New VAT regime, upward inflationary pressures are key economic headwinds – Cordros Research

Cordros Research has declared that the new Value Added Tax, VAT regime and persistent upward inflationary pressure are key economic headwinds confronting the Nigerian economy.

The analysts at Cordros Research stated this in its Weekly Economic and Market Report released weekend.

The analysts in the report stated: “We were not surprised that production (-2.2 points) and inventory (-1.7 points) levels grew at slower rates. For us, the institution of the new VAT regime (+50.0 percent to 7.5 prcent), together with persistent upward inflationary pressure (December: 11.98 percent Year on Year, Y o Y ) are key economic headwinds going forward. Nonetheless, the combination of low-interest-rate environment and higher minimum wage should limit the impact, thus, leaving the composite Purchasing Manager Index, PMI in the expansionary territory.”

Continuing the analysts said: “ In line with our expectations, economic activities in Nigeria retraced slightly in January 2020, relative to the festive-induced demand acceleration witnessed in December 2019. Precisely, while the composite PMI remained resolute in the expansionary region (59.4 points), it grew at a slower pace (-2.1 points) when compared to the prior month. The moderation stemmed from both the manufacturing PMI (-1.6 points to 59.2) and non-manufacturing PMI (-2.5 points to 59.6). With the moderation in the new orders (-1.8 points) and employment levels (-0.7 points.)”

“The wave of capital repatriation by foreign investors and the resultant drawdown on Nigeria’s foreign reserves has been sustained into early 2020. However, relative to December 2019, the downtrend has been far less steep. That said, our currency stability concerns have shifted from the sell-offs of naira assets to crude oil prices.

The recent outbreak of the deadly Coronavirus continues to send panic through global markets, as the Brent price slumped by 20.2 percent Year to Date, YTD to USD54.93 per barrel, pb (6 February 2019). For us, an extended period and/or a worsening of the virus outbreak should force the Central Bank of Nigeria, CBN to rethink its Foreign Exchange, FX management strategy.

Thus, we adopted the worst-case scenario of USD50 per barrel. Based on this, FX reserves would decline to USD30.36 billion by first half, H1-20. Farther out, the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira will force the CBN to throw in the towel in our opinion” The report noted.

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