The Nigerian Economic Dashboard @ 030323

Nigeria Economy

Supreme Court Extends the Use of Old N500 and N1000 Notes till December

The Supreme Court on Friday ruled that the old N200, N500 and N1000 currency notes must remain legal tenders till December 31, 2023. The CBN’s Naira Redesign and Currency Mop-up policies had seen N1.77trn of currency in circulation being withdrawn. The impact of the demonetization policy has been severe, with many MSMEs recording low turnover due to the lack of cash. According to the Stanbic IBTC PMI survey, Nigeria’s business activity plummeted by the most in the series of the data from 53 in January to 44.7 in February due to essentially to the cash crunch. The slowdown in business activity would persist in many sectors if as expected the CBN fails to comply with the Supreme court ruling. While the drive for a cashless economy is a good initiative, contracting currency in circulation further would be hurtful to the economy. Analysts argue that in the first place, Currency in Circulation in Nigeria as a proportion of Money Supply is only 5.8% less than what is obtainable in more sophisticated economies. Currency in Circulation as a ratio of Money Supply in the US is about 11%, in Canada the ratio is 9.4% while the in Eurozone the same ratio is 9.9% all suggesting that Nigeria was not doing badly all along. Overall, the CBN need not shut MSMEs out of cash so much to promote a cashless/digital economy. 

Understanding the Tinubu Presidency Objectives and the Nigeria Question

Nigeria’s ruling party candidate, Bola Tinubu, was on Wednesday declared the winner of the presidential election, after defeating the candidates of the two main opposition parties. Analysts describe the poll as the most keenly contested since the country returned to Democratic rule in 1999. The announcement of final results by the Chairman of the Independent Nigerian Election Commission (INEC) Prof. Mahmud Yakubu early on Wednesday, has however been met with contestation by members of the opposition who had staged a workout from the National Collation Centre in Abuja after concerns of irregularities were unaddressed. But judging by his manifesto Analysts say that the centrepiece of Tinubu’s fiscal and economic policy would be to bring about fast-growing, premised on industrialization and economic diversification.

Tinubu’s administration seeks to address the country’s high unemployment and poverty by targeting an overly ambitious 12% annual growth rate given that the country’s long-run growth rate is only around 5%. While the new administration would deploy tax policies in line with the Trickle-down theory Analysts believe this would raise big questions about the Federal Government’s (FG) ailing finances. Analysts recommend that the next administration must prioritize opening the capital account by offering opportunities for investment in the many redundant assets of the country as well as issuing new licenses for Greenfield investment in critical sectors. This way fiscal and external sector liquidity can improve significantly with positive knock-on effects on employment and domestic inflation.

Cash Crunch Hurts Private Sector Productivity, Reduces PMI to Three-year Low 

In a recent Purchasing Managers’ survey by S&P Global, Nigeria’s PMI fell to 44.7 in February from 53.5 the month before. It’s the worst record since the height of the coronavirus pandemic in June 2020. The February PMI data reflected the cash shortages experienced across the Nigerian economy had a severe impact on the private sector in February.

Analysts observed declines in both output and new orders, while firms scaled back their purchasing activity and employment. Companies were also impacted by shortages of fuel, which added to price pressures and led to supplier delivery delays. Readings above 50.0 signal an improvement in business conditions in the previous month, while readings below 50.0 show a deterioration. The headline PMI dropped below the 50.0 no-change mark in February, posting 44.7 from 53.5 in January. 

Business conditions deteriorated substantially, ending a 31-month expansion. The decline in operating conditions was the sharpest since the survey began in January 2014, excluding the opening wave of the COVID-19 pandemic in the second quarter of 2020. The most severe impacts of cash shortages were seen with in output and new orders. Analysts say that the recent GDP numbers which suggest that the economy grew by 3.52% y/y in Q4:22 from 2.25% Y0Y in Q3 2022 would be reversed by possible contractions in March. As the lingering cash shortages will likely dampen economic activities in Q1 2023. Proshare pencil-in a 2% real GDP growth in Q1 2023.

