. 2017)

Sources: U.S Energy Information Administration (EIA); Reuters; FSDH Research Analysis

We note that most forecasts

point to a stronger oil demand in

2018 than in 2017. This will lead

to a marginal increase in the

crude oil price.

OPEC will still be relevant in

influencing the global oil price.


FSDH Research 10

42.8

52.8

56.0

59.0

43.7

54.2

59.761.4

42.7

52.7

59.9

56.4

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

2016A 2017A 2018F 2019F

Crude Oil Price Actual and Forecast (mb/d)

World Bank EIA IMF

Sources: U.S Energy Information Administration (EIA); World Bank and IMF


FSDH Research 11

1.6 FOMC Rate Decision:

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (The Fed)

raised the Federal Funds Rate (Fed Rate) to a range of 1.0%-1.50%, at its December

2017 meeting from 1.0%-1.25%. The yields in the Treasury notes increased following the

increase. Although the FOMC maintained rate decision in January 2018, market

expectation is that the FOMC will raise the Fed Rate between two or three times in 2018.

Implications of the Expected Rate Hike:

Decrease in global financial liquidity flow

Increase in the cost of funds from the international debt market

Portfolio realignments amongst global portfolio managers

Possible capital reversal from emerging markets and impact on foreign exchange

market depending on the magnitude of the increase.

Increase in the yields on the Dollar denominated fixed income securities

FSDH Research observed fairly strong correlation between the movements in

yields in the U.S and in Nigeria. Looking at the relationship between the two

countries, we believe the 5-year yield in Nigeria should trade at 15.88%. This

means that the bond at the moment is trading at a yield that is below the equilibrium

point. We expect the yield to increase higher than the current level of 13.33%.

The U.S. Fed raised the funds

rate to a range of 1.0%-1.50%,

at its December 2017 meeting.

0.15%

0.35%

0.55%

0.75%

0.95%

1.15%

1.35%

1.55%

1.75%

U.S Fed Rate (Jan. 2017 - Dec. 2017)

1.7

1.8

1.9

2

2.1

2.2

2.3

2.4

02-J

an-1

7

02-F

eb-1

7

02-M

ar-1

7

02-A

pr-1

7

02-M

ay-1

7

02-J

un-1

7

02-J

ul-1

7

02-A

ug-1

7

02-S

ep-1

7

02-O

ct-1

7

02-N

ov-1

7

02-D

ec-1

71.75% May 2023 U.S Treasury Note

Source: Thomson Reuters

Looking at the relationship

between the two countries, we

believe the 5-year yield in

Nigeria should trade at 15.88%.


FSDH Research 12

2.0 The Nigerian Economy: 2.1 Purchasing Managers’ Index (PMI):

The Purchasing Managers’ Index (PMI) report that the CBN published for the month of

December 2017 shows improved business activities in both the manufacturing and non-

manufacturing sectors. At 59.3 and 62.1 points, the Composite Manufacturing PMI and

Composite Non-Manufacturing PMI respectively attained the highest levels since January

2015. For the CMI; the Production Level, New Orders, Supplier Delivery Time, Employment

Level, and Raw Material Inventories grew at a faster rate in December 2017. For the

Composite Non-Manufacturing Index (CNMI); Business Activity, New Orders, Employment,

and Inventories grew at a faster rate in December 2017 than in November.

The expansion in the PMI is an indication of the strong growth we expect in the

Nigerian economy in 2018. This will stimulate financing and investing opportunities

in the economy.

The PMI shows improved

business activities in the

manufacturing and non-

manufacturing sectors.

40

45

50

55

60

65Purchasing Managers' Index

Manufacturing Composite PMI Non- Manufacturing Composite PMI

Source: Central Bank of Nigeria

The expansion in the PMI is an

indication of the strong growth

we expect in the Nigerian

economy in 2018.


FSDH Research 13

2.2 Real Gross Domestic Product (GDP):

FSDH Research forecasts a Real Gross Domestic Product (GDP) growth rate of

3.16% in 2018 and 4.09% in 2019. Our forecast for 2018 is slightly higher than the

forecasts of the World Bank and International Monetary Fund (IMF) of 2.5% and 2.1%

respectively. However, with the population growing at 2.75%, the country requires growth

rate in excess of 5% to substantially improve the wellbeing of Nigerians. Agriculture, Trade,

and Mining & Quarrying sectors, with forecast growth rates of 4%, 2% and 3.2% would

drive the 3.16% growth rate in 2018. Other leading sectors of the economy that would

contribute to the growth are: Information and Communication (I&C): 2.2%; Real

Estate: 2.5%; Construction: 4% and Manufacturing: 1%. FSDH Research expects the

GDP Per Capita to recover slightly in 2018.

Agriculture, with a growth of 3.06%; Mining and Quarrying: 25.44% and Other Services:

1.72% were the three leading sectors that contributed to the growth rate of 1.40% recorded

in Q3 2017. The increase in the supply of foreign exchange has improved economic

activities across other sectors of the Nigerian economy. FSDH Research has observed

increased activities in Agriculture, Mining and Quarrying (oil and gas),

manufacturing, Trade, Real Estate and I&C in the last few months. The growth in the

equity market has created additional wealth that would stimulate effective demand in the

economy. Some light manufacturing activities are also taking place – stimulating demand

for raw materials from Agriculture sector. The current oil price will encourage investment

activities in the oil and gas sector. Trade sector would also benefit from the increase in

consumer purchasing power.

FSDH Research forecasts a

Real Gross Domestic Product

(GDP) growth rate of 3.16% in

2018 and 4.09% in 2019.

FSDH Research expects the

GDP Per Capita to recover

slightly in 2018.

69.02 67.93

68.61

70.79

73.68

386

370 364 365

370

300

310

320

330

340

350

360

370

380

390

400

65.00

66.00

67.00

68.00

69.00

70.00

71.00

72.00

73.00

74.00

75.00

2015A 2016A 2017E 2018F 2019F

Real GDP(N'trn) vs Real GDP Per Capita (N'000)

Real GDP Real GDP Per Capita

2.7% 3.0%3.7%

6.8%

8.8%

9.6%

10.1%

10.2%

15.9%

29.2%

Contribution to Real GDP (Q3, 2017)

Financial & Insurance ConstructionProfessional Services Real EstateManufacturing Information & CommunicationAll Other Sectors Mining & Quarrying

Sources: National Bureau of Statistics and FSDH Research

Some light manufacturing

activities are also taking place

– stimulating demand for raw

materials from Agriculture

sector.


FSDH Research 14

Key Developments that Will Shape Activities in the Nigerian Economy in 2018:

I. Improvement in crude oil price and production: The current crude oil price will

encourage investment activities in the oil and gas sector.

II. Implementation of the Economic Recovery Growth Plan (ERGP) of the FGN:

The fiscal policy plan of the FGN to stimulate economic activities in the non-oil

sector is crucial for achieving a sustainable economic growth.

III. Development of Key Infrastructure: Critical steps to improve the state of

infrastructure in Nigeria will boost the GDP growth rate. Development of

appropriate transportation system for efficient transportation of goods and services

and people across the country will stimulate economic activities. Appropriate

strategies to develop affordable housing units for Nigerians will help bridge the

housing deficit and also generate economic activities. The country needs to

increase power generation to support growth and make Nigeria an attractive

investment destination. FSDH Research notes that the FGN is adopting some

measures. However, more involvements of private sector in the development of

these growth enhancing infrastructure will stimulate growth.

IV. Rising Cases of Social Unrest in the Country: FSDH Research has noticed

rising cases of social unrest in some parts of the country. This can affect economic

activities and lead to escalating prices of goods and services.

V. Global Economic Outcome: The global economic outlook is positive; and we

expect it to have a positive effect on the demand for oil, which will impact economic

activities in Nigeria.

Table 5: Real GDP

Year 2016A 2017E 2018F 2019F 2020F 2021F 2022F

GDP (N’trn) 67.93 68.62 70.79 73.68 77.40 81.62 85.99

Real Growth Rate (1.58%) 1.01% 3.16% 4.09% 5.05% 5.45% 5.36%

Sources: NBS, FSDH Research

Appropriate strategies to develop

affordable housing units for

Nigerians will help bridge the

housing deficit and also generate

economic activities.

The global economic outlook is

positive; and we expect it to

have a positive effect on the

demand for oil, which will

impact economic activities in

Nigeria.

The current oil price will encourage

investment activities in the oil and

gas sector.


