As the micro and macroeconomic whirlwinds in Nigeria’s economic landscape continue to linger on, investment analysts at Bancorp Securities Limited, one of the investment research and consulting services firms in the country, have predicted that investor sentiment in the Nigerian Exchange (NGX) is likely to remain cautious this week and the near term.
The researchers, in the firm’s ‘Weekly Stock Recommendation: Oct 14 to Oct 18, 2024’ circulated to our correspondent on Monday, noted that the forecast was majorly hinged on the sectoral divergence evident as Oil & Gas and Banking attract interest, while Consumer Goods and Manufacturing face ongoing challenges from inflation and weak liquidity.
In addition, they maintained that Oil Market Impact on Nigeria Brent crude oil prices had experienced volatility, settling at $79 amid geopolitical tensions in the Middle East and Hurricane Milton’s effects on U.S. fuel demand.
According to them, despite a 0.4% drop, crude oil has surged over 10% since Iran’s missile attack on Israel, raising concerns about potential supply disruptions, adding that while China’s new policy to boost private sector growth offers a positive demand outlook, Nigeria’s oil-dependent economy remains vulnerable to global oil price fluctuations.
For instance, the experts stated that higher Brent crude oil prices could significantly boost Nigeria’s oil export earnings, which account for about 90% of FX earnings and 70% of government revenue, potentially adding $3.5 billion annually.
Based on this, they predicted that this increase may improve fiscal stability by reducing borrowing needs and enhancing external reserves, thereby strengthening the naira and curbing inflation.
On the negative side, the analysts stressed that Nigeria still faced significant challenges, including FX shortages and high inflation at 32.15%, due to limited oil production and a depreciating naira, hindering its ability to capitalize on rising oil prices.
The experts further clarified: “The country’s overreliance on oil revenues, coupled with social inequality and delayed economic diversification, threatens long-term fiscal stability and economic growth.
“Naira Depreciation and FX Market Pressures The naira depreciated by 4.06%, closing at N1,625.13 per US dollar due to ongoing FX supply shortages. Although Nigeria’s external reserves increased to $38.67 billion, FX liquidity remains constrained, widening the gap between official and parallel market rates. CBN interventions have eased some pressure, but analysts emphasize the need for export diversification to stabilize the naira and reduce reliance on hydrocarbons for foreign currency earnings”, they added.
On the cost-benefit analysis, the researchers noted that the depreciation of the naira can enhance Nigeria’s competitiveness in non-oil exports and increase oil revenues in local currency, potentially supporting economic diversification and bridging the budget deficit just as a weaker currency may attract foreign investment in various assets, further bolstering the FX market.
However, they lamented that the depreciation of the naira was driving inflation up to 32.15%, increasing costs for imported goods and straining purchasing power for many Nigerians living in poverty even as the widening disparities in the FX market and rising debt servicing costs continued to threaten fiscal stability, potentially leading to capital flight and further economic challenges.
On the capital market outlook, the analysts projected: “Given the foregoing, we expect the following in the near term: The Nigerian equities market outlook for the near term is shaped by inflationary pressures, naira depreciation, and oil price volatility. Higher oil prices are likely to benefit the Oil & Gas sector, while banking may see positive momentum due to recapitalization efforts. However, rising inflation (currently at 32.15%) and the weak naira continue to erode profitability for consumer goods and manufacturing companies, with high input costs and reduced consumer demand impacting margins.
“Foreign portfolio investments may increase due to the depreciating naira offering attractive entry points, but long-term foreign direct investment (FDI) could be deterred by prolonged naira instability.
“Investor sentiment is likely to remain cautious, with sectoral divergence evident as Oil & Gas and Banking attract interest, while Consumer Goods and Manufacturing face ongoing challenges from inflation and weak liquidity”, the experts added.