FX and Fuel Scarcity Drive Domestic Fares Up

Data from the Transport Fare Watch (January 2023) report of the National Bureau of Statistics (NBS), Local airfares increased 94.78% to an average of N74,702.70 in January 2023 from N38,352.19 in January 2022. The rise in airfares over the 12 months was associated with the depreciation of the naira and the corresponding adjustment of airfares by domestic airline operators. Meanwhile, the average fares paid by commuters for bus journeys within cities per drop also increased by 36.59% in January 2023 from N476.39 in January 2022. The average fare on intercity bus travels rose to N3,998.42 per drop in January 2023, a 36.75% Y-O-Y increase. Analysts expect the February report to reflect a slight moderation given that the currency mop-up and resultant cash crunch has forced some transporters to reduce fares, just as the situation with fuel scarcity has now abated. 

Global Economy

US Initial Jobless claims data, Service PMI, Signal Further Rate Hike

According to US Labor Department data released on Thursday, the number of Americans filing first-time unemployment claims fell by 2,000 last week to 190,000. The figure was lower than forecasts penciled-in at 195,000, while the previous week's figure was unrevised at 192,000. The US economy had added 517,000 jobs in January, while the unemployment rate fell to 3.4% from 3.5% the previous month. Economic activity in the services sector expanded in February for the second consecutive month as the Services PMI registered 55.1 marking the 32nd expansion in the last 33 months, with the single contraction in December. While the strong labor market and service sector activity indicate a ‘no-landing’ scenario the FOMC would be preparing to further raise rates to slow down the economy. On the other hand, however, economic activity in the US manufacturing sector continued to contract in February, albeit at a softer pace than it did in January, with the ISM Manufacturing PMI edging higher to 47.7 from 47.4. This reading came in below the market expectation of 48. 

Africa’s average GDP growth to stabilize, despite recent headwinds.

In a new report, titled Africa’s Macroeconomic Performance and Outlook (MEO) 2023, the African Development Bank estimates Africa’s average GDP to stabilize at 4% in the next two years, up from 3.8% in 2022. The stable outlook projected for 2023–2024 reflects the continuing policy support in Africa, global efforts to mitigate the impact of external shocks and rising uncertainty in the global economy. Analysts say it is important that African governments address the significant financing gaps in Africa. At the same time, it is imperative to enact policies that can encourage the mobilization and leverage private financing to complement government budgets thereby curtailing inflation, reduce debt servicing costs.

Oil and Gas 

Brent had a weekly growth of +4.28% (see Table 1 below).

Metals

Gold advanced by +1.75% while Silver advanced by +0.93% W-o-W (see Table 1 below).

Agriculture

Cocoa prices advanced +0.47% W-o-W. 

Corn prices declined by -2.07% W-o-W and Sugar prices declined by -1.50% (see Table 1 below).

Table 1: Commodity Prices

*Data for the 3^rd of February 2023 is as of 05: 39 pm (Nigerian Time)

Commodities

Cash Crunch Cripples Agric  Sector

Plateau State poultry farmers have complained about how the cash crisis has caused headaches for them as prices of poultry products have fallen by about 50%. A crate of eggs used to be sold at N2,100 but is now sold for N1,000. The problem with this is inputs have remained the same with poultry feed staying elevated as egg prices crashed in the state. Another business model has been adopted in Kano’s Dawanau International Grain Market, a market that serves as a major supplier of various food and cash crops for local consumption and export. While prices of grains have dropped in the market, some traders still accept the expired notes, albeit at higher costs. For a 100kg bag of rice, its price is N30,000 but is now sold at N45,000. Still, the high prices have not driven customers away now have lots of old naira notes with them. 

President-Elect Tinubu and Renewed Agricultural Hope

With a freshly-elected administration, analysts have taken a look at things that could improve Agricultural Production, Domestic Market Supply, and Export of Agricultural Produce. A breakdown shows that Nigeria’s production of agricultural produce has been lower than potential. In an earlier Proshare report: Understanding Nigeria’s Sugar Master Plan: The Gains and Pains, we could see that production of sugar compared to the initial plan have gone in opposite directions. Domestic supply of agricultural produce has also been under threat, from bad roads to herders and activities by unscrupulous individuals which increases the risk of transporting some of these products to the market, thereby increasing the prices of these products when they get to the market. 