FSDH Research 15

Our Broad Expectations on Specific Drivers of Activities in 2018-2022:

Agriculture: FSDH Research expects Agriculture to continue to drive

growth in the forecast period as the sector attracts more investments from

government partnerships and private sector operators. In addition to

providing food for the Nation and replacing imported food, we expect it to

supply the needed raw materials to the manufacturing sector. The good

soil and weather conditions should support the growth in the sector.

Trade: The rising purchasing power of consumers will boost activities in

this sector. The finance sector is equally positioned to reengineer this

sector to enable it maximise its potentials. The foreign exchange rate

stability should also increase trading margins.

Manufacturing: The manufacturing sector should receive further boost,

as leading macroeconomic indicators suggest renewed business and

consumer confidence in the Nigerian economy. This sector has the

capacity to employ large number of people thereby generating

employment opportunities. Oil refinery has so far contributed little to the

growth of this sector. However this story is about to change with the

Dangote refinery starting operation during the forecast period.

Information and Communication: Telecommunications dominated

activities in this sector. The Global System for Mobile Communications

(GSM) companies and Internet service providers are the major drivers.

We expect that there will be an adjustment to the tariff in the sector within

the forecast period and this will attract investments. As the economy

adopts more technology to deliver value, we expect telecommunications

sector to receive a boost.

Construction and Real Estate: Initiatives of the FGN to partner with the

private sector to develop infrastructure should stimulate activities in this

sector. The stability in the foreign exchange rate should also attract foreign

investors to the real estate. The growth in wealth on account of the growth

in the stock market will lead to more investment in the real estate.

The tables 6, 7 and 8 show the growth outcomes we expect in the different sectors of the

Nigerian economy. They also show where we expect opportunities given the relative size

of the economy.

Agriculture is expected to continue

to drive growth.


FSDH Research 16

Table 6: Real GDP at 2010 Constant Prices (N’bn)

2016A 2017E 2018F 2019F 2020F 2021F 2022F CAGR *

Agriculture 16,607 17,112 17,797 18,544 19,286 20,019 20,760 3.79%

Mining And Quarrying 5,760 6,599 6,810 7,151 7,580 8,262 8,964 7.65%

Manufacturing 6,302 6,326 6,389 6,709 7,245 7,934 8,648 5.41%

Electricity, Gas ,Steam And Air Conditioning Supply

232 251 257 265 284 305 328 5.96%

Water Supply, Sewerage, Waste Management And Remediation

104 116 128 137 148 162 177 9.36%

Construction 2,521 2,357 2,451 2,549 2,753 2,987 3,226 4.20%

Trade 11,669 11,435 11,664 12,154 12,822 13,463 14,163 3.28%

Accommodation And Food Services

619 576 636 700 763 824 890 6.23%

Transportation And Storage 809 792 836 882 926 979 1,035 4.20%

Information And Communication 7,859 7,748 7,918 8,156 8,401 8,653 8,869 2.04%

Arts, Entertainment And Recreation

147 171 188 202 223 245 269 10.68%

Financial And Insurance 2,028 2,056 2,091 2,112 2,176 2,252 2,342 2.43%

Real Estate 4,904 4,786 4,906 5,126 5,331 5,545 5,766 2.74%

Professional, Scientific And Technical Services

2,536 2,563 2,621 2,654 2,707 2,789 2,872 2.09%

Administrative & Support Services

14 15 15 16 16 17 17 3.07%

Public Administration 1,570 1,523 1,582 1,614 1,710 1,804 1,922 3.43%

Education 1,519 1,440 1,557 1,650 1,765 1,898 2,040 5.04%

Human Health And Social Services

476 470 499 519 545 576 621 4.53%

Other Services 2,257 2,280 2,440 2,538 2,715 2,905 3,080 5.31%

Total 67,931 68,615 70,786 73,678 77,397 81,618 85,989 4.01%

Sources: NBS, FSDH Research, * Compound Annual Growth Rate (2016 – 2022)

Table 7: Sectoral Real Growth Rate (%)

2016A 2017E 2018F 2019F 2020F 2021F 2022F Average *

Agriculture 4.11% 3.04% 4.00% 4.20% 4.00% 3.80% 3.70% 3.84%

Mining And Quarrying -14.45% 14.57% 3.20% 5.00% 6.00% 9.00% 8.50% 4.55%

Manufacturing -4.32% 0.38% 1.00% 5.00% 8.00% 9.50% 9.00% 4.08%

Electricity, Gas ,Steam And Air Conditioning Supply

-15.00% 8.19% 2.70% 3.00% 7.00% 7.50% 7.50% 2.98%


9.27% 12.21% 10.00% 7.00% 8.00% 9.50% 9.50% 9.35%

Construction -5.95% -6.50% 4.00% 4.00% 8.00% 8.50% 8.00% 2.86%

Trade -0.24% -2.01% 2.00% 4.20% 5.50% 5.00% 5.20% 2.81%

Accommodation And Food Services -5.32% -7.03% 10.50% 10.00% 9.00% 8.00% 8.00% 4.74%

Transportation And Storage 0.39% -2.05% 5.50% 5.60% 5.00% 5.70% 5.70% 3.69%

Information And Communication 1.95% -1.41% 2.20% 3.00% 3.00% 3.00% 2.50% 2.03%

Arts, Entertainment And Recreation 3.72% 16.70% 10.00% 7.60% 10.00% 10.00% 10.00% 9.72%

Financial And Insurance -4.54% 1.42% 1.70% 1.00% 3.00% 3.50% 4.00% 1.44%

Real Estate -6.86% -2.40% 2.50% 4.50% 4.00% 4.00% 4.00% 1.39%


0.80% 1.03% 2.30% 1.25% 2.00% 3.00% 3.00% 1.91%

Administrative & Support Services -0.69% 1.14% 4.00% 2.80% 3.50% 3.50% 3.50% 2.54%

Public Administration -4.58% -2.99% 3.90% 2.00% 6.00% 5.50% 6.50% 2.33%

Education 1.35% -5.20% 8.10% 6.00% 7.00% 7.50% 7.50% 4.61%

Human Health And Social Services -1.79% -1.27% 6.30% 4.00% 5.00% 5.70% 7.70% 3.66%

Other Services 4.93% 1.01% 7.00% 4.00% 7.00% 7.00% 6.00% 5.28%

Real GDP Growth Rate 1.58% 1.01% 3.16% 4.09% 5.05% 5.45% 5.36% 3.22%

Sources: NBS, FSDH Research; * Average ( 2016 – 2022)


FSDH Research 17

2.3 Opportunities:

Increased global economic growth should sustain high oil price

Investments opportunity to increase production and to create value addition across

most of the profitable segments of the agricultural value chain

Import substitution strategies in agro-allied industries

Manufacturing sector should receive a boost following the relative stability in the

foreign exchange market

We expect FGN and state governments to sign more Public Private Partnership

(PPP) deals to promote infrastructure development

Construction activities should continue to grow – Road, Rail, etc.

We expect a rebound in the corporate and infrastructure bond markets

Real estate sector should attract more investments as the economy improves.

Table 8: Contribution to GDP (%)

2016A 2017E 2018F 2019F 2020F 2021F 2022F Average * Agriculture 24.45% 24.94% 25.14% 25.17% 24.92% 24.53% 25.44% 24.94%

Mining And Quarrying 8.48% 9.62% 9.62% 9.71% 9.79% 10.12% 10.98% 9.76%

Manufacturing 9.28% 9.22% 9.03% 9.11% 9.36% 9.72% 10.60% 9.47%

Electricity, Gas ,Steam and Air Conditioning Supply

0.34% 0.37% 0.36% 0.36% 0.37% 0.37% 0.40% 0.37%


0.15% 0.17% 0.18% 0.19% 0.19% 0.20% 0.22% 0.19%

Construction 3.71% 3.44% 3.46% 3.46% 3.56% 3.66% 3.95% 3.61%

Trade 17.18% 16.67% 16.48% 16.50% 16.57% 16.50% 17.35% 16.75%

Accommodation And Food Services 0.91% 0.84% 0.90% 0.95% 0.99% 1.01% 1.09% 0.96%

Transportation And Storage 1.19% 1.15% 1.18% 1.20% 1.20% 1.20% 1.27% 1.20%

Information And Communication 11.57% 11.29% 11.19% 11.07% 10.85% 10.60% 10.87% 11.06%

Arts, Entertainment And Recreation 0.22% 0.25% 0.27% 0.27% 0.29% 0.30% 0.33% 0.27%

Financial and Insurance 2.98% 3.00% 2.95% 2.87% 2.81% 2.76% 2.87% 2.89%

Real Estate 7.22% 6.98% 6.93% 6.96% 6.89% 6.79% 7.07% 6.98%


3.73% 3.73% 3.70% 3.60% 3.50% 3.42% 3.52% 3.60%

Administrative & Support Services 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%

Public Administration 2.31% 2.22% 2.23% 2.19% 2.21% 2.21% 2.35% 2.25%

Education 2.24% 2.10% 2.20% 2.24% 2.28% 2.33% 2.50% 2.27%

Human Health And Social Services 0.70% 0.68% 0.71% 0.70% 0.70% 0.71% 0.76% 0.71%

Other Services 3.32% 3.32% 3.45% 3.44% 3.51% 3.56% 3.77% 3.48%

Sources: NBS, FSDH Research; * Average ( 2016 -2022)

Nigerians have developed taste for

locally produced goods and

services as against imports.


