Despite initial optimism surrounding growth projections for 2023, the first half of the year witnessed significant disruptions to global growth recovery driven by volatility in food and energy prices, the imposition of trade barriers, supply chain disruptions stemming from regional conflicts, and the labour market imbalances leading to slower economic activity. These developments have introduced a heightened sense of uncertainty in the global economic landscape, impacting trade, investment, and consumer confidence. Considering current realities, the IMF in its April 2023 World Economic Outlook (WEO) report downgraded its global growth projection for the year by 60 bps to 2.8% (2022: 3.4%).
On the domestic scene, macroeconomic performance in H1:2023 was largely shaped by the negative fallout of the ill-implemented Naira redesigned policy, election jitters, negative pass-through from the external economy, and lately, the radical reforms of the new government. Against our expectation of a 2.9% y/y GDP growth in Q1, actual growth printed lower at 2.4%, no thanks to the economic disruption caused by the Naira scarcity and pull-back on investment actions by businesses due to pre-election jitters. We estimated a potential output loss of c.₦6.5tn in this period, which in addition to other pressure points in Q2 have derailed projected growth for H1:2023 by no less than 0.34ppt.
Meanwhile, price pressure worsened in H1:2023 due jointly to the self- inflicted pains of the poor Naira redesign policy implementation, spillover effect of sizeable farm harvest loss in 2022 (NAERLS estimate: ₦700.00bn), counter-intuitive monetary policies, and the asynchronous timing of the PMS subsidy removal and palliative rollouts. Yet, we are optimistic that the bold reform moves of President Bola Ahmed Tinubu FX unification, roll back of trade barriers, and removal of consumption subsidies if properly implemented, should set the economy on the path to renewed hope. On the balance of analysis, we have revised our base case y/y GDP growth, average inflation, and official exchange rates for 2023 to 3.17%, 25.34%, and ₦673.40/$1.00, respectively.
In the equities market, we anticipated a modest return of 7.3% in 2023 to be driven by cautious trading amidst political transition and fiscal & monetary policy reforms. However, at the end of H1:2023, the equities market posted a gain of 19.0%, outperforming by 11.7ppts. The positive H1:2023 performance was inspired by a late market rally in May and June, following positive market reaction to the market reforms of the new administration. Notably, FPI inflows increased by 338.7% to ₦37.2bn (the highest since June 2022) in May 2023. Consequently, we have revised our scenario-based projections for the equities market to reflect current market dynamics. On a base case, we envisage a 37.3% return in 2023.
In the fixed-income market, the first half of the year was marked by bearish pressure on account of hawkish signaling, unabating inflationary pressure, and sizable domestic issuances. Despite these, sparks of fiscal and monetary policy reforms induced a late rally in the FGN bond market, driving prices above 2022 year-end. Against this backdrop, yields on benchmark FGN bonds moderated 15bps to close H1:2023 at an average of 13.2% while benchmark NT-bills rose 92bps to 6.2%. In all, local sovereign bonds gained 14.5% annualized in the period. Going forward, the big question is when or if the financial market would feel the pains of reforms, like the real sector.
Considering worsening macroeconomic indices, especially persistent fiscal imbalances, and price & currency instability, we consider domestic bonds over- valued at current levels. Yet, the FG and the monetary authority seemingly align on goals to expand money supply and force interest rates low. Factually, the economy needs to rein-in inflation, disincentivise dollarization, and lure offshore capital. So, it would make sense for interest rates and the yield environment to stay elevated or go higher.
Consequently, the outlook for H2 comes down to whether the bias for low-interest rates (which favours its borrowing cost) and CBN's playbook can defy economic realities. In our view, there is little reason to believe both fiscal and monetary authorities can hold on to the current path for much longer. Hence our expectation of a bearish market, with the benchmark bond yields and NT-bills to reach 13.3% and 6.4% respectively by year-end.
