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Nigeria Economy

Monetary Policy Committee to Raise Rates 

The Central Bank of Nigeria’s (CBN’s) Monetary Policy Committee is set to meet next Monday and Tuesday after which it would announce its policy decision. Analysts believe the Q4 GDP numbers, as well as the recent inflation numbers, would likely encourage it to retain its unanimously hawkish position. Another 100-basis points rate hike would push the minimum lending rate to 18.5%, citing the sharp decline in PMI numbers, Analysts say that the MPC must exercise caution not to tip the economy into a recession. 

Despite the moderation in inflation in the core sub-index, our long-term inflation outlook is moderated by a no-change outlook for the country’s foreign reserves and the exchange rate, as well as the expected rise in petroleum prices after the removal of the fuel subsidy. The favorable decline in month-on-month inflation observed in February is yet to constitute a trend. Moreover, the re-monetization of the old N500 and N1000 would reflate effective demand and price growth in 30 -60 days. While we expect a slight reduction in commodity prices to moderate, as we approach the dry season harvest of cassava, maize, rice, and yam, Monetary authorities must explore alternatives to interest rate hikes to increasing capital importation. Our analysis suggests that the single most important determinant of capital flows is the exchange rate differential between the several exchange rate windows.

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.

The Power Sector Reforms President-Elect Tinubu Must Undertake

As Nigeria’s President-elect, Asiwaju Bola Tinubu, prepares to assume office on May 29, 2023, Analysts say his administration must undertake several reforms to resuscitate the country’s ailing power sector. Analysts note that the first step would be the appointment of a power sector expert or administrator to supervise the sector in the capacity of Minister.  The new Minister must draw up a National Energy Plan which clearly outlines the Power Sector Expansion plan, this is necessary to resolve the imbalances between power generation, evacuation, dispatch, and electricity demand. According to experts, the provision of adequate gas supply to the existing generation plants is crucial in dealing with the power generation problem. Power sector professionals say the transmission end of the value chain, in the hands of the government, must be privatized to bring about greater efficiency and end the incessant problem of load-shedding.

Likewise, the incoming government must take advantage of mini-grid solutions to increase the amount of electricity generated. The problem of energy theft at the distribution end of the value chain must be addressed by increasing the number of electricity meters, this is expected to also bring an end to the notorious estimated billing.

Re-circulation of Old Notes Fails to Alter Lower Q1 GDP Growth Forecasts

Following the CBN’s directive to Deposit Money Banks (DMBs) to reintroduce the old N500 and N1000 notes, observers have noted improvements in the rate of acceptance of the old banknotes by banks, filling stations, and in markets.  Automated Teller Machines (ATMs) have also begun to disburse the old notes. The Supreme Court had on March 3, 2023, ruled that the Central Bank of Nigeria should extend the deadline of its Currency Swap Policy to December 31, 2023.  In the period between December and January, the Central Bank of Nigeria (CBN) mopped up a total of N1.78trn of currency outside of bank vaults. 

The implication was a severe reduction in the volume of trade and commerce reflected in the 44.7 Purchasing Managers Index (PMI) for February 2023 indicating the sharpest decline in business activity in the history of the data series. While Analysts are upbeat about the implications of the recirculation of the old N500 and N1000 notes they observe that the deed may have already been done with most GDP growth forecasts coming in between 1% and 2% due to the adverse impact of the demonetization policy. A strong performance by the services sector helped the economy manage a 3.52% real GDP growth in the final quarter of 2022.

Global Economy

ECB Raises Rates Amid Credit Suisse Panic

The European Central Bank (ECB) on Thursday went ahead with its earlier scheduled 50bp despite concerns around the stability of Europe’s financial system occasioned by the near collapse of Credit Suisse. The Swiss bank had seen its share price slump to 1.56CHF on Wednesday following concerns about large amount of outflows and a liquidity crisis at the bank when its largest shareholder announced that it had no plans to increase its investment in the Swiss bank. Being a Systemically Important Bank (SIB), the Swiss National Bank offered it a US$54bn line of credit while some Analysts believe the situation was uncertain enough for the ECB to review its earlier telegraphed 50bp rate hike. Analysts say that the ECB needed to prioritize reining inflation which at 8.5%, inflation in the euro area last month was far above the central bank’s 2% target. Meanwhile, the strong Eurozone Industrial Production data released on Wednesday showed a stronger than expected increase in industrial production across the euro area further justifying the rate hike.

Fed To Balance Inflation target with Financial System Stability 

Following the collapse of three US banks, namely: Signature, Silver gate and Silicon Valley Banks, the US Fed, is viewed by Analysts to be caught between their inflation fight and further financial stability restoration duties when it meets next Wednesday for policy meeting. Opinions split over the degree to which the FOMC might choose to hike rates in the upcoming March 21-22 meeting, with views ranging from no hike to the pre-SVB fallout consensus of 50 basis points, the rhetoric and projections will also be assessed for their near- to longer-term stance.