FSDH Research 18

2.4 Risks:

The rising social unrest in some parts of the country may affect economic activities

and lead to escalating inflation rate

External factors that can lead to a significant drop in the crude oil price may have

adverse impact on the economic activities in Nigeria

There could be capital flight out of Nigeria if there are excessive hikes in the

interest rates in the advanced economies.


FSDH Research 19

3.0 External Reserves: The external reserves grew substantially in 2017 compared with the figures in 2016.

The growth provided stability for the foreign exchange rate. According to the CBN, the

30-Day Moving Average of Nigeria's external reserves as at 29 December, 2017 stood at

US$38.77bn, representing an increase of US$12.93bn or 50.04%, compared with

US$25.84bn at the end-December 2016. The major drivers of the growth in the external

reserves are:

Increase in crude oil price and production

Increase in capital inflows as a result of the implementation of the Investors’ and

Exporters’ Foreign Exchange Window (I&E Window).

Going forward, FSDH Research expects the growth in the external reserves to

continue. The main drivers are:

Increase in oil production, export and price

Capital inflows – Both Foreign Direct Inflows (FDI) and Foreign Portfolio

Inflows (FPIs)

Expected drop in imports due to import substitution in various sectors

Growth in non-oil exports

Our forecast external reserves in 2018 – 2022 are shown in the table below:

Table 9: External Reserves 2017-2022 (US$’bn)- End Periods: Actual vs Forecast

Year 2017A 2018F 2019F 2020F 2021F 2022F

External Reserves 38.77 42.64 46.05 48.82 52.23 54.85

Sources: CBN and FSDH Research

Increase in crude oil price and

production and capital inflows

led to the growth in external

reserves.

25.84

28.1229.65 30.30 30.86 30.33 30.29 30.84

31.83 32.4933.83

34.95

38.77

20.00

25.00

30.00

35.00

40.00

External Reserves (US$bn) - End Periods

Source: Central Bank of Nigeria


FSDH Research 20

4.0 Foreign Trade: The positive developments in the crude oil markets and the improved confidence in

the outlook of the Nigerian economy have improved Nigeria’s external sector

position. The latest data from the National Bureau of Statistics (NBS) confirms this

position. The data from the last seven quarters shows that Nigeria recorded the highest

trade balance (exports higher than imports) and capital flows in Q3 2017.

The increase in the price of crude oil in the international market and improved crude

oil production in Nigeria led to a significant improvement in Nigeria’s external sector

position in Q3 2017. During the period, Nigeria’s trade balance exceeded the N1trn mark

for the first time since Q3 2014 to stand at N1.22trn.

The total value of merchandise trade as at Q3, 2017 increased by 3.94% to N5.92trn from

Q2, 2017. Total exports accounted for 61% of the total trade while total imports accounted

for 39%. The crude oil exports dominated the exports at 83.17% while non-crude oil exports

accounted for 16.83%. The huge contribution of crude oil exports to the total exports

revealed the vulnerability of the external sector to changes in the oil market.

Top on the list of the imported goods in Q3 2017 are: Machinery and Transport Equipment;

Mineral Fuels; Boilers, Chemicals and Related Products; Food and Live Animals;

Manufactured Goods; amongst others.

The implementation of the Economic Growth Recovery Plan (ERGP) of the FGN; stability

in the foreign exchange rate; and the efforts of the CBN to boost agricultural products would

boost exports in 2018.

FSDH Research expects the following factors to influence the foreign trade performance

in the short-to-medium term:

The improved global economic condition and outlook

The FGN efforts to improve the business environment

The import substitution strategy of the FGN via growing non-oil exports

Exports of refined petroleum products from the proposed Dangote Refinery

Nigeria will continue to import basic inputs and machinery for manufacturing

companies.

The Nigerian external sector

has improved.

The data from the last seven

quarters shows that Nigeria

recorded the highest trade

balance and capital flows in Q3

2017.


FSDH Research 21

Source: National Bureau of Statistics

1.69 2.36 2.46 2.31 2.29 2.60 2.35

1.44

1.79 2.32 2.98 3.01

3.10 3.57

(1.00)

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017

External Trade Position (N'bn)

Imports Exports Trade Balance


FSDH Research 22

Table 10: Foreign Trade Statistics (N’bn)

Year Imports Exports Trade Balance Total Trade

2016A 8,818 8,527 (290) 17,345

2017E 9,523 13,391 3,868 22,914

2018F 10,094 15,911 5,817 26,006

2019F 10,347 17,528 7,182 27,875

2020F 10,554 18,978 8,425 29,532

2021F 10,712 20,764 10,052 31,476

2022F 10,819 22,613 11,794 33,432


Table 11: Analysis of Exports (N’bn)

Year Total Exports Crude Exports Non-Oil Exports

Crude Oil Exports to

Total Exports

Non-Crude Oil Exports

to Total Exports

2016A 8,527 6,997 1,531 82.05% 17.95%

2017E 13,391 10,987 2,404 82.05% 17.95%

2018F 15,911 12,975 2,936 81.55% 18.45%

2019F 17,528 14,206 3,322 81.05% 18.95%

2020F 18,978 15,306 3,673 80.65% 19.35%

2021F 20,764 16,683 4,080 80.35% 19.65%

2022F 22,613 18,101 4,512 80.05% 19.95%


-290

3,868

5,817

7,182

8,425

10,052

11,794

-2000

0

2000

4000

6000

8000

10000

12000

14000

2016A 2017E 2018P 2019F 2020F 2021F 2022F

Trade Balance N'bn



FSDH Research 23

Our estimate shows that Nigeria would record a favourable balance of trade balance

in 2018. Our forecast for total merchandise trade for Nigeria in 2018 is N26trn, we expect

this figure to increase to N33.43trn in 2022. Favourable exports will be the main driver.

Implications:

We expect the trade balance to contribute to the stability of the foreign exchange

market

There would be financing opportunities in the exports led sectors of the economy


FSDH Research 24

5.0 Foreign Exchange Rate: The foreign exchange market witnessed relative stability in 2017. The CBN’s policy

of the I&E Window, increase in crude oil price, increase in foreign reserves and

increase in foreign capital inflow aided the stability of the foreign exchange rate.

The value of the Naira traded at N500/US$ at the parallel market of the foreign exchange

market before the implementation of the I$E Window. The average premium between the

inter-bank and parallel market rates reduced from N156.91 as at 01 January-21 April 2017

to N57.50 on 29 December, 2017.

Year-on-year, the value of the Naira depreciated marginally by 0.33% to close at N306/US$

at the inter-bank market at end-December 2017, compared with end-December 2016. At

the parallel market, it appreciated significantly by 35.08% to close at N363.50/US$ at end-

December 2017, compared with end-December 2016. The highest rate recorded at the

inter-bank and parallel markets in 2017 were N315/US$ and N520/US$, respectively. The

lowest values were N304.50/US$ and N362/US$, respectively.

The I & E window recorded a turnover of US$25.66bn in 2017. The increase in the FX

supply has helped the stability in the foreign exchange and consequently increased the

foreign investors’ confidence in the Nigerian economy. However, there is the need to

harmonise the foreign exchange rates in the country. This will led to an efficient market.

The foreign exchange market

witnessed relative stability in

2017.

614

1,316 1,513

2,258

3,681

4,219 4,534

4,084

3,633

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Investors' and Exporters' Forex Window Turnover (US$'mn)

270.00

320.00

370.00

420.00

470.00

520.00

570.00

Exchange Rate Movement in the US$ vs Naira (Jan. 17 - Dec. 17)

Inter-bank Parallel Market

Source: FMDQ


FSDH Research 25

Under a managed float foreign exchange system, it is difficult to forecast the foreign

exchange rate. However, we believe the following factors will drive the foreign exchange

rate in the short-term.

