Being an Analyst Note issued by Proshare Research on March 31st, 2023

Q1 2023’s Good, Bad and Ugly,  as Outlook for Q2 Ringfences Uncertainty 

Nigeria’s Q1 2023 was characterised by four major outcomes: Naira scarcity, high domestic inflation, fuel scarcity, and severe FX constraints.  Growth in the first quarter is believed to have slowed from the 3.52% recorded In Q4 2022 reflecting reduced purchasing power and lower business sector activity. S&P Purchasing Managers’ Index (PMI) declined in February 2023 to 44.7, ending a 31-month expansion and reflecting the impact of the cash shortage on orders and output. Service sectors such as Trade, ICT, and Finance are however expected to have led the economy’s fragile GDP growth in Q1 2023. Although NUPRC Data suggests that crude oil production rose to 1.54mpb a 13-month high the oil GDP is expected to remain a laggard. Analysts expect inflation to remain high for the rest of the year due to a no-improvement forecast for the foreign reserves, the removal of fuel subsidies, infrastructure deficit, insecurity, and exchange rate depreciation.

Monetary tightening will therefore persist as inflationary pressures exist and monetary policy authorities in advanced countries remain hawkish. On the fiscal side, actual fiscal deficits are expected to be larger as the GDP growth forecast and forecasted revenue decline. According to the Debt Management Office, it has, so far, raised N2.13trn in January and February 2023, of which N1trn has been utilized for budget financing.  Analysts believe that new private sector investment would stall in Q2 2023 due to the uncertainty around the transition to a new government by June.  When it is inaugurated in May, the new administration must attend to industrial and exchange rate management reforms needed to attract patient investment from abroad. To improve the fiscal space, the new government must improve tax administration and remove the regressive fuel subsidy but put in place measures to mitigate the inflationary externalities.

Nigeria’s Total Public Debt Stock Grows to N46.25trn, as Analysts Groan in Fear

According to Debt Management Office, Nigeria’s total debt stock rose to N46.25trn in 2022, a 7trn increase from N39.5trn recorded in 2021. A breakdown of the debt stock shows N27trn accounted for domestic debt stock and N18.7trn for external debt stock. To cover the 2022 budget deficit and project execution, new borrowings were made that raised the total debt stock. 

The total public debt to Gross Domestic Product (GDP) grew slightly to 23.20% on December 31, 2022, from 22.47% in 2021. However, the ratio of 23.20% is still within the 40% limit self-imposed by the country and the 55% limit recommended by the World Bank/IMF. The domestic debt excluding the sub-nationals rose to 22trn with the FGN bond being the highest at 16.4trn while others account for N5.6trn. For external debt, Eurobond has the highest at $15.6bn, followed by World Bank with 13.4bn, International Monetary Fund at US$3.2bn, and Bilateral loans have US$5bn. The report included debt servicing, N2.5trn was spent on domestic debt and US$2.41bn on external debt servicing, higher than N2.05trn and US$2.12bn spent in 2021 respectively. 

There is growing worry about Nigeria’s debt sustainability, especially with the possible securitization of N23trn Ways and Means that would bring the total public debt above N77trn and debt servicing taking a large proportion of revenue. Although the securitization is yet to be approved as it violates section 38 of the CBN Act, some analysts have proposed a different approach, CFG proposed the creation of a resolution trust vehicle SPV that will absorb the ways and means like AMCON instead of crowding out the private sector with the N23trn issuance. Analysts believe the resolution of the trust vehicle is more plausible as it prevents the sudden spike in total public debt that would have affected credit rating and eroded a large portion of revenue.  

Regulators Address Health, Safety, and Environment Issues in Nigeria’s Downstream Oil Sector

The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has announced that it will resume the technical safety audits of petrol retail outlets, tankers, refining facilities, and depot operations across the country to reduce the number of accidents in the sector. According to the industry regulator, 412 people were killed in 244 accidents between 2018 and the first quarter of 2023, with petroleum products retail outlets accounting for 39% of the total, followed by vehicle tankers, refining facilities, and gas facilities accounting for 13% each, and depot accidents accounting for 11%. Analysts say the state of Health, Safety, Environment, and Community (HSEC) in Nigeria's downstream oil industry has long been a source of worry, mostly due to weak regulations as well as monitoring and evaluation challenges. While fatality rates have fallen in most recent years as a result of a combination of private initiatives, recovering economic activity, and regulations, analysts believe safety audits and the development of new regulations have been slow, and regulatory enforcement (and inspections) have been lax.

