Nigeria Macroeconomic Update 2022 Q2 - Navigating through Bumpy Political Season and Tough Economic Headwinds

The Global Economy

IMF downgraded global GDP growth following the impact of the war in Ukraine

Data Source: International Monetary Fund (IMF)

Global Inflation rate has risen faster creating a downside risk to growth

Data Source: International Monetary Fund (IMF)

Crude Oil Price trended downwards but remains above US$100 per barrel

Data Source: U.S. Energy Information Administration

Analyst Views on the Global Economy

Following the impact of the war in Ukraine, global output growth is expected to decelerate in 2022. Higher energy prices and rising inflation across advanced and developing countries have weakened the purchasing power of households in many countries. The surging inflation and rising interest rates have triggered recession fears in large economies like the United States and the United Kingdom, which could have a ripple effect on the economies of emerging market, through capital outflows.
Some oil exporting countries are reaping the gains of higher oil prices. Saudi Arabia, Kuwait, UAE have increased oil output by 579 thousand barrels per day (tbpd), 186 tbpd, and 158 tbpd respectively from 2021Q4 to 2022Q2. Although these countries are not immune to the rising cost of food prices and other commodities, they have attracted significant foreign inflows to dampen the effect on citizens. Recently, Saudi Arabia allocated 20 billion riyals ($5.33 billion) for social insurance beneficiaries while similar programmes have been implement by other countries.
For oil importing countries, including oil exporting countries that do not have domestic oil refining capabilities, they have struggled with higher petrol prices, which have resulted in higher transport costs and overall cost of production. Pressure on government finances has also resulted in increased fiscal deficits and debt levels across many countries.
As anticipated in our previous macroeconomic outlook report, the IMF downgraded global growth for 2022 from 4.4% to 3.2% in its latest World Economic Outlook released in July 2022. With the recent fears of a recession in the US and the UK, we expect further downgrade of output growth in 2022.

Nigeria's Macroeconomic Environment

Nigeria’s GDP Growth at 3.1% in 2022Q1 is the lowest in the last three quarters

Data Source: National Bureau of Statistics

Demand pressure and limited foreign currency inflows triggered depreciation of the Naira, widening exchange rate premium

Data Source: Central Bank of Nigeria, Other sources

Trade balance became positive owing to slow growth of imports and improved exports value

Data Source: National Bureau of Statistics

Nigeria fails to meet OPEC quota and cannot reap the gains of high oil price

Despite rising crude oil price, Nigeria’s crude oil production has been on a decline, mainly due to oil theft and limited investments.

Data Source: OPEC, World Bank, Ministry of Finance, Budget and National Planning

Nigeria’s Debt Servicing from Jan to Apr exceeds Revenue for the first time

Data Source: Ministry of Finance, Budget and National Planning and Debt Management Office (DMO)

Monetary Policy: Outlook and Expectation

In the fourth meeting of the CBN Monetary Policy Committee (MPC) held in July 2022, the Committee decided to:

raise the MPR from 13% to 14%;
retain the Asymmetric Corridor at +100/-700 basis points around the MPR;
retain the Cash Reserve Ratio (CRR) at 27.5 percent; and
retain the Liquidity Ratio at 30 percent.

Key factors that influenced monetary policy decisions at the MPC meeting included:

Global economic risks;
Continued aggressive movement in inflation;
Fragile recovery;
Liquidity condition, savings and investment;
Purchasing power;
Widening negative real interest rate; and
Exchange rate volatility.

Analyst Views: Outlook on GDP Growth and Inflation

The Nigerian economy grew by 3.1% in 2022Q1 with growth driven by the non-oil sector. Key sectors such as finance, trade, ICT and manufacturing posted strong output growth while the oil sector weighed down GDP growth in the quarter. Given the decline in oil output in the second quarter of 2022 according to OPEC sources, growth of the oil sector will be negative mainly due to oil theft and limited investments in the oil and gas sector.
Rising price of fuel, food and other commodities are expected to have a negative effect on GDP growth in coming quarters. In addition, power shortages, infrastructure challenges and insecurity will limit investment inflows and business expansion further dampening growth prospects and will heighten inflationary pressure in 2022.
At the moment, Nigeria is not reaping from higher oil prices owing to high subsidy payment and lower crude oil production, which threaten government revenue and raise the need to borrow. The government plans to accumulate more borrowing to fund subsidy payments in 2022 which could reach N4 trillion. This will further raise debt level and increase debt servicing costs as a share of revenue, which was 119% in January – April 2022.
In view of these challenges, we believe that GDP will grow by 2.3% in 2022 in our moderate case scenario.

Analyst Views: Outlook on Foreign Exchange

The political season is expected to compound the situation especially in relation to the demand for foreign currency. Also, due to the current uncertainty around the economy, there is a growing demand for the dollar to hedge against further depreciation of the Naira.
We recognize some CBN interventions as they show signs of supporting foreign exchange inflows, especially the “Race to US$200 billion in FX Repatriation (RT200 FX Programme)” initiative. But then, the outcomes are far-fetched from matching the demand for foreign exchange. This is because there is still no clear-cut and effective footprint to drive output expansion across sectors for exports.
With growing uncertainty in the global and domestic market and the challenges facing the oil and gas sector, we anticipate that pressure on the Naira will remain. Our expectation for exchange rate remains at N430/US$ in the official market in 2022.

