Expectations from the Markets this Week – 250722
ECB raises rates, Emerging Markets face new threat of Capital Flows Reversal
For the first time in 11 years, the ECB on Thursday raised its benchmark deposit rate by 50 basis points to zero percent. The EU’s record high inflation (8.6% in June) forced the ECB to end its eight-year experiment with negative interest rates, the ECB signaled further hikes at its next meeting on Sept. 8. Last Wednesday, the Euro had dipped below parity with the US dollar a reflection of the increases in US interest rates over several months, which makes investments in the US dollar area more attractive.
As rates rise in the more advanced economies, the outlook for emerging markets becomes more uncertain. The belief is that with the high levels of inflation and public debt estimated at 64% of GDP, the growth outlook for emerging economies would be adversely impacted.
U.K. Inflation Hits 9.4%, a New 40-Year High
According to the U.K. Office for National Statistics, inflation surged to 9.4%, in June a new 40-year high. Inflation soared on the back of food and energy prices spurring a major cost-of-living crisis. The consumer price index rose slightly above a consensus forecast among economists polled by Reuters and up from 9.1% in May.
This represented a 0.8% monthly incline in consumer prices, exceeding the previous month’s 0.7% rise but remaining short of the 2.5% monthly increase in April. The Bank of England has implemented five consecutive 25 basis point hikes to interest rates as it looks to rein in inflation, but Governor Andrew Bailey that the Monetary Policy Committee could consider a 50-basis point hike at its August policy meeting. The worsening costs of living crisis in the UK would have implications for the volume of Diaspora remittances to emerging markets
U.S. weekly jobless claims rise, but Inflation expectation remains high
Data from the US Labor Department suggests that Initial claims of unemployment benefits (a measure of layoffs) rose 7,000 from an unrevised 244,000 a week earlier to an eight-month high of 251,000 for the week ended July 16. Economists polled by Reuters had forecast 240,000 applications for the latest week. While this has been received by many as an indication that the economy was already slowing and so the Feds would not require an aggressive rate hike to rein in inflation, however, note that the layoffs were major in the interest rate-sensitive housing and manufacturing industries. With 11.3 million job openings as of the end of May, demand remains strong; wages are expected to continue to drive inflation in the world’s largest economy.
CBN raises the base rate to 14%, Dimming Growth Prospects.
As anticipated the Monetary Policy Committee (MPC), on Tuesday, decided to extend its hawkish stance by raising the base rate by 100bp. According to the Committee Chairman, CBN Governor Godwin Emefiele, the unanimous decision to hike the rate was aimed at curtailing inflation and reducing the pace at which consumer purchasing power was being eroded by inflation. According to the National Bureau of Statistics (NBS), general inflation had risen to 18.6% (a five-year high) in June 20222.
It is also noted that, given the +10% increase in Money Supply to N48.8trn since January, a higher base rate would help to mop up liquidity and contain the inflationary trend. However, the action would also create the unintended consequence of slowing down manufacturing and non-manufacturing output. The Monetary Policy Committee however maintains its growth outlook with a forecast of +3.33% although The Analysts see growth slowing to +2.9% in H2 2022
FGN records 49% Revenue Performance, January – April 2022
Reviewing the Draft 2023 – 2025 MTFF/FSP document made available on Thursday by the Ministry of Finance Budget and National Planning, it is noted that in the event that the subsidy regime continues next year, N1.1trn meant for Capital expenditure would have to be utilized to foot the subsidy bill. It is also noted that this would limit the economy’s growth projection and therefore question the basis of the +3.75% growth assumption of the Medium-Term Framework. Meanwhile, it is also observed that over the period between January and April, Capital expenditure underperformed by -57.6%, Debt service costs exceeded the amount budgeted by N620bn (+47%) which reflects the larger than expected borrowings by the government, as well as global upward adjustments in interest rates.
Nigeria’s National Power Grid collapsed for the 7th time in 2022
The National grid crashed from a peak of 4091.6MW to 50MW on Wednesday. In their communique, Electricity distribution companies failed to identify the reason responsible for the recent collapse. It should be noted that the National grid collapse may not be unconnected with the frequent grid instability, which arises from the disparity between Power fed into the system and the amount off-taken. This, therefore, raises questions about efficiency at the distribution end of the value chain where too few users are registered.
Also note that the recent blackout marks the seventh in 2022, and Tuesday’s grid crash has occurred despite an accord made by all participants in the value chain and announced by the NERC, to deliver 5000MW to end users starting July 1.
