In line with market expectations, the Federal Open Market Committee (FOMC) at the recently concluded September policy meeting voted to keep the target range for the federal funds rate steady at 5.25% – 5.50%. Notably, the Committee stated that recent indicators suggest that economic activity has been expanding steadily. At the same time, inflation remains elevated, job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Although the financial markets are still pricing a high chance that the Fed will keep interest rates unchanged over the rest of the year, we highlight that the Committee’s tone was more hawkish than expected. Specifically, the US Fed’s “dot plot” showed that the FOMC is still committed to one more rate hike either at the November or December policy meeting, followed by two rate cuts in 2024. Still, the monetary policy stance is expected to remain slightly restrictive into 2026 as members pointed to a key policy rate of 2.9% in 2026 – above the Fed’s 2.5% neutral rate that is neither stimulative nor restrictive for growth.

The Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 5 – 4 to maintain the bank rate at 5.25% – its first interest rate pause since the current interest rate hiking cycle started in December 2021. The Committee highlighted that employment indicators have generally softened against the backdrop of subdued activity. Hence, there have been further signs of a loosening in the labour market, although it remains tight by historical standards. Further out, the members also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes and financed by the issuance of central bank reserves by GBR100.00 billion over the next 12 months, to a total of GBR658.00 billion. There are indications that the BoE has ended its interest rate hiking cycle, given its expectations of a significant dip in consumer prices in the near term. However, we do not rule out the possibility of an additional rate hike before the year ends, considering the tone of Governor Andrew Bailey that “there is no room for complacency”, which signals that the BoE may return hawkish if conditions warrant a more restrictive policy stance.

Global Markets

Global stocks faced downward pressure this week as the Federal Reserve indicated that interest rates would remain elevated for an extended period. Furthermore, concerns about a potential US government shutdown, due to ongoing federal budget disputes, added to the prevailing negative market sentiment. Accordingly, US equities (DJIA: -1.6%; S&P 500: -2.7%) were on track for a weekly loss as investors digested the Fed’s hawkish stance on future rate hikes. Similarly, European equities (STOXX Europe: -1.6%; FTSE 100: -0.4%) were poised to close lower as hawkish renditions from global central banks dented risk appetite. Meanwhile, Asian markets (Nikkei 225: -3.3%; SSE: +0.5%) were mixed as investors’ concerns centered around the potential for further interest rate hikes amid expectations of increased policy support measures in China. Finally, bearish sentiments dominated the Emerging (MSCI EM: -2.9%) and Frontier (MSCI FM: -0.4%) market indices consequent upon losses in Taiwan (-3.4%) and Vietnam (-3.9%), respectively. 

Nigeria

Domestic Economy

According to the recently released data by the Debt Management Office (DMO), Nigeria’s public debt profile rose to NGN87.38 trillion in Q2-23 (Q1-23: NGN49.85 trillion). The significant increase in debt during the review period was mainly due to the effects of (1) the inclusion of the securitized Ways & Means Advances (NGN22.71 trillion) in the local debt numbers; and (2) FX devaluation on the foreign debt. In addition, we highlight that new borrowings by FGN and States also contributed to the increased debt. Based on the preceding, we are unsurprised that external debt outstanding rose by 69.3% q/q to NGN33.25 trillion while domestic debt settled higher at NGN54.13 trillion (Q1-23: NGN30.21 trillion). The increase in public debt without contracting new ones played out just as we envisaged in our H2-23 domestic macroeconomic outlook. As the CBN’s Ways & Means Advances have now been securitized in addition to the (1) local currency depreciation and (2) expected increase in new borrowings to fund the 2023E budget deficit, we expect the public debt outstanding to settle at NGN90.49 trillion (or 43.1% of GDP) in 2023E (vs 2022FY: NGN46.25 trillion or 23.2% of GDP).

