April 21, 2020/Cordros Report

This morning, the National Bureau of Statistics released inflation data for March 2020, showing that, for the seventh consecutive month, headline CPI notched another yearly increase of 7bps to 12.26% y/y. Beyond the negative surprise from both the core (+30bps) and food (+7bps) baskets, the unfavourable base from the corresponding period of last year must have added another layer of pressure to the headline number, when compared to our estimate of 12.20% y/y (6bps variance). From a month ago, headline CPI was 5bps higher to 0.84%. We highlight that the faster pace of price growth, stemmed largely from the core and food baskets, with both rising by 7bps apiece.

In our last inflation update (See report: Devaluation Fears Introduce Fresh Risks to Inflation) we had expected the still healthy FX reserves would support the CBN currency defense mandate amid the precipitous decline in crude oil prices, occasioned by the COVID-19 outbreak. However, following the Saudi-Russia price war, which worsened the case for oil prices, the CBN announced a “re-alignment” of the currency, moving the official rate upwards from NGN305.00/USD to NGN360.00/USD. The CBN also effected a non-parallel upward shift along the rates sold at different FX windows. Meanwhile, the Naira, which had held steady in the parallel market for more than two years, depreciated by 12.8% against the greenback to NGN415/USD in March 2020 alone. Against that backdrop, the volatility witnessed in the FX market, occasioned by deteriorating macroeconomic picture, bled over to both core and food inflation in the review period.

Short-Term Outlook

Against the rising cases of COVID-19 in Nigeria, President Buhari, at the twilight of March, announced lockdowns in Lagos, Abuja, and Ogun in an attempt to flatten the curve of new cases. From our channel checks, we understand that the impact of the preceding is stoking upward pressure on food prices in April, owing to the disruption of the supply chain in the agriculture sector and the frontloading of food items purchases by consumers. As new cases grew further, the FGN extended the lockdown by another two weeks, thereby worsening the case for consumer prices, given thinner market supply. Already in March, we saw evidence of price pressure in Ogun (Food inflation: +130bps y/y) and Abuja (Food inflation: +80bps y/y), occasioned by the lockdown-induced price increases. Thus, food inflation is expected to grow faster in April by 16bps to 1.10%m/m.

Elsewhere, we understand that the FGN has further downwardly revised PMS pump price by another 1.2% m/m, due to lower global oil prices. While the foregoing should have ordinarily impacted the core basket favourably, we believe further FX depreciation at the I&E window and parallel market will bleed over to the core basket in April, and thus, neuter gains from lower PMS prices. On balance, core inflation is expected to print 0.83% m/m – 3bps higher than the previous month.

Overall, headline inflation is expected to print 0.98% m/m, cascading into 12.30% y/y in April 2020.

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