Heady Days for Nigerian Airlines as NCAA Grounds Dana Air
The Nigerian Civil Aviation Authority (NCAA) on Wednesday suspended the Operating License of Dana Airlines, barring the operator from flight operations. According to the NCAA, investigations showed that the airline is experiencing financial strains and as such is unable to conduct safe flight operations. The decision by the NCAA coincides with the decision of Aero contractors to suspend flight operations due to the incessant hike in the cost of aviation kerosene. The Aviation sector operators have been confronted with the double challenge of high cost of Jet fuel as well as the scarcity of FX required for their regular maintenance. With crude oil prices still projected at above US$100/b, it is believed that the cost of Jet fuel and adverse movement in the exchange rate may force other flight operators to suspend operations.
Oil and Gas Sector
Regulators Remain Mum on New Petrol Prices
Analysts observed that the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has remained silent on the PMS Pump Price Adjustment report flying across the media. Some other observers have noted that it might be convenient to say that the Authority has bowed to the antics of oil marketers to adjust the petrol pump price upwardly. The price adjustment report pointed out that petrol price had been reviewed upward from N165 per litre to somewhere between N169 and N189 per litre, depending on location. This follows a similar upward adjustment in ex-depot price from N148.17 to a maximum of N167 per litre.
With petrol pump price already selling at N170 per litre across filling stations in Lagos and environs, analysts believe the upward adjustment may not be far from the outcome of last week’s meeting between the regulators and the operators. The silence of the regulator, however, raises concerns about the efficiency of the new commission in managing the petrol pricing policy in the country.
Assessing the New NNPC
On Tuesday, 19 July 2022, the Nigerian National Petroleum Company Limited (NNPC Limited) officially transition into a commercial entity that will operate in line with the Petroleum Industry Act (2021) and be regulated in line with the provisions of the Companies and Allied Matters Act (CAMA). Typically, the expectation is that the new NNPC would be commercially oriented, profit-driven, and promote transparency, accountability, and good corporate governance.
However, analysts doubt the efficiency of the company given the ownership interests vested in the government – held by the Ministry of Finance and Ministry of Petroleum Incorporated. Brazilian counterpart, the State-owned Petrobras, facing management issues with the Brazilian government, the pursuit of social interest and the need to score political points might undermine the NNPC board decisions on appointments, pricing policy, value creation, and energy transition, financing, and refineries operations. Nonetheless, the Initial Public Offering (IPO) of the new NNPC by mid-2023, as promised by the Group CEO of the company, might be the game changer needed.
Higher Energy Prices Spur Nigerian Consumer Anxiety
It is expected that Nigeria’s energy prices to continue to rise as petrol price climbed by 6.21% year-on-year (Y-o-Y) and diesel rose by 202.67% Y-o-Y between May and June 2022, pressuring more Nigerians and worsening the cost-of-living crisis. The National Bureau of Statistics (NBS) Petroleum Price Watch for June 2022 shows price increases across the products year-on-year and month-on-month.
The increase in petroleum product prices largely reflects the rise in crude oil prices, the exchange rate pressure, and logistical issues associated with the sector in Nigeria. As energy costs remain a major driver of inflation, analysts expect elevated energy prices to contribute to higher inflation and reduce purchasing power in July 2022. Meanwhile, the inactions of the regulator on the recent price hike suggest that both the regulated and deregulated energy prices may continue to mirror the trajectory of the global benchmark crude prices.
New Oil and Gas Investments Needed to Reposition Africa’s Economies
The quest for alternative oil and gas to the sanctioned Russian energy is again shifting attention to Africa, where oil and gas projects have earlier been shunned on climate change concerns, operational issues, and high costs environment. African energy leaders have consistently discredited the global energy transition roadmap, arguing that it failed to acknowledge the unique features of regions like Africa, where a large proportion of the people are living in energy poverty. The energy leaders had maintained the call for a just energy transition that supported oil and gas development for an extended period in Africa while implementing carbon reduction strategies. Analysts expect the external investment consideration in Africa to provide leverage for the continent to upscale its oil and gas exploration and production. Reuters analysts estimated that the proposed energy investment projects of public and private companies in Africa are worth $100bn.
With Nigeria currently needing new investment and funding for its idle oil and gas projects, Analysts believe the drag in fully implementing the Petroleum Industry Act (PIA) may deter investment into Nigeria. This is because the Minister of State for Petroleum Resources, Timipre Sylva, had noted that Nigeria got only a paltry 7% from the $70bn gas investment inflow into Africa in the last ten years before the passage of the PIA.
Brent had a weekly growth of +3.74% (see Table 1).
