April 12, 2023/InvestmentOne Report

Please click to view the March 2023 Macro & Markets Update  

 Macro

• In the previous month, a banking crisis occurred as technology-based banks in the USA; Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank, experienced major liquidity issues due to interest rate hikes that have been prevalent on the back of rising inflationary pressures. Banks generally have investments in US Treasury securities through their capital reserves, even though they yield low returns; this spelled doom as securities prices lowered due to the interest rate hike and caused banks to sell these securities, thereby leading to abrupt losses. This further escalated as Silvergate Bank was the first to wind down due to extensive losses maintained in its loan portfolio; this was shortly followed by SVB as they failed to raise the much-needed capital that would have kept them afloat. Similarly, Signature Bank was closed by regulators on the back of systemic risks. In further details, SVB held securities worth $21 billion that were bought pre-covid when yields were relatively low at 1.79%, which is way below what the 10-year Treasury yield currently is, at 3.90%, thereby causing a loss of $1.80 billion.
• However, we are of the view that the likelihood of a global banking crisis is low at this point given the swift response of regulatory bodies such as the Federal Deposit Insurance Corporation (FDIC), US Federal Reserve and other major Central Banks. Particularly, in the case of SVB, the FDIC stepped in to prevent further escalations as they took over deposits and ensured customers were refunded to the tune of the insured amounts and beyond. Also, central banks have signaled their intention to provide liquidity for banks and avail support if the need arises to prevent a crisis.

Inflation 

• According to the latest CPI figures from the NBS, inflation rose for the second consecutive month in February. Specifically, headline inflation climbed by 9bps to 21.91% y/y from the January reading of 21.82% y/y. This was primarily driven by the slight upward movement in food inflation by 3bps to 24.35% y/y from 24.32% y/y in the prior month. Core inflation settled at 18.84% y/y in February, down by 32bps compared to 19.16% y/y in January. Month-on-month, headline inflation rose by 1.71%, a decline of 16bps compared to 1.87% in January.  Apparently, the intense naira scarcity that was felt in February was significant enough to moderate the pace of price increases compared to the previous month. 
• Going forward, we expect a steady northward movement in consumer prices in the short to medium term due to structural impediments such as shortages of food production emanating from persistent insecurity crisis, the     pass-through effect of high energy prices, and lingering FX challenges causing a further increase in food prices. We also anticipate that the circulation of old notes back into the economy will likely stoke consumer demand and mount further pressure on prices in the short term, as well as talks around the removal of fuel subsidy later in the year if eventually actualized.

Fiscal 

• Nigeria’s debt profile has continued to go downhill, with recent figures from the Debt Management Office (DMO) revealing a further climb in the nation’s debt stock. According to the numbers, total debt stock excluding ways and means advances from the CBN jumped by 16.91% (N6.69 trillion) y/y to N46.25 trillion as of the end of 2022 from N39.56 trillion. Domestic debt advanced by 16.24% y/y from N23.70 trillion in 2021 to N27.55 trillion in 2022. On the external debt front, an increase of 17.91% y/y from N15.86 trillion to N18.70 trillion was recorded due to upticks in multilateral, bilateral, and commercial loans. Multilateral loans rose 8.28% y/y from $18.66 billion to $20.20 billion, bilateral loans increased by 13.46% from $4.46 billion to $5.07 billion, and commercial loans rose by 6.48% y/y from $14.67 billion to $15.62 billion. Relative to the previous quarter, total debt increased by 4.97% (N2.19 trillion) from N44.06 trillion as domestic debt increased by 2.34% from N26.92 trillion and the foreign component advanced by 9.04% from N17.15 trillion.
• Elsewhere, Federal Account Allocation Committee (FAAC) disbursement decreased for the second consecutive month in March (revenue generated in February) to N722.67 billion, dropping slightly by 3.66% m/m from the N750.17 billion recorded in February. The pay-out for the month comprised distributable statutory revenue of N366.80 billion, Value Added Tax (VAT) of N224.23 billion, Electronic Money Transfer Levies (EMTL) of N11.65 billion, and N120.00 billion augmentation from the forex equalization account. According to the committee, the decrease in the total amount disbursed for the period under review was primarily driven by significant declines recorded in Petroleum Profit Tax (PPT), Companies Income Tax (CIT), Oil and Gas Royalties, and import and excise duties, while Value Added Tax (VAT) and Electronic Money Transfer Levies (EMTL) recorded minimal drops. For context, details from the committee revealed that Gross Statutory Revenue fell by 24.70% m/m from N487.11 billion, while VAT dropped by 10.31% m/m from N250.00 billion.
  

