Low Interest Rate Environment Favours Public, Private Spending -Analysts
Godwin Emefiele - Governor, Central Bank of Nigeria

Low Interest Rate Environment Favours Public, Private Spending -Analysts

The shade of the Nigerian economy will stay under the monetary policy’s dovish stance for a long period, analysts have said, following low interest rate environment that has persisted.

In a report, Chapel Hill Denham said the apex bank pro-growth policy that ushered in low interest rate environment is favourable for public sector and private investment spending.

Analysts however indicated that this would be more apparent going forward into fiscal year 2021, especially following a large deficit funding.

Nigeria planned to finance its budget deficit for fiscal year with 50:50 local and foreign financing, translating to $6 billion potential Eurobond and other foreign financial demand.

In a new report, Chapel Hill Denham explained that the global economy is expected to enter a synchronised expansion phase in 2021.

Although the performance will differ across regions based on vaccine rollout plans and the capacity of government officials to stem the second infection wave, it added.

The firm hinted that on this basis, Asia is expected to recover faster, led by China, due to relatively lower infection rate, as well as the rollout of vaccines.

“We expect a similar V-shaped growth recovery in the SSA region, supported by positive knock-on impacts of the rebound in commodity prices, sustained fiscal expansion and dovish monetary policy”.

For Nigeria, analysts think the odds are in favour of the economy returning to growth phase and exiting the recession by Q2-2021.

It however noted that the second infection wave and recent restrictions are downside risks.

“As a result, we have downgraded our 2021 GDP growth estimate to +1.7% from 2.0%”, Chapel Hill Denham said in the report.

Explaining its prediction, the firm said outlook projected is based on three factors including low base effect will set in by Q2-2021.

It maintained that outlook for oil prices is positive, due to COVID-19 vaccine rollout and strong OPEC cut compliance.

“Under our baseline scenario, we expect average oil production and prices to rise mildly to 1.83mb/d (below 1.86mb/d budget target) and US$55/b in 2021E from 1.82mb/d and US$43/b in 2020”, analysts said.

The firm said the CBN’s dovish monetary policy bias is favourable for public sector and private investment spending, and this should be more apparent going forward.

The report added that inflationary pressures are expected to remain elevated in 2021.

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In the projection, analysts see headline inflation crossing 16% year on year in Q1-2021, particularly in the first half of the year.

This expectation was attributed to further adjustments in fuel prices, subsisting supply chain challenges, and further FX devaluation.

However, the firm is expecting inflation rate to moderate in the second half of 2021 as high base effect sets in, and the FX market begins to stabilise on higher crude oil prices.

“We expect headline inflation rate to average 15.4% year on year in 2021 from 13.2% in 2020, but expect the pressures to subside to 13% by year-end”, Chapel Hill Denham.

Analysts at the firm also added that they expect the current account deficit to narrow to 2.3% of GDP in 2021 from 3.5% of GDP in 2020.

It anchored this projection on FX restrictions by the CBN, improvement in oil prices and FX rate devaluation.

“We expect the trade account to return to a mild surplus, due to a combination of demand management and higher crude oil export.

“The services sector deficit will, however, widen as the global economy gradually reopens”, it added.

It was however noted that weak FX remains a challenge, due to low portfolio inflows and lack of central bank support.

“At the minimum, we expect the CBN to weaken the Investors & Exporters Window intervention rate past N425 in 2021, while FX rate may eventually settle within the range of N440-470/US$.

“With GDP growth likely to swing positive in 2021 amid macroeconomic instability, the stars may begin to align for the CBN to redirect its policy goals from growth, towards its primary mandates of price and exchange rate stability.

“We have penciled down a 100 basis points rate hike in 2021 and expect a relatively hawkish balance sheet policy”, Chapel Hill Denham said.

For the equities market in 2021, analysts’ base case expectation is to deliver an 18.5% return.

“Our base case view is that the equities market will continue to offer better returns than the fixed income market.

“This, in addition to attractive dividend yields, will support a further increase in market valuation.

“However, we highlight that the macroeconomic outlook and the prospect for improved yields in the fixed income market may limit investors’ interest in the equities market”, the firm stated.

Low Interest Rate Environment Favours Public, Private Spending -Analysts