The Nigerian Senate recently announced the passage of the new National Minimum Wage Bill, increasing the monthly minimum wage from N7,500 (US$49) to N18,000 ($117), representing a 140% increase.

However, there have been concerns over the effect this might have on inflation. Recently, the National Bureau of Statistics (NBS) indicated that Nigeria’s inflation rate increased to 12.1% year-on-year in January 2011, up from 11.8% in December 2010.

Generally, inflationary pressures are expected to mount in most African states on the back of rising global food and energy prices. On Monday, Kenya and Uganda reported a surge in their February inflation on the back of soaring food prices. The World Cereals Price Index (which tracks the price of wheat, maize and rice) rose by 43% in January 2011.

In a trading economy like Nigeria’s, where the trading sector accounts for 18% of GDP, such a wage increase can translate to demand pull inflation. In addition, this may lead to increased government non-capital expenditure, which may also fuel inflation and challenge price stability.

On the positive side, however, is the effect this would have on disposable incomes. This, we believe will fuel consumer spending and is likely to be supportive of consumer, food, beverages, and brewing sectors.

A GDP growth rate of between 7% and 8% is expected in Nigeria, versus the 5% to 5.8% average that the IMF forecasts for most Sub-Saharan African countries.

It also appears that there is strong demand expectation given the massive investments undertaken by multinational groups. Some of the recent investments undertaken by groups such as Nestle Nigeria, Guinness Nigeria, Nigerian Breweries and Dangote Cement, also indicate rising demand expectations.

According to Reuters, brewer SABMiller plans to spend about $100 million to build a new brewery in Nigeria. The new brewery will be built on a greenfield site at Onitsha in southeast Nigeria. Nigeria’s annual beer market of around 18 million hl is second only to South Africa on the continent and is dominated by Heineken, with around a 70% market share, and Diageo’s Guinness business with over 20%, and SABMiller with less than 5%.

On the basis of an anticipated surge in consumption levels in Nigeria, we forecast the Nigerian Stock Exchange to deliver a 30% return in 2011. We recommend exposure in consumer plays such as Nigerian Breweries, Nigerian Flour Mills, PZ Cussons and UACN. Other picks include Lafarge Wapco and banking stocks such as First Bank, UBA and Zenith Bank.

Article written by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.