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Nigeria Economic Outlook Top 10 themes for 2019

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2Nigeria: Economic Outlook

Global Economic conditions

The World Bank forecasts global

growth to slow to 2.9% in 2019 from

initial growth forecast of 3.5%


Global growth is forecast to plateau, while some major nations including the US and China are on track to see marginally slower rates of growth

Risks on the horizon from rising protectionism as the US imposes import tariffs on goods, as well as the rise of populist politicians in other countries

Besides the risks from Brexit, the US-China trade war and fears of the US Fed hiking rates, several other risks linger on the sidelines for the World economy

Geopolitical risks could also resurface, including an escalation of tensions of the Middle East

A surge or sudden drop in the price of crude could pose problems for the World economy

The World Bank predicts growth in Sub-Saharan Africa to grow to 3.4%, due to improved investment in large economies and continued robust growth in non-resource intensive countries

Global economic outlook in 2019



Top 10 Economies in Africa in 2018

Egypt 8.2%US$1.13 trillion

Ethiopia 8.2%US$199.3 billion

Kenya 5.9%US$163.3 billion

Algeria2.5%US$630.5 billion

Nigeria1.9%

US$1.121 trillion

South Africa1.7%US$765.5 billion

Angola-0.7%

US$197.9 billion

5Nigeria: Economic Outlook * Real GDP growth (2018); Nominal GDP (2017)

* Nominal GDP based on PPP


Nigeria not among the fastest growing economies in Sub-Saharan Africa (SSA) by percentage growth in GDP The largest economies in Sub-Saharan Africa offer opportunities for business growth, particularly when considering an expansion into new regions

Country GDP growth rate Africa Rank World Rank

Ethiopia 10.3% 7th 67th

Ghana 8.1% 11th 86th

Cote d’Ivoire 7.7% 13th 91st

Tanzania 7.1% 10th 80th

Senegal 7.2% 21st 117th

Djibouti 7.0% 47th 174th


Source: World Bank, PwC analysis

Top 10 Themes for Nigeria in 2019

Theme 1 Diaspora remittances continue to sustain the economy

Theme 2 Economic growth sluggish characterised by slow recovery

Theme 3 Government’s fiscal deficit expands above budget

Theme 4 Lackluster policy implementation impacts FDI & FPI flows

Theme 5 Unemployment continues to trend upward

Theme 6 Oil prices still low coupled with production cuts

Theme 7 Inflation increases marginally, driven mainly by base effects

Theme 8 Petrol prices may be re-adjusted from N145/litre

Theme 9 Uncertainty around population and population growth rate

Theme 10 The exchange rate depreciates in the latter part of the year


Diaspora remittances continues to support the economy…

14,640

16,932

18,014

19,203

18,368

19,745

20,617

20,543

20,797

20,806

21,158

19,679

22,001

25,081

-10%

-5%

0%

5%

10%

15%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e

Nigeria: Migrant remittance inflows (2005 - 2018), US$ million

Migrant remittance inflows (US$ million) Growth rate (%)

• This figure translates to 83%

of the Federal Government

budget in 2018 and 11 times

the FDI flows in the same

period

• The Nigerian diaspora sent an

estimated US$25 billion in

remittances to the country in

2018, representing 6.1% of

GDP

• Nigeria’s migrant remittance

inflows was also 7 times

larger than the net official

development assistance

(foreign aid) received in

2017 of US$3.359 billion


Source: KNOMAD, PwC analysis

Leading countries worldwide by value of migrant remittance outflows comprise the United States, Switzerland, Germany, Russia and China…

Economic growth still sluggish characterized by lackluster recovery

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2015 2016 2017 2018 2019

Real GDP growth (%)

-1.6%

0.8%

• Depressed oil demand

coupled with production

supply cuts and price

fluctuations will impact the

economy’s growth trajectory

• Real GDP growth expected

to grow slightly to 2.5%y/y

on moderate improvements

in net exports and domestic

demand

• The investment climate will

also be dampened in the

short-term by uncertainty

usually associated with the

pre and post-election

cycles in the country



Source: NBS, PwC Estimates

2.7%

1.9%

2.5%

Government’s fiscal deficit expands above budget


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2015 2016 2017 2018e 2019f

Fiscal deficit (% of GDP)

