July 14, 2023/InvestmentOne Report
With the global fight against inflation paying off gradually, GDP growth remained resilient but fragile in the first half of the year, as the labour market remained tight. As such, this eased recessionary fears that lingered in the early parts of the year. Meanwhile, the Nigerian economy remained resilient in the first quarter of the year despite major headwinds confronting households and businesses in recent months. According to the Gross Domestic Product (GDP) report released by the National Bureau of Statistics (NBS) for Q1 2023, 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. We opine that the high inflationary pressures, shrinking household income and tighter financial conditions may have also contributed to the slow growth.
The Consumer Price Index remained critically high driven by stubbornly elevated food prices stemming from food insecurity in food producing parts of the country, PMS scarcity and cash scarcity during the first quarter. Q2 was faced with additional inflationary pressures such as heightened inflation from the removal of fuel subsidy on PMS and exchange rate devaluation. During the first half of the year, Brent crude oil prices started with prices on upward trajectory from the previous year due to various factors such as China’s reopening and production cuts by OPEC+ members.
Meanwhile, the removal of fuel subsidy, a major subject matter in the Nigerian economy, which has lingered for several months due to the lack of political will for implementation was finally halted by the new administration on 31st of May. The first half of the year witnessed yields advancing in the initial month and maintaining stability until they began to decline towards the end of Q2. The movement in yields was contrary to our 2023FY outlook where we expected no significant increase nor decrease in stop rates and yields.
During the first half of the year, the Central Bank of Nigeria (CBN) maintained a hawkish approach to monetary policy. From January to June 2023, the CBN raised the benchmark interest rate by 200bps to 18.50%. The major reform in the FX space was the unification of the exchange rate and abolishment of the multiple exchange windows, thus collapsing all into the IEFX window. In the IEFX window, the “willing buyer, willing seller” model was reintroduced to allow the forces of demand and supply to determine the exchange rate.
In the first half of the year, the ASI exhibited a robust performance, closing with a notable increase of 18.96%. This positive outcome can be attributed to several key factors that influenced market dynamics. Firstly, impressive earnings releases from various companies contributed to investor confidence and market sentiment. Additionally, the commencement of a new government administration generated positive reactions and expectations for economic reforms. Moreover, corporate actions and the unattractive yields in the fixed income space prompted investors to seek higher returns in the equity market.
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