As far as recent official CPI figures and early survey price indicators have shown, the Fed's inflation fight is far from over.  Though CPI inflation further moderated to 6% in February, and PPI dropped to 4.6%, the ease in price pressure has yet to bring the PCE Inflation number close to the 2% target. Analyst therefore pencil-in a 25bp rate hike in the next meeting.

Japan’s Recovery Doubtful with Trade Deficit

In February, Japan exports rose 6.5% Y-o-Y to  Y7655bn, although Analysts had an expectation of a 7.1% rise in exports Y-o-Y . Meanwhile, the 8.3% rise Y-o-Y in imports culminated in February trade deficit to clock a Y-897.7bn, the biggest deficit for the month of February since 1979. The breakdown of trade relations painted an interesting picture, with the US and China displaying contrasting trends. Trade with the US resulted in a favorable surplus of JPY 530.5bn. While trade with China proved more challenging, as exports dipped by -10.9%Y-o-Y and imports saw a marginal decrease of 0.6% yoy, culminating in a deficit of JPY -209.8bn. Analysts say Japan’s trade deficit further dampens hopes of the world’s third largest economy. Japan had in the final quarter of last year recorded a 0.1% growth despite the long standing ultra-loose monetary policy stance of the Bank of Japan which has included a yield curve control as well as the retention of rates at -0.1%.

Oil and Gas 

Pivoting Towards Alternative Energy in Preparation for High Petrol Prices

Analysts have noted that subsidy becomes a failure when it does not improve the socio-economic well-being of households and businesses. Nigeria’s petrol subsidy is an obscure public transfer mechanism benefitting a narrow band of individuals through opaque accounting and auditing of the sector. Operators in Nigeria's downstream oil and gas business have called on the country's incoming president to prioritize eliminating the rent-creating petrol subsidy and fully deregulate the sector as expected by the Petroleum Industry Act (PIA) 2021. 

Stakeholders are optimistic that the new administration would likely proceed with the subsidy removal plan as previously stated in campaign addresses. The removal of subsidy would mean petrol prices would rise to between N400 and N500 per litre. The problem, however, is that Nigerians are used to low petrol prices given the many years of petrol subsidies. With the possible removal of subsidies in 2023, Nigerians must prepare for higher energy costs. Besides the need to prepare for high prices, analysts reckon that households and businesses in Nigeria need to pivot towards alternative energy sources such as solar and biogas energy. 

NUPRC Initiative to Spur Oil Field Development 

The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) says it is planning a production-based lending engagement to assist license awardees of the 2020 Marginal Field Bid Round in obtaining the needed funds.  According to the NUPRC CEO, Engr. Gbenga Komolafe, the engagement would be between the Commission, Petroleum Production Licence (PPL) Awardees, Exploration and Production (E&P) service providers, and Nigerian Banks. 

Analysts have argued that the development of marginal oil fields in Nigeria has been hampered by the low level of support infrastructure, funding constraints, high operational and capital expenditure, policy ambiguity, and institution lapses. Thus, the recent move of the upstream regulator, in addition to its earlier engagement and mediation with oil field awardees on governance and regulatory requirements, would spur the development of many oil fields subject to investors’ optimism about the Nigerian oil and gas industry. Analysts believe the regulator should also prioritize resolving the legacy concerns, which have been inhibiting investment in the fields, such as infrastructure vandalism, oil theft, and host community issues.

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. Analysts believe these effects and the sedative measures must necessarily be considered by the government in engagement with analysts and different private sector groups.

Raising NNPCL Refining Capacity would Foster Energy Security in Africa

Nigeria currently has a refining capacity of 445,000b/d under rehabilitation, as well as a 20% stake in Dangote Refinery, all worth approximately US$6bn. The Group ED of NNPCL Downstream, speaking at the African Refiners and Distributors Association (ARDA) conference in Cape Town, disclosed that the national company needs approximately US$32.6bn in investment to overhaul refineries, pipelines, and vital downstream infrastructure. In addition to the existing refining infrastructure, the NNPCL wants to co-locate an African Refinery and a condensate refinery around the Port Harcourt Refinery to shore up the company’s refining capacity to 1.27m barrels per day of crude oil processing. Analysts believe that NNPCL's investment in refineries is crucial to meeting both the country's petroleum product needs and bridging Africa’s refining deficits. Yet, it is critical to contextualize it within the framework of the global sustainable energy movement, because expanding refineries and boosting oil output may not be a long-term sustainable solution to energy security, as global demand for fossil fuels is predicted to fall over time.

