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A Tale of Two Halves”, Coronation Research

Coronation Research issues 2019 Economic Outlook for Nigeria, with ‘A Tale of Two Halves’
In its 2019 economic outlook report titled “A Tale of Two Halves”, Coronation Research – industry-leader and a subsidiary of Coronation Asset Management Limited–believes the narrative for the Nigerian economy in 2019is largely hinged around the performance of the oil.
Speaking on the report, Guy Czatoryski , Head of Coronation Research said: “We forecast an average US$58.00/bbl for 2019. An average much below this means the CBN 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 Q4, less likely Q3.
The current rate of N365.29/US$1, or close to it, is likely to prevail this year. 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.
If, as we think, the oil prices will average US$58.00/bbl this year, then we think the CBN will want to keep interest rates high. It will do this through its open market operations (OMO).  We think OMOs will be issued in a range of 17.00% to 19.00% and that T-bill rates will be very close to this level during 2019.
We look at Nigeria 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% over the past few months. But if inflation trends, in 2019, towards the CBN’s target band of 6.00% to 9.00%, 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.
According to the report, GDP growth is expected to be 2.25% in 2019, as a result of very weak consumer demand, and a lack of growth in government expenditure relative to the 2018 budget.
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.
Coronation Research is a subsidiary of Coronation Asset Management; a leading financial services company, licensed and regulated by the Securities and Exchange Commission of Nigeria.

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