Global Economy

At its last meeting of the year, the People’s Bank of China (PBoC) voted to retain the key policy rate at 3.65% – marking the fourth consecutive meeting the Committee would keep the rate unchanged. Asides from the key policy rate, the Committee, also retained the five-year rate at 4.30%. The committee highlighted that maintaining the rate at the current level is appropriate to restore balance in the economy, given the slowdown in business activities facilitated by the COVID-19 containment measures amid the lingering woes in the real estate sector. Besides, cutting interest rates will have an insignificant impact on the property sector at a time domestic COVID-19 infections are increasing. Over the short term, we expect the Committee to favour holding the benchmark lending rate at current levels, given the recent increase in COVID-19 infections, which is expected to slow economic activities further. However, we think the Committee will likely increase the five-year rate in the near term based on its forward guidance and in line with the property sector’s persistent slump.

The United States (US) job market remains strong despite massive layoffs in the technology and interest rate-sensitive sectors. According to the US Department of Labor, the initial jobless claims in the world’s largest economy settled at 216,000 in the week ending 17 December – 2,000 higher than the claims in the week ending 10 December (214,000) but below market expectations (220,000). The preceding suggests that the labour market remains tight given that the jobless claims remain below the 270,000 threshold, believed to be the level that raises a red flag for the job market. Moreover, we highlight that the four-week moving average, which aims to smooth out volatility in the weekly initial jobless claims, printed lower to 221,750, down from 228,000 in the week ending 10 December. The still-tight job market suggests that the US Fed could maintain its hawkish policy stance longer than current market expectations as the stubbornly tight labour market reflects that upward price pressures may persist over the short term, given solid wage gains, which could contribute to higher consumer spending.

Global Markets

Global stocks posted mixed performances this week as sentiments were shaped by (1) positive economic data in the US and Europe and (2) recession worries following a fresh round of hawkish comments from major central banks. Accordingly, US equities (DJIA: +0.3%; S&P 500: -0.8%) swayed between gains and losses as investors weighed the course of monetary policy from the US Fed against positive growth data. On the other hand, European stocks (STOXX Europe: +1.9% and FTSE 100: +0.6%) were on course to close the week in green as investors digested a slew of earnings announcements and economic data from the region. In the same vein, Asian markets posted negative performances with the Japanese (Nikkei 225: -4.7%), and Chinese (SSE: -3.9%) equities suffering huge losses as investors assessed (1) a hawkish policy pivot by the Bank of Japan (BOJ), (2) Japan’s inflation data and (3) a spike in Covid-19 cases in China. Elsewhere, the Emerging market (MSCI EM: +0.7%) closed positively, primarily driven by gains in Brazil (+4.6%), which offset losses in China (-3.9%). On the other hand, the Frontier market (MSCI FM: -1.6%) index declined due to selloffs in the Vietnamese (-3.1%) market.

Nigeria

Economy

According to the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 71.5% y/y to NGN810.19 billion in Q3-22 (Q3-21: NGN472.52 billion | Q2-22: NGN714.40 billion). On the one hand, local collection rose by 79.0% y/y to NGN483.17 billion, likely underpinned by improved business activities, albeit slowly, amid lingering challenges which pressured corporate earnings. Elsewhere, foreign CIT payments grew by 61.4% y/y to NGN327.02 billion, consistent with the continued impact of the provision of the 2021 Finance Act, which includes a 6.0% tax on the turnover of e-commerce (including digital services) businesses by non-resident companies. On a quarter-on-quarter basis, we highlight that the CIT collection increased by 13.4% (vs Q2-22: +29.5% q/q to NGN714.40 billion). In the absence of any major shock to the economy, we expect the CIT collections to continue to improve, albeit slowly, over the short term. Our expectation of a moderate rise is in line with the resilience of domestic economic activities despite increasing downside risks.

