GDP Growth Down, Inflation Up. What Next?
Inflation data released by the Nigerian Bureau of Statistics show a steady increase since the start of the year. That was expected because of falling oil prices and consequent devaluation of the Naira. In addition to rising inflation, which stood at 9.30% in August 2015, GDP growth has also been declining - it is strange seeing GDP growth at 2.35% by the second quarter of 2015.
So inflation rising and GDP growth falling... what next?
Over the past few months, I have been of the opinion that the Nigerian stock market is not a good place to be, and I still maintain that stance. I already have a personal portfolio that is almost 85% skewed towards fixed income, and it has paid off with the high rates in the economy.
With people losing jobs and less money to spend coupled with our high import dependency and devaluation of the Naira, the inflation we are facing at the moment is largely cost-push, and that is a good thing. Stagflation is not something any Central Banker wants to hear about but Nigeria is already tethering towards the brink, but we have the type of inflation that is easier to overlook in the quest for keeping GDP growth up.
Yields had risen through the roof recently because of the implementation of the Treasury Single Account. This was almost worsened by JP Morgan notice to remove Nigeria from its Emerging Market Bond Index, but it looked priced in already as average bond yields stabilized just below the 16% mark.
What I expect is the CBN to ease monetary policy; this ease may come in form of a bond buying program or reduction in cash reserve ratio to put money in the hands of Nigerians. Unfortunately, we don't seem to have any kind of fiscal policy in place to support the CBN - there is currently no minister of finance, and it is hard to know what moves the Federal Government is making. The CBN has been operating in isolation without any kind of guidance from the Government.
With all the uncertainty surrounding the Nigerian economy, it is best to keep investment funds in fixed income instruments.