• Consequently, debt service

to revenue expands higher

than the projected 31% in

the budget

• Fiscal deficit widens by 79%

to NGN4.55 trillion (3% of

GDP). We expect that the

deficit will be funded by an

increased issuance in the

domestic bond market

• We expect revenues to

underperform budget by

c.27% as a shortfall in oil

supply offsets the impact of

oil price growth scenarios


Source: Budget Office, IMF, PwC Analysis

Election uncertainty coupled with lackluster execution of policy reforms impacts FPI and FDI inflows


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Foreign Investment, 2015 - Q3'2018 (USD'million)

FPI FDI

4,694

3,064

4,449

3,503

2,200

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2014 2015 2016 2017 2018

FDI flows (US$ 'millions)

Source: NBS, PwC estimatesSource : UNCTAD, PwC analysis

PwC estimates that Nigeria would need an investment rate of at least 26% of GDP to achieve a growth of 7%

Global FDI flows fell by 19% in 2018. However, 2018 FDI flows to Africa increased by 6% from US$38 bn to US$40 bn. South Africa grew by 446%; Egypt by

7%. Nigeria, on the other hand, fell by 36% (to US$2.2 bn) and was overtaken by Ghana with US$3.3 bn

Key Considerations

12

3

In 2018 we predicted a moderate increase in FPI and a slowdown in by HY’18, driven by uncertainty ahead of the elections. We expect FPI growth in HY’19 to remain low and lower than pre-2018 level

We expect FDI flows to be dampened by lackluster implementation of policy reforms

Key risks to foreign investment include • Declining interest rate differentials as

advanced economies continue to tighten policy rates

• Political instability following the 2019 elections

• Unfavourable investment climate• Broad macroeconomic instability


Uncertainty about the 2019 election outcomes, policy implementation slowdown & sell-offs by foreign investors in 2018 expected to slow growth in the stock market in HY’ 2019 amidst monetary tightening by members of the frontier markets


Source : CBN

Overall, key drivers for the market from HY’2019 include: commodity prices, exchange rate movement and stability; and inflation rate

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

NSE ASI

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Frontier Markets All Share Index


Unemployment rate continues to trend upward even as the youth population expands rapidly with more than half of the population under the age of 30


Source : NBS, PwC analysis

0%

5%

10%

15%

20%

25%

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2010 2011 2012 2013 2014 2015 2016 2017 2018e

Unemployment rate (%) and total number of unemployed

36.50%

24.40%

16.10% 16.50%

19.10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

15 to 24 25 to 34 35 to 44 45 to 54 55 to 64

Breakdown of unemployment by age group


Oil prices still low coupled with production cuts


Source: World Bank

Rising oil prices will not be sustained in the long term as oil production increases globally and demandstagnates.

• Fluctuating prices leave

Nigeria’s oil-driven economy

vulnerable to external shocks

• The oil production curve

continues to slope downward

and below the 2 mbpd

average target set by the

central government

• OPEC has lowered Nigeria’s

oil production level to 1.685

mbpd. We expect this cut

coupled with fluctuations in oil

price and potential supply

disruptions to impact the 2019

budget implementation

1,796

1,653

1,705

1,750

62

64

66

68

70

72

74

76

78

1,550

1,600

1,650

1,700

1,750

1,800

1,850

Q1 2018 Q2 2018 Q3 2018 Q4 2018

Nigeria, crude oil production vs price (quarterly)

Oil production ('000 bpd) Oil price (US$ per barrel)


PMS Deregulation scenarios: petrol prices may be re-adjusted from NGN145/litre despite subsidy…


Exchange rate

(NGN/USD)

Oil price (USD/bbl.)

50 60 70 80

285 144 164 184 205

325 160 183 206 229

365 176 202 228 254

405 192 221 250 278

• The grey area in the table are the possible retail prices of petrol per litre, given

changes in exchange rate and oil price

• Note: The estimates are based on PPPRA’s previous petrol pricing template as at

May 2016, margins are held constant

How much could Nigerians pay for petrol?

Estimated retail price of PMS under a full deregulation scenario

Current administered price

Fuel subsidy

• NNPC continues to be the

sole importer of petrol.

