The Euro Area’s private sector activity remains subdued, although there are signs that the weakness might have started dissipating. According to the S&P Global, the Euro Area’s composite PMI (49.3 points vs November: 47.8 points) settled at a 5-month high in December, albeit still below the 50-point psychological threshold for the sixth consecutive month. We highlight that the trifecta effects of (1) higher interest rates, (2) elevated inflation, and (3) subdued demand conditions remain the principal factors dragging overall activity levels. Notably, the Manufacturing PMI (47.8 points vs November: 47.1 points) remains a significant drag on the overall private sector activity, although business activity as measured by the Service PMI (49.8 points vs November: 48.5 points) also remained below the 50-point threshold. Although the Euro Area recorded mild downturns in two consecutive months, we think the regional bloc is unlikely to return to meaningful growth over the short term. Our prognosis is hinged on the lingering fragile demand conditions, low business conditions, and tight financial conditions.

According to the S&P Global/CIPS, the United Kingdom (UK) ‘s factory activity as measured by the Manufacturing PMI declined to a 31-month low of 45.3 points in December (November: 46.5 points), reflecting steeper declines across employment, new orders, output, and stocks of purchases. At the same time, the Services PMI noted higher to 49.9 points (November: 48.8 points), although it remains below the 50.0 points no-change mark for the third consecutive month. We understand that elevated price pressures continued to depress domestic consumption business decision-making remained marred by heightened uncertainties. Overall, the Composite PMI settled at 49.0 points in December (November: 48.2 points), supported by the Service PMI, although the weak investment climate and squeezed consumer wallets dampened output. Looking ahead, we maintain our view that the economy continues to be impacted by low business confidence and depressed demand amid the high cost of living, signaling heightened degrees of economic stress.

Global Markets

Global equities markets kick-started 2023 on a soft note as investors assessed the outlook for the world economy whilst gauging the impact of higher interest rates through trends in employment and consumer spending. Accordingly, US stocks (DJIA: -0.7%; S&P 500: -0.8%) were set to close negative in the first week of the year as investors assessed the latest non-farm payrolls report and hawkish Fed minutes. Elsewhere, European stocks (STOXX Europe: +3.4%; FTSE 100: +2.4%) were on course to end the week higher as investors digested slower-than-expected Eurozone inflation data and US jobs report for December. In Asia, the Japanese equities (Nikkei 225: -0.5%) declined as investors angst about the BOJ shifting away from its ultraloose monetary policy. On the contrary, the SSE (+2.2%) was boosted by a rally in the shares of Alibaba amid China’s supportive policy signals. Finally, the Emerging (MSCI EM: +2.9%) and Frontier (MSCI FM: +1.7%) market indices closed higher following gains in China (+2.2%) and Vietnam (+4.4%), respectively.

Nigeria

Economy

According to the recently released data from the Budget Office, the FGN’s aggregate revenue settled at NGN6.50 trillion in 11M-22 – 13.1% lower than the prorated revenue (NGN7.48 trillion) for the period. We highlight that the revenue print surpassed 2021FY aggregate revenue (NGN6.10 trillion), primarily due to a significant increase in grants (NGN974.49 billion vs FGN’s expectation: NGN47.53 billion) and a 23.3% overperformance of non-oil revenue. Meanwhile, aggregate expenditure (NGN12.87 trillion) underperformed the prorated expenditure (NGN13.60 trillion) by 5.4%. The breakdown provided showed that actual debt service (NGN5.24 trillion) and recurrent expenditure (NGN10.25 trillion) were higher than their prorated budget by 75.7% and 23.3%, respectively, while capital expenditure printed NGN1.88 trillion (-59.8% vs prorated budget: NGN4.68 trillion). The positive surprise from the aggregate revenue in the review period ensured that the actual fiscal deficit only slightly outperformed the prorated deficit by 3.9%. Based on the preceding, the FGN’s fiscal deficit is on track to settle at NGN6.95 trillion in 2022E – 14.9% lower than the 2022 amended budget (NGN8.17 trillion).