From the table above, we believe the foreign exchange rate may trade between N345/US$

– N361/US$ in 2018. The accretion to the external reserves, slow growth in imports in the

presence of strong growth in exports, increased capital inflow, the expected drop in inflation

rate in Nigeria while inflation rate is expected to rise in the advanced countries including

U.S are the factors that may lead to an appreciation in the value of the currency going

forward. The foreign exchange rate may appreciate going forward.

Table 12: Our View of the Important Determinants of Foreign Exchange Rate in Nigeria

Indicators Favourable/Fair Not Favourable

Balance of Payment (BoP) Position

Balance of Trade

Oil Price Forecast /Crude Oil Production

Militants in the Niger Delta

Fiscal Position – Debt Sustainability

Fiscal Position – Fiscal Deficits/GDP

Fiscal Position – Interest Cover

Political Stability

Possibility of FOMC Increasing Rate

The External Reserve Position

Inflow of FDIs, FPIs and Others in 2018-2022

Source: FSDH Research

Table 13: Foreign Exchange Rate Forecasts (2018 - 2022)

Year 2018F 2019F 2020F 2021F 2022F

Lower Band (US$/N) 361.00 351.98 343.18 338.03 332.96 Higher Band (US$/N) 345.00 336.38 327.97 323.05 318.20 Source: FSDH Research


FSDH Research 26

6.0 Public Debt: Available data from the Debt Management Office (DMO) shows that Nigeria’s total

debt stock (addition of external and domestic debt) as at September 2017 stood at

N20.37trn. This represents an increase of 17.36% from the end-December 2016 figure of

N17.36trn. A breakdown of the debt stock shows that external debt stood at N4.69trn or

23.04% of the total debt stock, while domestic debt stock stood at N15.68trn or 76.96% of

the total debt stock. The debt-to-GDP for 2016 stood at 16.92%. FSDH Research

estimates a debt-to-GDP ratio of 17.26% to end year 2017. This means that Nigeria’s

debt portfolio still has wide fiscal sustainability space; as the debt-to-GDP ratio is below

the applicable critical limit of 40% that the government sets for the economy.

Although the Debt-to-GDP ratio is low at about 17.26%, Debt service-to-revenue for

Approved Budget 2017 is 32.65%. The Medium Term Expenditure Framework (MTEF)

(2018-2020) projects debt service-to-revenue of 35.95% for 2018; and 37.46% for 2019

and 2020.

The DMO has a strategic objective to increase the proportion of the external debt in the

total debt stock. This will enable the FGN reduce interest expenses and reduce the

crowding out effect of high government borrowing in the domestic market.

The table below identifies the factors that will drive the public debt in our forecast period.

Factor with increase (+) means that they will increase the public debt. Factor with decrease

(-) will reduce the public debt.

Table 14: Determinants of Public Debt

S/N Factors Impact

1 Increase in oil price Decrease (-)

2 Increase in oil production Decrease (-)

3 Decrease in oil price Increase (+)

4 Decrease in oil production Increase (+)

5 Drop in FDIs and FPIs Increase (+)

6 Drop in taxation Increase (+)

7 Increase in inflation rate Increase (+)

8 Low investors’ confidence Increase (+)

9 Increase in FDIs and FPIs Decrease (-)

10 Expansionary fiscal policy Increase (+)


The DMO has a strategic objective to increase the proportion of the external debt

in the total debt stock.

Although the Debt-to-GDP ratio is low at about 17.26%, Debt service-to-revenue for Approved Budget 2017 is

32.65%.


FSDH Research 27

Most of the factors point to the fact that public debt will increase in the forecast

period. We expect the FGN to continue with her public debt restructuring plans of

replacing domestic debt with external debt. FSDH Research expects the interest

expense-to-revenue to drop during the forecast period as the FGN intensifies its

effort to increase tax revenue.

We also expect the interest rate and yields on fixed income securities to trend

downwards because of the public debt portfolio rebalancing of the FGN and her

improved revenue generation.

While Nigeria has one of the lowest debt-to-GDP among the selected countries, it

has one of the lowest revenue-to-GDP. We also note that ratio of the interest

expenses to FGN portion of the federal allocation is very high. This leaves little

resources to develop the economy. It also shows why the FGN will continue to

borrow at high level.

Table 15: Public Debt - N’bn

Total Debt Domestic Debt Foreign Debt

Foreign/Total Debt

Debt to GDP

2015A 126,037 104,922 21,115 16.75% 13.24%

2016A 173,600 138,811 34,789 20.04% 16.92%

2017E 207,452 161,501 45,951 22.15% 17.26%

2018F 239,607 181,622 57,985 24.20% 17.07%

2019F 264,646 198,961 65,685 24.82% 16.20%

2020F 289,126 216,469 72,657 25.13% 15.18%

2021F 309,365 230,477 78,888 25.50% 13.94%

2022F 324,833 240,766 84,067 25.88% 12.57%

Sources: DMO and FSDH Research

Most of the factors point to the

fact that public debt will

increase in the forecast period.

17% 28%46% 52%

68% 70%89% 96% 106%

250%

0%

50%

100%

150%

200%

250%

300%

Debt-to-GDP

Sources: Trading Economics; NBS; DMO, FSDH Research

0.99

1.20

0.45 0.68

1.22

2.60

2.08

0.55 1.10

1.85

0%

20%

40%

60%

80%

100%

-

1.00

2.00

3.00

2015 2016 Mar-17 Jun-17 Sep-17

Interest Payment vs Share of FGN Allocation (N'trn)

Interest Payments

FGN FAAC Allocation

Ratio of Interest payment to FGN Allocation


FSDH Research 28

7.0 Unemployment Rate: According to the NBS, the unemployment rate increased to 18.8% in Q3 2017, from

14.2% and 16.2% in Q4 2016 and Q2 2017, respectively. A total of 33.9 million people

were either unemployed or underemployed in the labour force in Q3 2017, compared with

31.3 million in Q2 2017.

The unemployment report showed that the economically active population or working age

population (persons within ages 15‐64) increased from 110.3million in Q2 2017 to

111.1million in Q3 2017. In Q3 2017, the labour force population (i.e. those within the

working age population willing, able and actively looking for work) increased to 85.1million

from 83.9million in Q3 2017, representing an increase of 1.43%. The total number of people

in full employment (at least 40 hours a week) declined from 52.7 million in Q2 2017 to 51.10

million in Q3 2017. The misery index, which is the sum of unemployment and inflation rate

stood at 34.78% in Q3 2017. This is an indication of a weak purchasing power in the country

which affects both financing and investment growth.

The NBS added that 26.04mn persons within the working age population decided

not to work for various reasons in Q3 2017.

A combination of fiscal and monetary policy measures to lower inflation rate are required.

Meanwhile the urgent development of the sectors of the Nigerian economy that are labour

intensive will address the high unemployment rate. Such sectors are:

Agriculture

Construction

Manufacturing

Real Estate

Table 16: Labour Force Statistics

Labour Force

(million)

Full Time Employed (million)

Under Employed (million)

Unemployed (million)

Unemployment Rate

Under Employment Rate

Q2 2017 83.94 52.70 17.70 13.59 16.20% 21.10%

Q3 2017 85.09 51.10 18.00 15.99 18.80% 21.20%


A total of 33.9 million people were either unemployed or underemployed in the labour force in Q3 2017, compared

with 31.3 million in Q2 2017.


FSDH Research 29

24.86%

29.80%

31.74%32.78%

31.70%32.28%

34.78%

20.00%

22.00%

24.00%

26.00%

28.00%

30.00%

32.00%

34.00%

36.00%

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017

Misery Index in Nigeria



FSDH Research 30

8.0 Nigeria’s Importation Update: The capital inflow into Nigeria in Q3 2017 recorded a substantial increase compared

with the past few quarters, as investors’ confidence on the short-to-medium term

outlook of the Nigerian economy continues to improve. The total capital inflow as at

Q3 2017 was US$6.85bn, more than the total inflow in 2016. The growth in the capital

inflow as at Q3 2017 was mainly driven by significant increase in both Foreign Portfolio

Investments (FPIs) and Other Investments (OIs).