Analysts Appraise Bullish Q1 2023 Equity Market Performance

Despite economic, political, and inflationary pressures, the Nigerian equity market remained resilient in Q1 2023t, with investors showing sustained bullishness. The NGX All Share Index opened the year at 51,251.06 index points and closed at 54,413.00 on March 30, 2023, marking a year-to-date gain of 6.17%. Analysts note that investors have maintained a positive outlook on the equity market despite political uncertainty, cash crunch, high inflation, and other economic variables. This bullish sentiment has demonstrated the market's strength, with the market capitalization gaining N1.73 trillion in the first quarter of 2023. Of all the indices, the Growth Index was the best performing with a 58.81% gain, indicating a high level of investor interest in growth-oriented companies. The Insurance Index was the only index that recorded a loss, declining by 0.11%. Analysts suggest that the strong performance of the Consumer Goods and Growth sectors is an indication of investor optimism about the Nigerian economy and the prospects of companies operating in these sectors. Overall, the Q1 equity market performance has shown resilience and strength, with investors maintaining a bullish outlook (see Table 1 below).

Table 1:

Oil Prices Set for a Huge Drop on Strong Market Speculation

Oil prices fell on Friday but are on track for their worst monthly performance since November 2022, ahead of critical US inflation data that might shed light on future interest rate hikes and the strength of the dollar. Brent and WTI contracts were headed for their monthly declines of 6% and 4%, respectively, after reaching their lowest levels since 2021 earlier in the month in the aftermath of the largest bank failures since the 2008 financial crisis. Prices surged for the majority of the week due to rising Chinese demand, supply difficulties in Iraq's Kurdistan area, and a surprising dip in US crude stockpiles. Analysts expect crude oil prices to rally in the coming week on persistent supply disruptions in the Kurdistan region, Russian output cut, and lower inventories in the US. In the local market, petrol prices are expected to remain stable while Nigerians remain undecided about the subsidy removal.

Nigeria’s Internet Subscription Hits 156m in February 2023

In February 2023, Nigeria's internet subscribers hit 156.98m, according to data from NCC compared to the 156.24m subscribers recorded in January 2023. MTN accounted for the majority of the increase, with 66.7m active internet subscribers in the month under review. Globacom came in second with 43.4m, followed by Airtel and Etisalat with 41.9m and 4.3m, respectively. As of 2022, the estimated number of internet users worldwide was 5.3bn, up from 4.9bn in the previous year.   

Further analysis of the data released by NCC showed that active mobile telephony service in February rose to 227.17m calculated based on a population estimate of 190m. The percentage contribution to the GDP of Nigeria by the telecom industry grew by 13.55% in Q4 of 2022 compared to the 12.61% it contributed in Q4 of 2021. However, Analysts observe the rise in internet subscriptions is a reflection of the growing use of digital technology in the country and despite the rise in internet subscribers, internet speeds in the country are still relatively slow, and the cost of internet services is still high for many Nigerians. 

Crypto Enthusiasts Call for Governments to Pay More Attention to Artificial Intelligence (AI) Regulation 

As Artificial Intelligence (AI) keeps growing and evolving around the world, there is a need for the government to draft regulations around AI as with Crypto regulation. Crypto has come out to be an important way of preserving value in a world where fiat currencies like the U.S. dollar are continuously getting debased. Bitcoin has served as a favourite exchange among investors due to its stability and high market cap. After Silicon Valley Bank (SVB) collapsed, the price of Bitcoin soared higher above US$26,000, the highest Bitcoin ever touched since June 2022. Analysts argued that the banking crisis prompted investors to Bitcoin as a financial alternative to convert their traditional currencies to digital coins. The risk involved in trading cryptocurrency is mainly its volatility which can become illiquid at any time which could cause investors to lose the entire value of their investment. This is why there is a need for a Standard Operating Protocol (SOP) to guide the crypto market. 

On the other hand, AI has some long-term benefits but there is a need to look at the potential dangers of Artificial Intelligence (AI) before it grows bigger. Analysts debated the threats posed by AI that could result in job losses due to AI automation as AI robots become smarter than humans, and potential abuse of AI systems that can be used to create cyber-attacks, such as scams, ransomware attacks, and other forms of cybercrime. These attacks can be extremely difficult to detect and prevent, especially if they are designed to learn and adapt to their targets. Social surveillance with AI technology is also a threat that deals with using Artificial Intelligence to monitor and analyse people's behaviour, interactions, and activities on social media platforms, websites, or other online channels which is an invasion of privacy. Analysts believe that the government need to set up a panel that would develop standards for applying AI to ensure that AI is used in a way that would benefit society and that its impacts are carefully considered and managed.