Our export has also been below par as export of certain commodities where production is at its highest in Nigeria have not been recorded. The example of cassava is brought to the fore where Nigeria’s high production doesn’t equate to exports as many products move along the border to neighbouring countries without being seen as exports. These, Production, which is tied to inputs, Domestic supply which is tied to security and Export which is tied to proper agency monitoring could improve foreign exchange earnings and improve the agricultural value chain under the new administration.

Oil and Gas 

Nigeria’s President-Elect and the Oil Sector:  A Few Soundbites

As hinted, Senator Bola Ahmed Tinubu's election as Nigeria's president-elect has two implications for the country's oil and gas industry in the near term. First, stability of petroleum product supply through local refining to satisfy domestic demand and full deregulation of the downstream sector (subsidy removal). Second, more forceful measures to curb crude oil theft and vandalization to oil infrastructures. We have argued that the APC's Bola Tinubu has the most comprehensive plan for reforming the oil and gas sector and given his experience in the oil and gas industry, we believe the sector, under his watch, will effectively utilize the country’s vast resources, takes advantage of high oil prices to generate revenue, and ensures self-sufficiency in meeting the demand for petroleum products and eliminating scarcity.

Fuel Scarcity Looms on Breach of Stakeholders’ Agreement  

High-ex-depot prices and differential pricing have reemerged in the Nigerian petroleum industry, which is consistent with our projections that the recent actions to address petrol scarcity and pricing ambiguity will be unsustainable and ineffectual. The Independent Petroleum Marketers Association of Nigeria (IPMAN), according to a report in ThisDay Newspaper, has raised alarm, accusing depot owners in Ijegun, Apapa, and Tin Can Island ports of undermining the efforts of the federal government by selling petrol to retailers at N220 per litre rather than the regulated N172 ex-depot price. Because of this, some marketers have maintained their pump price at N250 per litre while major marketers sell at the regulated N185 per litre, a recipe for another round of fuel scarcity. We believe that pricing ambiguity will neither aid in attempts to address the petrol shortage nor help investment. Investors’ mistrust of the downstream oil sector is one of the main effects of high ex-depot prices and differential pricing on investment inflow. The long-term solution, in our opinion, entails removing subsidies, charging statutory fees in naira rather than dollars, and domestic refining of petroleum products. 

Slow Execution Hobbles NLNG Capacity Upgrade

With a capacity to process 22m tonnes per annum (mtpa) of LNG, produce 5m tonnes per annum (mtpa) of Natural Gas Liquids (NGLs), and export LNG to markets across the world, mainly in Europe, Asia, and Americas, Nigeria’s LNG Limited (NLNG) is a significant player in the global LNG market. Specifically, its export markets include Spain, Italy, France, Turkey, South Korea, and other countries in the Americas. However, the NLNG had intended to start domestic LNG supply around July 2022 but fell behind schedule. The company recently disclosed that it is close to actualizing its plan to supply LNG to the Nigerian market after signing Sales and Purchase Agreements (SPAs) with three power firms as off-takers, who are to set up receiving infrastructure to enable the project to begin. By offering an initial volume of 1.1 mtpa for domestic energy generation in addition to the current supply of 100% of its liquefied petroleum gas (LPG) to the domestic market, we believe the move will deepen domestic gas utilization in Nigeria. More so, the NLNG has a viable model to boost gas revenue, promote the development of local content, and seize market possibilities in the competitive global LNG market.

A Rise in Condensate Output May Push Oil Production to 1.6mb/d

Contrary to a recent estimate by the Group Managing Director of NNPC Ltd, Mele Kyari, that Nigeria's oil production has recovered to 1.6 million barrels per day (b/d), a February OPEC output survey by Reuters shows Nigerian output increased by 100,000 b/d, improving its compliance with agreed-upon quota from 172% to 169% in February. According to this estimate, the country's output would have increased to 1.358 mb/d (or 1.436 mb/d based on OPEC secondary sources), bringing it closer to the budget assumption of 1.69 mb/d and quota of 1.8 mb/d. Analysts believe that the country's oil output has continued to increase as a result of ongoing efforts to prevent theft and vandalism as well as the reopening of shut-in wells. Despite this, Nigerian crude oil output has not increased to 1.6 mb/d. But, the inclusion of condensates, which are now produced at a rate of between 300,000 and 400,000 b/d, justifies oil production at levels higher than 1.6 mb/d, as stated by the GMD of the national oil company.

