Inflation Note – Inflation to edge higher through the year

Nigeria’s September 2018 inflation came in 5bps higher at 11.28% YoY compared to 11.23% YoY recorded in August. This increase was lower than our forecast of 11.43% YoY and lower than Bloomberg’s consensus forecasts of 11.50% YoY. The inflation figure marks the second consecutive increase in headline inflation, following an 18-month disinflation trend dating back to January 2017. The uptick in inflation was primarily as a result of rising food prices (food inflation represents 51% of the overall consumer price index). While headline inflation inched higher in September, core inflation dipped to record a 31-month low of 9.84% YoY (August: 10.02% YoY). On a month-on-month basis, headline inflation fell by 21bps to print at 0.84% MoM (August: 1.05% MoM), representing a third consecutive decrease.


Figure 1: YoY Inflation Trend                                                         Figure 2: MoM Inflation Trend  

Source: NBS


Food inflation slows MoM amid harvests

Food inflation declined on a month-on-month basis to record at 1.00% (August: 1.42% MoM). The slowdown in food inflation stemmed from higher than anticipated harvest on September as well as a fall in global food prices. Reports from Famine Emergency Early Warning System Network (FEWS NET) support that harvests of maize, green and yam came to market in September, thus narrowing the supply gap and easing upward pressure on prices. Across the globe, food prices reduced in September, evinced by the fall in the food price index reported by the Food and Agriculture Organization of the United Nations (FAO). The index dipped by 1.37% MoM and 7.40% YoY in September to read at 165.4 points. All sub-indices of the FAO food index, save the sugar index, declined on a month-on-month basis. This was largely due to the decline in the prices of cereals (Nigeria’s largest agricultural import) during the month. As harvest levels appear to be healthy despite the floods experienced in September, we expect a sustained slowdown in food price increases for the remainder of the year. However, this expectation is susceptible to a lagged effect from the flooding in September as well as upward pressure from electioneering activities.


Source: Food and Agricultural Organization of the United Nations


Descent in core inflation to halt in December

Core inflation maintained its downward trend in December declining by 18bps to 9.84% YoY (August: 10.02% YoY). The reduction was mainly driven by the lower inflation in clothing and footwear (declined by 17bps to 10.03% YoY), furnishings and household equipment (declined by 28bps to 9.79% YoY), transport (declined by 15 bps to 10.50% YoY) and miscellaneous goods (declined by 18bps to 9.85% YoY). The reduction in core inflation was recorded despite an uptick recorded in fuels and utility inflation. Notwithstanding, our forecasts indicate that the downward trend in core inflation should bottom out by November at the latest and begin to inch upwards from December as pre-election spending is expected to elevate price levels.

Monetary Policy Impact

Septembers’ inflation figure is expected to impact the decision of the Monetary Policy Committee (MPC) at the upcoming meeting. Policymakers are likely to hold rates constant, given the modest increase in headline inflation (below consensus expectations) alongside the continual decline in core inflation. Stripping out volatile prices (notably food prices), it suffices to mention that general price pressures are waning, evinced by the sustained downward trend in core inflation. This posits a strong argument for Godwin Emefiele and the other six members of the MPC to leave rates unchanged in their next meeting scheduled to hold in November.

Headline inflation to edge higher in coming months

We anticipate higher inflationary pressures through the year as pre-election activities intensify, following the recent conclusion of election primaries. Similarly, the implementation of the 2018 budget is expected to impact on price levels in the quarter. Meanwhile, the Nigeria Labour Congress and the federal government are yet to ink an agreement on a higher minimum wage. If implemented, we expect the impact on general price levels to trickle in after 2018. Nonetheless, Nigeria’s food price outlook looks improved as harvest produce is set to close the supply gap resulting from herdsmen-farmer clashes. Given our improved food price outlook, our October forecast has been revised downwards to 11.35% YoY and our average inflation forecast remains at 12.2% YoY.

Nigeria – Politics Update

Primaries concluded, stage set for electioneering
In our previous report “Navigating the Tide”, we highlighted that the 2019 general elections look set to be one of the most tightly contested since the return to democratic governance, especially as the opposing People’s Democratic Party (PDP) seeks to return to power after being defeated in the last general elections by the All Progressive Congress (APC). Recent political activities have culminated in the key parties adopting their candidates for the upcoming presidential elections. In this report, we provide an update on recent developments and reiterate our expectations.

