Analysts expect slow growth to persist with pressures on reserves, prices

FSDH Merchant Bank has said that growth in 2020 is expected to remain slow with pressure on the reserves and prices.

The company said in its Macro-Economic Outlook and Projections that although oil price is expected to remain stable in 2020, but reserves would face further pressure on the backdrop of higher Foreign Exchange (FX) demand triggered by imports and external payments obligations.

“We expect reserves to average US$ 37 billion in the year. Slower FPI inflows would persist particularly in the early parts of the year, given the low interest rate environment.

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“GDP growth is expected to average 2.5 percent in 2020 driven by higher consumer and government spending and improved lending to businesses as a result of the Loan-to-Deposit Ratio (LDR). From a sectoral point of view, Information and Communication Technology (ICT) and transport are expected to significantly expand, while operation of the Dangote Refinery will shore up manufacturing output in 2020.

“Inflation rate is expected to average 11.9 percent in 2020 driven by land border closer, value Added Tax (VAT) introduction, taxes and other charges,” it said.

It noted that the downside risks to economic growth would be tough operating environment, policy uncertainty and imposition of several taxes among others.

“Key challenges such as infrastructure deficits, power outages, high cost of finance and logistics cost will persist in 2020 and will result in higher production costs and in turn lead to higher prices in the year.

“The negative real interest rate achieved in November is a major concern for monetary authorities. The imminent inflationary pressure raises the likelihood of an increase in interest rates in 2020 to ensure positive real interest rate,” it added.

On naira devaluation, it said: “The CBN is expected to continue to defend the naira to ensure exchange rate stability. The CBN will continue its FX restriction policies to limit the amount of FX outflows in the year.

“There is no likelihood of a devaluation of the Naira unless reserves fall between US$25 and US$30 billion. Taking a cue from past experience, the last devaluation occurred when external reserves fell to about US$25 billion in 2016.”

The Report added that government’s aggressive revenue drive will result in an increase in non-oil revenue in 2020 to fund the budget, while revenues from taxes as well as other charges will improve overall revenue. However, revenue gaps due to slow collection rates will persist.

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