Year Ahead 2019
In Nigeria a forecast of oil prices is integral to foreign exchange and interest rate forecasts. Thanks to recently-realised calm in the oil futures market, derived in part from credible Saudi production cuts, we have some confidence in forecasting an average price (for Brent) of US$58.00/bbl in 2019.
If oil prices trend at US$58.00/bbl, or more, in 2019 we believe that foreign portfolio investors will find Naira fixed income instruments credible, and that the Central Bank of Nigeria (CBN) will supply no more than an average US$500m per month to the FX markets. Starting with FX reserves of US$43bn, the CBN would have few problems defending the N365.29/US$1 rate in 2019.
However, given our oil price outlook, the CBN is likely to continue its current interest rate policy in 2019, which is to offer risk-free Naira rates at levels attractive to foreign investors – 17.39% at the moment. The spread over domestic inflation (November: 11.28%) is sufficient, in our view. This points to a range of rates from 17.00%, to 19.00% if inflation spikes up around election time.
Possible interest rate cuts.
If oil prices trend substantially over US$60.00/bbl for more than a quarter in 2019, and the CBN’s FX reserves remain strong, interest rate cuts will be in the offing in Q4, we believe, or even in Q3. If inflation has by then trended down towards the CBN’s target of 6.00%-9.00%, these cuts could be deep.
General elections are due in February and early March, giving the CBN more reasons to remain cautious with rates in the first half of the year. One electoral outcome could bring a market-friendly administration and relaxation of exchange controls.