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The Eagle & The Bear?


As central bank drama goes, the Bank of England's recent efforts have arguably been trumped by its counterparts at the Central Bank of Nigeria. After abandoning the currency peg in June, the naira has fallen by around 55% against the USD compared to a post-referendum 10% "slump" in the sterling. Moreover, if shadow market rates are telling us anything then the naira has around another 50% to go before even coming close to fair value. Unsurprisingly, Nigeria's inflation rate has kept on leaping, up from an annual 9.6% in January to 16.5%, while the economy has gone into reverse with output contracting by 0.4% y/y. Q2 growth figures are due later this month.

It's hard to chirp against the argument that much of the nation's current wounds are self-inflicted. Although hydrocarbons account for only around 10% of economic activity, the 2-year plunge in oil prices has crunched public sector and external balances. Against this backdrop, it always seemed to be a huge gamble to restrict the importation of many staple items in order to ostensibly encourage domestic manufacturing and agricultural production but which predictably had the opposite impact. Using up precious FX and investor confidence reserves to maintain an unsustainable Naira fix also went against the 101 playbook.

So what is the near-term outlook? Despite the near constant official exhortations about economic diversification over the last two decades, it still hinges critically on oil.

On the quantities side, renewed friction in the Delta region in response to long-standing pollution and underdevelopment grievances has seen daily production dip by around 20% in 2016H1 compared to the same period in 2015. Similar disruption under the previous government was softened by cash handouts and political capital, both of which are in much shorter supply this time around.

Prices looked relatively rosy around a month or so ago with Brent Crude rising above $50/barrel. Since then, it has slipped, also by around 20%, into bear territory on the back of higher-than-expected global inventories, signs of an incipient bounce in US shale production, and USD strength. Rumours of a September Opec meeting notwithstanding, the next few weeks are likely to see even further softness with the onset of the autumn refinery maintenance period.

Fortunately, the underlying fundamentals still point to an improved demand-supply balance with a return to $50 by the end of the year rising to around $70 by 2017Q4. Assuming that the recent bout of CBN tightening action and further FX loosening are able to increase formal USD supply, reverse capital outflows and restore confidence, then the promised fiscal expansion should underpin a pickup in GDP growth during H2 to around 0.3% this year and 2.5% in 2017. Admittedly, this embodies far more faith in the authorities than the IMF whose July WEO update envisages outturns of -1.8% and 1.1% respectively. In any case, the ongoing adjustment in the Naira and rapid pass-through means that inflation is set to keep rising before peaking at close to 20% next year before levelling off in 2017.