Being an Analyst Note issued by Proshare Research on October 19th, 2022

Falling Rig Count Causes Further Revenue Anxiety in Nigeria

Nigeria's oil rig count fell by three units from 10 units in August 2022 to 7 units in September 2022, the lowest in 10 months, based on the latest OPEC Monthly Oil Market Report for October 2022. In the oil and gas industry, the rig count is a metric for drilling activities in the upstream sector. A further breakdown showed that Nigeria counted eight rigs in Q1, 11 units in Q2, and nine units in Q3 2022. The falling rig count is mainly due to the industry's lack of investment, aging infrastructure, crude oil theft, and pipeline vandalism. A falling rig count directly translates to a falling output level. Analysts questioned the operationalization of the recently awarded marginal oil field round, noting that activities should have commenced on those fields. Analysts expect Nigeria's crude oil production to remain low due to sliding rig count and other operational issues along the oil value chain in the country.

Economists Ask What Nigeria's US$440bn GDP Represents

With an estimated nominal GDP of US$440bn, Nigeria is considered the largest economy in Africa, but what does this count for given the country's level of industrialization?  Analysts often resort to an array of macroeconomic indicators such as GDP growth, the size of the country's excess absorptive capacity,  and domestic price stability to assess how well an economy is being managed. But while the Gross Domestic Product (GDP) of a country reflects the value added within the economy over a one-year period,   the fact that  GDP includes value added by foreign nationals who tend to repatriate income earned in the process means that the figure does not mean much for the economy, especially where growth is non-inclusive. The value added/income earned by foreign nationals leaves the country with limited gains.  Nigeria's GDP also fails to capture the income earned by Nigerians resident abroad. In a world where remote work has become a reality, the GDP figure would also prove very inaccurate in assessing the true level of productivity of the economy.  Income earned by the sizable number of Nigerians who have ventured into the Talent industry and are exploring opportunities on the global stage while still resident in Nigeria would also be excluded.  

Naira to Fall by 20% Predicts Bank of America (BoA)  

The Bank of America (BoA) predicts that the naira might weaken further in 2023 as its current exchange rate to the dollar is above fair value. Based on three indicators; the black-market rate, the central bank's (CBN’s) real effective exchange rate, and the bank of America's currency fair value analysis, the naira is overvalued by 20%. It will weaken by an equivalent amount in the next 6 to 9 months, taking it to N520 per US$. Nigeria operates a multiple exchange regime characterised by a tightly controlled official exchange rate and a parallel market where the currency trades freely. The official rate has depreciated by less than 10% since December 2021, while the parallel rate has fallen by 31.2% since January 2022, showing a gap of almost 70%. BoA stated that the greater the disparity with the official market, the higher the excess demand for foreign currency in the parallel market. Analysts believe the exchange rate spread requires the convergence of the official and parallel market rates.   

Understanding the the Grey Spots of NLNG’s Force Majeure 

Following the flood-induced force majeure declared by the Nigerian Liquefied Natural Gas (NLNG) on gas supply from its Bonny Island platform, analysts expect spillover effects on major economic players in the country. The likely impacts include a significant drain in the country's revenue, a sharp increase in gas prices, failure to meet export obligations which would lead to low foreign exchange earnings, and operational disruptions to industries that depend on gas. While force majeure is a provision based on unavoidable events, Proshare analysts believe the current flooding is man-made or man-ignored, this speaks to the country's infrastructure deficit and a lack of proactiveness. Globally, citizens expect a declaration of force majeure to be guided by a timeline after an initial assessment of the situation to moderate the effects on markets. No such timeline appears to have been announced

UK inflation reverts to 40-year high: Higher Base Rates threaten Nigeria’s Capital Inflows 