Nigeria’s crude oil production (including condensates) resumed its uptrend, increasing by 8.5% m/m to 1.41mb/d in August (July: 1.30mb/d). The increase was supported by higher volumes from the Forcados terminal (+35.5% m/m) as crude oil production activities resumed at the facility following the leak-induced shutdown in mid-July. Elsewhere, we highlight that crude oil production volume also increased across the Bonny (+68.5% m/m), Qua Iboe (+12.3% m/m), and Bonga (+2.2% m/m) production terminals. While progress is still underway as regards the fight against crude oil theft and vandalism, we believe that (1) frequent leaks from pipelines and (2) intermittent oil terminal shutdowns for repairs pose downside risks to crude oil production in the near term. Thus, we lower our 2023E average crude oil production estimate to 1.42mb/d (previously: 1.53mb/d | FGN’s estimate: 1.69mb/d), a relatively slight improvement compared to 2022FY production volume (1.37mb/d). Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

Capital Markets

Equities

The domestic bourse closed lower for the second consecutive week, as sell pressures on DANGCEM (-8.5%) offset gains in BUAFOODS (+6.3%) and AIRTELAFRI (+3.2%) and triggered a 0.1% w/w decline in the All-Share index to 67,324.59 points. As a result, the Month-to-Date and Year-to-Date gains moderated to +1.2% and +31.4%, respectively. Elsewhere, activity levels were weaker than the prior week, as the total trading volume increased by 33.1% w/w while the total traded value declined by 36.3% w/w. Meanwhile, performances across sectors were broadly positive, as the Insurance (+3.3%), Consumer Goods (+3.0%), Banking (+0.6%) and Oil and Gas (+0.6%) indices recorded gains, while the Industrial Goods (-4.8%) index declined. 

In the short term, we anticipate cautious trading in the local stock market due to the absence of significant positive catalysts to boost sentiments. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the unimpressive macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate declined significantly by 21.12ppts w/w to 3.3% as inflows from government SURE-P refunds (c. NGN300.00 billion) and FGN bond coupon payments (NGN134.70 billion) saturated the system and supported the financial system liquidity. As a result, the average system liquidity closed at a net long position of NGN109.42 billion (vs. a net short position of NGN273.74 billion from the previous week).

We expect the OVN rate to remain depressed next week as we believe the expected inflows from FGN bond coupon payments (NGN202.34 billion) will likely keep the system afloat.

Treasury bills

Activities in the Nigerian Treasury bills secondary market ended this week on a bearish note as the average yield across the market expanded by 46bps to 8.7%. Notably, demand for instruments remained weak despite the improved liquidity position as market participants reacted negatively to the CBN postponing this month’s MPC meeting. Across the market segments, the average yield advanced by 48bps to 8.5% in the NTB secondary market and increased by 12bps to 13.4% in the OMO segment.

In the coming week, we anticipate lower yields in the Treasury bills secondary market as we believe the expected inflows into the financial system will drive demand. In addition, the CBN is scheduled to hold an NTB PMA on Wednesday (27 September) where it will roll over maturities worth NGN177.12 billion.

Bonds

Similarly, the Treasury bonds secondary market closed on a bearish note this week, driven by tepid demand as investors adopted a wait-and-see approach on the direction of the benchmark interest rate. Consequently, the average yield expanded by 8bps to 14.5%. Across the benchmark curve, the average yield advanced at the short (+30bps) and mid (+5bps) segments due to profit-taking activities on the MAR-2024 (+155bps) and APR-2032 (+12bps) bonds, respectively. Conversely, the average yield contracted at the long (-1bp) end following demand for the JUN-2053 (-15bps) bond.

Over the medium term, we expect yields in the FGN bond secondary market to remain elevated, driven by the sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep borrowing costs moderate remain a downside factor.

Foreign Exchange

This week, Nigeria’s FX reserve closed flat at USD33.28 billion (21 September). At the I&E window (IEW), the naira appreciated by 1.2% to NGN747.76/USD, with total turnover at the window (as of 21 September) advancing by 52.3% WTD to USD418.61 million, as trades were consummated within the NGN475.00 – NGN910.00/USD band. In the Forwards market, the naira rates increased across the 1-month (+2.0% to NGN781.96/USD), 3-month (+2.9% to NGN795.39/USD), 6-month (+4.4% to NGN814.91/USD) and 1-year (+5.8% to NGN867.80/USD) contracts. 

The narratives in the FX market have remained the same in recent weeks, as FX reform momentum has slowed down. Hence, barring any significant positive developments, we expect (1) the lingering low crude oil production and (2) a sustained dip in foreign investors’ net flows to weigh on FX supply in the short term. Consequently, we expect FX liquidity constraints to linger in the near term, ensuring the local currency pressures remain intact.