March 13, 2023/United Capital
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Macroeconomic Highlights and Outlook
Data from the National Bureau of Statistics (NBS) on Nigeria’s Foreign Trade in Goods Statistics for Q4-2022 disclosed that the country’s trading activities with the World ended on a favourable note in FY-2022. Total exports for 2022 rose from N18.9tn reported in 2021 to N26.8tn in 2022 showing a 41.7% increase in foreign trade in goods. Imports rose by 22.8% from N20.8tn in 2021 to N25.6tn in 2022.
The Nigerian National Petroleum Company Limited disclosed that 339.0mn litres of petrol were distributed to 63 depots nationwide between 25-Feb and 03-Mar. The energy company has shown commitment in bridging existing supply gaps which has been evident in the fewer queues at petrol stations.
Extracts from National Bureau of Statistics’ (NBS) reports show that, consumers of goods and services and companies paid N5.34tn as taxes to the government in 2022, indicating a 42.1% y/y increase from the N3.76tn that was raised in 2021. A sum of N5.34tn was raised from Value Added Tax and Company Income Tax. The NBS also indicated that manufacturing, information & communication, and mining & quarrying sectors were the largest contributors to local VAT.
The Federal Government recorded N7.3tn fiscal deficit between January 2022 and November 2022. This represents 89.4% of the budgeted fiscal deficit (as amended, inclusive of supplementary) of N8.2tn for FY-2022. The rising deficit has elicited serious concerns considering the implications of public debt accumulation which amounted to N44.1tn as of September 2022 excluding nearly N23.0tn Ways and Means Advances.
The Central Bank of Nigeria (CBN) noted that the banking system was sound and resilient in 2022. The industry’s Non-Performing Loans (NPLs) decreased from 4.9% reported in December 2021to 4.2% in December 2022 below the maximum requirement of 5.0%. The decline in NPLs was attributable to write-offs, restructuring of facilities, global standing instruction and sound credit risk management by banks.
Also, the CBN disclosed that 52.4% (N503.0bn) of funds disbursed to farmers under its Anchor Borrowers Programme has been repaid as of Feb-2023. This was in response to the IMF’s earlier report which stated that only 24.0% of the loans have been repaid.
During the week, the Federal Government (FG) appealed to the EU, United Nations Population Fund (UNFPA), and other development partners for technical and financial support for the forthcoming national census. The exercise is slated for 29-Mar to 02-Apr.
According to a statement by the National Export Promotion Council (NEPC), the FG has approved disbursement of N309.5bn worth of promissory notes to one hundred and ninety-nine (199) non-oil exporting companies. The funding is aimed at facilitating the expansion of the export capacity of these companies; the disbursement comes under the FG’s Export Expansion Grant Scheme (EXGS).
This week, we expect the NBS to release its CPI and Inflation Report for Feb-2023. We also anticipate the release of the Price Watch of National Household Kerosine and Premium Motor Spirit (Petrol) within the week.
Global Markets: Fears About the US Banking Sector Drove Selloffs.
At the start of last week, Fed chair, Jerome Powell warned of a possible 50bps hike later this month (March) after a slew of data continued to indicate that the US economy remained resilient. Seemingly, it looked like most equity investors’ fears were eased by Powell’s testimony on Tuesday, 07-Mar-23. Consequently, the S&P 500 held steady, and rates-sensitive Infotech stocks outperformed Treasuries. Following the trend, it was observed that jobs data released within the week had a marginal effect on investors’ sentiments. Conversely, Bloomberg Intelligence stated that, the S&P 500’s breadth in terms of percentage trading above their 50-Daily Moving Averages (DMA) was at its lowest level since Oct-2022. Based on the foregoing, earnings have deteriorated, and Traders burned by stocks are pouring billions into credit, whilst, tech’s big premium investors left their vulnerability to disappointment, indicating the equities market outlook was anything but rosy. Meanwhile, the bond market is doubling down on the prospect of a US recession. The week ended with the drop of a “bombshell”. On Friday, 10-Mar-2023, it was announced that SVB Financial Group’s Silicon Valley Bank, the 10th-largest US bank by assets, had been mainly shuttered due to restrictive monetary policy. This led to its shutdown as the FDIC created a Deposit Insurance National Bank of Santa Clara to protect insured depositors of Silicon Valley Bank, Santa Clara, California. Several regional bank stocks were halted from trading after falling sharply in a volatile Friday session, including PacWest Bancorp, First Republic Bank, Signature Bank and Western Alliance Bancorp.