U.K. inflation rose to 10.1% in September 2022 as the country's cost-of-living crisis persists. Inflation had unexpectedly slipped to 9.9% in August, down from 10.1% in July, following a fuel price decline. The Liz Truss-led administration has received several criticisms on proposals to cut the tax rate on the highest income tax brackets. While new chancellor, Jeremy Hunt, is expected to address the interest of the most vulnerable, the long-term growth objectives of his predecessor would be maintained. Meanwhile, the Bank of England (BoE) would be expected to be more aggressive in raising rates and resume its plans to sell off gilts in a bid to tap down inflation.   Emerging and frontier economies have recorded reverse capital flows following the spate of aggressive rate hikes by the BoE and other monetary policy authorities. Analysts believe that with an expected rise in the UK base rate, Nigeria may record a pullback in capital flows originating from the UK. Over half of the capital flows in Q2 2022 originated from the United Kingdom. The UK, which accounted for $781.05m of the $1.53bn received in the period, has typically been a major source of foreign investment and diaspora remittances.

Food Shortage Imminent in Nigeria as Farms Get Washed Out

Nigerian farmers and agricultural companies have spoken about the scale of flooding in 2022. Farmlands and crops have been destroyed while the flood has also sacked warehouses. This has pushed farmers to call for urgent intervention from the federal government in the agriculture sector to avert an impending famine. Food prices are expected to continue its rise before the end of the year owing to factors such as flooding, the infrastructure gap, the high cost of inputs, and high diesel cost, which has also affected the cost of transporting agricultural commodities. The flooding across the country, partly caused by heavy rainfall in some parts of the country and the water release held at a dam in Cameroon put Nigeria in a situation where food production would be seriously reduced. Added to the situation is the rate of insecurity, which has been a major problem for the country. As food prices tend to increase during the holidays, the coming year-end holiday and the current challenges facing the agricultural sector indicate a likely higher food price before the year runs out.

Airtel Africa Drags Down NSE Index as Lafarge Africa’s Stock Plunges on US Fine.

Airtel Africa recorded a further decline of -10% in the share price to N1458, following a drop in share price to N1620 in the previous trading session. The sell-offs in the industry's heavyweight pulled NGX (ASI) by -2.16% to close at 45,366.32 index points as against the -2.53% loss recorded the previous day. The market's sectorial performance was broadly positive, with ten (10) sectors index closing positive, while five (5) sectors closed negative and three (3) sectors stayed flat. The NGX ASI is presently recording its lowest Index point since January 2022, and the month-to-month (M-o-M) loss rose to -7.5%, while the Year-to-Date (YTD) gain stood at +6.20%. The Equity Market has recorded a loss of N1.199trn in the first two trading days of the week.

Lafarge Africa Plc saw a decline in its price by -2.13% to N23.00 per share in yesterday’s trading, from the N23.50 it opened on the Nigerian Exchange Limited (NGX). Analysts attributed the decline to reports that its parent company, Lafarge SA, pleaded guilty to a United States federal court of conspiring to provide material support to ISIS and another terrorist organization. The share price of the cement-producing company on the NGX had remained flat since September 21, 2022, but dropped to N23 per share yesterday. Analysts expect more sell-offs as investors react to the allegation and interest rate uncertainty affects the market (see chart 1 below).

Chart 1: NGX ASI INDEX MOVEMENT

Netflix’s Fortune Turns on New Movie Releases

After several months of losing subscribers, Netflix is enjoying a change of fortune after struggling to hold on to subscribers in the face of competition and pressures from the rising cost of living. The streaming company boosts an increase of about 2.4m new subscribers with Hits such as Stranger Things and Monster: the Jeffrey Dahmer Story, helping draw viewers back to the site. Analysts expect to see Netflix maintain the trend of subscriber increase with the new introductions of a lower-budget subscription plan.

EU-Commissioner Pushes for Regulatory Framework for Cryptocurrency

In an interview with the Financial Times, EU Commissioner, Mc Guinness called for a global regulatory framework for cryptocurrency, noting that unregulated digital assets could threaten financial stability. MC Guinness also urged US lawmakers to establish rules to govern digital assets, as she spoke with many US lawmakers who have been pushing proposals in Congress. In the wake-up call for regulation, analysts reiterated that a country-based regulation of the industry might result in regulatory arbitrage. They urged the global economy to take uniform authority over exchanges, coin creators, and crypto addresses to pitch out addresses found to have been compromised.