May 30, 2023/InvestmentOne Report
- The winner of the February 2023 Presidential election, Bola Ahmed Tinubu, was sworn in as President on the 29th of May 2023 where he gave his inaugural speech as the 16th President of the Federal Republic of Nigeria. His speech contained anticipated policy pronouncements which sparked necessary deliberations amongst market participants at various levels. Particularly, the President reiterated his intention to take out PMS subsidy, stating that “subsidy can no longer justify its ever-increasing costs in the wake of drying resources”. However, this has led to unintended consequences such as panic buying, hoarding and elevated prices. In addition, we expect this to further fuel inflationary pressures in the short term. Although the effects of the removal could be tough on the masses in the short term, we maintain our stance that the policy would be beneficial to the Nation in the long run as the fiscal burden on the government would subside. Also, the commencement of operations at Dangote Refinery should further reduce the pressure on the government and lead to FX savings.
- Furthermore, the president spoke about “monetary policy needing thorough house cleaning” and how the CBN must work towards the unification of exchange rates. This means that the administration intends to adopt a single exchange rate system where the multiple windows in the official market and the parallel market will be collapsed into a single rate system. For this to materialize, the illiquidity challenges in the FX space must be resolved by ensuring an adequate supply of FX to the market. We believe that this does not seem feasible in the short term given fundamental issues such as weak oil production, underwhelming export proceeds, lack of FPIs and low FX reserves. However, if concise efforts such as reviewing multiple taxation and other anti-investment policies to attract both local and foreign investors, amongst other measures, are put in place by the government, we expect a gradual improvement in macro indicators which would send optimism to investors in the market.
- With regards to the agricultural sector, the President indicated that his administration would protect rural income through commodity exchange boards to cap prices for certain crop and livestock products. Although this sounds positive, we believe that adequate measures such as curbing insecurity, reducing cost of farming inputs like fertilizers and fixing of dilapidated infrastructures and road network to reduce cost of transportation must be put in place to fight food inflation which constitutes over 50% of CPI in Nigeria. The President also registered his intention to tackle insecurity, unemployment and improve upon the efforts of the past administration on infrastructure. He also said his administration will target a GDP growth rate of 6% per year through reforms in electricity, manufacturing, and tax review.
- In summary, we posit that the policy pronouncements are encouraging and promising, however, it would take a substantial amount of time to see the implementation and proceeds of most of these policies. In the interim, we opine that optimism stemming from these policy implementations will continue driving the direction of various markets. We expect the local equities market to stay resilient and positive in the short term as foreign investors observe improvements as regards FX liquidity, while the removal of fuel subsidy should be a plus for oil companies on the Local Bourse.
- In the Fixed income space, we maintain our base case scenario for a modest rise in interest rates in coming months given that provision for fuel subsidy was only made for H1 2023. Also, the upward review of ways & means from 5% to 15% supports the case for a tepid increase, amid deficit financing by the apex bank for borrowings needed by the new administration to fund its projects and other costs. In the FX market, we expect to see a devaluation in the exchange rate at the official window as the CBN adjusts the peg to reflect current realities. As such, a depreciation of the Naira to around N550 – N600/$ levels is not far-fetched.