The inflows has increased the valuation of equity and led to a drop in yields in fixed income

securities. FSDH Research expects the capital importation to continue to flow provided

there are appropriate policies to attract investors.

Table 17: Nigeria Capital Importation – Investment Type (US$’mn)

2016 2017 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Total

Foreign Direct Investment - Equity 173.7 184.21 340.64 344.57 1,043 210.10 274.07 117.47 602

Foreign Direct Investment - Other Capital 0.73 0.08 - 0.07 0.88 1.28 0.30 0.13 2

Portfolio Investment - Equity 201.69 279.81 201.12 176.44 859 101.99 614.05 1,932.07 2,648

Portfolio Investment - Bonds 1.5 - 369.00 25.40 396 - 57.87 115.43 173

Portfolio Investment - Money Market Instruments 67.85 57.5 350.20 82.37 558 211.61 98.59 719.91 1,030

Other Investments - Loans 241.81 520.19 561.10 917.01 2,240 369.28 747.47 956.69 2,073

Other Investments - Other Claims 23.66 0.38 0.06 3.02 27 14.00 - 303.40 316

Total 710.97 1,042.17 1,822.12 1,548.88 5,124 908.27 1,792.34 4,145.10 6,846 Sources: National Bureau of Statistics (NBS)

The total capital inflow as at Q3

2017 was US$6.85bn, more than

the total inflow in 2016.

271 337

920284 314

771

2,767

265521

561

920

383

747

1,260

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017

Total Capital Inflow (US$'mn)

FDI FPI Others

Source: NBS


FSDH Research 31

Table 18: Capital Importation into Nigeria (US$ million)

FDIs FPIs Others Total

2011 1,753 4,513 1,637 7,904

2012 2,000 13,488 1,129 16,616

2013 1,279 17,369 2,670 21,318

2014 2,277 14,917 3,557 20,751

2015 1,447 6,005 2,191 9,643

2016 1,044 1,813 2,267 5,124

2017* 603 3,852 2,391 6,846

Sources: NBS and CBN * YTD September; FDI – Foreign Direct Investment; FPI – Foreign Portfolio Investment

7.90

16.62

21.3220.75

9.64

5.12

6.85

0.00

5.00

10.00

15.00

20.00

25.00

2011 2012 2013 2014 2015 2016 Sep-17

Capital Importation into Nigeria (US$mn)

Figure as at September 2017 was

higher than FY 2016

Sources: CBN and NBS


FSDH Research 32

9.0 Inflation Rate:

The inflation rate recorded persistent decline in 2017. The base effect from previous

year’s Consumer Price Indices and stability in the foreign exchange rate led to the

consistent drop in the inflation rate in 2017. The inflation rate dropped to 15.37% in

December from 18.72% in January 2017.

Our forecast shows that the inflation rate in 2018 would drop to an average of

10.62%, compared with an average of 16.55% in 2017. This is based on the

assumption that there is no increase in the Premium Motor Spirit (PMS) pump price

and electricity tariff. However, we believe it may be difficult to maintain these prices

at the current levels given the current economic realities. However, political and

social considerations may have overriding effect on the possible impacts of these

decisions on the economic realities. Inflation rate may shift between 2% to 3% if

there’s an adjustment to the electricity tariff and PMS pump price.

The following factors will influence inflation rate in 2018:

Positive factors to lower inflation rates:

The availability of foreign exchange to meet consumption and production

purposes

The expected lower interest rate environment in 2018 than in 2017

Improved oil production and local substitution strategy

Increased local food production

Negative factors to raise inflation rates:

Further disruption to food production in some food producing areas in Nigeria

Moderate growth in global commodities prices

Possible increase in electricity tariff and PMS pump price.

Our monthly inflation rate forecast between January and December 2018 is shown on the

table 19 below:

Our forecast shows that the inflation rate in 2018 would decelerate to average of 10.62%, compared with an

average of 16.55% in 2017.

The inflation rate dropped to 15.37% in December from 18.72% in January 2017.

Inflation rate may shift between 2% to 3% if there’s an adjustment to the electricity

tariff and PMS pump price.


FSDH Research 33

Our Yearly average inflation rate forecast between 2018 and 2022 is shown on table 20

below:

9.1 Implications:

The expectation of a drop in the inflation rate in 2018 should support expansionary

monetary policy to stimulate economic growth recovery

Yield on fixed income securities to trend downwards.

Table 19: Inflation Rate Forecast

Month Inflation Rate Adjusted Inflation Rate*

Jan-18 15.04% 15.04%

Feb-18 14.16% 16.34%

Mar-18 13.11% 15.29%

Apr-18 12.17% 14.35%

May-18 10.93% 13.11%

Jun-18 9.94% 12.12%

Jul-18 9.34% 11.52%

Aug-18 8.86% 11.04%

Sep-18 8.68% 10.86%

Oct-18 8.45% 10.62%

Nov-18 8.24% 10.42%

Dec-18 8.54% 10.72% *The adjusted inflation rate assumes PMS and electricity tariff increase;


Table 20: Average Inflation Rate

Year 2016A 2017A 2018F 2019F 2020F 2021F 2022F

Average Inflation 15.62% 16.55% 10.62% 9.03% 9.05% 9.01% 8.98%

Sources: NBS, FSDH Research Analysis

Source: FSDH Research Analysis

14.2%13.1%

12.2%

10.9%9.9%

9.3% 8.9% 8.7% 8.4% 8.2% 8.5%

15.0%

16.3%15.3%

14.3%

13.1%12.1%

11.5% 11.0% 10.9% 10.6% 10.4% 10.7%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

Inflation Rate Forecasts

Without Electricity Tariff and PMS Price Adjustments

With Electricity Tariff and PMS Price Adjustments

The expectation of a drop in the inflation rate in 2018 should support expansionary monetary

policy.


FSDH Research 34

9.2 Risks to the Single Digit Inflation Rate:

1. Geopolitical Tensions: Unforeseen or on-going geopolitical tensions could

disrupt the flow of international trade and create shortage of commodities around

the globe leading to increase in international prices. This may come to Nigeria in

the form of imported inflation.

2. The Rising Unrest in some Parts of the Country: The current unrest in some

parts of the country may lead to food shortage and escalating prices.

3. The Generation Elections in 2019: If not controlled the electioneering may

increase inflation rate.

4. The increase in the Electricity Tariff: Current realities suggest that the variables

used to arrive at the electricity tariff have changed. Thus an upward review of the

electricity tariff is imminent as the current tariff is not cost reflective. An upward

review in the tariff may cause inflation rate to rise except the increase in electricity

generation offsets the increase in tariff.

5. Increase in the PMS Pump Price: The current exchange rate and the price of

crude oil at the international market may make the landing cost of PMS higher than

the pump price. An increase in the pump price is in line with current realities. This

will affect the attainment of single digit inflation rate

There are certain risk factors to the attainment of single digit inflation rate.


FSDH Research 35

10.0 The FGN Medium-Term Expenditure Framework 2018 - 2020: The 2018-2020 Medium -Term Expenditure Framework (MTEF) and the Fiscal Strategy

Paper (FSP) that the Federal Government of Nigeria (FGN) released on 20 October, 2017

will focus on some areas which we believe are critical in raising the revenue generating

capacity of the Nigerian economy. The MTEF/FSP forms the basis on which the FGN’s

yearly budgets are developed.

The major focus of the 2018-2020 MTEF/FSP is to achieve the following:

Broaden revenue receipts by identifying and plugging revenue leakages

Improve the efficiency and quality of capital spending

Place greater emphasis on critical infrastructure

Rationalise recurrent expenditure and

Fiscal consolidation to maintain the fiscal deficit below 3% of the GDP

FSDH Research’s analysis of the data that the International Monetary Fund (IMF) released

shows that Nigeria recorded the lowest average revenue to GDP ratio 11% between 2010

and 2016 among some selected countries. Some of the reasons for the low performance

are:

Revenue leakages; weak infrastructure and institutions

Inadequate structures to unlock revenue from agriculture, which is the largest

contributor to the country’s GDP

Overreliance on one product (crude oil) as the source of revenue.

Some of the effects of this situation are widespread poverty and income inequality; and

unsustainably high debt service to revenue. Thus, concerted polices and efforts are

required to address these challenges in order to develop the Nigerian economy.

