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February 1, 2024/United Capital Research

Executive Summary

Global

In 2023, global economy battled rising interest rates and manufacturing slowdown, but steady growth persisted. US’ GDP was expected to decline due to reduced consumption. China’s growth was brief because of stagnant exports, and strained US relations. Eurozone – Germany, Italy, and the Netherlands had a tepid growth, while France, and Spain performed impressively.

Meanwhile, global inflation fell owing to lower commodity prices, but remained above central banks’ targets. Thus, the Fed, ECB, and BOE etc. hiked interest rates to combat inflation. Contrary, China slipped into deflation. Owing to elevated interest rates, bonds yields (excluding China) spiked, while equity markets showed resilience.

In 2024, US and other strong economies may slowdown owing to declining savings rates. The consumption surge in 2023 is finite. However, services sector momentum from post-pandemic consumption is likely to continue in 2024. The one-off inflation assistance from high European natural gas and oil prices in 2022 may not recur.

Furthermore, global inflation may moderate in developed economies, leading to increased unemployment. Core disinflation is anticipated due to declining wages in the US. China’s overheating and inflationary pressures may delay. Developed economies may pause interest rate hikes. The Fed and ECB are assumed to have concluded their rate hikes, while, the People’s Bank of China may stimulate its economy, but Emerging Markets’ central banks may cut rates.

Global equities may climb owing to macroeconomic normalisation. However, fixed income investors may prefer emerging and frontier markets debts due to high yields. The US Dollar may be bearish owing to a gradual weakening, but emerging markets’ currencies may rise due to higher real yields.

Africa

In 2023, SSA was resilient with an estimated 3.2% growth amid turbulence. Egypt, Nigeria, and South Africa faced growth obstacles in 2023. Many SSA countries recorded double-digit inflation due to high energy costs and FX challenges. Interest rates hikes were used to combat inflation. Chad, Ethiopia, Ghana, and Zambia faced debt distress, hence engaged in debt restructuring. Elevated pressure on domestic borrowings dominated as no SSA country accessed the international capital market due to high rates. Meanwhile, equities markets were mixed as Zimbabwean (886.1% YTD) and Nigerian (+39.4% YTD) exchanges emerged as best performers, whereas Nairobi (-27.6%) and Uganda (-26.0%) exchanges performed poorly.

In 2024, SSA will experience mixed growth, with rises in West Africa, stable growth in Central and Eastern Africa, but declines in North and Southern Africa. The DRC, Cote d’Ivoire, Senegal, and Rwanda may record over 6.0% growth, while Egypt, Nigeria, Morocco, and Ghana may record modest growth. Meanwhile, Kenya and Senegal may drive a 4.0% growth in the region.

Inflationary pressure will persist as Angola, the DRC, Ethiopia, Nigeria, Sudan, and Zimbabwe continue to battle inflation. Resource-intensive countries may record a 13.1% inflation while non-resource intensive countries will record a 15.6% inflation rate.

Notably, Ghana’s Cedi and Zimbabwe’s Kwacha may improve based on debt restructuring efforts. South African’s Rand may decline due to a widening current account deficit and political uncertainty. Also, Angolan Kwanza will depreciate owing to muted exports and high external debt payments.

Additionally, funding of fiscal deficit via domestic borrowings will persist. As global yields moderate, SSA sovereign spreads may adjust lower in the Eurobonds markets. However, potential downside risks exist owing to country-specific factors which may dampen upside potentials.

Nigeria

In 2023, Nigeria’s average growth was c. 1.3% due to excess fuel subsidies, high debt, weak currency, and insecurity. Fuel subsidies were removed, and Naira was floated. Nevertheless, Q3-2023 recorded impressive non-oil output. Also, crude oil production grew by 4.6% but remained historically low.

Inflation has remained high since 2016. The removal of fuel subsidy and Naira devaluation led to a 25.0% average inflation, with petrol prices rising by 210.3% y-o-y. In November 2023, inflation rose to 28.2% y-o-y. Food and core inflations rose to 31.5% and 22.6% y-o-y in October.

The MPC was hawkish raising the MPR by 725bps to 18.75% and OMO operations were reinstated. The latter part of 2023 saw an improved fiscal environment owing to reforms. Due to low oil production, anticipated rise in net oil revenues did not occur. Thus, expenditure pressure persisted in 2023.

Public finance remains a concern with a projected budget deficit of 5.0% of GDP in 2023 and 4.7% in 2024. Fuel subsidy and FX reforms overshadowed mitigating measures of $800 million World Bank loan which covered less than 10.0% of subsidies. Short term advances were restructured into 40-year debt with 9.0%. Thus, public debt surged with a projection of 39.0% in 2023.

Notably, current account surplus surged to 1.1% in 2023 owing to subsidy removal. However, reserves hovering around $33 billion amid low oil production contributed to a weak exchange rate. Since 2021, Naira has devalued over 40.0%, and persistent FX challenges have aided a widening gap between official and parallel exchange rates.

Money market saw excess liquidity of over N2.0 trillion. Shonubi introduced unorthodox methods, but Cardoso reinstated orthodox methods, and maintained an 18.75% MPR threshold. The bonds market was bearish due to FX volatility and rising debts. H1-2023 saw a 150bps MPR hike, driving yields upwards, but in H2 high yields were influenced by 65.0% LDR directive. Equities market was impressive as the ASI exceeded 66,371.2 points.

In 2024, Nigeria’s economic growth may uptick at 2.6%, driven by an oil sector rebound and growth in non-oil sectors. The services, banking, and ICT sectors will record impressive growth. On the flip side, rising inflation, potential interest rate hikes, FX illiquidity, and Naira depreciation may inhibit growth.

Similarly, Naira’s depreciation may increase the prices of imported goods. Thus, inflation will persist averaging 23.6% in 2024. Therefore, we anticipate an upward adjustment of 125bps in the MPR, reaching 20.0% by early 2024.

Fiscal deficit may exceed budget owing to costly Ways and Means financing. Due to Naira depreciation, foreign currency debt may increase, and domestic debt may rise as reliance on domestic borrowing surges. Due to expected oil production from Port Harcourt and Dangote refineries, current account surplus may increase from estimated 2.1% in 2023 to 2.9% in 2024.

The premium status of Nigerian equities market will persist. PFAs will contribute to the growth of equities market. We see a bullish run in the fixed income space as yields adjust lower in advanced economies. Foreign investors will find Nigerian markets attractive as central banks cut rates in 2024, leading to a shift in global capital flow. Corporate issuers may raise debts at the short end of the curve, copitalising on FG’s indication to reduce reliance on domestic debt market.

The return to orthodox methods will drive yields based on supply and demand fundamentals. System liquidity will play a key role in determining money market rates, particularly at the short end of the curve. CBN’s SDF window activities, and OMO maturities of N718.0bn will support system liquidity in 2024.

Perennial debt sustainability and FX volatility concerns will pose downside risk. As global debt becomes cheaper, Nigeria may opt for Eurobond issuances. We expect a total of $1.3bn worth of Eurobond maturities in 2024, this will provide exit points for investors at different intervals.

Overall, we foresee a positive year for capital market.

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