Nigeria: Economic Dashboard @ 301222

Nigeria Economy

Analysts Expect Slow Growth to Persist in 2023

The fear of a global recession, the recovery in domestic crude oil production, and the slant of monetary policy are three risk factors that Analysts believe would shape the Nigerian economy in 2023. Proshare analysts believe that the outcome of the elections could also spur foreign interest in investment opportunities in the country. Although, this would depend on investors’ perception of the new government that would be formed by May next year. While the frontline candidates in the Presidential race have all expressed readiness to let go of the regressive subsidy regime which has burdened the Federal Government’s finances, they have all provided little information about the way and manner in which the inflationary impact of the subsidy removal would be managed.

Analysts say that unstable and multiple exchange rates, FX scarcity, Insecurity, fuel scarcity, and high cost of funds characterized the business environment in 2022. As such the meager 2.97% real GDP growth recorded in 9M 2022 is in line with early forecasts but below the country’s long-run real GDP growth of 5%. If the country would begin to cater to its large army of unemployed youth it must open up critical sectors for investment and this way jobs can be created in large numbers.  

FG's Borrowing Cost Grows 72% as National Assembly Approves 2023 Budget 

After making an additional provision of N1.3trn, the National Assembly on Wednesday approved the sum of N21.82trn as the Federal Government's budget for 2023. According to the Appropriation committee of both houses, the increase in the budget size was due to the additional funding earmarked for the National Population Commission (NPC) ahead of the planned 2023 census as well as amounts appropriated for the Independent National Electoral Commission (INEC), ahead of the 2023 general elections. Analysts believe the National Assembly's assumed 1.69mbpd oil production volume could be over-ambitious given current production levels. In contrast, increasing the benchmark crude oil price from $70/b to $75/b may prove over-optimistic given global recession fears.

Comparing the 2023 budget as passed with that of 2022, Analysts observed that the N5.97trn allocated for Capital Expenditure in 2023 is a 9.4% increase compared to the 2022 budget. While this may seem impressive, the dollar denomination of the capital component of the budget of the two-year reflects a 15.4% decline. Analysts also noted, with worry, that the amount budgeted for debt service in 2023 (N6.55trn) is 72% higher than the amount budgeted (N3.8trn) for debt service in 2022.  This while borrowing cost accounts for a third of next year's budget.  Analysts say that the Federal Government must address its revenue challenges through the financialization of redundant national assets to rationalize its deficits and borrowings

Ogun, Kaduna and Kaduna Pass Smaller 2023 Budgets 

The State Governors of Ogun, Kaduna, Kano, Nasarawa, and Ekiti have signed their respective 2023 Appropriation Acts into law. But with the States in question, each having budgets less than $1bn, Analysts have noted with concern the sizes of the planned spending of the sub-nationals. For instance, Ogun State's N472.3bn budget is 21.7% less than the 2022 budget, while Kano's N376.5bn 2023 budget is also significantly less than the N481.03bn budgeted for 2022. Analysts noted that while pre-election year budgets have typically outsized those of the subsequent years, Nigerian sub-national budgets have not been impactful over the years. With most of the spending being allocated to recurrent spending, such states have little wiggle room to provide the infrastructure needed to encourage private-sector investment.

As a result, such 'civil service' states have most of their working population engaged in the civil service. This creates a vicious cycle whereby the civil service becomes a burden on the states' finances rather than being lean and fit for purpose. Analysts say that with such uninspiring budgets, budgetary appropriations would fail to meet the UN-required spending-to-GDP ratio in critical sectors such as Health and education.   Analysts recommend that the poor fiscal condition of sub-nationals needs to be addressed by increasing revenue sources to fund larger and more ambitious budgets, reducing the predominance of recurrent expenditure, as well as ensuring greater monitoring and implementation of projects.

