FX regime changes and the elimination of the longstanding subsidy on Petroleum Motor Spirit (PMS) were the catalysts that initiated a series of events propelling the Nigerian equities market to an impressive 45.90% gain by the year's close. This marked the fourth consecutive year of positive returns for the market. Despite the strong macroeconomic headwinds that characterized the year, the reforms renewed investor confidence and resulted in massive revaluation gains for many banks. The positive momentum was further fueled by several corporate actions and expectations of renewed foreign inflows. The market has begun 2024 on a positive note and we believe the momentum can be sustained especially if the broader economy starts to realize gains from the implemented reforms.
Generally, our 2024 economic forecasts paint a slightly better picture relative to 2023. We forecast GDP growth of 3.37%, up from 2.55% in 2023, driven by both the oil and non-oil sectors as we expect the oil sector to exit a 4-year recession in 2024. We anticipate an enhancement in oil production to reach 1.56 million barrels per day (mbpd) in 2024, driven by the government's proactive initiatives to reactivate inactive oil terminals and revive dormant oil wells. Despite the significant devaluation of the Naira in June 2023, we expect headwinds to the Naira to persist as foreign inflows remain uninspiring, and demand pressure remains heightened, but we do not expect as steep a devaluation as seen in 2023. We forecast the exchange rate at the I&E window will depreciate to N1016.20/US$ from a 2023 closing rate of 907.11/US$ but we expect the wide parallel market premium to persist.
The Central Bank of Nigeria (CBN) maintained its hawkish stance throughout 2023, implementing a policy rate hike of 225 basis points, bringing it to 18.75%. The CBN governor has emphasized the necessity of a continued hawkish approach due to the prevailing inflation trajectory. Consequently, we anticipate a potential increase of 100-200 basis points in the first half of 2024, followed by a decision to hold the rate steady in the second half of the year. In 2024, we expect inflation to average 22.22%, slightly lower than 24.52% in 2023. Our disinflation expectation largely emanates from a favorable base effect and the decelerating impact of energy and currency pressures. In terms of the external sector, the current account is projected to remain positive, settling at 0.80% of GDP in 2024.
In 2024, Nigeria appears poised to realize its goal of achieving self-sufficiency in the local oil refining sector. This optimism stems from the commencement of operations at the Dangote refinery, the successful refurbishment of the Port Harcourt refinery, and the completion of several modular refineries. While the attainment of self-sufficiency may not lead to a substantial reduction in the cost of petrol, However, sufficient local refining capacity and potential for export should enhance the availability of the product and have a positive impact on foreign exchange (FX) liquidity.
News of attacks on some villages in Plateau state during the Christmas festivities and kidnappings at the start of the new year suggest the high level of insecurity in the country will remain a theme in 2024 and continue to have severe negative implications for investment flows and food supply. From nomadic Fulani Herdsmen killings to Boko Haram/ISWAP insurgency, to kidnappings and IPOB-related activities in the southeast regions, it is likely that Nigeria will grapple with problems of insecurity in 2024.
The disposable income of the average Nigerian has faced substantial pressure in recent years, exacerbated by the subsidy removal and currency depreciation implemented last year. Anticipated hikes in utility costs, particularly in electricity and fuel, are expected to further constrain the consumer wallet in 2024. This scenario is likely to impact the earnings of consumer goods companies. While the private sector implemented wage increases in 2023, and the government is set to follow suit in 2024, these expected raises may not sufficiently alleviate the challenges posed by the rising cost of living. The increases in wages are anticipated to be overshadowed by the broader and more significant surge in living costs.
In recent years, foreign investors have displayed a lack of enthusiasm towards Nigerian equities, and we do not anticipate a significant resurgence in their participation this year. This sentiment is likely to persist until there is a notable improvement in clarity and transparency within the foreign exchange market. As of November 2023, total market transactions amounted to N3.2 trillion, with a substantial 88.8% attributed to domestic investors, leaving foreign investors with only 11.2% contribution. However, we acknowledge the potential for a shift in this trend towards the latter part of the second half of the year. This could be prompted by positive outcomes from the Tinubu reforms and a reduction in foreign exchange tensions.
We see the equities market heading for another positive close in 2024 but we struggle to see the NSE’s 2024 returns matching those of 2023. Pricier equity valuations (particularly for the more liquid stocks) will most likely undermine the attractiveness of quoted stocks and potentially limit upside movements in the index. Valuations of many stocks are stretched in our view, given 2023’s steep price appreciations. Nevertheless, we believe the market has yet to fully recognise the mid to long term earnings potential of Access (Buy), GTCO (Buy), Zenith (Buy), UBA (Buy), MTNN (Buy), Guinness (Buy), Okomu (Buy), Flourmills (Buy) and Nestle (Buy).
For the fixed income market, in 2024, our expectation is for rates to trend higher, as the CBN governor has guided that the current inflation trajectory requires further tightening. In addition, the liquidity narrative also strengthens our prognosis. For context, save for March 2024, when we are expecting bond maturities of c.N720.0 billion, liquidity will likely remain low in the year, fanning higher yields. To wit, we expect the 365-day NTBs and the 10-year Bond market yield to settle at 10.5% and 16.0% by year-end.