Buhari and Atiku lead quest for the reins
President Muhammadu Buhari emerged as the flagbearer for the All Progressive Congress (APC) for the upcoming elections during the recent party conventions—a mere formality as President Buhari is the sole candidate for the party. In contrast, the People’s Democratic Party (PDP) had to endure a more rocky ride. Over 11 candidates participated in the party primaries, each pulling varying degree of political weight. However, it was former vice president Atiku Abubakar who prevailed, leaving notable names such as Aminu Tambuwal (current governor of Sokoto state), Bukola Saraki (current Senate president), Rabiu Kwankwanso (former governor of Kano state), amongst others, in his trail.

Fringe players unlikely to stir the waters
Other than the PDP and APC, there were other parties who also adopted their presidential candidates among whom are Obiageli Ezekwesili (Allied Congress Party of Nigeria – ACPN), Kingsley Moghalu (Young Progressive Party – YPP), Donald Duke (Social Democratic Party – SDP), Fela Durotoye (Alliance for New Nigeria – ANN), Omoyele Sowore (African Action Congress – AAC), Tope Fasau (Abundance Nigeria Renewal Party – ANRP) and Eunice Atuejide (National Interest Party – NIP).

In our previous report, we had highlighted the possibility of a coalition or a potential third contender that could rattle the current political power play. However, recent developments do not yet support this possibility. While there may be some reputable names listed above, we do not foresee any fierce challenge coming from any of the candidates, notably due to lack of significant grassroots spread. Instead, our assessment is that the upcoming presidential polls will be a two-horse race between the ruling APC and the opposition PDP, who are both more formidable in platform and geographical spread.

Our expectations have not changed
A lot of factors come into play going into the 2019 general elections. The APC is expected to retain most of their territory given their significantly stronger base than the PDP currently. Following the 2015 elections, the APC controls 24 states, while the PDP controls 11 states. Recent elections have also put Ekiti state (formerly under the control of the PDP) in the hands of the APC.
However, there may be a few surprises yet to pan out, notably with respect to the Middlebelt states which swung from the PDP in 2011 to the APC in 2015. We think that these states have the potential to swing either way in the upcoming general elections, given host communities dissatisfaction with the government’s handling of the Fulani herders-farmers clashes.

South East and South South states voted predominantly for the PDP during the last two presidential elections and it is widely expected to remain the same come 2019.

Figure 1: Geographical spread of key political parties

Risks to the incumbent
Notwithstanding our expectations, we believe that there are other key elements that can sway votes towards or away from the incumbent. We rate factors that can win votes for the ruling administration (APC) as positive, while those that can sway votes away as negative:

Upward review of the minimum wage – We expect that an upward review of minimum wage before the elections will portend favourably for the incumbent. space Positive
Speedy implementation of capital budget – Despite the late passage of the budget, we expect that a speedy implementation will enhance the confidence of the electorate in the current government. space Positive
Insecurity – Lingering concerns around Boko-Haram insurgency and the Fulani herders-farmers clashes can potentially weaken confidence in the current administration space Negative
Contagion impact of EM concerns – Interest rate hikes in the US and concerns around emerging market economies like Argentina and Turkey have accelerated capital outflows from the domestic economy, putting pressure on FX and the reserves. For context, the foreign reserve has lost 8.4% between May and October this year. While the central bank has resolutely defended the naira through a steady supply of FX, we envisage that further pressures could weaken the domestic economy and derail confidence in the current administration. space Negative


Table 1: 2019 polls – Likely outcome

Geopolitical zone Likely outcome
North East APC
North West APC
North Central SWING
South East PDP
South West APC
South South PDP


All in, we assess that a victory for the incumbent in the 2019 elections will be positive for policy continuity, especially with regards to the implementation of the Economic Recovery and Growth Plan (ERGP). We believe that the ERGP is robust in terms of possibilities for sustainable growth and development of the domestic economy and is a key pathway to ensuring stability. Notwithstanding, there are concerns such as the slow pace of infrastructure development and debt sustainability, amongst others. Please click here to access the ERGP document.

On the other hand, a 2019 victory for the opposition party holds positives for the economy, given that Atiku Abubakar elevates restructuring Nigeria as a panacea for accelerated economic growth. The former vice-president favours wealth creation from the federating units, rather than wealth distribution from the federal government. This would ensure true economic independence of states and better social and economic welfare for the masses, amongst others. Please click here to access Atiku Abubakar’s policy document, initially released in 2015 when he contested on the platform of the APC.




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