Written by the Research Unit, PanAfrican Capital Holdings Limited
Global economic growth is moderating as the recovery in trade and manufacturing activities loses steam, trade tension among major economies remained elevated. Trade dispute combined with concerns about weakening global growth prospects weigh on investors’ confidence and contributed to global equity decline. Therefore, global economic growth is estimated at 3.7% in 2018 and 3.5% was projected for 2019 to be driven by the emerging markets. The risk to the global economic outlook is; rising trade tension and policy uncertainty, uncertainty over Brexit negotiation, geopolitical risk and the direction of the commodity prices.
The recovery in sub-Saharan Africa continues, although at a slow pace. The sluggish recovery was due to weaknesses in the region’s largest economies – Nigeria, South Africa and Angola. The region faced a more difficult external environment in 2018 as the global growth moderated and financing conditions tightened. Commodity prices diverged, while oil prices were higher, the prices of metals and agricultural products dampened by weakening global demand.
In Nigeria, oil production fell partly due to pipeline closure while non-oil sector was affected by weak consumer demand and the security challenges in the northern part of the country.
In Angola, oil production contracted due to under-investment and maturing oil fields. The region is estimated to grow at 2.9% in 2018; this is expected to strengthen to 3.5% in 2019. The risks to the outlook for the region are both external and domestic. On the external front are; slow growth in China and Euro Area, elevated trade tensions, normalization of monetary policy in advance economies, negative commodities price shock and high sovereign debt. On the domestic front, the risks to the outlook are; political uncertainty in countries holding elections in 2019 – Nigeria, Malawi, Mozambique and South Africa. Other downside risks are insurgencies and armed conflict, adverse weather condition and rising financial sector stress.
Furthermore, the price of crude oil was volatile in 2018 due to supply concerns which saw Brent Crude Oil traded at an average price of US$69.54 with the highest and the lowest price of US$84.82 and US$51.02 per barrel in the year respectively. Also, global demand and supply averaged 98.8mbpd and 98.3mbpd accordingly. The supply concerns that affected the prices of crude oil in 2018 are; the U.S. sanctions against Iran, OPEC actions and reactions, the collapse of production in Venezuela and unexpected outages in Canada and disruptions in Libya. From the foregoing, crude oil prices is projected to average US$60 per barrel in 2019.
The Nigerian economy recorded real GDP growth rate of 2.38% in the fourth quarter of 2018 and 1.93% for the full year, driven by both the oil sector and the non-oil sector. Real growth rate of 2.2% is projected for 2019 to be driven by both the oil and the non-oil sector with estimated average crude oil production of 2.00 mbpd. The downside risk to the outlook are; unsuccessful election, crude oil price shock and production shock, banking sector vulnerability, elevated trade tension, security challenges and weak consumer spending.
The expected policy responses to the downside risk are; increased borrowing, subsidy removal – partially or fully, increase in VAT on some items, renewed interest in privatization, concessioning and further devaluation.
The policies and events that are expected to shape 2019 are classified into external factors and domestic factors. External factors are; the direction of the U.S. interest rates, trade tension, projected low prices of crude oil. While domestic factors are; the outcome of the 2019 general election, probability of change in the leadership of the CBN, the relationship between the Executive and the Legislature post-election, expected delay in the passage of the 2019 budget, review of minimum wage, banking sector vulnerability and the review of items that cannot access foreign exchange.