Saudi Aramco Reports Record Profits as NNPCL Position Remains Hidden 

Saudi Aramco has declared a record US$161bn (£134bn) profit for 2022, the largest annual profit ever recorded by an oil and gas company, spurred by surging global demand and skyrocketing energy prices. The 95% state-owned oil company recorded a 46% year-on-year (Y-o-Y) increase in profits from US$110bn in 2021, almost tripling Exxon’s US$56bn profit in 2022, and more than four times that of Shell’s US$39.9bn, Chevron’s US$36.5bn and BP’s US$27.7bn. Following its Q4 trading, the world's largest oil company declared a US$19.5bn dividend. Its board has also suggested that bonus shares be issued, with investors receiving one more share for every ten they own.

Analysts have drawn a sharp contrast between Saudi Arabia’s oil gain, Saudi Aramco, and Nigeria’s NNPCL, noting that both companies are not on the same level. Analysts say Saudi Aramco, which is listed on Riyadh Stock Exchange, has not been marred by underinvestment, inefficiency, and lack of transparency that continue to threaten the Nigerian national oil company. Meanwhile, Saudi Arabia currently produces over 11 million barrels per day (b/d), meeting its OPEC quotas with some spare capacity, while Nigeria's output stood at 1.3mb/d in February, after recovering from a decades-long low of 900,000 b/d last year.  Analysts maintain that the listing of NNPCL will put it on a path to track the success of Saudi Aramco. 

Oil Prices Fell, Recording the Biggest Weekly Loss 

At the end of the week, oil prices fell reversing earlier gains of more than $1 as concerns around the banking sector crisis outweigh the high China demand outlook. Both contracts fell to their lowest levels in more than a year this week and are on track for their worst weekly drops since December, totaling almost 10%. The failures of Silicon Valley Bank (SVB), Silver Gate, and Signature Bank, as well as the scramble to resurrect Credit Suisse, roiled securities markets and fueled fears of a new financial crisis, weighed on oil prices this week. Investors, however, remain hopeful as a stronger OPEC outlook on China's demand helped offset bearish global investor sentiment. Analysts expect oil prices to record a slight rebound in the coming week as oil fundamentals remain strong while regulatory actions ease the financial crisis concerns. In the local market, analysts expect the petroleum product market to remain stable due to the movement restriction associated with the gubernatorial election. 

Fixed Income 

Currency Market

At the Investor and Exporter fixing, the naira depreciated week-on-week to N461.83/US$1 by 7bps but closed positive at the NAFEX fixing by 3bps (W-o-W) to settled at N461.17/US$1 (See table 1 below). 

Table 1: Naira/Dollar at the I&E FX Window and NAFEX Market

Source: FMDQ, Proshare Research

Money Market

Interbank rate moved up this week as the NTB auction settlement mopped up liquidity. Week-on-week, the Open repo rate (OPR) and Overnight rate rose by -2619bps and 2766bps to 13.25% and 13.80% respectively (see table 2 below).

Table 2: Money Market

Source: FMDQ, Proshare Research

Funding rates should remain elevated next week.

Treasury Bills Market 

This week, the bears led the Nigerian treasury bill market as investors react to the February CPI which rose to 21.91%. The market experienced selloff across all tenors on Friday and the average benchmark yield grew by 6185bps (W-o-W) to 5.94%. 

The OMO bill stayed unchanged all through the week, with the yield at 3.01% (See table 3 below). 

Table 3: Treasury Bills Market

Source: FMDQ, Proshare Research

We expect the selloffs to persist next week in anticipation of the MPC meeting. 

Investors in NTBs Stay Bullish Despite Rising Inflation Expectation 

For the second Treasury bill auction in March, investors’ subscriptions remained very strong, rising to N1.03trn as against N161.87bn offered by DMO. Despite the 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 are opting for risk-free short-term instruments to ease off the impact of rising inflation. Compared to the previous auction, 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 (see table 4 below). 

Table 4: Nigerian Treasury Bills Auction Result

Source: Commercio paper

FGN Bond Market

Both the short and long-dated bonds experienced selloffs this week as investors react to February inflation data. The average benchmark yield spiked by 512bps (W-o-W) to 13.96% (See table 5 below).

Table 5: FGN Bonds Market

Source: FMDQ, Proshare Research 

Analysts expect the bearishness to continue next week as investors weigh on MPC meeting outcome.

AFEX Issues Commercial Papers (CPs) to Raise N30bn. 

