Uncategorized

Russia-Ukraine Crisis: Global Uncertainty, Domestic Constraints threaten Nigeria’s Economic Recovery

Posted by InvestAdvocate on

More in Uncategorized:

Russian President Vladimir Putin, right, said Sunday he was putting nuclear forces on high alert. Ukrainian President Volodymyr Zelensky, left, says delegations from the two countries will meet at the Belarusian border. (Aleksey Nikolskyi/Kremlin/Sputnik/Reuters, Aaron Chown/WPA/Getty Images)

March 29, 2022/FSDH Report

Kindly click here to download the full report on Macroeconomic Update 2022 Q1. Below is the summary:
Global growth will taper in 2022 following the impact of the Russia-Ukraine Crisis
  • Prior to the Russia-Ukraine Crisis, the IMF downgraded the projection for global GDP growth in its latest report released in January 2022. The IMF anticipated growth at 4.4% for 2022, down from 4.9% earlier projected.
  • The downgrade was mainly as a result of the spread of the Omicron variant of COVID-19 which led a number of countries to impose restrictions.
  • Rising energy prices and supply disruption were also highlighted as major risks to growth by the IMF.
  • With the crisis in Ukraine, the risks facing global growth have been heightened.
  • Energy prices have increased significantly while prices of some commodities have also increased, threating food security and driving up inflation across several countries.
  • Given these developments, global growth will be cut down. The OECD for instance estimated a growth of 3.4% in 2022 from 4.5% earlier forecasted.
Data Source: International Monetary Fund (IMF)
Russia’s Invasion of Ukraine creates disruption in global Energy & Commodities Markets
  • The Russia-Ukraine crisis constitutes a major disruption to global trade along with the associated humanitarian crisis.
  • Russia is a major supplier of several commodities including wheat, fertilizer, crude oil, natural gas, etc.
  • The sanctions placed on Russia by Western nations have continued to limit the supply of these commodities, driving up inflation rate in many countries across the world.
  • Western Europe, which relies on gas supplies from Russia could face an energy crisis, which will translate into high cost of production, high inflation and a drop in real income.
Crude Oil Price rose to US$133.2 per barrel as a result of the Russia-Ukraine Crisis
  • Oil price has trended upwards since the invasion of Ukraine.
  • Oil price rose from US$98.6 per barrel on February 25 to US$133.2 per barrel on Mar 8, 2022. This is the highest price since 2008.
  • As a result of the crisis in Ukraine, energy companies such as Shell, BP and Exxon withdrew from Russian energy deals. In addition, the United States President placed a ban on oil and other related products imports from Russia, which accounts for about 8% of U.S.-bound crude shipments.
  • These factors, coupled with strong oil demand following the recovery from COVID-19 led to an increase in oil price.
Analyst Views on the Global Economy
  • The Russia-Ukraine Crisis constitutes a major headwind to global economic recovery following the strong growth experienced in 2021. In addition to the humanitarian challenges brought about by the crisis, its impact on the rest of the world are severe, especially given that both countries are major producers and exporters of key food items, mineral and energy products.
  • As a result of the crisis, prices of major commodities have trended upward, even as commodity-importing countries continue to battle with scarcity of goods and rising inflation. Financial markets have also displayed poor performance, reflecting heightened uncertainty in the global economy. Consequently, the OECD projected that the global GDP will expand by 3.4% in 2022, lower than the initial projection of 4.5%. We also expect the IMF and World Bank to downgrade their global growth projections for 2022.
  • Going forward, the global economic and investment landscape will remain volatile especially if the crisis intensifies. In this scenario, further sanctions will be imposed on Russia by the West, crippling its trade with the rest of the world. As a result, inflation, corporate performance, public debt and unemployment will increase, while economic growth will be subdued in many countries. In addition, several advanced countries are considering raising benchmark interest rates to curtail inflation, and this could result in investment outflows in developing markets.
  • Looking at these, we believe that investors will continue to seek safety in haven assets like Gold and Treasuries. We advise investors to remain significantly underweight to equities with a preference for War & Defence stocks, and Commodity-focused companies (i.e. companies that sell key commodities like oil, gas, and other metals). In addition, we prefer retail investors shift exposure to debt instruments as the flight to safety could help counteract the impact of Fed’s and other policymakers’ policy normalization plan.
The Russia-Ukraine Crisis and the Nigerian Economy: Oil Price Channel
In terms of the impact via the oil price channel, Nigeria’s situation is complex. Nigeria is both an oil producing and petroleum importing country. Petroleum importation is a problem that the country has been unable to resolve for decades.

