May 8, 2023/InvestmentOne Report
Please click to view the April 2023 Macro & Markets Update
Macro
- In the previous month, commodities, particularly crude oil, experienced a record low in almost 15 months as it traded below $70 in the period under review, as recession fears weighed on demand. Consequently, OPEC+ at its general meeting in April reached a consensus to further cut production by 1.66mbpd, starting from May 2023 to ensure stability in the market due to sluggish demand. This came as a surprise to the market and as expected, oil prices rallied significantly. In addition to previous cuts last November, production cuts have totalled 3.66mbpd post-pandemic as the cartel uses the stringent method to force prices of their commodities higher.
- Going forward, we opine that reopening of the Chinese economy and OPEC’s significant production cuts should support higher levels of oil prices. However, uncertainties surrounding a potential recession and liquidity crisis facing regional banks, coupled with fears of contagion remain a major downside risk for oil.
Inflation
- According to the latest CPI figures from the National Bureau of Statistics (NBS), inflation rose for the third consecutive month as it increased by 13bps to 22.04% y/y from the February reading of 21.91% y/y. The core inflation was the primary driver of the surge in headline numbers, even as food inflation recorded a slight uptick. Month-on-month, headline inflation also rose by 1.86%, 15bps higher than the 1.71% recorded in February.
- Nevertheless, we maintain our view that the primary drivers of rising inflation in Nigeria are supply-side factors that may not be very responsive to monetary policy. Therefore, while monetary policy measures can be used to control inflation, addressing supply-side issues such as insecurity, infrastructure deficits, and weak production capacity may be necessary to achieve more sustained inflation control.
Fiscal
- Deliberations about the removal of Premium Motor Spirit (PMS) subsidy have lingered and intensified through the month as various stakeholders continue to access the impact of the proposed policy on the Nigerian economy and its fiscal condition. During the month, news broke about the Federal Government securing a loan of about $800 million from the World Bank as palliative to cushion the effect of the subsidy removal by June on the populace, especially the most vulnerable.
- Elsewhere, the Federal Account Allocation Committee (FAAC) payout for the month of April (revenue generated in March) was reported to have recorded further decline in line with recent trend. In details, the monthly disbursement came in at N714.63 billion in the period under review, a slight decrease of 1.13% compared to N722.68 billion paid in the previous month. The total amount shared amongst the three tiers of government comprised distributable statutory revenue of N497.45 billion, distributable Value Added Tax (VAT) revenue of N202.69 billion and Electronic Money Transfer Levy (EMTL) which amounted to N14.49 billion.
Monetary Policy & Fixed Income
- At the tail end of the previous month, we saw a significant liquidity injection into the system, totalling N998.54 billion from bond coupon inflows and maturity of the 2023 April FGN bond. As such, money market rates such as the open buyback and overnight rates dropped by 475bps each to close at 12.63% and 13.13% respectively.
- Elsewhere, at the bond auction held by the Debt Management Office (DMO), the DMO raised N368.67 billion – slightly higher than the N360.00 billion on offer across maturities. Stop rates moved in different directions as the Feb 2028 maturity closed flat at 14.00% while the stop rate on the Apr 2032 rose by 5bps to 14.80%. Furthermore, the stop rates on the replaced Jan 2042 and March 2050 printed at 15.40% and 15.80% respectively.
- Going forward, we expect interest rates to remain elevated on the back of the steep borrowing plans of the fiscal authorities. However, we believe that the current liquidity glut should lead to occasional downward pressure in yields in the month of May. Elsewhere, the securitization of the Ways and Means by the DMO should pressure yields upwards, given less reliance on the CBN deficit financing. Thus, this further adds to our base case scenario of a tepid rise in interest rates as the DMO creates a balance between attractive level of yields and the borrowing costs.
Foreign Exchange
- In the previous month, the significant production cuts and the lower U.S. oil inventory levels supported oil prices as brent crude traded at an average price of $83.37 per barrel – higher than the average price of US$79.12 recorded in March 2023. Despite looming recession risks and worries about the overall stability of the banking system, oil prices traded healthy for the month under review.
- Going forward, we believe that the FX illiquidity challenges should remain in the short term despite the bullish outlook for oil for Q2 2023 and gradual improvement in oil production volume. We believe that subsidy under-recovery cost should continue to pressure reserves. In addition, we opine that FX liquidity conditions will continue to be weak unless significant reforms are implemented to attract US dollar inflows into the economy. We expect FPI to continue to shy away from our market in the near term as risk-adjusted returns remain unattractive on the back of global elevated interest rates, weak macro backdrop and lack of flexibility in exchange rate management.
Equities
- The month of April followed the trend set by last month as the bears outweighed the bulls all through the first three weeks of April, only breaking the chain in the last week as its trading session recorded a positive movement. Notably, the NGX-ASI recorded its second monthly decline in 2023 with a loss of 2.05% m/m to settle at 52,403.51 pts. The market capitalization also decreased, falling from 29.54 trillion to 28.53 trillion, and the year-to-date return fell to 2.25% from 7.04% in the prior month.
- Looking forward to May, we anticipate that the equities market sentiment will slightly trend upwards as we see the possibility of alpha-seeking investors taking advantage of the current attractive prices of fundamentally sound stocks. While we are cautiously optimistic about the domestic bourse, we believe that elevated yields in the fixed income space remains a major headwind.