Being an Analyst Note issued by Proshare Research on August 16^th  2022

Analysts Observe That Subsidy Accounts for 13% of Crude Oil Revenue

Aside from the heavy import bill for petroleum products which is taking a significant proportion of the country's crude oil revenue, the subsidy regime has been another leakage to the system in Nigeria. Within the first half of 2022, subsidies accounted for about 13% of the country's crude oil revenue (see table 1 below). Energy analysts noted that underproduction and rising crude oil prices are the primary drivers of the country's heavy subsidy bill. 

Table 1: Proportion of Subsidy in Crude Oil Revenue

Meanwhile, amidst the vast opportunities in Africa's oil and gas despite the global energy transition, McKinsey analysts have suggested that oil and gas potentials in Africa can be harnessed by a combination of decarbonizing operations, investment in low-carbon infrastructure, and investment in renewable energy. Proshare analysts expect that Africa will gain no support for its oil and gas development at COP27 later in the year due to the recent severity of climate change worldwide. However, with western nations reassessing their oil and gas investment positions, Analysts believe it is time for Africa to ally to develop the continent's fossil fuel projects, given the low severity of climate change and the high incidence of energy poverty. 

Nigeria's Inflation Soars to 19.64%; Analysts Identify Naira Weakness as Major Factor

According to the National Bureau of Statistics, Nigeria registered a headline inflation print of 19.64% in July. With Inflation rising 104bp higher than the June print and hitting a 17-year high, Proshare Analysts question the potency of monetary policy levers in dealing with the current inflation worries. Analysts believe that the recent surge in Inflation can be attributed to the significant drop recorded in the Naira in July. 

The core sub-index rose Y-o-Y by 16.26%, the highest core inflation data since January 2017, signalling long-term inflation concerns. Food prices rose by 22% Y-o-Y last month. On a month-on-month basis, all item inflation remained unchanged at 1.82%. In comparison, food price inflation dropped slightly to 2.04%, reflecting the moderation of food prices after the rise recorded in June on the early preparation for the 'Eid celebration (see chart 1 below). 

Chart 1: Nigeria's Headline and Food Inflation (%) (May 2021 – July 2022) 

Rising Fertilizer Prices Threaten to Push Sri Lanka into Food Crises.

Sri Lanka used to be self-sufficient in rice production but returned to the market last year to import about 149,000 tonnes of rice and has already placed contracts to import about 424,000 tonnes of rice. The stunted growth in many farms worsened their importation of rice caused by reduced production as fertilizer gets scarce and more expensive. Fertilizer shortage reflects the inability of the country to import adequate fuel for farm machinery and trucks to transport rice to the markets.

With prices of Urea going up by above 2000%, from 1,500 rupees (US$4.23) to 40,000 rupees (US$112.68), and herbicides going up by almost ten times their previous price, standing at 100,000 rupees (US$281.69), diesel prices also going up by 179% on the black market, the problems seem large. As fertilizer prices stay high and farmers continue to struggle for availability, the risk of a food crisis going through the country's doorstep is high.

Bond Auction: lower investor's interest as inflation spikes 

Following yesterday's primary auction, the amount offered was slightly undersubscribed by -10.9% at N200.57bn worth of bonds against the N225bn suggested. The spread of the low subscription came from the -69.3% and -45.6% decline in investors' interest for the 2025 and 2032 tenors as rising inflation expectations pepper spray real return. However, 2042 was oversubscribed by +144.4% as investors sought higher yields to cushion Inflation. The rates for 2025, 2032, and 2042 maturities rose by 150bps, 50bps, and 25bps to settle at 12.50%, 13.50%, and 14.00%, respectively. The bid-to-cover ratio across the three maturities was 0.31x, 0.54x, and 2.44x. Analysts expect a rise in rates to pull back the bearishness in the secondary market today (see table 2 below).

Table 2: Nigerian Bond Auction results Auction

Nigerians and The Mass Exodus to Off-grid Electricity

Analysts predict that most Nigerians will rely on off-grid electricity supply in the coming years if significant improvement is not made in the power generating sector. This is due to the spotty and unstable power supply and the ever-increasing prices of electricity tariffs, currently as high as N65/KWh despite the sector's privatization. Many individuals and businesses rely on generators as a source of electricity, leading to air and noise pollution, which has negative environmental impacts. Therefore, Nigeria must shift focus to Renewable energy as it is not only better from a cost perspective for Nigerian households but is also sustainable.

 Analysts believe that although the cost of acquiring renewable energy has experienced no significant reduction, various startups specializing in renewables have made periodical payment plans available, making it more accessible to the average Nigerian and increasing penetration into the rural areas of the nation.

Effect Of Growing Inflation on HBO Max

Warner Bros Discovery is eliminating 70 jobs at HBO Max, primarily from the division's reality, casting, and acquisitions departments. HBO Max is a stand-alone streaming platform; this shows the problem major streaming platforms have been having recently. Analysts believe cutting down on staff is a tactic to cut operating costs because of the reduced subscription to programmes due to growing Inflation and reduced indoor activities.

Brazil Central Bank Believes Credit Cards will Cease to Exist 

While credit cards may appear to be a long way off in the future, the Brazilian central bank's governor, Roberto Campos Neto, believes credit cards will become obsolete as the open financial system expands. According to him, the open finance system eliminates the necessity for a credit card because consumers can handle all of their financial activity on mobile rather than having several applications from various institutions. Banks in Brazil have also turned to the PIX Instant Payment System (open financial system) to provide credit services, with 62% of Brazilians regularly utilizing it. Analysts remarked that Brazil's PIX has been effective because it does not impose transfer fees and is limited to payment services.

The cryptocurrency market traded mixed, with low volatility on all major coins worth more than US$50. The price of Bitcoin fell by -0.03% to US$24,048.03 after trading at a 24-hour high of US$24,295.61. Other altcoins traded close to their 24-hour highs, with Ethereum falling by -0.46% from US$1,926.60 to US$1,890.24. Despite the negative impetus, meme coins experienced some buying strength with high volatility on the Bollinger band. Dogecoin appears second in the top 100 market gainers with +16.1%, with Shiba Inu also gaining by +4.3%. Analysts believe the lateral movement in the Bitcoin chart indicated a decline in buying strength and believe bitcoin can attain the US$27,000 resistance level if it remains above US$24,000 for a substantial period (see chart 2 below).

Chart 2: Market Movers