Further to the above, Treasury Secretary, Janet Yellen met with Federal Reserve and FDIC officials to assess the collapse and its impact on the banking system. The news contributed to added flight to safety interest in the Treasury market. This also prompted market participants to rein in their risk exposure amid concerns about a possible contagion effect. As a result of this, the2-yr note yield declined 27bps this week, the highest drop since 2008 to 4.6%, while the 10-yr note yield dropped 26bps to 3.7%. The fallout surrounding SVB Financial has led to radical reassessments of the likely path for rates and asset valuations. Fed funds futures are pricing at a peak rate of below 5.3%, which was 5.4% on Friday, 03-mar-2023 but climbed above 5.6% after Powell spoke. The fed funds futures market pivoted back to thinking that the Fed will likely raise rates by only 25bps at the March FOMC meeting. The CME FedWatch Tool indicates only a 39.5% probability of a 50 basis points rate increase. The culmination of the above resulted in investors becoming risk-off in the US and Europe. Thus, equity indices closed lower across board with the S&P 500 (-4-5% w/w), DIJA (-4.4% w/w), NASDAQ (-4.7% w/w), Europe’s STOXX (-2.3% w/w), UK FTSE (-2.5%), Germany’s DAX (-1.0% w/w) and France’s CAC (-1.7% w/w) all experienced weekly losses.
In Asia, news out of the US spooked Investors. The MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.0% w/w, with banks and Hong Kong technology stocks leading losses. In China, bears dominated the markets as a terrible week for global markets, compounded by selloffs spurred by lack of significant policy incentives. However, continued positive investor sentiments due to Japan’s monetary policy resulted in Japanese equities being outliers as they experienced weekly gains. However, the Shanghai Composite Index (-3.0% w/w) and India’s Sensex (-1.1%) all experienced weekly losses, While Japan’s Nikkei (+0.8% w/w) gained.
Oil prices rose to multi-week highs at the start of the week on confidence in a solid economic rebound in China, furthered by the country’s trade balance data for Feb-2023, which logged a record trade surplus in the month. However, mid-week crude prices declined as supportive U.S. inventory data was cancelled out by Federal Reserve Chair’s (Jerome Powell) testimony to Congress. This has- continued to spook traders’ worries about the intensity of oncoming rate hikes. Based on this, crude oil prices continued to decline due to U.S. slowdown fears as Investors awaited labour market data for more cues on U.S. monetary policy. However, fears of rising interest rates put crude on course for steep weekly losses. Oil prices edged higher on Friday after U.S. jobs growth slowed in Feb-2023. The U.S. economy continued to create jobs as nonfarm payrolls rose by 311,000, above the 205,000 consensus forecast. However, this was well below the revised 504,000 jobs seen in Jan-2023. The rebound in crude prices at the end of the week was insufficient to avert the week-on-week losses as brent futures declined 3.6% w/w to settle at $82.78 a barrel.
This week, the CPI numbers of the US and the Eurozone for Feb-2023 will be released. In addition, investors would turn their attention to the European Central Bank, awaiting its interest rate decision and comments by officials at its press briefing.
Domestic Equities: Large Cap Stocks Drove Positive W/W Close
Last week, the local equities market closed bullish, maintaining the positive momentum from previous weeks in the market. Notably, buy interests in large-cap stock, DANGCEM (+3.6% w/w), and MTNN (+1.4% w/w) drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 0.5% w/w to print at 55,794.5 points. YTD return strengthened to 8.9%, while market capitalisation gained N100.0bn to print at N30.4tn. Activity level closed mixed as average value climbed by 9.7% w/w to N4.0bn, while average volume traded fell by 46.4% w/w to 204.7mn units. Investor sentiment weakened to 0.5x from 2.5x last week, as 22 tickers appreciated while 41 depreciated.
Across sectors, overall w/w performance was mainly bearish as only two (2) of the five (5) sectors we cover closed in the green zone. The Industrial goods sector (+1.7% w/w) led the gainers due to bargain-hunting in DANGCEM (+3.6% w/w). Trailing was the Insurance sector (+0.7% w/w) on account of price appreciations in MANSARD (+5.0% w/w) and AIICO (+3.4% w/w). On the flip side, the Oil & Gas sector (-3.8% w/w) led the losers due to losses in CONOIL (-18.9% w/w) and MRSOIL (-19.0% w/w). This was followed by the Banking (-1.8% w/w) and Consumer goods (-0.3% w/w) sectors, following selloffs in ZENITHBANK (-3.0% w/w), UBA (-4.1% w/w), NB (-1.0% w/w), FLOURMIL (-1.6% w/w) and UNILEVER (-2.2% w/w).
On corporate actions, the Securities and Exchange Commission has approved the establishment of a new share buy-back programme for Dangote Cement Plc. The programme will expire on 12 December 2023, 12 months from the date of the shareholders’ resolution.