  • Oil price increased to US$133 per barrel in March 2022, far above the 2022 budget benchmark of US$62 pb. Year-to-date (Mar 18), crude oil price has averaged US$97.3 per barrel. 
  • While such price increase should be a positive development for Nigeria to improve oil revenue, which represents 35% of total revenue in the 2022 Federal Government budget, in reality, however, this is not the situation for the following reasons:
    • First, crude oil production continues to under-perform and remains below OPEC quota and the federal government budgeted benchmark of 1.88 million barrels per day (mbpd).
    • Second, the payment of subsidies on petrol is expected to increase and could be over N3 trillion in 2022.
  • The inability of Nigeria to leverage on high crude oil price points to several structural problems of inefficiencies in the oil sector, crude oil theft, a weak petrol refining industry and the continuation of petrol subsidies.
The Russia-Ukraine Crisis and the Nigerian Economy: Trade/Commodities Channel
  • Nigeria’s trade with Russia mainly involves importation of agricultural products. 49% of the total value of 15 major agricultural goods imported into Nigeria in 2021 came from Russia. 
  • With Russia facing sanctions, importation of some agricultural products have been affected, hence the increase in prices of several goods.
  • Sustained sanctions, delays of transportation and supply chain disruption will threaten food security and lead to an increase in food prices in Nigeria.
The Russia-Ukraine Crisis and domestic constraints are driving up average prices in Nigeria
  • Nigeria’s inflation rate rose marginally from 15.6% in January 2022 to 15.7% in February 2022. On a month-on-month basis, average prices rose by 1.63%, the highest increase since May 2017.
  • In the month of February, increases were recorded for both food and core inflation. Average food prices rose by 17.1% year-on-year, while core inflation rate was 14%.
  • Rising prices in Nigeria are driven by a combination of factors such as:
    • supply chain disruption due to delays in the black sea;
    • scarcity of inputs such as fertilizer and wheat;
    • irresponsibility and negligence in the case of the recent importation of contaminated petrol into Nigeria, which resulted in petrol scarcity and higher prices of goods and services;
    • oil price increase which translated into higher price of diesel and other by-products and
    • electricity outage following the collapse of national grid in March.
Data Source: National Bureau of Statistics 
Our Growth forecast for 2022 was lowered in consideration of the Russia-Ukraine Crisis
  • In our Macroeconomic Outlook report released in December 2021, the projection of real GDP growth for 2022 was 2.6%.
  • The outbreak of the war, in our view, will have an effect on the Nigerian economy through three main channels: oil price, trade and financial channels.
  • The oil price and trade channels highlighted earlier are expected to dampen economic growth especially through higher cost of inputs such as diesel, wheat and other commodities imported by Nigeria.
  • Already, high cost of doing business, rising food prices, poor power supply and insecurity are exerting pressure on economic growth and as this pressure intensifies due to the crisis, growth will be subdued even further. 
  • We expect real GDP to grow by 2.3% in 2022.
Data Source: National Bureau of Statistics 
Higher Crude Oil Price was not enough to improve External Reserves
  • Since the approval of the US$3.35 billion Special Drawing Rights (SDRs) by the IMF in August 2021 and the issuance of Eurobond in September, external reserves have trended downwards.
  • Reserves, which opened the year 2022 at US$40.5 billion, have lost 2% of its value since the start of the year.
  • Lower oil production below the budgeted benchmark despite high crude oil price led to limited foreign currency inflows needed to boost the reserves.
  • In addition, rising import bills continued to exert pressure on external reserves and this is expected to continue into the year.
Despite subdued foreign investment inflows, the I&E Window remained stable
  • While Nigeria continues to struggle with diversifying and improving foreign exchange inflows, exchange rate in the Investors’ and Exporters’ (I&E) Window has remained stable so far in 2022.
  • The Naira exchange rate on the first trading day in 2022 stood at N422/US$ on the I&E Window. It appreciated to N416.50/US$ as at 15th March 2022.
  • The parallel market, on the other hand, experienced pressure. The gap/premium between the two markets increased to N156.6/US$ in 2022Q1 from N73.64/US$ in 2021Q1.
  • The Parallel market rate as at March 15, 2022 stood at N578/US$, increasing from N565/US$ at the beginning of the year.