During the week, the Minister of Finance presented the 2023FY-approved budget to the public. Based on the presentation, we highlight that the FGN now expects aggregate revenue of NGN10.49 trillion in 2023FY – oil revenue (NGN2.23 trillion), non-oil revenue (NGN2.43 trillion), independent revenue (NGN2.62 trillion), GOEs revenue (NGN2.42 trillion), and other revenue (NGN794.13 billion). Simultaneously, the FGN expects aggregate expenditure to settle at NGN21.83 trillion. Accordingly, the government expects a fiscal deficit of NGN11.34 trillion to be financed by the combination of (1) domestic borrowing (NGN7.04 trillion), (2) foreign borrowing (NGN1.76 trillion), (3) multilateral/bilateral funding (NGN1.77 trillion), (4) privatisation proceeds (NGN206.18 billion), and (5) additional revenue from spectrum fees and tax on the maritime sector (NGN553.46 billion). Using historical performance and factoring current realities and risks, our revised estimates show the 2023FY fiscal deficit could print between NGN12.35 – NGN14.53 trillion, with a base case scenario of NGN13.28 trillion. Consequently, considering that the government is unlikely to patronise the Eurobond market in 2023FY, given foreign investors’ continued preference for safe-haven assets, we expect the FGN to increase its domestic borrowing and reliance on the CBN’s Ways & Means advances.

Capital Markets

Equities

Although the domestic equities market kicked off the first trading day of the year positively, pressure from profit-taking activities in the penultimate trading session dragged the benchmark index lower. Accordingly, the All-Share Index dipped by 0.1% w/w to close at 51,222.34 points. Precisely, selloffs of AIRTELAFRI (-5.2%) and BUACEMENT (-1.8%) amid bargain-hunting in BUAFOODS (+14.6%) and NB (+14.6%) stocks drove the weekly loss. Based on the preceding, the YTD return for the index printed -0.1%. Analysing activity levels, the total volume traded declined by 51.0% w/w while the total value traded increased by 43.0% w/w. Save for the Industrial Goods (-0.6%) index that declined, all other sectoral indices — Consumer Goods (+6.4%), Banking (+4.3%), Insurance (+2.7%), and Oil and Gas (+0.1%) – recorded gains.

In the interim, we believe positioning for 2022FY earnings releases and accompanying dividends declarations will continue to support buying activities on the local bourse even as institutional investors continue to search for clues on the direction of yields in the FI market. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate started this week lower, but eventually closed higher by 317bps w/w to 14.5% as late debits for CRR (NGN995.15 billion) were enough to pressure the system liquidity. We highlight that the average system liquidity (excluding the late CRR debits) settled higher at a net long position of NGN1.29 trillion (vs a net long position of NGN550.15 billion in the previous week).

In the coming week, we expect the OVN rate to trend higher as debits for CBN’s auctions (NTB, OMO & FX) will likely offset the expected inflows from OMO maturities (NGN10.00 billion).

Treasury bills

The buoyant liquidity in the system continued to trigger bullish sentiments in the Treasury bills secondary market, with local banks having to sterilize idle cash to avoid excess CRR debit this week. Consequently, the average yield across the market contracted by 158bps to 3.4%. Across the market segments, the average yield at the NTB segment declined by 197bps to 3.4% but was flat at the OMO segment at 3.4%.

We expect the outcome of the upcoming NTB auction to shape the direction of yields in the T-bills market next week. At the auction, the CBN is set to roll over NGN56.93 billion worth of maturities to market participants.

Bonds

Similarly, trading in the FGN bonds secondary market opened this year on a bullish note as investors continued to take positions in attractive positions across the curve while anticipating the release of the Q1-23 bond issuance calendar. Accordingly, the average yield dipped by 36bps to 12.7%. Across the benchmark curve, the average yield contracted at the short (-80bps), mid (-34bps), and long (-2bps) segments following demand for the APR-2023 (-161bps), NOV-2029 (-44bps) and APR-2049 (-16bps) bonds, respectively.

In the short term, we expect FGN bond yields to oscillate around current levels, pending the publication of the FGN bond issuance calendar for Q1-23. Notwithstanding, 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

This week, Nigeria’s FX reserve maintained its accretion, as the gross reserve position rose by USD70.13 million w/w to close at USD37.15 billion (05 January 2023). Meanwhile, the naira was flat at NGN461.67/USD at the I&E window (IEW). On activity levels, the total turnover (05 January) at the IEW declined by 43.5% WTD to USD290.93 million, with trades consummated within the NGN425.00 – NGN477.67/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.5% to NGN470.35/USD) and 1-year (-0.2% to NGN530.67/USD) contracts, but appreciated at the 3-month (+0.1% to NGN479.54/USD) contract. Meanwhile, the naira was flat at the 6-month (NGN497.58/USD) contract.

For our outlook, we believe the FX liquidity issues will remain over the short-to-medium term as we do not see 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.