- Monetary Policy’ll Keep Economic Variables Neutral in 2019 – Sigma
To keep economic variables in a neutral state, monetary policy will be needed to deliver an economic policy that will respond to the developing external environment in 2019, according a report by Sigma Pensions.
The Chief Investment Officer, Sigma Pension, Mr Pabina Yinkere, stated this in a report on ‘Nigeria 2019 Outlook: Election downtime, tight monetary policy, drive subdued growth outlook’.
He stated, “The Nigerian economy faces another round of oil-induced pressure over 2019. However, focus is likely to be on the elections and less on economics. In a bid to keep economic variables in a neutral state, monetary policy will shoulder the burden of delivering an economic policy response to the developing external environment and will tilt towards a contractionary stance.
“We think fiscal policy response will likely be delayed until much later in the year, whichever way the elections go. Given likely foreign reservation towards naira assets in general, our investment strategy prioritises a focus on assets with high correlation to interest rates over most of 2019.”
After a period of strength, it stated that the rapid sell-off in crude oil in November and December 2018 amid a testy political climate was driving a cautious outlook regarding Nigeria’s macroeconomic environment in 2019.
“In our view, the investment landscape for the year will be shaped by relatively lower oil prices, the pace of monetary policy normalisation in developed markets; and the 2019 general elections in February.
For much of 2018, it added, Nigeria’s financial markets struggled under the weight of heightened political risk ahead of the 2019 polls.
Also, it added, a fresh concern over crude oil prices in a less accommodative global financial environment presented headwinds to the domestic investment landscape.
“In 2019, we note that Nigeria’s large dependence on crude oil for foreign exchange reserves and fiscal revenues, positions it poorly in a soft crude oil price environment, which we envisage over the year.
“The implications of a less supportive current account balance for key economic variables are central in our thoughts around the macroeconomy, policy responses and asset price movements.”
According to the report, there will be a less supportive oil price and external environment over 2019.
He stated, “The central point from our review of the global macroeconomic environment is that in contrast to 2018 when stronger oil prices underpinned a favourable external balance for Nigeria, the reverse is likely to be the case in 2019.
“We adopt a pessimistic view on oil amid a growing supply-demand imbalance reflecting a mix of rising US Shale oil production and subdued global economic growth and its implications for oil consumption.
“Accordingly, we think any OPEC rebalancing will struggle to clear a building over-supply picture and expect the benchmark Brent crude oil prices to average between $55-60/bbl (2018 average: $71.7/bbl). Given the large role of oil in Nigeria’s exports, our cynicism about oil prices feed through to a weaker view on the current account balance in 2019.
On the global front, he said, “We think US monetary policy will continue on the path of normalisation and envisage further rise in US bond yields curbing the quantum of foreign portfolio inflows to emerging/frontier markets.
“Overall, the balance of payments is likely to present headwinds to Nigeria’s economic performance in 2019 and in particular the exchange rate.”