Image Credit: United Capital
August 30, 2023/United Capital
GLOBAL ECONOMY
- During H1-2023, the global economy showed promising signs of a gradual recovery, despite facing significant challenges from the pandemic and Russia’s unprovoked war on Ukraine. China’s economy bounced back vigorously after reopening, while supply-chain disruptions eased, and the impacts on energy and food markets caused by the war subsided. In the US, economic growth printed at 0.3% quarter-on-quarter in Q1-2023, which was half the increase of 0.6% observed in Q4-2022. The composition of US growth during this period showed strong consumption and a rise in exports, but these were offset by a contraction in investment, marking the fourth consecutive quarterly decline and a decrease in inventories.
- Global economic growth is projected to decelerate to 2.1% in 2023, a considerable drop from the robust 5.7% growth observed in 2022. This slowdown is primarily attributed to the ongoing war in Ukraine, which has substantial repercussions on the global economy. The conflict is leading to higher commodity prices, disruptions in supply chains, and Russia’s utilisation of energy supplies as a weapon. The economic consequences of the war are particularly severe in Germany and Central Europe, where the impact is strongly felt. These developments pose significant challenges to the stability and performance of the global economy in the current year.
- On inflation, global central banks’ active monetary policy decisions in H1-2023 have helped calm the knock-on effects of the Russian-Ukraine war, which caused supply chain disruptions and price increases. Although headline inflation rates are declining, core inflation in the US and Europe remains high, driven by increasing service prices (e.g., housing, insurance, transport) and labour costs with robust wage growth.
- Policymakers will need to carefully navigate these challenges and implement appropriate measures to address the inflationary pressures and ensure sustainable economic development in the face of global economic uncertainties. Inflation is predicted to stay above central bank targets in H2-2023. The United Nations forecasts a global inflation decline from 7.5% in 2022 to 5.2% in 2023, primarily driven by lower food and energy prices, along with a softening in global demand.
NIGERIAN REAL ECONOMY
- The Nigerian economy experienced a slowdown in H1-2023 due to the effects of the Naira redesign policy and cash crunch. These factors contributed to a decline in economic activities, leading to the Nigeria’s Purchasing Managers’ Index (PMI) falling into the contractionary region, recording 44.7 points in February 2023 and 42.3 points in March 2023. During this period, there was a significant reduction in the amount of currency in circulation and currency outside the banks, with declines of 70.4% and 62.5%, respectively. This resulted in the levels dropping as low as 0.8 trillion Naira and 1.2 trillion Naira, respectively.
- Additionally, Nigeria witnessed varied impacts on economic growth and specific sectors due to key government policies. The unification of exchange rates, and removal of petrol subsidy were noteworthy policy changes during the period. Among the affected sectors, the manufacturing industry experienced significant challenges as the additional policy changes worsened its prospects, compounding the existing difficulties (high lending rates, elevated foreign exchange rates, and a scarcity of foreign exchange).
- However, Q2 2023 showed stronger growth as the PMI returned to expansionary territory in April, indicating a recovery from the cash crunch that affected economic activity in Q1 2023. The Central Bank of Nigeria’s (CBN) announcement in March that it would allow old naira notes to remain legal tender until the end of 2023 improved cash. As a result, consumer activity is likely to have increased in Q2 2023, leading to firms scaling up production and higher purchasing activity. This improvement in economic conditions is expected to bolster growth in the second quarter of the year.
- Looking ahead, the uptick in economic activity witnessed in Q2 2023 is not expected to be sustained in the second half of the year (H2 2023) due to soaring consumer prices resulting from President Bola Tinubu’s economic reforms (fuel subsidy removal and FX rates unification). These reforms will exert substantial upward pressure on consumer prices in H2 2023, with inflation projected to average 25.1% for the entire year, marking the highest annual rate since the 1990s. As a result, consumers’ purchasing power will be significantly eroded, clouding the outlook for private consumption in the latter half of the year.
- In H2 2023, we anticipate that the non-oil sector will continue to be the main driver of growth, particularly led by the service sector. The growth in the service sector is primarily attributed to the Information and Communication Technology (ICT) and financial sectors on the back of the introduction of the 5G network and mobile money services.
NIGERIAN INFLATIONARY ENVIRONMENT
- In H1 2023, inflation followed a continuous upward trajectory, reaching a 19-year high of 22.79% in June 2023. This significant increase indicates a substantial 97 basis points rise between January and June of this year, reflecting the persistent and accelerating inflationary pressures in the country during the period. This came in spite of the hawkish Monetary Policy Committee’s stance on the economy.
- The elevated inflation can be attributed to heightened price levels across all components of the inflation basket. This increase was driven by various structural anomalies and policy shocks, which had an impact on the overall economy and contributed to the rise in consumer prices during the period. These shocks include the closure of borders, which has limited the supply of certain goods, insecurity in the food-producing regions of the country, devaluation of the naira, imported inflation, high fuel pump prices and the increase in electricity prices. These factors have collectively contributed to the continuous increase in consumer prices and overall inflationary pressures in the country.
- In H2 2023, several price triggers, including the increase in PMS prices, currency pressure from the unification of exchange rates, and the potential electricity tariff increase, are expected to drive inflation higher. Additionally, policy measures such as the implementation of importation duties on selected goods and new taxes from the finance act are likely to contribute significantly to the rise in headline inflation during this period. These factors combined pose challenges to inflation control and warrant close monitoring by policymakers to ensure economic stability.
