Expectations from the Markets this Week – 241022
Economists Fear that Food Prices and Debt levels raise political and social risks in Sub-Saharan Africa
The International Monetary Fund (IMF) has said Nigeria and other countries in the Sub-Saharan African (SSA) region face bigger risks of social and political instability because of worsening food insecurity and rising inflation. The IMF report titled, ‘Africa’s Inflation Among Region’s Most Urgent Challenges.’, noted that inflation has nearly doubled from pre-pandemic levels in the region. Nigeria’s inflation rose to a new 17-year high (20.77%) in September 2022 amid rising food prices, while the median inflation rate in the SSA region increased to almost 9% in August. Analysts note that as of July 2022, 29 of 33 countries in Sub-Saharan Africa (SSA) saw inflation rates of over 5%, while 17 countries had double-digit inflation. Analysts believe inflation across the SSA is expected to stay high, with the end of the European geopolitical tension not in sight. National currency devaluations are expected to persist under the impact of aggressive rate hikes by Western Central Banks.
UK inflation reverts to 40-year high: Higher Base Rates threaten Nigeria’s Capital Inflows
U.K. inflation rose to 10.1% in September 2022 as the country’s cost-of-living crisis persists. Inflation had unexpectedly slipped to 9.9% in August, down from 10.1% in July, following a fuel price decline. The Liz Truss-led administration has received several criticisms on proposals to cut the tax rate on the highest income tax brackets. While the new chancellor, Jeremy Hunt, is expected to address the interest of the most vulnerable, the long-term growth objectives of his predecessor would be maintained. Meanwhile, the Bank of England (BoE) would be expected to be more aggressive in raising rates and resume its plans to sell off gilts in a bid to tap down inflation.
Emerging and frontier economies have recorded reverse capital flows following the spate of aggressive rate hikes by the BoE and other monetary policy authorities. Analysts believe that with an expected rise in the UK base rate, Nigeria may record a pullback in capital flows originating from the UK. Over half of the capital flows in Q2 2022 originated from the United Kingdom. The UK, which accounted for $781.05m of the $1.53bn received in the period, has typically been a major source of foreign investment and diaspora remittances
Liz Truss resigns amid rising fears of a UK recession
Liz Truss announced, on Thursday, her decision to resign from the position of UK Prime Minister. Truss, who had come under severe criticism for a £45bn tax cut arrangement that would have left a fiscal black hole, cited her inability to deliver on her campaign promises of reining in inflation and achieving rapid growth as the reasons for her resignation. Meanwhile, new forecasts warn that the UK is facing the potential of a recession for the next three quarters. Analysts noted that a 0.3% contraction in the UK’s GDP is now expected for 2023- a downgrade from the 1% growth forecast in the summer due to high energy prices, elevated inflation, rising interest rates, and global economic weakness.
Analysts give varying outlooks on the US economy
Economists have said that a US recession is very probable in the next 12 months. Using projections of a multi-variate economic model, analysts forecast a higher recession probability across all time frames, with the 12-month estimate of a downturn by October 2023 hitting 100%, up from 65% for the comparable period in the previous update. Meanwhile, Analysts noted that the current financial system stability and credit performance as a major consolation. Credit scores are higher, and debt levels are not near Covid levels. Suggesting that a US recession, when it occurs would not be as severe as the 2008 and 2009 economic downturns.
FGN Revenue Underperforms by 36%, New Finance Bill to Remove Tax Support from Old Sectors
At the Ministerial presentation of the 2023 Budget, Minister of Finance Zainab Ahmed stated that as of August 2022, the Federal Government (FG) generated a total of N4.23trn, an equivalent of 64% of the targeted N6.65trn revenue. Notably, the oil component of revenue performance further dropped in the period, as total oil revenue generated over the eight-month period came in at N395.06bn (a 27.1% performance). While the actual fiscal deficit (N5.33trn) was N430.82bn higher than the prorated budget deficit, Analysts note that this would have been larger had expenditure been fully implemented. The report showed that the Federal Government’s expenditure as of August 31, 2022, was N9.51trn, an 82.3% performance of the targeted expenditure.
Meanwhile, the 2022 Finance Bill, which the Minister also discussed at the event on Wednesday, highlighted, amid other points, the need to reform tax incentives by gradually transitioning from expensive and redundant tax incentives. Analysts believe that the 2022 Finance Bill, upon passage and implementation, would see the government take a detour from supporting established sectors to providing more efficient tax incentives to new high-growth sectors.