Gold inched up by +1.50% and Silver also inched up by +0.43% W-o-W (see Table 1).
Cocoa prices declined by -1.33% W-o-W.
Corn prices dropped by -4.36% W-o-W while Sugar prices dropped by -7.11% (see Table 1).
Table 1: Commodity Prices
Commodity 22-Jul-22 15-Jul-22 31-Dec-21 Weekly Chg YTD Chg
Brent 104.93 101.15 78.54 3.74% 33.60%
Gold 1727.7 1702.1 1827.1 1.50% -5.44%
Silver 18.66 18.58 23.27 0.43% -19.81%
Cocoa 2298 2329 2546 -1.33% -9.74%
Corn 570.5 596.5 595.5 -4.36% -4.20%
Sugar 17.9 19.27 18.83 -7.11% -4.94%
*Data for the 22nd of July 2022 is as of 05: 01 pm (Nigerian Time)
The Rising Cost of Fertilizer And the Dangerous Alternative for Farmers
The rising cost of fertilizer has caused an increased cost in crop production. This rise has forced farmers in poor countries to alternate means of higher production inducement. Farmers in Nigeria have resorted to using organic matter (manure) to improve crop production. They use organic matter which ranges from animal dung to decomposed forms of dead plants and animals. Smallholder farmers in Kano state of Nigeria have spoken about newer alternatives taken by them as these organic matters has begun increasing in price as demand also increases. They have turned to another means to increase production, Salt, and Potash. They claim this mixture mirrors the effects fertilizers have on yield while being a lot cheaper to get than fertilizer.
While this mixture might seem to work well in the immediate future, it could have long-lasting negative effects on the soil as it would alter the alkalinity of the soil while also reducing nutrients required by the soil over a while. Experts have suggested the use of compost which is gotten from having manure, adding water, and covering it to generate heat which causes a reaction for the nutrients to be released. This compost is said to be environmentally friendly and can be used without using manure.
Heat wave in Europe Fuels Fears of Wheat Supply Constraints
Wheat prices have been under pressure for about 4 weeks majorly from exports coming from a major exporter, the United States, and news that other major producers would have a good harvest. The pressure had pushed prices below pre-Ukraine war prices up to a negative YTD value at $776.75/t.oz. An intense heat wave in Europe poses problems for bakers who would have been happy to see the drop in wheat prices which in turn would affect flour prices. The heat waves have been persistently affected several cities in Europe with some recording temperatures as high as 35 degrees. This has affected harvests in countries like France which have cut down the wheat production forecast to below last year’s harvest.
This could affect wheat prices as we should expect an appreciation in the international market as consumers fear a reduced supply resulting from this heat wave could further put a strain on the market especially after it climbed above the $800 mark.
High Wheat Price Encourages Bread Production Innovation in Nigeria
High prices of Wheat resulting from the Russia -Ukraine war have forced some Nigerian bakers to innovate to keep afloat. Some bakers have begun exploring the use of potato-wheat mix in bread production. At a lesser production cost, many bakers were able to record breakthroughs from the teething problems experienced concerning the percentage mix of potato puree and wheat. More yeast was needed to ensure the bread rose in the oven compared to using wheat flour only as wheat flour only bread is dry as opposed to wheat flour and potato puree mix. The implications this innovation would have if adopted across the board is bread production costs reduce thereby forcing bread prices down
Fixed Income Market
RT 200 programme raised FX earnings in H1 2022
Following the data released by CBN, forex inflows from the non-oil exports through the I&E window grew by 166% to $2.4bn in H1 2022 compared to H1 2021. The increment in non-oil export inflows can be attributed to the RT200 FX programme introduced by CBN. However, the FX scarcity still lingers in the country despite the increased inflows and analysts believe diversification of the country’s export should be expanded beyond primary products, a plug into finished goods should generate more FX earnings.
FX Shortage Threatens further Naira Depreciation
FX scarcity has worsened in the country amidst massive demand and it’s beginning to weigh on Naira, especially in the Parrel market following the subsequent depreciation. Although, the exchange rate at the I&E window has been sparingly stable due to the sustained intervention in the FX market by the CBN. The recent suspension of virtual dollar cards by some Fintechs might ultimately worsen the situation indicating that investors solely rely on the parallel market for FX. The belief is this revenue constraint problem projects a further depreciation in the naira this year as inflows of FX is relatively low despite the rise in non-oil export through the RT 200 programme introduced by CBN.