NIGERIAN FISCAL ENVIRONMENT
- Nigeria has relied heavily on debt to finance its expenditure, driven by revenue shortfalls and a growing government deficit. Despite the significant rise in global energy prices, Nigeria has not experienced the anticipated benefits as there has been a widening of the variance between oil revenue and debt servicing costs. In Q1-2023, the country’s total public debt reached N49.9 trillion, showing a significant 19.8% year-on-year increase compared to the N41.6 trillion reported in Q1-2022.
- In May, the National Assembly granted approval for the securitisation of the N22.7 trillion overdraft provided by the Central Bank of Nigeria (CBN) to the Federal Government (FG) through its Ways and Means Policy. The Ways and Means provision allow the government to access short-term or emergency loans from the CBN to address temporary budget shortfalls while adhering to statutory restrictions.
- The recent unification of the Naira across all foreign exchange market segments has resulted in a significant depreciation of the Naira to as low as N770.0/$ in the Investors and Exporters (I&E) window. As a consequence, the value of foreign debts denominated in Naira will rise substantially, reaching as high as N32.4 trillion. Consequently, the Nigerian government (FG) would need to generate more revenue or resort to additional domestic borrowing to cover its expenses and interest payments.
NIGERIAN MONETARY ENVIRONMENT
- In H1 2023, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria maintained its hawkish stance by raising the Monetary Policy Rate (MPR) by 200 basis points (bp). At its meeting on 23-24 May, the MPC increased the key rate to 18.50% from 18.00%, marking the seventh consecutive hike since May 2022, resulting in a total tightening of 700 basis points. The decision to continue the tightening cycle was driven by the sustained acceleration of price pressures.
- However, inflation has a strong correlation with FX rates and the low correlation with money supply, thus highlighting the ineffectiveness of the MPC’s rate hikes. As a result, the MPC’s efforts to control inflation through rate adjustments may be less impactful in the current economic environment.
- In recent times, the MPC has prioritized currency stability and focused on attracting Foreign Portfolio Investments (FPIs) despite elevated interest rates in developed countries, prioritizing these objectives over the real economy. The MPC’s persistent rate hikes have led to a substantial increase in the cost of borrowing, adversely affecting sectors such as manufacturing and hindering the purchasing power of citizens.
NIGERIAN CAPITAL MARKET
- The Nigerian stock exchange was met with a fantastic first half in 2023. The Banks outperformed market expectations in their earnings performance, amid their exposures in Ghana’s fixed-income market. Increased bargain hunting across large stocks like MTNN (+33.2%), BUAFOODS (+108.9%) and DANGCEM (+16.9%) drove the bourse’s positive performance for the period. Downstream Oil and gas players gained massive traction in Q2-2023, sponsored by the petrol subsidy removal, which improved their valuation. Overall, Investors’ traction for risk in H1-2023 also played a massive role with respect to their appetite for the equities market, supported by strong and resilient revenue and earnings performance.
- In the fixed income market, liquidity was “KING”, as it majorly determined the direction of yields in H1 2023 (particularly at the short end of the curve). In Q1-2023, yields in the fixed-income market were mostly depressed due to the liquidity from the inflow of N676.2bn into the financial system, which came on the back of the CBN’s Naira redesign policy. Private issuers utilised this period to raise cheap debt. Other inflows including OMO maturities, coupon payments, CRR refunds, FX maturities, and FAAC payments, kept yields depressed in the fixed income market.
- Keeping in view that two key factors which have kept the development of the real sector suppressed (elevated interest rate and foreign exchange losses), we expect the new policies of the new administration particularly the “Unification of the exchange rate”, and “Advocacy for a Lower Interest rate Environment” to stand as a significant upside for the earnings performance of listed Nigerian corporates, which will bolster investors confidence toward listed corporates, particularly in earning seasons (H1-2023, and Q3-2023 earnings season).
- Overall, we anticipate a broadly favorable market for the Equities Market in H2-2023, supported by the above expectations. For the fixed-income market, we believe the new administration’s objective to dampen the interest rates environment will continue to provide enough incentive for the CBN to leave the financial system mostly liquid, in a bid to stimulate activities in the real sector. The MPR and improved foreign participation are two (2) strong factors to determine the trend of yields from the mid-long end of the curve.
- That said, we forecast that the equities market will be the most favorable market segment for both foreign and local investors. A strong incentive will be the cheaper Naira, removal of multiple taxations, and easy repatriation of FX by foreign investors.
NIGERIAN EXTERNAL SECTOR
- In the foreign exchange market, the Nigerian Naira experienced significant pressures in H1-2023. It was primarily triggered by the collapse of all official foreign exchange (FX) windows into the Import & Export (I&E) window. The merging of the official FX windows into the I&E window had a pronounced impact on the Naira’s exchange rate, causing a rapid depreciation in its value. This decision was taken as part of the government’s efforts to streamline and manage the country’s foreign exchange policies and operations.
- On foreign trade statistics, Nigeria recorded a trade surplus position of N996.8bn in Q1-2023, (2.0% of GDP). As expected, high crude oil prices supported export earnings. Total exports in the quarter rose by 2.0% q/q but declined 8.7% y/y. Export growth correlates with crude oil exports, which accounted for 79.4% of the value of export traded products.
- In H2 2023, we anticipate a moderate disparity between the FX rates at the parallel market and the official market, with the parallel market experiencing higher demand pressure. However, the opening of the Dangote refinery could potentially alleviate some exchange rate pressures if it becomes operational before the end of the year. This development may have a positive impact on the exchange rate dynamics and help mitigate the disparities between the two markets.
- On foreign trade, we expect the Current Account to stay positive, benefiting from improved export conditions as crude production recovers and import demand weakens. Additionally, the devaluation of the naira at the official window is expected to boost exports and make imports relatively more expensive, further contributing to the positive Current Account balance. These factors are likely to support the country’s external trade position during the specified period.
Click here to download full report