Analyst Views: Outlook on GDP Growth and Inflation
  • The Nigerian economy was expected to continue on its recovery path in 2022, following a strong growth of 3.4% in the previous year. However, the first quarter of the year has been challenging for different economic agents – businesses, households and the government. 
  • The crisis in Ukraine as well as domestic constraints have intensified existing pressure in the economy.
    • First, the increase in the price of agricultural commodities has elevated cost of input and food prices, which will constrain growth in the year. 
    • Secondly, scarcity of energy products and higher prices of diesel and aviation fuel have had detrimental impacts on businesses across different sectors. Players in the aviation sector have threatened to shut down operations due to higher cost.
    • Thirdly, the shutdown of the national grid in March 2022 and continued insecurity are negatively impacting businesses across several sectors in the country.
  • For the government, high subsidy payment and lower crude oil production threaten the realization of oil revenue, despite high oil price as a result of the crisis in Ukraine. The government plans to accumulate more borrowing to fund subsidy payments in 2022 which could exceed N3 trillion. This will further raise debt levels and increase debt servicing costs as a share of revenue, which was already high at 76% in 2021 (Jan – Nov).
  • The implications of these challenges are higher cost for businesses,  limited investment inflows into the real sector and a decline in real aggregate demand.
  • In view of these challenges, we have revised downward our GDP growth projection for 2022, from 2.6% to 2.3% in our moderate case scenario.
Analyst Views: Outlook on External Reserves and Exchange Rate
  • Although exchange rate was stable in the Investors’ & Exporters’ Window, external reserves trended downward reflecting the intervention of monetary authority to keep the Naira stable. In addition to frequent intervention, the Central Bank launched the “Race to US$200 billion in FX Repatriation (RT200 FX Programme)” to boost foreign currency inflows into the economy.
  • This Programme aims to diversify foreign exchange sources with a goal of attracting US$200 billion over the next 3 to 5 years. The Programme is anchored under five themes: Value-Adding Exports Facility; Non-Oil Commodities Expansion Facility; Non-Oil FX Rebate Scheme; Dedicated Non-Oil Export Terminal and Biannual Non-Oil Export Summit. The CBN aims to offer a local currency rebate to non-oil exporters of finished produce who sell their export proceed in the I&E window to boost market liquidity.
  • While the objectives of the Programme are laudable, we believe that successful implementation of such Programmes lies not only with the CBN but also with the fiscal authorities and Ministries of Agriculture, Industry, Trade and Investment, among other stakeholders.
  • Efforts to improve the business environment coupled with clarity on foreign exchange policies remain vital in attracting investment into the country, boosting external reserves and ensuring exchange rate stability. 
  • With the crisis in Ukraine triggering inflation rate across the world, advanced countries are expected to raise benchmark rates to restore price stability. In March 2022, the US, for instance, raised rates by 0.5% while the Bank of England increased interest rate from 0.5% to 0.75%. Rate increase limits the possibility of investment inflows into Nigeria and also creates pressure on exchange as capital exits the country. 
  • Our expectation for exchange rate, therefore, is a depreciation to N430/US$ in 2022.
Fiscal and Monetary Update
  • Personnel Cost, Debt Servicing and Capex account for 80% of 2022 Budget Expenditure
  • Government’s response to improve non-oil revenue is through the implementation of the Strategic Revenue Growth Initiatives (SRGI).
  • Over the medium term, the target is to grow Revenue-to-GDP ratio from the current 8 – 9 percent to 15 percent by 2025.
  • Some key objectives include:
    • Improve the tax administration framework including tax filing and payment compliance.
    • Review of sectors eligible for Pioneer Tax Holiday Incentives under the Industrial Development Income Tax Relief Act (‘IDITRA’);
    • Set annual ceilings on tax expenditures to better manage their impact on already constrained government revenues.
    • Leverage technology and automation; and
    • Plug fiscal drainers like subsidies
Monetary Policy: Outlook and Expectation
In the second meeting of the CBN Monetary Policy Committee (MPC) held in March 2022, the Committee maintained its policy stance for the eight consecutive meetings. The MPC decided to:

