Being an Analyst Note issued by Proshare Research on January 4th 2023  

2023 Budget Gets Public Presentation

The Minister of Finance Budget and National Planning on Wednesday presented the N21.82trn budget for the year. President Muhammadu Buhari had on Tuesday signed the 2023 Appropriation Act after the National Assembly made N1.3trn addition to the budget of Ministries, Departments, and Agencies (MDAs). While analysts commend the early passage and signing of the budget, they noted that debt costs relative to capital expenditure remain high. The 2023 budget allows for a N6.55trn budget allocation for debt service while Capital Projects are funded to the tune of N5.97trn. As of eight months 2022, the debt service to revenue ratio was 83% and analysts fear that this could rise to over 100% in 2023.  The rise in debt service to revenue would arise if 2023 revenue underperforms projections and the National Assembly fails to approve the securitization of the ways and means (W & M) obligations to the Central Bank of Nigeria (CBN) on which it pays a Monetary Policy Rate (currently 16.5%) plus 3% spread (MPR+3%). The bright spots are, however, in the prospects offered by the government’s efforts aimed at improving crude oil production, subsidy removal, and tax waiver restructuring (see table below).

Table 1:  

EFCC Echoes Analysts’ Worry on Petrol Subsidy 

A report from the Economic and Financial Crimes Commission (EFCC) noted that the commission has recovered N12.998bn as proceeds of illegal payment under the petrol subsidy regime between 2017 and 2021. According to the report, N4.67bn was recovered in 2017, N4.29bn in 2018, N2.41bn in 2019, N416.51m in 2020, and N1.22bn recovered in 2021. Analysts have been calling for an end to the subsidy regime, arguing that there are many inadequacies in the under-recovery programme. From over-invoicing to a lack of accurate data on the daily fuel consumption volumes and the apparent smuggling of the products to neighbouring countries, these factors continue to propagate fraudulent activities in the sector. While subsidy gulped N1.43trn in 2021, it is expected to drain the system of nothing less than N5trn in 202 and over N3.3trn in the first six months of 2023. The EFCC report validates analysts’ position that there are many opportunities for fraudulent activities in the oil and gas sector from extraction to sales of refined products to consumers, buoyed by the lack of reliable equipment to measure flows and consumption of crude oil and petroleum products, respectively. 

Bulls Dominate Equity Market Early in the Year

The Nigerian Equity Market began 2022 on an impressive bounce as investors increased their buying interest, opening the year at 51,595.66 against the 51,251.06 index point recorded at the close of last year. The equity market saw a gain of N188bn with a market capitalization of N28.103trn. The renewed buy interest was largely in large-cap stocks, including BUA Foods, Fidson Healthcare, PZ Cussons Nigeria, United Bank for Africa (UBA), and Nigerian Aviation Handling Company (NAHCO). Analysts observe that the local equity market has headed towards 8 consecutive weeks of investors going long, buoyed by sustained market optimism. 

Sectoral performance was broadly positive as thirteen (13) NGX sector indexes closed northward, two (2) closed southward and three (3) closed flat. The NGX Food and Beverages index advanced by 3.60% to top the gainer’s chart while the NGX GROWTH index declined by 1.51% to top the losers’ chart (see table 2 below).

Table 2: 

Analysts expect continued buy interest and positive week-on-week growth as investors go bargain-hunting.

Pakistan’s Poultry Industry Faces Harsh Times as Soybeans Prices Spike

The poultry market in Pakistan has faced a major downturn as traders and poultry farmers claim that the affordability of chicken might be a thing of the past. Since the sharp spike in the price of poultry in October 2022 after customs stopped the release of genetically modified (GMO) soybean arriving from Brazil and the US, the market has slumped. Generally, Pakistan does not allow the import of GMO products. Soybean meal is a key ingredient in poultry feed and its shortage has made prices of poultry feed spike on rising demand. The Pakistan Poultry Association equally claimed that they are paying US$0.4 million daily as demurrage for the seized ships which could mean that even when imports of soybeans are allowed into the nation, the price of poultry could stay elevated.

Unicorn Valuation Issues in Israel

According to the Viola Venture Capital Fund, just half of Israel's existing unicorn portfolios can justify their unicorn designation, despite 21 businesses attaining unicorn status in 2022. The VC fund's assessment is based on company revenue rates and the technological excellence of these start-ups. Nonetheless, Israel remained the fifth most attractive location for global technology investments. 

Elsewhere, research shows that more than half of all start-ups fail within the first five years, raising questions about the sustainability of African digital unicorns since African startups reflect global conditions. Goldman Sach dealmakers note that large investors are sitting on heaps of cash and big profitable corporations are trying to diversify their businesses - but they are waiting for economic uncertainties to dissolve. Thus, there are prospects for African start-ups to benefit from easing uncertainties in the financial markets in 2023.

Former FTX Boss Sam Bankman-Fried Pleads Not Guilty as US Issue Warning on Crypto Activities

The former FTX founder Sam Bankman-Fried at the court hearing yesterday pleaded not guilty to criminal charges that he cheated investors by diverting their funds to purchase real estate and to donate money to politicians in his now-bankrupt FTX cryptocurrency exchange. Sam Bankman-Fried, the defendant, entered his plea through his lawyer against the eight criminal counts, including wire fraud and conspiracy to commit money laundering, before U.S. District Judge Lewis Kaplan in Manhattan federal court. Analysts expect a change of mind later from the 30-year-old man after he is present with valid evidence. 

Meanwhile, the US bank regulators issued a fresh warning to lenders over the risks of getting involved with crypto activities. This move came after major liquidity crises evolved in the crypto space, including the collapse of FTX under Sam Bankman-Fried which led to millions of customers losing their crypto investments. Analysts expect a more careful assessment of most crypto-related investments by traders and investors.