Monetary Policy & Fixed Income 

• At the 2nd Monetary Policy Committee (MPC) meeting of the year, the committee voted unanimously to raise rates by 50bps to 18.00%, while keeping other policy parameters such as the asymmetric corridor of +100/-700 bps around the MPR, liquidity ratio of 30.00% and Cash reserve ratio of 32.50% unchanged. At the global scene, the committee considered the impact of the banking system failure, continued geopolitical and global tensions in the energy market on economic growth. Locally, the committee acknowledged a subdued pace in growth, given several challenges such as fuel scarcity, heightened borrowing expenses, inflationary pressures, and deteriorating fiscal balances.
• In the preceding month, system liquidity was tight despite inflows from FGN coupon (N355.07 billion) and OMO repayment (N90.00 billion). To expatiate, activities at the interbank market, i.e., average net transactions at standing lending and deposit facilities window, ended March at a deficit of N134.4 billion (compared to the positive balance of N14.30 billion recorded in February). As such, open buyback and overnight rates ballooned by 800bps and 805bps to 18.50% and 18.88% respectively.
•  In the fixed income space, rates primarily increased as investors anticipated more attractive yields due to the interest rate hike. At the initial auction of the month in the treasury bill space, the system liquidity was favourable, with the CBN allotting N324.50 billion, surpassing the N224.50 billion offered. As a result, stop rates on the 91-day bill fell by 156bps, settling at 1.44%, while stop rates on the 182-day and 364-day bill increased by 276bps and 10bps to settle at 6.00% and 10.00%, respectively. During the second auction of the month, the CBN allotted the exact amount offered, which was N145.47 billion. As a result, stop rates increased on all tenures, with the 91-day, 182-day, and 364-day bills advancing by 456bps, 200bps, and 474bps to close at 6.00%, 8.00%, and 14.74%, respectively. In tandem with the northward movement in stop rates at the primary market, bearish sentiment prevailed at the secondary market as yields surged by 860bps, 298bps, and 260bps to 4.61%, 7.14%, and 12.39% across the three tenors. 

Foreign Exchange 

• During the previous month, oil prices fluctuated, falling to a low of US$72.77 per barrel and then climbing to a high of US$86.18 per barrel. Brent ended the month at US$79.89 per barrel, significantly less than the US$83.45 per barrel it had ended the previous month at. Several variables could be accountable for the swings in oil prices, including policy rate hikes, China’s reopening and increased optimism, the recent banking sector crisis, worries about a more hawkish Fed stance and its potential negative effects on the US economy, tensions between the EU and Russia over oil supply, a weaker dollar, and increased oil production from Nigeria could be responsible for the fluctuations in oil prices.
  

• Elsewhere, data from FMDQ showed that exporter’s inflow decreased by 7.29% to $367.30 million while the CBN and FPI inflows rose by 240.33% and 185.64% to $181.40 million and $224.80 million,  respectively. Consequently, the Naira gained 0.13% of its value against the US dollar to close at N461.38/$ at the IEFX window. At the parallel market, the naira appreciated by 2.22% against the USD to close the month at N750/$ as the political risk waned.
  

Equities 

• The positive trend of the past four consecutive months was reversed in the month of March, as the bulls outweighed the bears all through the last three weeks of the period. Notably, the NGX-ASI recorded the first monthly decline in 2023 with a loss of 1.70% m/m to settle at 54,857.96 pts. To follow suit, the market capitalization declined from 30.40 trillion to 29.54 trillion, and the year-to-date return depreciated to 7.04% from 8.89% in the prior month.
• In our opinion, the negative sentiment that resurfaced in the period under review was spurred by profit taking activities of investors on specific large-cap tickers, recalling that the market had rallied for four straight months beginning in November last year. In addition, we highlight that the post-election uncertainties, concerns of a possible contagion effect from the global financial tremor, which fuelled downward pressure on banking stocks, and a further increase of 50 bps in the MPR by the MPC could have influenced investors’ negative reaction towards the market.