Inflation rises to 20.77%, Analysts note a slight improvement
The National Bureau of Statistics (NBS) on Monday released the Consumer Price Index (CPI) data for September 2022. According to the NBS, the headline CPI, which tracks the prices of a basket of commodities nationwide, grew Y-o-Y by 20.77%. Inflation, therefore, added 25 basis points compared to the August print which came in at 20.52%. The recent inflation print brings the average inflation for the year 2022 to 17.92%. Analysts noted that month-on-month inflation continues to show signs of disinflation as prices in September rose by only 1.36% compared to the eight-month average of 1.72%. Examining the components, analysts observed that food inflation advanced to 23.34% Y-o-Y from 23.12% in August while core inflation rose to 17.6% Y-o-Y from 17.2% in August.
Analysts believe that the slower advancement of prices is due to the cumulative impact of the hawkish monetary policy actions embarked upon by the Monetary Policy Committee (MPC). As the impact of policy lag disappears the cumulative impact of the policy actions further weighs on money stock and monthly inflation. With the recent trajectory, the MPC could consider a dovish pivot in its next meeting
Lagos State’s newly established Wealth Fund would enhance State’s Growth Potential
At the official launch of Lagos state’s 30-year development plan, Lagos state governor Babajide Sanwo-Olu disclosed that he had signed the Lagos State Wealth Fund (LSWF) Bill. The Governor noted that by its recent action, the state intends to toe the path of fiscally autonomous States and Provinces in countries such as Singapore and Canada. Analysts note that the LSWF would prove critical to the state’s future development as it would help wean Lagos State off federal allocations and smoothen its infrastructural spending. Analysts argue that the LSWF would enhance the long-term growth potential of the state.
Meanwhile, the launch of the state’s development plan coincided with the release of the 2021 Internally Generated Revenue (IGR) data for sub nationals by the National Bureau of Statistics (NBS). According to the data, Lagos state expectedly outperformed all other states in generating revenue internally in the 2021 fiscal year. Available data shows that Lagos state generated a total of N753bn in 2021, while in a distant second place was the FCT with an IGR of N131bn.
Economists Ask What Nigeria’s US$440bn GDP Represents
With an estimated nominal GDP of US$440bn, Nigeria is considered the largest economy in Africa, but what does this count for given the country’s level of industrialization? Analysts often resort to an array of macroeconomic indicators such as GDP growth, the size of the country’s excess absorptive capacity, and domestic price stability to assess how well an economy is being managed. But while the Gross Domestic Product (GDP) of a country reflects the value added within the economy over a one-year period, the fact that GDP includes value added by foreign nationals who tend to repatriate income earned in the process means that the figure does not mean much for the economy, especially where growth is non-inclusive.
The value added/income earned by foreign nationals leaves the country with limited gains. Nigeria’s GDP also fails to capture the income earned by Nigerians resident abroad. In a world where remote work has become a reality, the GDP figure would also prove very inaccurate in assessing the true level of productivity of the economy. Income earned by the sizable number of Nigerians who have ventured into the Talent industry and are exploring opportunities on the global stage while still resident in Nigeria would also be considered factor income from abroad which does not feature in GDP computations.
Oil and Gas
NLNG Force Majeure: Two-way Threats of Soaring Price and Revenue Loss
The recent flooding in the country has forced the upstream gas suppliers (also its shareholders) of the Nigerian Liquefied Natural Gas (NLNG) to declare force majeure on gas supply. The announcement has, in turn, prompted the NLNG to declare force majeure on shipments of natural gas from its Bonny Island platform. A force majeure is a declaration of inability to fulfil a contractual obligation due to unavoidable circumstances. An elongation of the force majeure will significantly raise the price of Liquefied Petroleum Gas (LPG, also known as cooking gas). The industries and export partners that depend on natural gas from NLNG would also have to deal with zero gas delivery. Analysts expect prompt responses from the government to salvage the situation, noting that the gas shut-in and the recent drop in crude oil production could significantly undermine the country’s foreign exchange earnings.
Understanding the Grey Spots of NLNG’s Force Majeure
Following the flood-induced force majeure declared by the Nigerian Liquefied Natural Gas (NLNG) on gas supply from its Bonny Island platform, analysts expect spillover effects on major economic players in the country. The likely impacts include a significant drain in the country’s revenue, a sharp increase in gas prices, failure to meet export obligations which would lead to low foreign exchange earnings, and operational disruptions to industries that depend on gas. While force majeure is a provision based on unavoidable events, we believe the current flooding is man-made or man-ignored, speaking to the country’s infrastructure deficit and a lack of proactiveness. Globally, citizens expect a declaration of force majeure to be guided by a timeline after an initial assessment of the situation to moderate the effects on markets. No such timeline appears to have been announced.
