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.

Nigerian Capital Importation Q2 2017

Total capital imported in Q2’17 grew by 95.0% QoQ

According to the data released by the National Bureau of Statistics (NBS), total value of capital imported into Nigeria in Q2’17 grew substantially by 95.0% QoQ and 43.6% YoY to $1.8 billion from $908 million in Q1’17 and roughly $1billion million in Q2’16. Within the quarter, the month of May recorded the highest amount of capital importation at $616.5 million, followed by June ($612.6 million) and April ($563.3 million). Looking at capital importation by types, the main driver of the quarterly growth in capital imported was foreign portfolio investments (FPI), which grew by 145.7% QoQ to $770.5 million (Q1’17: $313.6 million) and contributed 43.0% to the aggregate total capital imported in Q2’17. Foreign portfolio investment in Q2’17 flowed mostly into equities instruments which accounted for 79.7% ($614 million) of FPI while money market and bond instruments accounted for 12.8% ($98.6 million) and 7.5% ($57.9 million) respectively. “Other investments” and foreign direct investment in Q2’17 stood at $747 million and $247 million – a 95.0% QoQ and 29.8% YoY growth, and contributed 15.3% and 41.7% respectively to total capital imported.


Figure 1: Total Capital Importation (Q1’16 – Q2’17)                                        Figure 2: Capital Importation by type (Q1’2016 – Q2’2017)

Source: NBS


Oil & Gas sector attracted the largest capital while Nigeria imported most of the capital from the United Kingdom

By sector, excluding shares, the Oil & Gas sector attracted the largest capital imported at $190.4 million, which represents an 88.4% QoQ growth and 10.6% contribution to the total. Telecommunications, servicing and production sectors also attracted sizeable capital during the quarter with respective contribution of 9.7%, 8.1%, and 7.9% to aggregate total capital imported. Lagos state continued to import the most capital into the country as it accounted for 97.1% ($1.74 billion) of total capital, followed by Akwa-Ibom ($34.1 million) and Abuja ($16.6 million). In Q2’17, Nigeria imported the most capital from the United Kingdom with a value of $696.7 million and contribution of 38.9% to the total. This was closely followed by United States, with a value of $287.8 million (16.1% contribution).


Investor and Exporter window the main contributory factor for growth in capital imported

We attribute the remarkable growth in total capital imported in Q2’17 to the introduction of the Investors and Exporters FX (IE) window in April, which was implemented to boost liquidity in the FX market as well as attract foreign investors who previously had concerns regarding timely repatriation of dividends and capital. The IE window also allows investors to trade the Naira at a market determined rate which encouraged participation of foreign portfolio investors during the quarter. We highlight that prior to the introduction of the IE window, capital imported in March stood at $243 million, as compared to an increase of 131% to $563 million in April. Given further improvement in transparency at the IE window (disclosure of daily volume on FMDQ and NAFEX rate Bloomberg) we expect sustained capital inflows for the rest of the year.