June 8, 2023/InvestmentOne Update

Please click to view the May 2023 Macro & Markets Update  

Macro

• The latest Gross Domestic Product (GDP) report released by the Bureau of Statistics (NBS) for the first three months of the year revealed that the Nigerian economy remains resilient and in positive territory despite major headwinds affecting households and business activities in recent months. According to the report, real GDP expanded by 2.31% y/y, lower than the 3.11% y/y and 3.52% y/y growth rate recorded in Q1 2022 and Q4 2022, respectively. The slower growth rate in the period under review can be largely attributed to the severe cash scarcity that ensued from the Naira redesign policy which adversely affected businesses, particularly in the informal sector and across the broad economy.

• Going forward, we maintain our expectation of continuous growth in the Nigerian economy, albeit at a moderate pace given macroeconomic challenges such as persistent inflationary pressure, tighter financial conditions, and insecurity issues across the Nation. In addition, we expect the upgrade in the oil sector to support higher overall GDP growth in the coming months as the Federal Government intensify efforts to tackle oil theft to increase oil production volume, whilst we also envisage a recovery in the non-oil sector as the effects of the cash scarcity subsides.

Inflation 

• According to the recent CPI figures released by the National Bureau of Statistics (NBS), inflation continued its upward trend for the fourth consecutive month. In April, the headline inflation rate rose by 18bps to reach 22.22% y/y, compared to the previous reading of 22.04% y/y in March. Moreover, this represents a significant increase of 540bps when compared to the inflation rate of 16.82% y/y recorded in April 2022. Furthermore, on a month-on-month basis, headline inflation also exhibited an upward trend, registering a 1.91% increase. This is 5bps higher than the rate of 1.86% recorded in the previous month of March. 

• Looking ahead, we expect inflationary pressures to remain prevalent in the near to medium term driven by persistent pressures from the food index which constitutes a significant part of overall CPI. The unabating security challenges in food producing parts of the country, poor road and transportation networks, higher cost of production as well as elevated energy prices should continue to drive inflation upwards and stoke further pressure on the supply-side components causing high inflation in Nigeria.
  

Fiscal 

• Oil production in Nigeria was reported by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to have declined for the second consecutive month in April. This came after the ramp up in production witnessed in recent months since crude oil production volume plummeted below 1 million barrel per day in August 2022. In details, aggregate oil production (including condensate) fell by 17.76% m/m to 1.25mbpd in April 2023, from the 1.52mbpd recorded in the previous month.

• Elsewhere, the Federal Account Allocation Committee (FAAC) disbursement for the month of May (revenue generated in April) witnessed further downturn in the period under review in accordance with recent patterns. Specifically, the monthly pay-out stood at N655.93 billion, declining by 8.21% from N714.63 billion recorded in the previous month. The total amount comprised distributable statutory revenue of N364.65 billion, distributable Value Added Tax (VAT) revenue of N202.76 billion, Electronic Money Transfer Levy (EMTL) of N14.52 billion, N50.00 billion augmentation from Forex Equalization revenue and N24.00 billion augmentation from non-mineral revenue.
  

Monetary Policy & Fixed Income 

• During the 3rd Monetary Policy Committee (MPC) meeting of the year, the committee voted unanimously to increase rates by 50bps to 18.50%. The committee decided to keep other policy parameters unchanged, including the asymmetric corridor of +100/-700 bps around the Monetary Policy Rate (MPR), a liquidity ratio of 30.00%, and a cash reserve ratio of 32.50%. At the meeting, the committee discussed both global and local economic developments. They expressed concerns about potential contagion from a US banking crisis, the US debt ceiling, high public debt, inflation, declining oil production, and moderate output growth.
  

• At the Treasury bill auctions, N324.43 billion worth of matured T-bills was allotted by the Central Bank, which was the exact amount offered. Amid robust system liquidity and improved demand as evidenced by bid-to cover ratio of 5.03x  (April auction:3.91x), stop rates trended lower for all maturities. Specifically, stop rates for the 90-day, 182-day and 364-day bills moderated by 301bps, 301bps and 218bps to 2.29%, 4.99% and 10.17% respectively.

• Moving ahead, we expect interest rates to remain elevated as outlined in our 2023 fixed income outlook throughout the next quarter. Despite the substantial budget deficit and lean liquidity inflows in the months ahead, a significant surge in yields is unlikely as the Debt Management Office (DMO) continues to strike a balance between managing borrowing costs and stimulating investor interest in long-term bonds.
  

Foreign Exchange 

• Last month, proceedings in the energy sector were mixed, albeit with a negative tilt. This was evident as the price of Brent crude oil fluctuated in different directions and ultimately closing the month lower by 3.95% to $72.97. We highlight that the decline in prices can be attributed to subdued industrial activity and elevated interest rates, both of which have contributed to the emergence of recessionary conditions. Consequently, concerns about a decline in oil demand growth exerted downward pressure on prices.
  

• Looking ahead, we opine that the challenges of FX illiquidity are likely to persist in the short term, despite the gradual increase in oil production volume. We anticipate that the removal of subsidy will in the long term reduce pressure on reserves. Furthermore, we hold the view that unless significant reforms are implemented to attract US dollar inflows into the economy, FX liquidity conditions will remain weak. Currently, we expect foreign portfolio investors (FPI) to maintain their reluctance to participate in our market due to unattractive risk-adjusted returns, driven by elevated global interest rates, a weak macroeconomic environment, and limited flexibility in exchange rate management.
  

Equities

• May proved to be a highly favorable month for the local equities market, as bullish sentiment prevailed to cut the negative trend observed in the previous month. The NGX All-Share Index demonstrated substantial growth, registering a notable month-on-month gain of 6.42%, marking the highest monthly gain thus far this year to close at 55,769.28 points by the end of May. Additionally, market capitalization experienced a significant increase from N26.46 trillion to N30.37 trillion, while the YTD return reached 8.82%.

• Going forward, our outlook for the equities markets this month indicates a slight bearish pressure driven by profit-taking among investors, considering the recent rally witnessed this month. Furthermore, the recent contractionary policy action taken by the Monetary Policy Committee of the Central Bank of Nigeria is expected to trigger an increase in yields within the fixed income space, which poses a downside risk to the equities market. However, we posit that optimism amongst investors as regards potential policy implementation by the new administration could support the upwards momentum.