Discovery of More Illegal Pipelines
Barely a week into discovering a 4km illegal pipeline attached to the Trans-Forcados Export Trunk Line, Tantita Security Services Nigeria Limited (TSSNL) has found yet another illegal pipeline attached to the Shell-operated Trans-Forcados pipeline connecting directly to the sea in Delta state. TSSNL reported that the oil thefts connect their pipeline to the trunk line through a pipeline abandoned by Nigerian Agip Oil Company (NAOC) which links to an offshore facility where crude is loaded into vessels and exported illegally. Analysts advocated the need to cut off these points and increase real-time surveillance. Howbeit, with the new discovery and the associated details, The report writers noted that the pipeline operators and security officials should be held accountable for illegal tapping activities, and sanctions should be swift, precise, and public.
Falling Rig Count Causes Further Revenue Anxiety in Nigeria
Nigeria’s oil rig count fell by three units from 10 units in August 2022 to 7 units in September 2022, the lowest in 10 months, based on the latest OPEC Monthly Oil Market Report for October 2022. In the oil and gas industry, the rig count is a metric for drilling activities in the upstream sector. A further breakdown showed that Nigeria counted eight rigs in Q1, 11 units in Q2, and nine units in Q3 2022. The falling rig count is mainly due to the industry’s lack of investment, ageing infrastructure, crude oil theft, and pipeline vandalism. A falling rig count directly translates to a falling output level. Analysts questioned the operationalization of the recently awarded marginal oil field round, noting that activities should have commenced on those fields. Analysts expect Nigeria’s crude oil production to remain low due to sliding rig count and other operational issues along the oil value chain in the country.
Crude Oil Theft Containment Receives a Shot in the Arm as NNPC Strengthens Surveillance
The scale of oil theft has reduced significantly following the discovery of many illegal pipelines. This is according to the GCEO of Nigerian National Petroleum Company Limited (NNPCL), Mele Kyari, at the 2022 Energy and Labour Summit organized by the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN). As of September 2022, the country’s total oil production, including crude oil and condensate, maintained its falling posture, dropping from 1.18mb/d in August to 1.14mb/d. It should be noted that a genuine reduction in oil theft could only be assessed by an increase in the country’s crude oil production volume. Analysts at Financial Derivatives Company Limited (FDC) believe that successful intelligence and surveillance of the country’s pipeline will save the country an estimated $700m per month. It is argued that the process of curbing oil theft should begin with judicial prosecution of supply chain partners outside the country. This should be followed with the extradition of local partners for prosecution, noting that the involvement of high-ranking individuals in the criminal cartel may undermine the judicial process locally.
Pinnacle Petroleum Products Terminal: Efficiency through Scaling
Pinnacle Oil & Gas Limited, recently completed a purpose-built petroleum products terminal in Lekki Lagos. The US$1bn intake, storage, and offtake facility would see large vessels berthing on the Nigerian coastline. Analysts commended the initiative, noting that it would help reduce product losses, and transhipment costs, in addition to eliminating expensive vessel lightering and reducing demurrage.
The resumption of shell-operated 400,000 b/d capacity Forcados Oil Terminal on Thursday, October 20, 2022, may raise Nigeria’s crude oil production. However, the ongoing efforts to remove illegal tapping points on onshore pipelines and the aging of the oil facility may limit the full utilization of the terminal.
Oil Prices Showed Strength Walking into the Weekend
Oil prices were up for a large part of the week’s trading session on solid fundamentals. Both Brent and WTI benchmarks were up for the week following a rollover in front-month contracts. China’s consideration of cutting the quarantine period for visitors by seven days from ten days raises optimism of a rise in demand. The expectation of increased oil demand and the possibility of output cuts often leads to increased oil prices. OPEC+’s move to cut output by 2mb/d supported buying interest among investors. At the same time, the looming EU ban on Russian oil and gas and the risk of Russian supply disruption that may follow the G7 price cap pointed investors to market tightness. The possibility of the US Federal Reserve raising interest rates further to tame runaway inflation kept a lid on oil prices in the week.
Brent had a weekly growth of +0.99% (see Table 1).
Gold advanced by +0.08% and Silver also advanced by +3.83% W-o-W (see Table 1).
Cocoa prices declined -3.28% W-o-W.
Corn prices declined by -0.87% W-o-W and Sugar prices declined by -2.55% (see Table 1 below).
