Being an Analyst Note issued by Proshare Research on August 3^rd, 2022

Oil Prices Reflect Global Uncertainty Say, Analysts

While more oil majors released huge quarterly earnings this week, oil prices have continued to mirror the uncertainty across global markets. Brent crude prices have hovered around N99-N100 per barrel so far in the week on structural weakness in demand outlook due to fear of an economic slowdown in the US and Europe, debt distress concerns in emerging market economies, global inflationary concerns, and China COVID-19 policy. These concerns were reinforced by a significant build in US crude inventory by 2.2m barrels last week against analysts’ expectations of 600,000 barrels drop. Proshare Analysts expect a mild response of oil prices to OPEC+ decision for September output today. OPEC+ will likely hold production unchanged given global demand concerns (see chart 1 below). 

Chart 1: Oil Price Movements July 2022 to Date ($’ per barrel)

Proshare Analysts Question Inflation Outlook for Nigeria in 2022

At a mid-year review of Nigeria’s economic outlook, economist and Chief Executive of B. Adedipe Associates Limited, Dr. ‘Biodun Adedipe, noted that despite domestic inflation rising to 18.6% (a five-year high) in June, inflation is expected to remain below 20% by the end of the year. Proshare Analysts, however, note that with month-on-month (M-o-M) inflation averaging +1.4% inflation would hit 21% by year-end. The recent surge in inflation has been attributed to a global food and energy crisis and a depreciation in the Naira. While these are expected to persist, Pre-election spending and spending during festive seasons could compound the country’s inflationary worries. 

Analysts Review Nigeria’s Energy Transition Drive

The Nigerian government has shown a high level of commitment and deliberateness in ensuring that the 2030 targets for renewable energy use are achieved. This is evidenced in several bi-lateral cooperations: the liaising of the Nigerian Energy Support Program and the General Agency for International Cooperation, and the European Union (EU) launch of a 1.3bn Euro Nigerian Green Energy Project under the Team Europe Initiative, among others. Aside from supporting the energy transition plan, Analysts expect these initiatives to achieve a more stable power supply in the energy sector and an increase in output levels within the agricultural sector. However, fiscal challenges could smother enthusiasm and derail targets. 

Ukraine Recommences Exports, But Lingering Food Issues Could Push Back Progress

Ukraine restarted exports through the black sea on Monday, August 01, 2022, since the invasion from Russia began after a ship carrying about 26,000 tonnes of corn headed for Lebanon. This move is said to be the first step to preventing the looming global food crisis as many feel the war in Ukraine put the world on edge. While this thought might seem true as food prices hit record levels after the war started, Analysts have disagreed with the notion, citing that there were already existential issues before the war began.

Right after lockdowns were lifted globally in response to the control of the COVID-19 pandemic, demand for commodities increased and supply chain disruptions came to the fore. Food prices started increasing, and logistics could not meet up with global demand. The world bank stated that food prices are expected to stay elevated up till 2024, a view shared by analysts who point out that food price volatility could still exist since supply chain disruptions have not been properly addressed and Russia could still spook the market after strongarming Europe into considering removing some of the sanctions towards the country, coupled with food protectionism witnessed among countries looking to protect their domestic market.

Investors React to Bullish Sentiment in the Equity Market

As more companies release positive financial statements for Q2, investors are turning bullish. The Equity Market erased the previous day’s loss to close in the positive territory amid positive market breadth while the key market indicator retracted to close above 50,000 psychological lines, the first Bull in over 3 weeks. Analysts believe the positive turn can be attributed to the sound financial results and CBN intervention in strengthening the naira against the dollar. Sectoral performance was broadly positive as thirteen (13) NGX sector indexes closed northward, two (2) closed southward and three (3) closed flat. The NGX Premium Index inched up by 2.73% to top the gainers while NGX Growth Index dipped by -0.63% to the losers’ chart.

Meanwhile, Proshare Analysts believe that the banking group’s share price dropped as a result of the change in Managing Director and Executive board members. The group’s share price fell by -2.2% compared to the previous day. Investors wait for the release of the financial group’s Q2 2022 financial statement (see chart 2 below).

Chart 2: Movement in UBA Share Price

Analysts Critique CBN’s Ways & Means Advances, and Macroeconomic Instability 

According to the data from Medium-term Expenditure Framework and Fiscal Strategy Paper 2023- 2025, Federal Government paid an interest of N405.93bn to the Central Bank of Nigeria for the loans received through Ways and Means Advances from January to April 2022. Borrowing funds from the CBN by Ways and Means have been questioned by analysts who have noted that it has created adverse effects on domestic prices and exchange rates as we are experiencing presently. The non-inclusion of the cost of financing the Ways and Means advances in the 2022 budget portends higher debt servicing. The monetary advances have put pressure on the local currency and inflation. Analysts expect a slowing down of fiscal borrowing. The debt service to revenue ratio is already 118% within the first four months of 2022. 

A bearish stance returned to the bond market yesterday, as selloffs dominated the trading sessions across the three tenors. The ongoing FGN bond saving auction buoyed the selloffs with the higher yields offered; the overall average benchmark yields rose by 91bps to 12.43%. Proshare analysts expect a similar outcome today as investors seek higher yields to salvage rising inflation (see table 1 below). 

Table 1: FGN Bonds Market 

NIN Database as A Tool for Combating Terrorism Doubtful Say Analysts

The Minister of Communications and Digital Economy, Prof. Isa Pantami, decried the non-utilization of the National Identification Number (NIN) database in the country by security institutions in the fight against­ insurgency, banditry, and terrorism. Analysts believe the NIN database is not strong enough to fight terrorism yet, although it can be utilized to combat other criminal cases. This is predicated on the fact that the proportion of registered citizens to the total population is about 41.7%, implying that more than half of the population is not covered under the database.

Bank of Japan Halt CBDC Projects Over Lack of Public Interest

Due to a lack of public interest, the Bank of Japan placed its CBDC (digital Yen) pilot on hold, alluding that citizens already have a viable alternative to digital payment. According to the bank, pre-existing digital payments pose a challenge to the digital yen since the payment providers offer redeemable services that allow users to transfer funds and earn payment points that can subsequently be used in shopping or redeeming settlements. Analysts noted that the significant challenge to the CBDC is the demographics of Japan, which has the largest percentage of older citizens in the world and prefers to hold on to cash rather than deposit it in a bank account.

The cryptocurrency market increased slightly after a two-day bearish momentum, rising by +1.35%. Over the last trading session, major coins traded in a mixed bag, with Bitcoin gaining +0.56% and Solana losing -2.1% (see table 2 below).

Table 2: Market Movers