  • retain the MPR at 11.5%;
  • retain the Asymmetric Corridor at +100/-700 basis points around the MPR;
  • retain the Cash Reserve Ratio (CRR) at 27.5 percent; and
  • retain the Liquidity Ratio at 30 percent all through the year.
Monetary Policy: MPC retained key Monetary Parameters in 2021
  • We noted in the previous Macroeconomic report that the base effect will influence economic growth in 2022, especially in the second and third quarters.
  • A prolonged Russia-Ukraine crisis constitutes further downside risk to growth, especially as Nigeria has been unable to maximize the benefits associated with the increase in oil price. Rather, the federal government is constrained with a bloated subsidy cost. The crisis also has the tendency to trigger imported inflation in Nigeria.
  • These challenges constitute a dilemma for the MPC as the Committee intends to continue to support growth. Exposure to such external risks will negatively affect economic output and the MPC could consider lowering rates to support the real sector.
  • On the other hand, the possibility of massive capital outflows from Nigeria are real, especially if yields continue to rise in advanced countries. Therefore, one remedy for such capital outflow is raising interest rates, to retain and attract foreign capital. These are the two options facing the MPC in the first and second quarters of 2022.
  • We anticipate that the Committee will retain policy parameters in its meeting in the first half of 2022 to examine the impact of the crisis on different aspects of the economy.
Analyst Views: Fiscal Policy
  • We note the rising fiscal deficit in the federal government budget over the years.  From a share of 3.5% of nominal GDP in 2020 to 4% of GDP in 2021, actual deficit increased to N7 trillion in 2021 (Jan – Nov) from N5.35 trillion in 2020 (Jan – Nov). Although fiscal deficit in the 2022 FGN Budget is projected at 3.5% of GDP, a review of past trend, coupled with lower than expected revenue imply that deficit will exceed its target in 2022.
  • In essence, government revenue will underperform as a result of higher subsidy payments and limited oil production while expenditure (on recurrent items) will fall in line with budgeted estimates. Rising deficit, at a time when crude oil price is high, points to the existence of several fundamental and structural problems such as oil theft, subsidy payment, lack of adequate investment in the oil and gas segment, which the Nigerian government has failed to address for decades.
  • By implication, Nigeria’s public debt will increase further in 2022. Already, government debt has risen by more than three folds since 2015 or by almost five folds when CBN Ways and Means and AMCON liabilities are included in total debt. As a share of GDP, public debt appears below the sustainability threshold of 40%. However, debt servicing cost as a share of revenue is high, and stood at 76% as at November 2021. This means that Nigeria could be trapped in a debt cycle, where it borrows to fund recurrent expenditure. For instance, from Jan – Nov 2021, aggregate capital expenditure was N3.4 trillion while total borrowing stood at N7 trillion, according to data from the Federal Ministry of Finance, Budget and National Planning.  Rising debt costs, without a corresponding increase in revenue could trigger macroeconomic instability, if the trend continues.
  • Going forward, there is a need for urgent and consolidated efforts by the federal and state governments to address the challenges of oil theft and pipeline vandalism, which are crucial in improving oil output and by extension, oil revenues. For non-oil revenue, the harmonization of government taxes, plugging leakages, ensuring transparency and accountability in the management of public funds and improving the business environment are necessary in the short to medium term.
Market Performance
Average yields in Nigeria are tapering mainly due to expansion of liquidity
  • Since the start of 2022, yields across the Nigerian fixed income market are tapering.
  • The average yield in the FGN Bond market inched downward from the start of the year to Mar 15 2022. Yields fell to 10.44% from 11.55% at the end of 2021Q4.
  • Key factors such as expansion of liquidity coupled with the drive by the federal government to keep borrowing cost low are responsible for the decline in yields of FGN bonds.
NT-Bill yields fell in 2022Q1
  • The Treasury Bills market rode on the expanded system liquidity brought about by maturities of over N2.25 trillion as NTB yields declined in 2022Q1.
  • Average yield in the Treasury Bills market in 2022Q1 stood at 3.49%, a 94 basis point yield contraction from 4.43% at the beginning of the quarter.
  • While yields are declining in the NT-Bills market, the government has so far borrowed a total of N1.16 trillion from the Treasury Bills auctions.
  • Due to the low yield environment, the total turnover on Treasury Bills trade contracted with a significant share  of activities executed in the Primary Market.  With this, there is, perhaps, a risk of capital flight, especially as yields are now picking up in developed countries.
