Being an Analyst Note issued by Proshare Research on March 16th, 2023
Stakeholders Advise that Subsidy Removal should be A Broader Social Engagement
Petrol subsidy has both costs and benefits, but its benefits in Nigeria have been eroded by a poor allocation mechanism and the rent-seeking conduct of its main operators, explaining the call to remove subsidy. The Minister of Finance, Budget, and National Planning, Mrs Zainab Ahmed, recently said that the federal government would remove the controversial petrol subsidy before the end of President Muhammadu Buhari’s tenure on May 29, 2023. She attributed the delay to the 2023 general elections and the forthcoming national population census. Relatedly, the Minister of State for Budget and National Planning, Mr. Clem Agba, also revealed that the federal government is yet to harmonize efforts with the states on the palliative measures to put in place for the discontinuation of the petrol subsidy.
Analysts observe that the benefits of petrol subsidy, including affordable fuel, social stability and economic growth have been softened by a combination of overconsumption, lack of investment, rent-seeking activities, inefficient allocation, and economic burden on the government. Nonetheless, the removal of the subsidy is a complex issue with socioeconomic pains and gains that requires a careful assessment of the aftereffect and the necessary protective measures (see illustration 1 below). Analysts believe these effects and the sedative measures must necessarily be considered by the government in engagement with analysts and different private sector groups.
Nigeria’s Inflation Rate Rises to Record High
According to the National Bureau of Statistics (NBS) inflation in February rose to 21.91%, the highest in the NBS series' contemporary history, defying Analysts’ expectations. The Inflation rate projections for February 2023 ranged from 20.9% to 21.2%. Annual inflation numbers rose by 11bp to 21.91% up from 21.82% in January. The core sub-index recorded a disinflation (18.84% in February compared to 19.16% in January) while prices rose faster in the Food sub-index (24.35% in Feb. compared to 24.32% in January). The expectation that inflation would decline was premised on the severe cash crunch occasioned by the CBN’s Naira redesign and demonetization policy which severely affected cash-based transactions.
Analysts note that the impact of the demonetization policy bootstrapped the monthly data while adverse exchange rate movement and higher energy costs dominated the price increase figures. Meanwhile, the overall index on a month-on-month basis queued along the downward trajectory as expected, just as both the food and core sub-indexes declined in the period. Headline inflation declined from 1.87 to 1.71% between January and February, similarly, the food subindex showed a slower pace of price growth in February as core inflation declined from 1.82% to 1.06% while food inflation declined from 2.08% to 1.9%. Analysts say that last quarter’s strong GDP numbers (3.52%) as well as the recent rise in inflation would encourage the Monetary Policy Committee (MPC) to further rates in its second meeting for the year billed to hold next week (see chart 1 below).
Between Credit Suisse and SVB; the Implosion of Global Banks
Global Banking has in the last week witnessed the implosion of two US banks, most notably Silicon Valley Bank (SVB) and Signature bank. The latest concerns have been around Credit Suisse. Analysts observe that the situation with Credit Suisse is different from the American banking debacle. While the US banks were classified as mid-sized and not Systemically Important Banks (SIBs), Credit Suisse is a large European and systemically important institution, explaining the level of panic it has created so much so the European Central Bank (ECB) has started to review its earlier telegraphed 50bp rate hike for today’s meeting in the interest of financial system stability. But even the nature of the two crises is also slightly different.
While the problem with SVB was attributed to the mismanagement of interest rate risk, and the concentration of depositors, the large outflows seen in the case of Credit Suisse has been attributed to the history of mismanagement in the European giant. In 10 years, the bank’s share price has progressively declined by 90% from 23.CHF in 2013 to 2.24CHF as of the start of trading yesterday. The bank’s share price further declined to 1.56CHF yesterday following concerns about large outflows at the bank. While the bank’s share price has now gained 20% in the wake of the Swiss National Bank’s £44bn lifeline, its Credit Default Swap premiums are trading above 2008 levels suggesting a certain level of pessimism. Analysts doubt if the lifeline would be sufficient in addressing what looks like an entrenched management problem (see illustration 2 below)
Investors in NTBs Stay Bullish Despite Rising Inflation Expectation
For the second Treasury bill auction in March, investors’ subscriptions remained strong, rising to N1.03trn as against N161.87bn offered by DMO. Despite the massive subscription, the DMO sold exactly N161.87bn with a spread of N1.10bn for 91-day, N928m for 182-day and N159.85bn for 364-day. Analysts observed that Investors have increasingly opted for risk-free short-term instruments to ease the impact of rising inflation. Compared to the previous auctions, the rate on the 91-day instrument rose by 111bps to 2.55% while the rates on the 182-day and 364-day declined by 100bps and 51bps to 5% and 9.49% consecutively. The bid-to-cover ratio across the three papers stood at 6.43x, 19.43x, and 6.30x. Analysts, however, expect the market to experience some selloffs as investors react to the February inflation figure of 21.91% (see table 1 below).
NCC Introduces Uniform Short Codes for Mobile Networks
In line with its consumer-centric view of regulation, the Nigerian Communications Commission (NCC) has directed mobile network operators (MNOs) to commence implementation of approved harmonized short-codes (HSC) for providing certain services to telecom consumers in Nigeria (see table 2 below).
The old and new harmonized shortcodes will run concurrently up until May 17, 2023, when all networks are expected to have fully migrated to full implementation of the new codes. The era of recharging using different codes depending on the network will come to an end.
Analysts believe that the initiative, which is in line with NCC’s regulatory modernization program, is essential to make life easier for telecom consumers, as easier code recall would improve consumer quality of experience (QoE).
Collaborative Efforts of PenCom and PFAs to Boost ROI of Dollar-Denominated Pension Assets
Pension Fund Administrators (PFAs) and the National Pension Commission (PenCom) have agreed to create a framework that would allow pension funds to invest in dollar-denominated assets both within and outside Nigeria. Pension fund investment (PFI) in the foreign money market classes has declined steadily to N18bn as of December 2022 from N32bn recorded in September 2022. Although, pension fund investment (PFI) in foreign money markets has risen by 111% year-to-date (YTD) from the N8bn reported in January 2022.
The pension industry has seen sustained growth YTD as the total assets of the industry stand at N15trn as of December 2022. The increased priority on portfolio diversification by the regulator has helped prop up investment in alternative assets and infrastructure projects in Nigeria. As such, alternative asset classes like private equity funds, real estate properties, and infrastructure funds reported strong growth in December 2022 relative to January of the year (see table 3 below).