AFEX Investment Limited has issued a series 2 Asset-backed CP of N30bn under its N100bn ABCP Programme. The issuance is guaranteed by AFEX Commodities Exchange Limited, and the proceeds are intended to provide pre-qualified Agro processors with working capital to support the purchase of commodities reduced for the production process. The offer has two tenors, 179-day and 270-day with a discount rate of 13.55% and 13.50% and yield of 14.50% and 15.00% respectively. The ABCP notes will be listed on the AFEX Commodities Exchange Limited platform and have a minimum subscription of N5m. The issue has a rating of A1 from DataPro Limited with a stable outlook. Analysts expect the high yields to attract investors as secured short-term instruments offer a lower yield of 9.9% for 365 days.

FX Demand to Spike as Banks Slash PTA and BTA to US$2,000

As the country grapples with insufficient FX inflow resulting in a smaller foreign reserve of US$36.19bn on March 13, 2023, from US$41bn as of December 2021. The accessibility of the dollar in the country for average Nigerians to cater for schooling and business purposes will continue to thin out. The process of receiving Personal Travel Allowance (PTA) and Business Travel Allowance BTA has been adjusted again as FX scarcity worsens. Nigerian banks have reduced the quantity of dollars available to PTA customers by 50% from US$4,000 to US$2,000 and BTA by 60% from US$5,000 to US$2,000. Also, the payment of school fees is subject to a maximum of US$7,500 each twice in a year and the processing time is now raised to a minimum of 16 weeks after approval. Analysts mull that the recent development will further pressure the local currency as the demand for dollars at the parallel market will spike, leading to a depreciation of the naira. 

Commercial Papers (CPs) Step up in 2023 as Treasury Bill Rates Drop

To evade the high-interest rate charged by banks on loans, firms have tilted to the debt market by issuing unsecured short-term instruments to meet their current obligations. The number of commercial papers (CPs) issued in the first three months of 2023 has risen significantly. Analysts had expected that the hawkish Central Bank of Nigeria (CBN) monetary policy rate (MPR) increases would deter firms from issuing CPs and bonds as treasury bills have seen high coupon rates. However, ample liquidity has changed the dynamics of the t-bill market, pushing yields to record lows. Thereby, giving room for firms to raise funds at cheaper rates in the CP market. With the expectation that liquidity will keep yields low, analysts expect more issues of CPs till Q2 2023.

Investors rally at AfDB US$2bn 5-year Bond Issuance

African Development Bank AfDB has issued a five-year global benchmark bond to raise two billion dollars. The bond was issued on March 7, 2023, and will mature by March 14, 2028. According to the bank, bond issuance is part of its funding strategy of issuing large liquid benchmark transactions. The issuance has a coupon of 4.375% and a re-offer price of 99.73%. The lead managers of the bond include Barclays, Credit Agricole CIB, Deutsche Bank, J.P Morgan, and T.D securities while the co-lead manager is CastleOak securities.  The final order book closed in excess of USD 3.5bn with more than 90 orders. Analysts believe the strong rating of Aaa/AAA and a stable outlook from Moody’s and S&P supported the large investor’s interest in the issuance. For the geographic distribution of investors, EMEA had the highest at 64%, followed by Americans at 24% and Asia at 12% with Central banks/ official institutions being the highest investors. 

Equity Market

NGX – Listed Equities

• Year-to-date, the NGXASI closed positive at close the week with a gain of 7.19% as market capitalization settled at N29.91trn.
• Sectoral performance across sectors was broadly negative W-o-W. At the close of trading on Friday, two (2) sectors closed positive while thirteen (13) sector closed negative while two (2) sectors closed flat W-o-W. NGX Consumer Goods topped the gainer’s chart with a gain of 1.11% W-o-W while NGX  MERIVAL index topped the losers’ chart with a loss of 5.25% W-o-W (see chart 1 below).

Chart 1: Movement of NGXASI Index Points 1^st MAR. 2023 – 17^th 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 731.44 points and 961.12 with an increase of 0.55% respectively (see table 6 below).

Table 6: NASD W-o-W Change

Source: NGX, Proshare Research

Gote And Toni Index

Gote Index closed the week positive at 150.59 index points from 150.82 index points recorded previous week representing an increase of 0.15%. DANSUGAR closed the week negative at 3.47% W-o-W and DANGCEM and NASCON closed the week flat (see table 7 below).

Table 7: Gote Index W-o-W Change

Furthermore, the Toni Index closed negative at 118.34 index points from 124.74 index points recorded previous, representing a decrease of -5.13% W-o-W AFRIPRUD closed the week positive at 1.69% W-o-W while UBA, UBCAP and TRANSCORP closed negative at 2.42, 16.72%, and 6.52% respectively W-o-W  and TRANSCOHOT closed the week flat (see table 8 below).

Table 8: Toni Index W-o-W Change

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