Nigeria | NGX

Given the heightened volatility across financial markets, driven by geopolitical developments and monetary policy responses to inflation and currency pressures, we believe FY’23 presents a new opportunity for Nigerian banks to reimagine or consolidate go-to-market strategies. Even as banks have demonstrated resilience in light of post-pandemic externalities, we see renewed threats from stricter regulatory environments, political risks, and nimbler fintech competition. Against this backdrop, we assess our coverage banks’ exposures and readiness to mitigate these risks through their diversification footprints and by embracing digital technologies for scale.

In line with our prognosis (see here), price increases and volume expansions were critical to revenue growth in 2022, with our consumer goods coverage companies growing by an average of 29.6% over the period. We expect this top-line momentum to taper slightly on the cumulative impact of higher inflation, weaker naira, and tighter monetary policy. However, we are broadly positive on margins as the combined impact of higher prices and energy cost moderation will likely mask pressures from higher raw material prices and finance costs. Drags from finance costs are likely to reflect the impact of higher yields, while input cost pressures may be stoked by passthrough from currency weakness.

For Nigeria, the growth outlook could be materially influenced by the sustained traction in tech-led services and an impending paradigm shift in the oil sector. To wit, the imminent onboarding of the Dangote Refinery could translate into a key upside risk, helping to unlock new policy frontiers and abate perennial FX woes. Nonetheless, the picture is beclouded by sociopolitical and policy uncertainties stoked by the coming February general elections. Would the emergent president seek to bite the bullet and make strategically important decisions despite the risks of near-term backlash? Or would he be swayed by the need to endear himself to the populace with unsustainable subsidies and other social interventions? Against this backdrop, this report assumes that 2023 will be mostly transitional and gradual, with strategic priorities of the new administration likely to be more pronounced in 2024.

At the start of the year, the global economy was projected to extend the strong post-pandemic recovery (2021: 6.1%) with a baseline growth rate of 3.6% in 2022. However, this bullish outlook was dented by the multifaceted negative spillovers from the ongoing war in Ukraine and aggressive monetary policy tightening by global systemic central banks targeted at curbing the runaway inflation. On the back of these developments, the IMF in its October 2022 World Economic Outlook (WEO) report downgraded its global growth projection for 2022 to 3.2% - its third downgrade since the war in Ukraine began in February.

Q4’22 commenced with heightened recessionary angst, as intensified geopolitical risks sustained energy-induced inflationary pressures and provided fodder for increased monetary hawkishness. Nonetheless, akin to July 2022, equity investors’ sentiments were lifted by expectations for a slowdown in the pace of monetary tightening and improvement in global supply chain (aided by progress in the execution of the Russia-Ukraine grain deal).

Over 15 states in Nigeria are battling excessive flooding, with National Emergency Management Agency (NEMA) estimating that more than 600,000 persons have been displaced while over 637,000 hectares of cropland are submerged. The crisis has been attributed to the release of excess water from the Lagdo Dam in Cameroon, which cascaded into Nigeria through River Benue and its tributaries, thereby inundating communities. In our view, the ongoing challenge Is a downside risk to agric GDP growth and upside risk to inflation.