Table 1: Commodity Prices
|Commodity||21-Oct-22||14-Oct-22||31-Dec-21||Weekly Chg||YTD Chg|
*Data for the 21st of October 2022 is as of 05: 22 pm (Nigerian Time)
Food Shortage Imminent in Nigeria as Farms Get Washed Out
Nigerian farmers and agricultural companies have spoken about the scale of flooding in 2022. Farmlands and crops have been destroyed while the flood has also sacked warehouses. This has pushed farmers to call for urgent intervention from the federal government in the agriculture sector to avert an impending famine. Food prices are expected to continue its rise before the end of the year owing to factors such as flooding, the infrastructure gap, the high cost of inputs, and high diesel cost, which has also affected the cost of transporting agricultural commodities.
The flooding across the country, partly caused by heavy rainfall in some parts of the country and the water release held at a dam in Cameroon put Nigeria in a situation where food production would be seriously reduced. Added to the situation is the rate of insecurity, which has been a major problem for the country. As food prices tend to increase during the holidays, the coming year-end holiday and the current challenges facing the agricultural sector indicate a likely higher food price before the year runs out.
For the weekly performance, Naira appreciated by -0.24% against the US dollar to settle at N431.60/US$ at the I & E FX fixings.
On Thursday, Naira closed at N440.76/US$, indicating a week-on-week depreciation of +0.17% at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX)
At the parallel market, the naira fell to N750 against the US dollar on Friday as demand for the dollar rises (see table 2 below).
Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
|Average Benchmark Yields|
Without any significant improvement in system liquidity, the bank’s funding rate maintained its double-digit figures all week. On Friday, the funding rates settled at 16.50 and 16.33 for the Open repo rate (OPR) and Overnight rate (O/N).
For the week-on-week performance, the overnight rate stayed flat while the Open repo rate rose slightly by +0.99% (see table 3 below).
Table 3: Money Market
|Money Market Rate|
Funding rates should hover around current levels in the coming week
Treasury Bills Market
This week, the average benchmark yield of the NTB rose for most trading sessions as inflation expectations waned investors’ interest. The average benchmark yield for NTB and OMO bills settled at 10.46% and 10.22% respectively (See table 4 below).
Table 4: Treasury Bills Market
|Average Benchmark Yields|
|T. Bills (%)||7.30||10.46||+43.3%|
|OMO Bills (%)||10.25||10.22||-0.29%|
We expect the market to be quiet in the coming week
FGN Bond Market
The FGN bond market started the week on a quiet note as the bond primary auction distracted investors. However, it traded bearishly towards the end of the week as rising inflation expectations weigh on investors’ interest.
On a weekly basis, the average benchmark yield rose by 163bps to close at 14.35% (See table 5 below).
Table 5: FGN Bonds Market
|Average Benchmark Yields|
The bearish sentiment should persist next week.
FGN Bond Auction
Traders Note Persistently Low Subscription at FGN Bond Auction as Inflation Bites
Given higher inflation expectations, investors’ interest in the fixed-income market has waned over the last two months. Investor disinterest was reflected at the FGN Bond Market Primary auction yesterday. The N225bn bond offer was undersubscribed by -52% with the low subscription skewed between the 2029 and 2032 maturities. The rates in 2029, 2032, and 2037 maturities were allotted at 14.50%, 15.00%, and 16.00%, indicating a 380bps, 115bps, and 150bps rise compared to the previous auction (see table 6 below).
Table 6: Nigerian Bond Auction Result Auction
|Nigerian Bond Auction|
|Tenor||Amount offered (N’bn)||Total subscription (N’bn)||Amount sold
|Previous Stop Rate (%)|
Source: Debt Management Office (DMO)
VFD to Raise N5 billion through Commercial Paper (CP) Issuance
VFD Group Plc issued a N5bn series 1 Commercial Paper (CP) under its N20 billion Commercial Paper issuance programme, opened for subscription between October 19 and 25, 2022. The commercial paper issued has a 270-day tenor with a discount rate of 15.89% and an implied yield of 18% lower than the current headline inflation of 20.77%. The group intends to use the proceeds from the issuance to support short-term working capital and funding requirement. A minimum of N5m is required for the subscription of the debt instrument. Looking through the conglomerate financials and the A rating from Datapro, analysts believe investors should be attracted to the issuance considering its higher yield compared to risk-free instruments of a similar tenor which trade at a discount of 10%.