This week, we expect the depressed interest rate environment to continue to favour the equities market in line with our expectations for Q1-2023. We believe that taking positions in stocks with solid valuations and dividend yields ahead of the dividend-paying season is a good strategy. However, we note that there may be profit-taking activities from the extended rallies.
Money Market Review: Stop Rates on 182- and 364- Day Bills Climbed Higher at PMA
Last week, the financial system opened relatively liquid with a balance of N288.6bn, reflecting the CRR (N650.9bn) deductions by the CBN in the prior week. In the week, the financial system remained in the surplus zone, bolstered by OMO maturities to the tune of N50.0bn. This was evident in the week’s primary market activity, which was underpinned by strong investor demand which saw the CBN overselling its auction. Funding rates between banks tapered on the back of a flourishing financial system, hovering around 10.5% and 10.8% support. Despite the CBN overselling the NT-bill auction at the PMA, the financial system closed the week relatively liquid with a balance of N197.3bn. That said, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 17bps w/w and 11bps w/w to close at 10.6% and 11.0% respectively.
On details of last week’s primary market activity, the CBN conducted an NT-bill auction with N224.5bn worth of bills on offer across the 91-day, 182-day and 364-day papers. Investors submitted total bids to the tune of N906.1bn, implying bid-to-cover ratio of 4.0x. We note that most of the bids (N890.5bn) came in for the 364-day bill. The CBN opted to oversell only the 364-day bill, by an allotment rate of 1.5x. As a result, the auction was oversold by an allotment rate of 1.5x, with total sales by the CBN printing at N324.5bn. Investors oversubscribed the 91-day and 364-day bills by 4.2x and 4.2x. As investors demand for the 364-day bill was met with increased supply of the bill, thus, stop rate on the bill climbed by 10bps to print at 10.0%. Stop rate on the 182-day bill climbed by a notable 276bps to print at 6.0%, supported by supply and demand fundamentals. For context, the 182-day bill was only oversubscribed by 1.1x . Conversely, stop rate on the 91-day bill declined 160bps to print at 1.44% .
Investors sentiment from PMA trickled into the secondary NT-bills market, as they sought to fulfill unmet bids at the auction. As a result, the average yield on NT-bills fell by 39bps w/w to close at 3.6% (previously 4.0%). The OMO bills segment was quiet, as average yield on OMO bills remained at 3.0%.
Looking ahead into the week, we expect system liquidity to remain pivotal in the direction of NT-bill yields, FTD and money market rates. On a broader scope, we expect funding rates between banks to be relatively stable this week, as it appears to have been capped with a 10.5% and 10.8% support, OPR and OVN respectively. Rates will remain depressed around the short end of the curve, supported by the relatively liquid financial system.
Bond Market: System Liquidity Drove Bullish Sentiments
Last week, the secondary bonds market was broadly bullish, particularly driven by the surplus financial system. Overall, the average yield across sovereign bonds declined by 18bps w/w to close at 13.1% (previously 13.2%). In tandem with the above, corporate bonds traded on a bullish note, as the average yield on corporate bonds shed 23bps w/w to 12.9% (previously 13.2%).
On the other hand, the Nigerian Eurobonds market was met with sell-pressure as the overall abysmal investors’ sentiments toward Nigerian Eurobonds prevailed. Consequently, the average yields on Nigerian Eurobonds climbed 25bps w/w to close at 12.5% (previously 12.3%).
This week, we expect the liquidity position of the financial system to play a significant role in investors’ sentiment toward fixed-income instruments. We expect c.52.8% (N185.8bn) of the total N351.9bn coupon payments for Mar-2023 to hit the system this week. This will stimulate extended bullish sentiments in the bonds market, as investors would most likely opt to re-invest their funds. For the Eurobonds Market, we expect to see bearish sentiments prevail on the back of the abysmal sentiments toward SSA Eurobonds as debt sustainability risks remain unabated.
Currency Market: The Naira Depreciates at the Official Window.
Last week, the Naira depreciated against the US Dollar in the Investors & Exporters (I&E) window to close the week at N461.50/$ from N461.30/$ recorded in the prior week. We find offer quotes in the N748.00/$ – N760.00/$ range at the parallel market. Activities in the I&E window improved significantly as average FX turnover rose by 61.2% w/w to $117.9mn. Also, the most recent CBN data registers Nigeria’s external reserves at $36.7bn.
This week, we expect continued pressure on the local currency, as witnessed in other SSA economies. This is due to the prevailing conditions – unrelenting FX demand and suboptimal FX earnings, which weigh on the value of the Naira.