Nigeria has low revenue to GDP

ratio

11%18% 19% 22% 24%

27% 27% 28%31% 31% 33% 36% 36% 37%

60%

0%

10%

20%

30%

40%

50%

60%

70%Ratio of Government Revenue to GDP (2010A - 2016A) -

Average

Source: IMF


FSDH Research 36

The MTEF projects a benchmark crude oil price of US$45 per barrel for 2018 (US$44.5 in

2017 budget); crude oil production estimate of 2.3mbd (2.2mbd in 2017); and an average

exchange rate of N305/US$ same as in 2017. It projects a GDP growth rate at 3.5% in

2018. The MTEF expects inflation rate to end the year 2018 at 12.42% lower than 15.74%

for 2017.

Based on these assumptions, estimated aggregate revenue for the FGN for 2018 is

N6.61trn, 30% higher than N5.08trn approved in the 2017 budget. The oil revenue is

projected to contribute N2.44trn. Non-oil revenues (Companies Income Tax, Value Added

Tax, Customs and Excise Duties, and Federation Account Levies) are estimated at

N1.39trn; Independent Revenue: N847.95bn; Recoveries: N512.44bn; and Others

(including mining): N1.42trn.

The proposed expenditure for 2018 is N8.61trn, 15.74% increase over 2017 of

N7.44trn. Adjusting the proposed expenditure by the projected inflation rate to end the

year, it represents a marginal growth in real terms. The aggregate expenditure comprises:

Statutory Transfers: N456.46bn; Debt Service: N2.01trn; Sinking Fund: N220bn; Recurrent

Expenditure: N3.14trn; Special Intervention Programme: N350bn and Capital Expenditure

of N2.43trn. This fiscal plan will result in a deficit of N2trn for 2018, which is about 1.77%

of GDP.

Table 21: FGN Medium-Term Expenditure Framework 2018 - 2020:

Indicators 2016A 2017B 2018P 2019P 2020P

Oil Production (mbd) 1.82 2.2 2.3 2.4 2.5

Oil Price Benchmark (US$) 42.09 44.5 45.0 50.0 52.0

Exchange Rate (N/US$) 305 305 305 305 305

Inflation Rate 18.55% 15.74% 12.42% 13.39% 9.90%

GDP Growth Rate 1.58% 1.50% 3.50% 4.50% 7.00%

Fiscal Deficit to GDP 2.34% 2.18% 1.77% 2.08% 1.67%

Debt Service to Revenue 47% 32.73% 30.48% 36.53% 37.47%

Deficit to FGN Revenue 81.81% 46.34% 30.35% 40.95% 32.96%

Source: Budget Office of the Federation (BOF). A: Actual, B: Budget, P: Projected

The MTEF expects inflation rate

to end the year 2018 at 12.42%

lower than 15.37% for 2017.

Adjusting the proposed

expenditure by the projected

inflation rate to end the year, it

represents a marginal growth in

real term.

The ratio of the proposed fiscal

deficit in 2018 to GDP is 1.77%.


FSDH Research 37

FSDH Research notes that the expected average oil production is aggressive, while

the expected average exchange rate is conservative. In addition, the expected capital

expenditure of about N7.22trn between 2018 and 2020 is not sufficient to lift the economy

from the current infrastructure deficit. FSDH Research reiterates that a functional

infrastructure is critical for the economy to generate revenue and since government is

constrained by funds to address this, it is imperative to develop other constructive and

innovative ways to fund the infrastructure. The rough estimate of the infrastructure

expenditure gap in Nigeria at the moment is about N30trn.

10.2 Implications:

We expect the CBN to adopt an accommodative monetary policy stance going

forward

We expect the yields on the NTBs to trend downwards

The yields on the FGN bonds may increase to the region of 15%

There may be improvements in the fiscal position of the FGN if crude oil price and

production are sustained.

2.362.95 2.65

2.25

5.085.65

6.336.83

7.44

8.608.98 9.08

1.67%

1.50%

1.70%

1.90%

2.10%

2.30%

2.50%

2.70%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2017B 2018P 2019P 2020P

2017B-2020P MTEF Estimates - N'trn

Deficit Revenue Expenditure Deficit-to-GDP

2.2

2.3

2.4

2.5

44.5

45

50 52

2.00

2.10

2.20

2.30

2.40

2.50

2.60

40

42

44

46

48

50

52

54

2017B 2018P 2019P 2020P

Estimates of Crude Oil Parameters (2017B-2018P)

Oil Output (mbd) Oil Price Benchmark (US$)

FSDH Research notes that the

expected average oil production

is aggressive, while the

expected average exchange

rate is conservative.

Source: Nigerian Budget Office


FSDH Research 38

11.0 Interest Rate: The yields in the fixed income securities remained high between Jan – May 2017

reflecting the risk inherent in the economy when it was in recession. However, the

yields dropped from June through December 2017 reflecting the improvement in the

macroeconomic environment.

FSDH Research observed the highest drop on the yield on 364-Day NTB. The drop in the

yield was also higher than the drop in the inflation rate during the year. Thus the real yield

was higher on the 364-Day NTB in January 2017 than the December 2017.

The Nigerian Interbank Offered Rates (NIBOR) declined across all the tenors to close the

year 2017. The average NIBOR on the 30-Day, 90-Day and 180-Day decreased by 0.70%,

1.15% and 3.21% respectively. The decrease was as a result of the relative availability of

liquidity in the system.

The CBN maintained the Monetary Policy Rate (MPR) at 14% throughout the year

and retained the symmetric corridor of -5% and +2% around the MPR. It also retained

the CRR at 22.50%; and maintained the Liquidity Ratio (LR) at 30%. In April 2017, the CBN

introduced the Investors’ and Exporters’ foreign exchange window, this initiative inspired

confidence from the foreign investors leading to an increase in foreign capital inflows.

Table 22: Yields Vs Inflation Rate - 2017

NTBs Yields vs. Inflation Rate

Average January Average December Change RY* January RY* December

91-Day NTB 14.45% 13.45% (1.00%) (4.26%) (2.45%)

182-Day NTB 19.02% 16.42% (2.60%) 0.31% 0.52%

364-Day NTB 22.95% 18.46% (4.49%) 4.24% 2.56%

Inflation Rate 18.72% 15.90%

FGN Bonds Yields vs. Inflation Rate

Average January Average December Change RY* January RY* December

16.00% FGN Jun 2019 16.27% 14.49% (1.78%) (2.45%) (1.41%)

16.39% FGN Jan 2022 16.08% 14.14% (1.94%) (2.64%) (1.76%)

10.00% FGN Jul 2030 16.26% 14.25% (2.01%) (2.46%) (1.65%)

30-Day NIBOR 16.95% 16.25% (0.70%) (1.77%) 0.35%

90-Day NIBOR 18.61% 17.46% (1.15%) (0.11%) 1.56%

180-Day NIBOR 22.34% 19.14% (3.21%) 3.63% 3.23%

*RY: Real Yield. Sources: NBS, FMDQ, FSDH Research

The NIBOR declined across all

the tenors to close the year 2017.

FSDH Research observed the highest drop on the yield on

364-Day NTB.


FSDH Research 39

The average NIBOR in 2017 was higher than what was recorded in 2016. The average

NIBOR in 2017 stood at 26.40%, 18.31%, 20.50% and 22.78% for overnight, 30-Day, 90-

Day and 180-Day respectively. In 2016, the average NIBOR stood at 12.32%, 12.89%,

14.69% and 16.51%, respectively.

Although the yields in the fixed income dropped from June 2017 through December, the

average yields on the Nigerian Government Treasury Bills (NTBs) were higher in 2017 than

2016. The 91-Day, 180-Day and 364-Day NTB were 13.93%, 18.49% and 21.93% in 2017

compared with 10.94%, 13.66% and 16.73% respectively in 2016. The average yields in

2017 on the 7-year, 10-year and 20-year FGN Bond stood at 15.91%, 15.72% and 15.76%

respectively, compared with 13.30%, 13.73% and 14.04% respectively in 2016.

FSDH Research expects the Monetary Policy Committee (MPC) of the CBN to

commence monetary policy easing in early 2018. The MPC may achieve this via an

adjustment to the asymmetric corridor around the MPR or reduce the CRR. The

monetary policy easing will stimulate lending to the real sector of the economy

which will boost GDP growth.

The major drivers of interest rates and yields in 2018 would be:

The inflation rate – actual and expectation

Fiscal deficit financing

Realignment of the debt profile in favour of foreign debt

Realignment of the debt profile in favour of long tenored debt

Expectation of favourable oil price and production

Fiscal cautions

Electioneering considerations.

