In its 2019 economic outlook report titled “A Tale of Two Halves”, Coronation Research, a subsidiary of Coronation Asset Management Limited forecasts that the Nigerian economy in 2019 will largely be hinged on the performance of the oil.
“We forecast an average US$58.00 per barrel for 2019. An average much below this means the Central Bank of Nigeria will have to keep rates very high and could even challenge the Naira / US dollar exchange argument. An average much about US$60.00/bbl means the CBN will have confidence its reserve position and will be able to cut rates later in the year, in the fourth quarter, less likely in the third quarter” Guy Czatoryski, Head of Coronation Research said.
The current rate of N365.29/US$1, or close to it, is likely to prevail in 2019. The CBN’s policy is to defend the rate and with reserves at US$43.0bn, it is in a strong position to do so. “We think the CBN will supply US dollars to the FX markets at an average rate of US$500m per month during 2019. This is compatible with maintaining a strong reserve level” Czatoryski added.
The report suggests that if oil prices average US$58.00/bbl, then the CBN will want to keep interest rates high. It will do this through its open market operations (OMO). OMOs will be issued in a range of 17.00 percent to 19.00 percent and T-bill rates will be very close to this level during 2019.
In the international context of interest rates, Nigerian T-bill rates look competitive in the context of other emerging market rates – which is why the CBN is having success in attracting inflows of Foreign Portfolio Investment
However, if oil trades at substantially above US$60.00/bbl during 2019 then foreign investors in T-bills will be encouraged and the CBN might well be in a position to cut rates in Q4 2019, or even in Q3 2019
This could be helped by a downtrend in inflation. Inflation has proved stubborn and has trended at around 11.00 percent over the past few months. But if inflation trends, in 2019, towards the CBN’s target band of 6.00 percent to 9.00 percent, then it will help the CBN cut rates in order to stimulate the economy.
“We are agnostic on politics. However, there is some evidence that in the period after general elections (2011 and 2015) yields in the T-bill market tend to fall. This might help persuade the CBN to cut OMO rates later in the year” the report stated.
GDP growth is expected to be 2.25 percent in 2019, as a result of very weak consumer demand, and a lack of growth in government expenditure relative to the 2018 budget.
The report suggests banks are unlikely to post large gains in profits this year. They are unlikely to experience much loan growth, given the weak economy and the fact that they can benefit from high T-bill yields. On the other hand, bank stocks are cheap in historical terms. So, if interest rates come down later in the year and the market conditions improve, then there could be a sharp rally in bank stocks later in the year.