Oil Prices Rise on Renewed Bullish Signals

Despite trading negative on Friday on rumour that the UAE has an internal debate about leaving OPEC and pumping more oil, oil prices gained for the week on a rebound in China’s factory activity and Russia’s plans to deepen oil supply cuts. However, the gain was moderated by a stronger dollar (which made oil expensive for holders of other currencies), growing concerns about the rising US inventory, and heightened recession risks on rising rate hikes in Europe and the US. Analysts expect the rising US inventory and the faster-than-expected rise in consumer prices across the globe to bolster further interest rate hikes, reinforcing expectations of slower fuel demand. Analysts expect a stable petrol market but price differentials to persist between major and independent marketers, albeit at a lower range. Meanwhile, depending on the LNG spot prices, analysts reckon that the prospect of rising Chinese demand for natural gas would open market opportunities for Nigerian gas.

Fixed Income Market

Currency Market

This week, the naira deviated from the weekly gain trend, depreciating by 13bps at the Investor and Exporter FX window to settled at N461.75. 

The naira also depreciated at the Nigerian Autonomous Foreign Exchange (NAFEX) fixing to N461.33/US$1(See table 2 below).

Table2: Naira/Dollar at the I&E FX Window and NAFEX Market

Source: FMDQ, Proshare Research

Money Market

The OMO bill maturity and FX swap maturity of 150m kept system liquidity robust this week with the funding rates staying flat for most trading sessions. However, on Friday, the Open repo rate (OPR) and Overnight rate rose to 12.13% and 12.43%. On a weekly basis, the OPR and O/N rates rose by   1552bps and 1499bps (see table 3 below).

Table3: Money Market

Source: FMDQ, Proshare Research

The Funding rates should remain elevated in the coming week.

Treasury Bills Market 

The Treasury bill market had mild buying interests this week, staying flat for most trading sessions this week. Week-on-week, the average benchmark yield declined by 211bps to 4.17%. 

With the maturity of the OMO 7-May-23, the average benchmark yield dropped to 3.01% (See table 4 below).

Table 4: Treasury Bills Market

Source: FMDQ, Proshare Research

We expect a stronger buying interest next week.

FGN Bond Market

The selloffs at the short end of the curve outweighed the buying interest at the mid-to-long tenors this week. The average benchmark yield rose by 37bps week-on-week to settle at 13.52% on Friday (See table 5 below).

Table 5: FGN Bonds Market

Source: FMDQ, Proshare Research

The cherry picking should continue in the coming week.

Central Bank to Raise N1.13trn in Q2, 2023. 

The Central bank of Nigeria has allocated N1.13trn Treasury bill issuance for the second quarter of 2023, a 22% higher than N926bn issued in Q2 of 2022. The projected treasury bills issuance serves as a roll-over of maturing bills for the corresponding period. For January and February only, the CBN raised N540.9bn as the robust liquidity favoured the large supply. According to the document, the CBN will raise N531.74bn in March, N280.96bn in April and N324.36n for May. The issuance will be spread across three tenors, 91-day, 182-day, and 364-day. Nigeria’s treasury bill rate has fallen to record low in January 2023 but recovered in February, rising to 3% for 91-day, 3.24 for 182-day and 9.9% for the one year as at the last auction. Analysts believe the large issuance serves as an instrument to mop out excess liquidity with estimated inflow of N1.6trn from OMO, bonds, and T-bill maturity in April (see table 6 below). 

Table 6: Nigerian Treasury Bills Offer for Q2, 2023

Source: CBN, Proshare Research

GCR Assigns Negative Outlook to C&I leasing Plc

GCR rating has revised C&I leasing Plc’s outlook to negative but reaffirmed the short and long-term national scale issuer ratings at BBB (NG) and A3 respectively. The company’s weak cash flow and leverage metric triggered the negative outlook. From the company’s FY 2022, EBITDA coverage interest expenses remained low at 1.9x despite the moderation in interest expenses, and net debt to EBITDA increased to 3.9x which justifies the group’s low operating cash flow and high debt. The group currently has series 1 & 2 under its N20bn Bond issuance programme, Series 1 N7bn was issued in 2018 and will be fully redeemed in June 2023 while N10bn series 2 was issued in June 2021 with a seven-year maturity. Although the company has not defaulted on any of its repayment since inception till date, the negative outlook suggests that the cash flow and debt challenges might persist which may eventually lead to a downgrade. Analysts expect the rating to generate mild selloff pressure on the company’s bond.     