Intermittent scarcity in the

supply of petrol persists.

• Impact on headline inflation

is marginal. Estimate

remains at 13% y/y in

2019, in line with our

projection

Scenario A

Full Deregulation

• The exchange rate

assumption is marked to

NAFEX; petrol prices

increase by at least 57%

• Marketers resume

importation of petrol, with

improved supply

• Headline inflation

accelerates to 15.0% y/y in

2019, 210 bps above our

baseline estimate

Scenario B

Source: PPPRA, PwC estimates


Inflation increases marginally, driven mainly by base effects


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2015 2016 2017 2018e 2019f

Inflation rate (yearly average)

• Headline inflation

accelerates from 2018

estimate of 11.2% by an

average of 2 basis points to

13% y/y, driven by base

effects

• Food inflation rises to

15.0% y/y - a reflection of

food security challenges

due to climate change and

conflicts in the major food-

producing regions

• Core inflation grows to

11%y/y due to moderately

stronger consumer demand

(increase in minimum wage

bill) and higher transport

costs (average increase in

the price of PMS)


Source: NBS, PwC Estimates

Exchange rate depreciates in the latter part of 2019


• Early 2019, we expect the

forex market to remain

largely stable, however

volatility in the oil market

may cause depreciation that

could range from about

N390 to N415 per US$ by

year-end 2019

• In the bid to sustain its policy

of exchange rate stability

amidst sustained demand

pressures, the Central Bank

of Nigeria (CBN) increased

dollar injections into the

foreign exchange market by

87 percent to $40 billion in

2018.

0

100

200

300

400

500

600

Exchange rate

Interbank (NGN/USD) Parallel Market (NGN/USD) I&E Window (NGN/USD)

Source: CBN


Uncertainty around population and population growth rate


95,269,988

122,352,009

158,578,261

206,152,701

264,067,527

333,172,092

398,507,704

-

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

1990 2000 2010 2020 2030 2040 2050

Population growth in Nigeria (1990 - 2050)

Source: UN, PwC analysis

• Nigeria is projected to add no

fewer than 200 million people to

its current population of 196

million between 2018 and 2050.

The country is also expected to

surpass the United States,

currently ranked the 3rd most

populous in the world by 2050

• The last population census in

Nigeria was held in 2006, over a

decade ago. Assessing Nigeria’s

current growth rate necessitates

the occurrence of another major

census to gauge the actual growth

rate and enable critical strategic

decisions to be made regarding

population-related issues such as

housing, food supply,

employment, among others


Recent history suggests that election cycles are associated with decreased external reserves and increased foreign exchange demand


Source: CBN, PwC Analysis

-

10

20

30

40

50

60

Ja

n-1

0

Ju

n-1

0

No

v-1

0

Ap

r-11

Sep

-11

Feb

-12

Ju

l-12

Dec

-12

Ma

y-1

3

Oct

-13

Ma

r-14

Au

g-1

4

Ja

n-1

5

Ju

n-1

5

No

v-1

5

External Reserves (USD’ billion)

A sharp 24% decline between January 2010 and May 2011

A sharp 30% decline between January 2014 and May 2015

140

150

160

170

180

190

200

Ja

n-1

0

Ma

y-1

0

Sep

-10

Ja

n-1

1

Ma

y-1

1

Sep

-11

Ja

n-1

2

Ma

y-1

2

Sep

-12

Ja

n-1

3

Ma

y-1

3

Sep

-13

Ja

n-1

4

Ma

y-1

4

Sep

-14

Ja

n-1

5

Ma

y-1

5

Sep

-15

Interbank Rate (NGN/USD)

A mild 4% depreciation between January 2010 and May 2011

A significant 23% depreciation between January 2014 and May 2015

Note: The extent of depreciation in the exchange rate depends on the broad macro-economic environment during the election season


2019 Election season underway…three horse race…?


Source: INEC

*No of Parties:

91

Presidential elections:16 February 2019

What we know…

Three horse race?

Parties

?

All Progressives Congress

Peoples Democratic Party

Dark horse?