Analyst Views: Fiscal and Monetary Policies

Monetary Policy

The aggressive inflationary pressure has necessitated the need for a higher interest rate in Nigeria and other countries. This is despite the threat to the fragile recovery of the economy from the COVID-19 induced recession.
The Central Bank MPC noted that raising the MPR is necessary to curtail rising inflation, which, if unaddressed would erode the moderate gains achieved in improving consumer purchasing power and worsen poverty level.
Raising the MPR however comes with a trade-off. Growth of the real sector could be affected especially considering the tough business environment, particularly for small business owners. Cost of borrowing is expected to be higher for both government and businesses, serving as a risk to growth.
We anticipate that the MPC will retain its current policy position at subsequent meetings, having increased the MPR in the last two meetings.

Fiscal Deficit, Government Revenue and Public Debt

The pressure on government finance have become intense. Actual revenue in the first four months of the year was 51% short of its target while debt servicing costs exceeded revenue by 19%.
With no significant reform to curtail fuel subsidy and address oil theft, government revenue is expected to underperform in the second half of 2022, further raising the need to borrow.
Rising debt costs, without a corresponding increase in revenue could trigger macroeconomic instability, if the trend continues.
Going forward, there is a need for urgent and consolidated efforts by the federal and state governments to address the challenges of oil theft and pipeline vandalism, which are crucial in improving oil output and by extension, oil revenues.
For non-oil revenue, the harmonization of government taxes, plugging leakages, ensuring transparency and accountability in the management of public funds and improving the business environment are necessary in the short to medium term.
With the recent commercialisation of NNPC, the company is expected to be managed as a private energy enterprise to produce results expected by stakeholders. While this could possibly be the beginning of better financial performance of the NNPC, its impact on Nigeria’s fiscal environment, particularly in terms of oil revenues remains unclear at the moment. As we proceed into a new era of the company, modalities such as the level of government interference, ownership structure, corporate governance, attraction of competent employees, efficiency of operations, etc. will need to be clarified.

Market Performance

NT-Bill yield curve expresses investors’ short term concern on Nigeria’s economy

Yields in Nigeria’s fixed income market are ticking up as the global economy responds to inflationary pressure.
This is driven by rising rates in advanced economies such as the US, UK and the EU as investors favour investment in their securities over Nigeria’s.
The average yield in the FGN Bond market increased by 50 basis points to end 2022-Q2 at 10.8% and stood at 11.5% (as at 20th July 2022) from 10.3% on the first trading day of the quarter.
With no end in sight concerning the Russia-Ukraine crisis and its associated economic impact, yields are expected to remain high.
While this means increased return for investors, it implies a higher cost of funding (local and international) for the Nigerian government and businesses.
Despite rate hike, equity market remains on the gaining side driven by a few counters
While the gain in the Nigerian equity market was motivated by gains across many sectoral indices, sectoral and company performances are, however, skewed towards a few counters.
The NSE 30 index that tracks the performances of the stocks of top companies appreciated by 5.8% (however, far less than the gain on the NGX-ASI). This was motivated by negative (-4.2%) performance in the banking sector which dominates the NES 30 index, alongside losses in the industrial sector.
Reaping from the bullish trend in the global oil market, the oil & gas sector recorded a 27.6% gain in 2022-Q2*. Likewise, the consumer goods sector index expanded by 8.9%.
The gain in the equity market has largely been driven by AIRTELAFRICA, contributing 46.4% of the gains recorded so far. The contribution of others, such as SEPLAT and MTN, amount to 5.6% and 5.9%, respectively.
The growth in AIRTELAFRICA stock is motivated by its dual listing, serving as a medium for transferring assets abroad in the face of restrictive capital mobility.

Capital Market: Analyst View – Outlook and Expectations

Rising inflation has resulted in a series of rate hikes by the CBN Monetary Policy Committee. This, however, presents a challenge to the government, which has a fiscal deficit of N7.35 trillion.
While yields are ticking up in the global market, sell-offs appear to be a major driver of increasing yields across segments of Nigeria’s fixed income market as investors look out for safe havens in this turbulent time. Nigerian government securities have already seen their prices drop, driving up yields on all fronts.
This is particularly the case of the July 2022 FGN Bond Auction of N225 billion was undersubscribed despite relatively higher spot rates. If this trend persists, the government will struggle to meet up with its fiscal deficit and impact the economy significantly.
With the lingering global crisis and the impact of the pre-election year on investors’ confidence, yields will remain elevated into 2022-Q3 and 2022-Q4.
Meanwhile, the rising yields are driving the bearish sentiment in the equity market and will persist deep into 2022-Q3 and 2022-Q4. However, with a robust earning season, the equity market can still sustain its positive stance to close the year.

The 2023 Elections and the Economy

Since 2019, the economic and social landscape have become tougher