Nigeria’s Eurobond Turn Positive before Election 

The Eurobond market turned positive from the previously bearish sentiment triggered by Moody’s recent downgrade to Caa1 on January 27^th. The rally in the Eurobond market began on Thursday, 23 February 2023, before the election, with an overall rise in bond prices while the average benchmark yield dropped to 11.65% from 12.03% from the previous trading session. 

This discovery is contrary to Bloomberg’s observation that the market has recorded its best gain due to the election results showing the APC candidate leading. According to the report, the sovereign bond ranked five of 10 top-performing emerging market bonds. However, analysts believe the risk-on sentiment cannot be attributable to a single political candidate since the rally began before the release of electoral results. Also, the strong buy interest observed was driven by institutional investors as foreign investors instinctively avoid below-investment-grade bonds. 

Lagos State Lists N137bn Bond on NGX 

The Lagos State Government has listed its N137bn series IV bond on the Nigerian Stock Exchange. The 10-year unsecured bond with a fixed rate of 13% was issued in December 2021 with the sole purpose of financing major infrastructural projects in the transportation, environment, and health sectors in the state. The debt issuance is the largest single bond in the Nigerian domestic market and the listing on NGX will stimulate more investors’ participation. However, analysts noticed that Fitch recently downgraded the state’s long-term foreign and local currency issuer default ratings to B- from B in November 2022, based on a deteriorating operating environment that might weaken revenue and the state’s ability to cover its debt service. The downgrade rating should not impact the listing on NGX as the exchange platform is dominated by domestic investors and also being the state with the highest IGR in the country should keep investors optimistic.

Equity Market

NGX – Listed Equities

• The Nigerian bourse ended the week on a positive note as market sentiment turned positive.  The NGXASI closed the week with a gain of 1.06% as against a 2.13% gain recorded last week. The Nigerian Exchange recorded N315.96b gain in naira terms. 
• Year-to-date, the NGXASI closed positive at close the week with a gain of 8.62% as market capitalization settled at N30.24trn.

Sectoral performance across sectors was broadly positive W-o-W. At the close of trading on Friday, fifteen (15) sectors closed positive while one (1) sector closed negative while one (1) sector closed flat W-o-W. NGX CONSUMER GOODS topped the gainer’s chart with a gain of +5.65% W-o-W while OIL and GAS index topped the losers’ chart with a loss of -2.36% W-o-W (see chart 1 below).

Chart 2: Movement of NGXASI Index Points 1st FEB. 2023 – 3rd MAR. 2023

Source: NGX, Proshare Research

NASD OTC Exchange - Unlisted Equities

The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week on a positive note.  The NSI and Market capitalization closed the week at 724.99 points and 952.64 with an increase of 1.78% respectively (see table 7 below).

Table 7: NASD W-o-W Change

Source: NGX, Proshare Research

Gote And Toni Index

Gote Index closed the week positive at 145.86 index points from 141.06 index points recorded previous week representing an increase of 3.38%. DANSUGAR, NASCON   and  DANGCEM  closed the week positive with 11.63%, 10.91% and 2.21% respectively W-o-W (see table 8 below).

Table 8: Gote Index W-o-W Change

Furthermore, the Toni Index closed negative at 126.86 index points from 127.53 index points recorded previous, representing a decrease of -0.53% W-o-W UBA closed the week positive at 1.18% while UBCAP, AFRIPRUD and TRANSCORP closed negative at -5.50%, -0.79% and -1.54% respectively W-o-W and TRANSCOHOT closed the week flat (see table 9 below).

Table 9: Toni Index W-o-W Change

Analysts Expectation:

Analysts expects the bulls to dominate as investors take positions as more companies release their audited financial result for the previous year and declare dividend.

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