Being an Analyst Note issued by Proshare Research on February 15th 2023

Flash lighting the CBN/ Supreme Court’s Naira Swap Tussle

The Supreme court earlier today adjourned the case on the currency swap policy of the Central Bank of Nigeria (CBN) till Wednesday, February 22. According to reports, the decision was made to ensure a consolidated hearing of the suits by the 10 states who have now approached the court. Kaduna, Lagos, and Zamfara States (now joined by the seven other states) had on February 8 obtained ex-parte ruling to suspend the currency swap policy. In what looks like an attempt to play the waiting game, the Supreme court has now implicitly extended the ex-parte ruling by adjourning the ruling on the suit filed by the state governments. In what has now become a face-off between the CBN and the Supreme Court, Analysts believe that the average Nigerian would be the one to bear the brunt. The adjournment which comes barely 24 hours after the Central Bank Governor Godwin Emefiele insisted that the policy stands and that old notes are no longer legal tenders would further create an environment of uncertainty and can severely disrupt economic activities. While banks, markets, and filling stations have ceased to collect the old notes, many Nigerians still have large amounts of the old naira notes.   This is while the country’s Digital Payment Infrastructure has proven to be inadequate to support large volumes of cashless transactions (see illustration1 below).

Illustration 1: 

During his address to the Diplomatic Corp yesterday, Emefiele warned Point of Sales (POS) agents who have taken advantage of the cash shortage to charge usury rates to desist and limit their charges to N100 per N5000 withdrawals. Proshare believes that this is sound and fury signifying nothing.  It is expected that the practice would persist due to the acute shortage of Naira notes. Analysts also note that the number of POS operators and mobile money agents (1.6m) relative to the number of Micro Small and Medium Enterprises MSME (42m) is a reflection of the magnitude of the problem. In-house data crunchers punch holes in the Central Bank Governors’ claim that the policy is responsible for the decline in inflation in December. Proshare economists believe that the decline in inflation to 21.34% last December was seasonal and particularly attributable to the uncharacteristically sober festivities recorded in the period. The rise of inflation to 21.82% in January up from 21.34% in December buttresses the argument. Analysts note that the proportion of currency in circulation to the Money supply being less than 4% suggests that reducing the part of the money in circulation outside of the banking system does nothing to reduce pressures. Also, the argument made by the CBN Governor that Nigeria’s Digital Payment Infrastructure is sophisticated enough to support a cashless economy is specious and unsupported by data on average daily transactions processed since the currency squeeze

OPEC’s MOMR Confirms Rise in Nigeria’s Oil Output

The Organization of the Petroleum Exporting Countries (OPEC) Monthly Oil Market Report (MOMR) for February 2023 raises optimism for rising oil production in Nigeria, in contrast to our uncertain outlook for Nigeria's oil production in 2023 based on official data from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) on January oil output. OPEC's secondary sources, a more reliable gauge of Nigeria’s output by foreign investors, reveal that the country's crude oil output increased by 65,000b/d from 1.271mb/d in December '22 to 1.336mb/d in January 2023, while OPEC direct source data remains as reported by NUPRC. 

The latest report showed that the nation's rig count, which measures the level of activity in the oil and gas industry, grew by one unit from 12 units to 13 units, adding to the sense of confidence. We attribute the increase in crude oil output to a mix of surveillance contracts, aerial monitoring from a control assessment center, and the whistleblower’s policy. However, we question if the surveillance contract, which is estimated to cost N48 billion a year, will be sustainable, although we believe there are prospects in tech-enabled monitoring and modernized pipeline infrastructures, unlike the existing aged and abandoned infrastructures.

Bond Market Turns Bearish Ahead of January Inflation Figures

Yesterday, analysts flagged the bearish sentiment at the short and medium end of the local bond market. Previously, investors opted for short-term instruments due to rising inflation and higher monetary policy rates (MPRs).  However, the slight twist is the January inflation figures which some analysts have speculated would rise to 21.42% as the country battles a cash crunch and fuel scarcity. Market selloffs should persist, causing higher short-term yields (see table 1 below). 

Table 1: 

NGX lists TAJ Bank’s N10 billion Mudarabah Sukuk

The Nigerian Stock Exchange Group (NGX) has approved the listing of TajBank's N10 billion Sukuk Mudarabah bond. According to Mr. Jude Chiemeka, the Divisional Head of Capital Markets at NGX, the exchange aims to support issuers by providing them with a range of capital-raising options and connecting them with a diverse pool of investors. The listing of TajBank's bond is seen as a significant step in the growth of Islamic financing in Nigeria's capital market. The N10 billion Sukuk Mudarabah program raised additional Tier 1 capital with loss-absorbency and strengthened TajBank's capital adequacy ratio under the N100 billion Sukuk Mudarabah program.

Turkey Uses Pension Funds to Stop Selloffs in Equity Market

Turkey has mandated pension funds to increase their proportion of assets invested in domestic stocks from a previous minimum of 10% to 30%. This legislative requirement was adopted in response to the devastating earthquakes that sparked enormous selloffs, wiping out US$35 billion from Istanbul's major index. Also, the country enforced a 5-day trading ban that has temporarily trapped investors' funds in a bid to minimize an economic breakdown.

The poor performance of Istanbul’s main index in 2022 coupled with previous adjustments to the pension age that made early retirement a possibility for millions further complicated the situation. Analysts raised concerns about how this may affect future pension disbursements because of the increased riskiness to their portfolio. Turkish pension fund managers will need to navigate their portfolios more carefully to ensure they have enough liquidity to meet the volume of pension payouts. 

UK Authorities Set to Conduct First Raid on Illegal Crypto Cash Machine

The Police in the U.K, in collaboration with the Financial Conduct Authority (FCA), has raided several sites allegedly hosting cryptocurrency ATMs. The FCA does not regulate cryptocurrencies but in the same vein mandate, all businesses using it to strive hard and stop money laundering, terrorism, and every form of fraud well. Now, no crypto ATM operators have FCA registration, which makes their use unlawful in the country. Prior to the recent fraud cases and uncertainty around the cryptocurrency exchange, all crypto businesses operating in the U.K. need to be registered with the FCA for anti-money laundering purposes. Analysts believe that the G20 meeting would result in improved standard operating procedures (SOPs) around crypto. However, the fact remains that crypto exchanges are currently unregulated and high-risk.