Despite weak Q1 data leading us to revise down our growth forecasts in 2017, we maintain a broadly constructive outlook on prospects for Nigeria's economic recovery over the coming quarters. In addition to increasing oil output, an improvement in FX liquidity will boost investor sentiment.
A robust increase in oil output will sustain Nigeria's return to a current account surplus over the coming quarters. This will support a gradual relaxation of capital controls imposed on the country's external position, boding well for foreign investment into the economy.
Slowing inflation and sluggish economic growth will encourage the Central Bank of Nigeria to adopt a more dovish stance when setting monetary policy over the coming quarters, prompting the beginning of the cutting cycle before year-end 2017. However, concerns over the normalisation of monetary policy in developed markets and high levels of credit growth will temper the pace of easing.
Nigeria's central bank will continue to tightly manage the naira through 2017, as the country's improving fundamentals indicate that downside pressure on the currency is beginning to decline.
However, the current multiple-rate FX regime is unsustainable beyond the short term, and will likely be consolidated into a single – more flexible – rate in 2018.
In the context of growing concerns in Nigeria's domestic media regarding the health of President Muhammadu Buhari, we take a closer look at the potential fallout should he leave office before his term ends in 2019. Past precedent and constitutional processes means that we would expect relatively little instability in the handover of power; however, north-south tensions could rise to the fore in the 2019 election as a result.