New political parties and alliances have

emerged to challenge the dominance of the

APC and PDP

• Zoning implies the sharing or rotation

of public office based on region,

ethnicity or religion aimed at reducing

domination or marginalization of a

group(s) of people

The zoning principle

Unwritten rule

• Reviewing election results from the past

2 presidential election cycles, we

observed a shift in the voting pattern of

voters in the South-West and the North-

Central states in the 2o15 elections

• The question is, which states will swing in

2019?

What does historical data tell us?

PwC Analysis

Which states will swing in 2019?

Niger

Niger

CPCMuhammadu Buhari

PDPGoodluck Jonathan

ACN Nuhu Ribadu

APCMuhammadu Buhari

PDPGoodluck Jonathan

2011 Presidential Election

2015 Presidential Election

Note: CPC and ACN merged into APC in 2013

Total number of registered voters as at August 15, 2018 = 84,004,084Source: NBS, PwC estimates


Emerging risks pose a threat to policy continuity, economic recovery and macro-economic growth, as well as socio-political stability


Risks Description Potential

impact

Likelihood of

occurrence

Time horizon

Lower oil prices Failure of OPEC members to comply with production cuts agreement and increasing shale production

Short to medium term

Slowdown in key

economies

Slowdown in economies with strong trade

relations with Nigeria, particularly China, the

UK , the US and India


Monetary policy

normalisation

Ongoing monetary policy normalisation in the

US could lead to a reversal of foreign capital

and restrict further flows


High inflation Election spending

Adjustment of petrol prices and power tariff


Low Medium High


Lower oil prices, disruptions to crude oil production, and political instability are the major near term risks


Risks Description Potential

impact

Likelihood of

occurrence

Time horizon

Oil production disruption Attacks on oil and gas facilities by militant

groups in the Niger Delta regionShort to medium term

Political risk/Heightened

insecurity

Election uncertainties could elevate political

tensions, and leadership succession could

hamper policy continuity

Continuous insurgency in the Northern region


Medium term

Low Medium High

PwC Analysis


A stable political environment key to sustaining Nigeria’s economic recovery


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2018e 2019f 2020f 2021f

Real GDP growth (%)

Scenario 1 Scenario 2 Scenario 3

Source: PwC estimates

Our AssumptionsOil price

(USD/bbl.)

Oil

Production

(mbpd)

Structural reforms

Scenario 1: Incumbent

returns to power60 1.7

Policy continuity with all the reform

policies intact and the economy

continues its recovery albeit at a

slow pace

Scenario 2: New

government emerges60 1.9

New policies are formulated or

potential re-adjustment to existing

policy with focus on deepening the

recovery of the economy

Scenario 3: Heightened

political risk60 1.4

Political tension accelerates in the

wake of the 2019 general elections,

negatively impacting policy

implementation with significant

security risks across parts of the

country


Uncertain post-election outcomes could accelerate political tensions and leadership succession could hamper policy continuity and the economy


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2017 2018e 2019f 2020f 2021f

Real GDP growth (%)

A mix of political and

security shocks in scenario

3 bring about a significant

decline in revenues

resulting in no growth

(zero percent) in 2019.


Abbreviations


APC All Progressives Congress

ACN Action Congress of Nigeria

BBl Barrel of Crude Oil

CBN Central Bank of Nigeria

CPC Congress for Progressive Change

FDI Foreign Direct Investment

FPI Foreign Portfolio Investment

GDP Gross Domestic Product

I&E Investors and Exporters Window

MPC Monetary Policy Committee

MPR Monetary Policy Rate

NAFEX Nigerian Autonomous Foreign Exchange Rate Fixing

NBS National Bureau of Statistics

NGN Nigerian Naira

NNPC Nigerian National Petroleum Corporation

OMO Open Market Operation

PDP People’s Democratic Party

PPPRA Petroleum Products Pricing Regulatory Agency

USD United States Dollar


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This proposal document contains information that is proprietary and confidential to PwC, and shall not be disclosed outside the recipient’s company or duplicated, used or disclosed in whole or in part by the recipient for any purpose other than

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Contacts


Omosomi Omomia

Senior Industry Associate

PwC Nigeria

[email protected]

Andrew S. Nevin

Partner & Chief Economist

PwC Nigeria

[email protected]

26

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