Bond Market:

o FSDH Research believes that the average yield on the FGN Bond will be lower in

2018 than in 2017, the yields should increase in the first half of the year 2018. The

yield should drop in the second half of the year when inflation rate drops to single

digit all things being equal.

o We expect more activities in the corporate bond market and commercial papers in

2018 because of the drop in the yield on the NTBs.

FSDH Research expects the MPC

of the CBN to commence monetary

policy easing in early 2018.

FSDH Research believes that the

average yield on the FGN Bond will

be lower in 2018 than in 2017.


FSDH Research 40

Treasury Bills (TBs):

o FSDH Research expects the average yields on the NTBs to drop lower in 2018

than 2017. Our expectations is that the yield will drop below the current levels as

shown on the table below.

o The following factors will be the major drivers of yields in 2018:

Expected drop in inflation rate

The FGN’s strategy to issue longer dated bond against the short dated

The plans to increase the issue of foreign debt

Foreign currency stability.

Fixed Deposits:

o We also expect the fixed deposit rate to drop in line with drop in the NTB yield.

Our forecast monthly average interest rate on the 90-Day Fixed Deposit, FGN Bonds and

the yields on the Treasury Bills are presented on the tables 23, 24 and 25 below.

Table 24: FGN Bond Yields – Monthly Average Actual vs Forecast

2017 - Actual 2018 - Forecast

Month Jul-21 Mar-27 Apr-37 Jul-21 Mar-27 Apr-37

Jan-A 16.42% N/A N/A 13.40% 13.43% 13.33%

Feb 16.38% N/A N/A 13.16% 13.66% 14.16%

Mar 16.12% 15.90% N/A 14.61% 14.81% 14.91%

Apr 16.19% 15.97% 16.12%

14.67% 14.82% 15.02%

May 16.36% 16.27% 16.10% 15.43% 15.33% 15.53%

Jun 16.35% 16.23% 15.98% 14.44% 14.34% 14.54%

Jul 16.27% 16.23% 16.16% 13.84% 13.84% 14.04%

Aug 16.51% 16.54% 16.56% 13.36% 13.36% 13.56%

Sep 16.34% 16.31% 16.25% 13.18% 13.18% 13.38%

Oct 15.01% 15.02% 14.87% 13.25% 13.25% 13.45%

Nov 14.96% 14.95% 14.65% 13.04% 13.04% 13.24%

Dec 14.06% 14.11% 13.92% 13.34% 13.34% 13.54%

Average 15.91% 15.75% 15.62% 13.81% 13.87% 14.06% Sources: FMDQ, FSDH Research A – Actual, N/A – not yet traded

Table 23: 90-Day Fixed Deposit Rates Forecasts - 2018

Month JanA-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

Rate 14.00% 13.79% 13.59% 13.14% 13.08% 13.04% 12.44% 11.96% 11.78% 11.55% 11.34% 11.64%

Source: FSDH Research, A - Actual

Expectation of lower inflation rate,

FGN’s strategy to issue longer

dated bond and plans to issue

foreign debt will lower the yields on

NTBs.


FSDH Research 41

.

Our forecast yearly average yields on the treasury bills and the FGN Bond are presented

on the table below:

We note that the interest rate and the yields on the tables 23, 24, 25 and 26 above are

based on the inflation rate without the adjustment for a hike in PMS pump price and

electricity tariff for the periods. If the PMS pump price and electricity tariff increase, the

inflation rate forecast will increase and this will increase yields in the market.

Table 25: Treasury Bill Yields – Monthly Average Actual vs. Forecast

2017 - Actual 2018 - forecast

91day 182day 364day

91day 182day 364day

Jan-A 14.45% 19.02% 22.95%

12.72% 14.86% 16.33%

Feb 14.23% 18.81% 22.69%

12.59% 14.63% 16.25%

Mar 14.08% 18.81% 22.81%

12.39% 14.48% 15.11%

Apr 14.05% 18.94% 23.23%

11.94% 13.67% 14.17%

May 13.97% 18.79% 23.02%

11.88% 12.83% 12.93%

Jun 13.97% 19.05% 20.81%

11.84% 12.44% 12.74%

Jul 13.93% 19.11% 22.80%

11.24% 11.84% 12.64%

Aug 13.82% 19.02% 22.73%

10.76% 11.36% 12.16%

Sep 13.65% 18.67% 21.02%

10.58% 11.18% 11.98%

Oct 13.62% 16.68% 18.56%

10.35% 10.95% 11.75%

Nov 13.45% 16.42% 18.46%

10.14% 10.74% 11.54%

Dec* 13.45% 16.42% 18.46%

10.44% 11.04% 11.84%

Average 13.89% 18.31% 21.46% 11.40% 12.50% 13.29% Sources: FMDQ, FSDH Research *No NTB auctions in December 2017, the yields here are for November 2017, A - Actual

Table 26: Yearly Average Interest Rates Forecast (2018 – 2022)

Year Average Inflation 91 NTB 182 NTB 364 NTB

5yr FGN Yields

10yr FGN Yields

20yr FGN Yields

Prime Lending

Rate

90 -Day Deposit

Rate

2018F 10.62% 11.40% 12.50% 13.29% 13.81% 13.87% 14.06% 20.85% 12.60%

2019F 9.03% 9.88% 10.03% 11.83% 11.93% 12.53% 12.98% 19.32% 11.08%

2020F 9.05% 9.55% 10.05% 11.85% 11.95% 12.55% 13.00% 18.99% 10.75%

2021F 9.01% 9.51% 10.01% 11.81% 11.91% 12.51% 12.96% 18.96% 10.71%

2022F 8.98% 9.48% 9.98% 11.78% 11.88% 12.48% 12.93% 18.92% 10.68%

Source: FSDH Research Analysis

If the PMS pump price and

electricity tariff increase, the

inflation rate forecast will increase

and this will increase yields in the

market.


FSDH Research 42

Our forecast

yearly average

12.0 Equity Market:

12.1 The Secondary Market:

The improving macroeconomic environment and the policy of the CBN to improve

liquidity in the FX market had positive impacts on the equity market in 2017. The NSE

ASI closed 2017 at 38,243.19 points, representing an appreciation of 42.3% (a gain of

41.98% in US$). The following stocks recorded the highest return in terms of capital

appreciation in 2017: Dangote Sugar (227%), International Breweries (195%), Fidelity

Bank (193%), Fidson Healthcare (189%) and Dangote Flour Mills (186%). Similarly, the

market capitalization gained by 47.18% (a gain of 46.85% in US$) to close the year 2017

at N13.61trn (US$44.50bn).

12.2 Equity Market Drivers in 2017

The increase in the price of crude oil

The increase in Nigeria’s crude oil production

The Nigerian economy’s exit from recession

The introduction of the Investors’ and Exporters’ (I&E) Foreign Exchange window

Stability in the foreign exchange market

The drop in the yields on fixed income securities

Growth in the external reserves

Improved corporate earnings.

The improving macroeconomic environment and the policy of the CBN to improve liquidity in the FX market had positive impacts on the equity market in 2017.

-3.12% -2.72%

0.74% 0.95%

14.52%12.27%

8.23%

-0.95%-0.18%

3.50% 3.45%0.79%

42.30%

-4.00%

6.00%

16.00%

26.00%

36.00%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

Monthly NSE ASI Change 2017

Source: The NSE


FSDH Research 43

12.3 Outlook for 2018

The outlook of the equity market remains positive in 2018 as FSDH Research expects

the macroeconomic environment in Nigeria to strengthen further. We expect a strong

rally in the first half of the year 2018. The quarterly analysis of the equity market in the last

seven years shows that it appreciated consistently in Q2. We attribute the appreciation in

Q2 to the release of the Full Year earnings and corporate actions during the period.

Looking ahead into 2018, we believe the following factors will drive the market:

Increase in crude oil price at the international market and increase in local

production

The expected drop in the yields on fixed income securities leading to portfolio

realignment towards the equity market

Improvements in the external position of the country through increase in external

trades and capital inflows

Increase in the external reserves providing further stability for the foreign

exchange market

Improved corporate earnings and actions

Increased participation of the foreign portfolio investors

Table 27: Quarterly Equity Market Trend Analysis (2011-2017) – NSE ASI Analysis

NSE ASI 2011 2012 2013 2014 2015 2016 2017

Q1 -0.60% -0.38% 19.44% -6.25% -8.40% -11.65% -5.05%

Q2 1.46% 4.59% 7.84% 9.64% 5.39% 16.96% 29.79%

Q3 -18.44% 20.43% 1.16% -3.00% -6.69% -4.27% 7.01%

Q4 1.76% 7.95% 12.97% -15.90% -8.25% -5.16% 7.91%

FY -16.31% 35.45% 47.19% -16.14% -17.36% -6.17% 42.30% Sources: NSE and FSDH Research Analysis,

The outlook of the equity market

remains positive in 2018 as FSDH

Research expects the

macroeconomic environment in

Nigeria to strengthen further.