VAT collection continues to increase in line with the lingering increase in consumer prices. According to the National Bureau of Statistics (NBS), VAT collection grew by 25.0% y/y to NGN625.39 billion in Q3-22 (Q3-21: NGN500.49 billion | Q2-22: NGN600.15 billion). We think the increased VAT collections continue to reflect the impact of (1) higher prices of goods and services and (2) resilient consumer spending. Consequently, there was a broad-based increase across the local (+24.5% y/y to NGN367.93 billion | 58.9% of total VAT collection) and NCS-import (+9.6% y/y to NGN135.61 billion | 21.7% of total VAT collection) and foreign (+50.0% y/y to NGN121.85 billion | 19.5% of total VAT collection) VAT collections in the review period. Finally, we highlight that VAT collections increased by 4.2% on a quarter-on-quarter basis. In the absence of any major shock to the domestic economy, we expect the lingering recovery in domestic demand to remain supportive of VAT collections even as inflationary pressures remain elevated. Accordingly, we expect the combined impact of higher VAT and CIT collections to support the FGN’s non-oil revenue over the short-to-medium term.

Capital Markets

Equities

This week, the dominance of the bulls ensured the local bourse closed the week in the green territory, as the benchmark index recorded gains in all trading sessions, save for the second trading session when the market closed flat. Pertinently, the All-Share Index advanced by 0.8% w/w to close at 49,706.09 points. Notably, bargain hunting in GTCO (+7.4%), STANBIC (+8.6%), FBNH (+8.3%), BUAFOODS (+2.5%), and GEREGU (+9.0%) spurred the positive outturn. Based on the preceding, the MTD and YTD gains rose to +4.3% and +16.4%, respectively. Activity levels mirrored the market’s broad gauge as trading volume and value increased by 9.4% and 40.0% w/w, respectively. Sectoral performance was broadly positive following gains in the Banking (+1.5%), Consumer Goods (+1.0%), Oil and Gas (+0.9%), and Insurance (+0.3%) indices. On the other hand, the Industrial Goods index closed flat.

As the year draws to an end, we expect yield-seeking investors to take positions in stocks with attractive dividend yields ahead of the 2022FY dividend declarations. However, we advise investors to take positions in only fundamentally sound stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 225bps to close this week at 12.8% despite the ample liquidity in the financial system. Notably, the average system liquidity settled higher this week at a net long position of NGN383.71 billion (vs a net long position of NGN108.31 billion) supported by inflows from FAAC allocation (c. NGN540.00 billion) and OMO maturities (NGN5.00 billion).

Next week, we believe the OVN rate will trend upward from current levels following the expectations that debit for (NTB, OMO & FX) auctions will offset the sole inflow from OMO maturities (NGN30.00 billion).

Treasury bills

This week’s buoyant system liquidity triggered the bullish performance in the Nigerian Treasury Bills secondary market as participants looked to invest idle cash. Consequently, the average yield across all instruments contracted by 342bps to 5.2%. Across each segment, the average yield dipped by 578bps and 283bps to 4.3% and 5.4% at the OMO and NTB secondary markets, respectively. 

For the coming week, we believe yields for T-bills will increase in the secondary market following the anticipated liquidity squeeze next week. Notwithstanding, we believe the outcome of the NTB PMA scheduled to hold next week, where the CBN is set to roll over NGN67.43 billion maturities, will influence the sentiments in the secondary market.

Bonds

The bulls prevailed in the Treasury bonds market this week, as investors continued to take positions in bonds with attractive yields across the short and long spectrum. Hence, the average yields across all instruments contracted by 40bps to 13.1%. Across the benchmark curve, the average yield declined at the short (-71bps), mid (-26bps), and long (-37bps) segments due to demand in the APR-2023 (-255bps), APR-2032 (-49bps), and JAN-2042 (-88bps) bonds, respectively. 

We maintain our view of an uptick in bond yields in the medium term, as the FGN’s borrowing plan for 2023FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

After fifteen consecutive weeks of decline, Nigeria’s FX reserves increased by USD13.47 million to USD36.95 billion (22 December 2022). Meanwhile, the naira depreciated by 1.1% to NGN456.50/USD at the I&E window (IEW). At the IEW, total turnover (as of 22 December 2022) declined by 19.3% WTD to USD692.08 million, with trades consummated within the NGN435.00 – NGN472.98/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.8% to NGN468.95/USD), 3-month (-0.9% to NGN475.22/USD), and 6-month (-1.2% to NGN505.22/USD) contracts. Elsewhere, the naira appreciated at the 1-year (+1.7% to NGN527.97/USD) contract.

For our outlook, we believe the FX liquidity issues will remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market.