The equity market is on the gaining side, reaps from the low yield fixed income market
  • The Nigerian equity market closed the year 2021 on a positive note, recording a gain of 6.07% and accruing a total of N1.24 trillion to equity investors.
  • The NGX-ASI year to date (as at 15th March 2022) recorded a gain of 10.83%, increasing from 42,716.44 index points at the start of the year to 47,340.86 index points.
  • This culminated in a 14.43% increase in Market Capitalization and accrued a total of N3.22 trillion to investors within the period.
  • The equity market continues to reap from the low yield environment in the fixed income and money markets.
  • Gains across many sectoral indices drove the positive performance in the equity market.
  • This was largely motivated by expansion in the Banking,  Industrial and Oil & Gas sectoral indices that increased by 10.6%, 5.41% and 29.18%, respectively.
  • Other sectoral indices on our watch list include the Insurance and Consumer Goods indices, which contracted by 5.81% and 2.96%, respectively.
  • While yields trended downward, participation in the equity market kept up the pace in 2022Q1, however, with subdued foreign participation.
  • In January 2022, investors’ participation in the equity market expanded to N323.38 billion from N158.26 billion in the previous month.
  • The apathy of foreign investors towards Nigeria’s equity market persists as foreign participation was only 11% of total trade in January and dominated by outflows.
  • Domestic investors, on the other hand, continued to dominate Nigeria’s equity market with 89% of total trade.
Capital Market: Analyst View – Outlook and Expectations
Fixed Income Market
  • The capital market continues to be driven by system liquidity, with maturities of government securities dictating its trajectory.
  • In line with our expectations, the maturity of government securities of N2.24 trillion in 2022Q1 is supporting the system liquidity, resulting in lower yields across the fixed income market.
  • With the revision of the 2022 budget to make provision for fuel subsidies, the government is expected to borrow more this year. While the government moves to reduce borrowing cost, yields will pick up going into 2022Q2 and 2022Q3 as borrowing expands.
  • The year 2022, being a pre-election year, impacts investors’ confidence, especially on short tenor government instruments. Hence, the Treasury Bill market yields could increase as investors buy less or dispose of their holdings.
Equity Market
  • The equity market consolidates on the 2021Q4 performance in 2022Q1 as it reaps from the expanded liquidity in the system and declining yields in the fixed income market.
  • We expect this trend to continue as major market players in the industrial, banking, and communication sectors turn in impressive results for 2021. This will follow from investors taking investment positions to benefit from improved dividends payments.
  • The uncertainty around stock markets around the world due to the impact of the Russia-Ukraine crisis could drive investors towards fixed income instruments.
  • In addition, with 2022 being a pre-election year, investors are likely to cautiously participate in the equities market.
The Nigerian Economy in 2022: Key Action Points for the Federal Government
Macroeconomic Stability
  • Ensure clarity of foreign exchange policies, clear backlogs and allow for a market reflective exchange rate.
  • Incentivize production for exports to boost external reserves accretion.
  • Re-assess the implication of rising fiscal deficit and public debt sustainability on macroeconomic stability.
Address Insecurity
  • Implement welfare reforms for security agencies – pensions, benefits, living conditions and general welfare reforms.
  • Transparency and accountability of security-related funds are important.
Food & Energy Security
  • Provide incentives and support structure including finance to enable the production of strategic food crops such as rice, wheat, maize, etc. in the medium term.
  • Curtail activities of non-state actors that place levies on businesses. In addition, the government needs to address logistics bottlenecks to reduce transport cost.
  • Implement the Petroleum Industry Act.
Ease of Doing Business
  • Institutionalize the policymaking process and ensure strict compliance by government officials to reduce policy inconsistency.
  • Ensure infrastructure development leveraging on private capital.
  • Ensure constant stakeholder engagements in the designing and implementation of policies that affect businesses.
Analyst Macroeconomic Scenario for 2022

  • GDP Growth at 2.3%
  • Inflation Rate at 15.9%
  • External Reserves at US$37 billion
  • Average Exchange Rate at N430/US$
FSDH Research
research@fsdhgroup.com

Leave a Comment

Your email address will not be published. Required fields are marked *

*