FSDH Research 44

12.4 Sectoral Performance and Outlook:

The banking sector recorded the highest performance in 2017 followed by consumer

goods.

12.4.1 Banking:

The NSE Banking Index recorded the highest appreciation in 2017, growing by

73.32%.The improvements in the price of crude oil and production had a positive impact

on the loans extended to the oil and gas sector. The stability in the foreign exchange also

had a positive impact on the operations of the companies in the sector. Analysts and

investors see this positive developments for growth in future earnings and corporate

actions. FSDH Research expects the continued improvement in the macroeconomic

environment to boost the performance of the banking sector in 2018. We see investment

opportunities for the tier two banks in the sector.

12.4.2 Consumer Goods:

The improvements in consumer purchasing power and the stability in the foreign exchange

market in 2017 had positive impacts on the consumer goods sector. Despite the increased

supply and stability in the foreign exchange market, companies continue to substitute

imported inputs for local inputs where available. FSDH Research expects that as consumer

purchasing power grows, the consumer goods sector will grow in 2018. FSDH Research

expects the improvements in the macroeconomic environment and the growth in the equity

markets to have positive impacts for consumers and firms income in 2018. This should

help to stimulate effective demand for consumer goods. Consequently, firms should

expand production leading to increased profit and corporate actions for investors.

5.8%10.4%

23.8%

37.0%

73.3%

0.0%

20.0%

40.0%

60.0%

80.0%

NSE Oil and Gas NSE Insurance NSE IndustrialGoods

NSE ConsumerGoods

NSE Banking

NSE Sectoral Indices Performance in 2017

The NSE Banking Index recorded

the highest appreciation in 2017,

growing by 73.32%.

The improvements in consumer

purchasing power and the stability

in the foreign exchange market in

2017 had positive impacts on the

consumer goods sector.

Source: The NSE


FSDH Research 45

12.4.3 Industrial Goods:

The FGN’s drive to bridge the infrastructure deficit through the involvement of the private

sector will be one of the major drivers for the industrial goods sector in 2018. This will

create investment opportunities in the sector. Specifically, we see opportunities in building

materials and construction.

12.4.4 Oil and Gas:

The increase in the price of crude oil and production boosted activities in the upstream oil

and gas industry. This should increase profitability and make the sector attractive to

investors. However, the current high crude oil price and the unwillingness of the FGN to

adjust the PMS pump price leading to a shortage of products may lower the profitability in

the sector. This will make this sector less attractive.

Looking at the developments in the international and in the domestic markets, we

expect the equity market to grow by 27.43% in 2018.

The FGN’s drive to bridge the

infrastructure deficit through the

involvement of the private sector

will be one of the major drivers for

the industrial goods sector in

2018.

Looking at the developments in

the international and in the

domestic markets, we expect the

equity market to grow by 27.43%

in 2018.


FSDH Research 46

A cursory look at some of the selected stock markets performance shows that all

stock markets we monitored appreciated in 2017. The GSE All-Share Index was the

best performing market at 52.72%, followed by the NSE All-Share Index with an

appreciation of 42.30%. The Shanghai Stock Exchange Composite Index recorded the

lowest appreciation of 6.56% during the period.

Table 28: Some Selected Stock Market Indices as at December 2017

North/Latin America YTD Change

Dow Jones Industrial Average 25.08%

S&P 500 Index 19.42%

NASDAQ Composite 28.24%

Brazil Stock Market Index (Ibovespa) 26.86%

Europe

Swiss Market Index 14.14%

FTSE 100 Index (UK) 7.63%

CAC 40 Index (France) 9.26%

DAX Index (Germany) Deutsche Boerse AG 12.51%

SMSI Index (Madrid, Spain) 7.59%

Africa

NSE All-Share Index 42.30%

FTSE/JSE All-Share Index (S/A) 17.47%

GSE All-Share Index (Ghana) 52.72%

Nairobi All-Share Index (Kenya) 28.39%

Asia/Pacific

NIKKEI 225 Index (Japan) 19.10%

BSE 30 Index (India) 27.91%

Shanghai Stock Exchange Composite Index 6.56%

Hang Seng Index (Hong Kong) 35.99%

Source: Financial Times

A cursory look at some of the

selected stock markets

performance shows that all stock

markets we monitored

appreciated in 2017.


FSDH Research 47

Looking at the outlook for 2018, we are proposing the following fund allocation model for

investors. This is very important as investors navigate through the challenging markets

ahead.

Table 30: Stock Watchlist

Stocks Max Entry Price 52 Week Low 52 Week High Target Price

Access Bank 11.25 5.93 12.97 15

Cadbury 13.95 7.41 17 17

Dangote Cement 238.5 149.26 273 300

Dangote Sugar 19.00 5.71 22.01 23

FBN Holdings 13 2.96 14.75 17

Fidelity Bank 3.02 0.77 3.99 3.7

Flour Mills 33 17.2 35.47 43

Lafarge Africa 50 34.5 63 60

Nestle Nigeria 1,450 570 1,556 1,856

Nigerian Breweries 135 112.82 193 165

PZ Cussons 21.6 11.04 27.3 27

Transcorp 1.93 0.69 2.55 2.5

United Bank for Africa 12.5 4.75 13 17.5

Zenith Bank 29 13.3 33.51 38

Source: NSE; FSDH Research

Table 29: Asset Allocation

Asset Class Fund Allocation

Equities 30%

Fund Placement 12.5%

Treasury Bills 12.5%

Real Estate Investment Trust (REIT) 5%

Bonds 20%

Collective Investment Schemes 15%

Total 100%



FSDH Research 48

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are expected to make their own investment decisions without undue reliance on any information or

opinions contained herein. The opinions contained in the report should not be interpreted as an offer

to sell, or a solicitation of any offer to buy any investment. FSDH Merchant Bank Limited may invest

substantially in securities of companies using information contained herein and may also perform or

seek to perform investment services for companies mentioned herein. Whilst every care has been

taken in preparing this document, no responsibility or liability is accepted by any member of the

FSDH Merchant Bank Limited for actions taken as a result of information provided in this publication.

Table 31: Summary of Forecast (2018 - 2022)

Economic Indicators 2017A 2018F 2019F 2020F 2021F 2022F

Nominal GDP (Ntrn)* 120.19 140.33 163.35 190.45 221.87 258.51

Real GDP (N'bn)* 68.61 70.79 73.68 77.40 81.62 85.99

Real GDP Growth Rate* 1.01% 3.16% 4.09% 5.05% 5.45% 5.36%

Import (N'trn)* 95.23 10.09 10.35 10.55 10.71 10.82

Export (N'trn)* 13.39 15.91 17.53 18.98 20.76 22.61

Trade Balance (N'trn)* 3.87 5.82 7.18 8.43 10.05 11.79

Total Trade (N'trn)* 22.91 26.01 27.88 29.53 31.48 33.43

Public Debt (N'trn)* 20.75 23.96 26.46 28.91 30.94 32.48

Debt/GDP (%)* 17.26% 17.07% 16.20% 15.18% 13.94% 12.57%

Average Inflation (%) 16.55% 10.62% 9.03% 9.05% 9.01% 8.98%

91 NTB (%) 13.89% 11.40% 9.88% 9.55% 9.51% 9.48%

364 NTB (%) 21.46% 13.29% 11.83% 11.85% 11.81% 11.78%

5Yr FGN Yields (%) 17.85% 13.81% 11.93% 11.95% 11.91% 11.88%

Prime Lending Rate 22.89% 20.96% 19.32% 18.99% 18.96% 18.92%

90-day Deposit Rate 15.09% 12.60% 11.08% 10.75% 10.71% 10.68%

Exchange Rate (N/US$) – Lower Band

355.55 345 336.38 327.97 323.05 318.20

Exchange Rate (N/US$) – Upper Band

383.28 361 351.98 343.18 338.03 332.96

NSE 42.30% 27.43% 16.60% 25.32% 18.47% 17.72%

Sources: FSDH Research, NBS, DMO, CBN, FMDQ and NSE * - Estimate

http://www.fsdhgroup.com/

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