Naira to Fall by 20% Predicts Bank of America (BoA)
The Bank of America (BoA) predicts that the naira might weaken further in 2023 as its current exchange rate to the dollar is above fair value. Based on three indicators; the black-market rate, the central bank’s (CBN’s) real effective exchange rate, and the bank of America’s currency fair value analysis, the naira is overvalued by 20%. It will weaken by an equivalent amount in the next 6 to 9 months, taking it to N520 per US$. Nigeria operates a multiple exchange regime characterised by a tightly controlled official exchange rate and a parallel market where the currency trades freely. The official rate has depreciated by less than 10% since December 2021, while the parallel rate has fallen by 31.2% since January 2022, showing a gap of almost 70%. BoA stated that the greater the disparity with the official market, the higher the excess demand for foreign currency in the parallel market. Analysts believe the exchange rate spread requires the convergence of the official and parallel market rates.
FGN Mulls Special FX Window for Manufacturers
At the Manufacturers Association of Nigeria Export Promotion Group’s Annual General Conference last Thursday, the Minister of Trade and Investment, Mr. Niyi Adebayo, hinted that the Federal Government (FGN) would begin steps towards creating a separate and special foreign exchange window for export manufacturers. The Minister responded to the manufacturer’s plea for access to forex through a special window instead of operators visiting the parallel market to source FX. The manufacturers lamented that the acute FX scarcity had made the cost of production more costly as they source forex from the parallel market which is currently trading above N700/USD.
However, a separate exchange window for manufacturers should not be the solution, as the I&E FX window already exists. The country currently has four exchange windows, with arbitrators taking advantage of the disparity. Analysts believe the Federal Government should be working towards a single exchange rate to encourage capital inflows as the World Bank and IMF advised.
Nigeria to Convert FGN’s Ways and Means Debt into a 40-year Bond
Nigeria plans to convert N20 trillion loans taken from the central bank (Ways and Means) to 40-year bonds at a 9% interest rate, and it will be added to the official debt figures currently at N42.84trn as of June 30, 2022. The funds accumulated gradually from 2015 when FG opted for loans to cover the government expenditure after revenues collapsed on lower oil prices and production. Some analysts stated that the conversion implies a higher total debt stock and the debt-to-GDP ratio with room for more borrowings from CBN.
Meanwhile, the interest rate attached to the 40-year bond is relatively low, lower than the 10-year FGN bond trading at 14.34%. Analysts doubt any rational individual and institutional investors will want to invest in such a negative yield asset considering the high inflation expectations. However, they believe that FG will rely on pension fund administrators for subscriptions, eventually reducing the value of pensioners’ funds.
- The Nigerian bourse ended the week on a negative note as market sentiment turned negative. The NGXASI closed the week with a -6.67% loss as against a 46% gain recorded last week. The Nigerian Exchange recorded N1.07trn loss in naira terms.
- Year-to-date, the NGXASI maintained its positive position to close the week with a gain of +3.93% as market capitalization settled at N25.909trn.
- Sectoral performance across sectors was broadly positive WoW. At the close of trading on Friday, eight (8) sectors closed positive WoW while seven (7) sectors closed negative WoW and two (2) sectors closed flat WoW. NGX AFRHDYI topped the gainer’s chart with a gain of +2.45% WoWrespectively while the NGX MAIN BOARD Index topped the loser’s chart with a loss of -10.84% WoW (see chart 1 below).
Chart 1: Movement of NGXASI Index Points 04 October 2022 – 21 October. 2022
NASD OTC Exchange – Unlisted Equities
The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week on a negative note. The NSI and Market capitalization closed the week at 729.92 points and 960.88 with an increase of +0.28% respectively (see table 7 below).
Table 7: NASD W-o-W Change
|MKT Capitalization (Bn)||958.19||960.88||0.28%|
|Value Traded (000)||135,754,996.00||7,216,005.00||-94.68%|
Dangote And Elumelu Index
Dangote Index closed the week positive at 128.24 index points from 128.15 index points recorded the previous week, representing an increase of +0.07% W-o-W.
DANGSUGAR closed the week positive with +1.56% W-o-W while DANGCEM and NASCON remained flat respectively WoW (see table 8 below).
Table 8: Gote Index W-o-W Change
Furthermore, the Elumelu Index closed positive at 106.63 index points from 103.68 index points recorded the previous week, representing an increase of +2.85% W-o-W. UBCAP, UBA, and TRANSCORP closed the week positive with +10.13%, +1.45% and +3.81% respectively while AFRIPRUD closed the week negative with -3.70% and TRANSCOHOT closed the week flat W-o-W (see table 9 below).
Table 9: E;umelu Index W-o-W Change