Nigeria’s inflation risks keep investors on the sideline

Investors in Nigeria’s investment classes are remaining cautious as they anticipate a more hawkish stance by the monetary policy committee to combat the country's rising inflation. With inflation currently standing at over 33%, well above the 21.4% target, market sentiment remains subdued. Luke Ofojebe, the Head of Research and Portfolio Management at Zedcrest Wealth, recently discussed these economic challenges on CNBC Africa, shedding light on how investors are navigating the turbulent waters of the Nigerian market. Ofojebe highlighted the impact of inflation on investment decisions, emphasizing the shift towards the fixed income space due to the struggles in the equity market. Companies in high-risk sectors are experiencing declining profitability margins, driven by foreign exchange volatility and rising direct costs. As a result, investors are minimizing their exposure to equities and opting for fixed income instruments, albeit with a focus on shorter durations to mitigate inflation risks. The Central Bank of Nigeria (CBN) has taken significant steps to address inflation, raising the NPRC by over 500 basis points since the start of the year. However, the structural nature of inflation in Nigeria underscores the need for a multi-faceted approach involving both monetary and fiscal interventions. Ofojebe emphasized the importance of addressing food insecurity, a key driver of inflation, and the need for sustainable solutions beyond short-term imports. While short-term measures such as importing food may provide temporary relief, long-term strategies focused on enhancing food security and ramping up oil production are crucial for sustained inflation control. The uncertainty surrounding food security poses a challenge for the CBN's inflation management strategy. Ofojebe discussed various scenarios where persistent food inflation could test the central bank's hawkish stance. In the absence of significant improvements in food security, the CBN may face continued inflationary pressures that require a nuanced policy response. Looking ahead, Ofojebe outlined a cautious outlook for inflation over the next few months, citing ongoing challenges in the food and energy sectors. While inflation is expected to remain elevated in the short term, a potential slowdown is anticipated in the first half of next year due to base effects. The discussion with Ofojebe underscores the complex landscape that investors and policymakers alike must navigate in the face of persistent inflationary pressures and economic uncertainties in Nigeria. As stakeholders remain vigilant, the need for coordinated efforts to address structural issues and shore up market confidence becomes increasingly paramount.