Raised yields from corporate commercial paper with Hawkish MPR
Robust International Commodities Ltd raised the yields of the ongoing commercial paper issuance following the recent 100bps MPR hike. The company issued N10bn series 1 & 2 under its N20bn commercial programme. The proceeds from the loan will be used to support short-term working capital requirements essentially in building modern warehouses and processing facilities in the country’s northern region. The yield rose to 15.50% from 14% for the 179-days and 16% for the 270-days from 14.50%. As the issuance is still ongoing and will close on Friday 22nd, analysts believe the hike should attract domestic investors relative to other investments with lesser returns as Datapro recently rated the company ‘’A1’’ indicating a good credit standing.
Looming debt crisis as debt servicing to revenue rose by 118%
Following the 2022 fiscal performance report released yesterday, Nigeria’s debt service exceeded its revenue by 118% with the retained revenue at N1.63trn less than N1.94trn spent on debt servicing between January and April 2022. The hike in debt service to revenue poses a concern considering the mounting debt profile of the country, analysts expect an intense focus on revenue generation especially in the non-oil sector to salvage the impending debt crisis.
Naira depreciated mostly this week as FX scarcity worsens. As of Friday, the naira appreciated by -0.08% (W-o-W) to N430.00 at the Investor and Exporter FX fixings (I&E).
The Naira against the dollar appreciated on a week-on-week basis at Thursday’s trading session in the Nigerian Autonomous Foreign Exchange Fixing (NAFEX), declining by-0.63% to N423.83 (see chart 2 below).
Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
Average Benchmark Yields
15-July-22 22-July-22 % Change
I&E FX 430.33 430.00 -0.08%
NAFEX ($/N) 426.50 423.83 -0.63%
All through this week, the funding rate had an upward trajectory, reaching a peak of 15.00% after the MPR 100bps hike.
As of Friday, the interbank rate rose at both the Open Repo rate (OPR) and overnight rate (0/N), it grew by +7.23% (W-o-W) and +7.14% (W-o-W) to settle at 14.83 and 15.00 respectively (see chart 3 below).
Table 3: Money Market
Money Market Rate
15-July-22 22-July-22 % Change
OPR (%) 13.83 14.83 +7.23%
O/N (%) 14.00 15.00 +7.14%
Analysts expect funding rates to hover around current levels in the absence of any significant inflows
Treasury Bills Market
The bearish sentiment continued this week as liquidity remained depressed in the absence of any major inflows.
The market also closed bearish on Friday, as multiple selloffs dominate both the Nigerian treasury bills and OMO bills. The Average benchmark yield for Treasury bills grew by +1.12% (W-o-W) to 7.23 and OMO bills ticked up by +26.57% (W-o-W) to settle at 9.05 (See table 4 below).
Table 4: Treasury Bills Market
Average Benchmark Yields
15-July-22 22-July-22 % Change
T. Bills (%) 7.15 7.23 +1.12%
OMO Bills (%) 7.15 9.05 +26.57%
Analysts expect the bearish sentiment to wane next week as the MPR hawkish outcome begins to weigh on investor’s decision
FGN Bond Market
The bears outweigh the bulls all through this week as investors seek investments with higher returns.
At the close of the market on Friday, the selloffs sentiment persisted across all tenors, extending the average benchmark yield by +3.45% to 12.20 (See table 6 below).
Table 6: FGN Bonds Market
Average Benchmark Yields
15-July-22 22-July-22 % Change
Short Tenor 10.12 11.18 +10.47%
Mid Tenor 11.44 11.79 +3.06%
Long Tenor 12.77 12.92 +1.17%
The bearish sentiment should continue next week as investors drift from long-term investments due to higher inflation expectations.
FGN Bond Primary Auction Result
At the Bond auction on the 19th of July, the DMO sold N123.84 billion against the N225.00 billion offered with the lowest subscription of 142.29. The rates on the 2025,2032 and 2042 maturities rose by 90bps,50bps, and 60bps to settle at 11.00%, 13.00%, and 13.75% respectively. The bid-to-cover ratio across the three maturities was 0.16x, 0.34x, and 1.40x accordingly (see table 1 below).
Table 7: Nigerian Bond Auction results Auction
Nigerian Bond Auction
Tenor Amount offered (N’bn) Total subscription (N’bn) Amount sold
(N’bn) Stop Rate
(%) Previous Stop Rate (%) Bid-to-cover
2025 75.00 11.75 5.30 11.00 10.10 0.16x
2032 75.00 25.62 17.82 13.00 12.50 0.34x
2042 75.00 104.92 100.72
13.75 13.15 1.40x
Source: Debt Management Office (DMO)
We expect the bearish sentiment to continue next week as investors pivot towards short-term securities with rising inflation.