FG raises Third Party Vehicle Insurance to N15,000

The National Insurance Commission (NAICOM) has announced a 200% increase in the amount payable as a premium on compulsory vehicle third-party insurance policies. The new directive, which takes effect from January 1, 2023, would require owners of private vehicles who used to pay N5,000 for third-party insurance to now pay N 15,000. Analysts believe that the decision of NAICOM would further affect the cost of transportation in the country.  With higher fuel prices, the decision, according to stakeholders, is believed to be ill-timed. Analysts also say that the Nigerian Insurance Industry Database (NIID), introduced as an insurance policy verification platform, has failed to prevent the prevalence of fake third-party insurance as fake policies are still commonplace.

Global Economy

Narrow Escape from Global Recession in 2023

With the geopolitical tension in Ukraine still rife and monetary policy authorities still ready to tamp down on elevated, but slightly moderating, inflation with more rate hikes, the outlook for growth next year is not great.   Analysts however believe that the travel restriction on Chinese travelers due to the surge in China’s covid 19 cases would not be a concern for long. As no new strands of the virus have been detected after testing infected travelers, the already high rate of vaccination in Europe would suggest that there is no fear of contagion, and as such China’s ease of its strict Zero covid policy would rather provide for the free movement of goods and travelers.

Still on Analysts’ expectations for next year, the US is expected to grow by 1% in 2023 while the Euro Area would only manage to escape a contraction by recording a 0.5% growth next year. The drop would be mostly felt in advanced economies where growth would slow from 2.4% this year to 1.1% in 2023 while growth in Emerging Markets and Developing Economies would stabilize at around 3.7%.

Fears of Recession in Japan, As Inflation Rises

As export growth slows in Japan, Analysts believe that the world’s third-largest economy could enter a recession sometime in 2023. The Japanese economy contracted by -1.2% in a revised Q3 2022 GDP growth estimate released earlier in the month, Japan’s household spending which grew 1.2%Y-o-Y in October would be affected when real wages in the nation eventually impact the wider consumption activity.

Meanwhile, Inflation in Japan rose to 3.7% in November, a 40-year high, on the back of a depreciating Yen and higher global energy prices. The Bank of Japan (BOJ) had before now viewed the country’s rising prices as a temporary problem and as such had no intentions to roll back stimulus. The BOJ had always believed that inflation would slow below 2% next year. However, the BOJ tweaked its yield control to allow long-term interest rates to rise more, a move Analysts consider a prelude to a further withdrawal of its ultra-loose policy

Oil and Gas 

African Oil Refiners to Offset Demand Losses 

Analysts expect the onboarding of many refineries in Africa to provide an alternative market for African crude oil following the push of Western countries away from fossil fuels. From 2023, some African refineries are expected to begin operations with a cumulative throughput rate of about a 1.7million barrels per day (mb/d). The refineries include Dangote Refinery at 650,000b/d, Nigeria's four national refineries of 445,000b/d, Egypt's MIDOR at 160,000b/d, Ghana's Sentuo refinery at 120, 000b/d, Algeria's Hassi Messaoud Refinery at 100,000b/d, South Africa' Astron Restart with 100,000b/d capacity, Egypt's Assiut Hydrocracking complex with 90,000b/d capacity, and Angola's Cabinda Refinery at 60,000b/d, among others. As Western countries reduce their dependence on fossil fuels, demand for African crude oil will decrease, albeit not total losses in the long run. Analysts expect African refiners to offset some of the losses in demand for African crude oil while still meeting the lower demand from the rest of the world. 

Regulatory Difficulties Cause Oil Asset Dispute

The House of Representatives has urged the NNPC upstream subsidiary, Nigerian Petroleum Development Company (NPDC), to suspend the planned auction of Oil Mining Licence (OML) 11, which was intended for auction at US$250m against the US$1bn offered by Shell Petroleum Development Company (SPDC), the former licence holder. The House predicated its appeal on the many unresolved issues among the government, the host communities of Ogoniland, and the SPDC, the previous licence holder.

Although the new Petroleum Industry Act (PIA) has changed the licence nomenclature to Oil Mining Lease, analysts linked the issues around licencing and concerns of host communities to the slog in finalizing the regulations from the PIA. The fiscal and legal uncertainty in the industry before the PIA has resulted in a series of litigations among stakeholders as interests diverge, with IOCs like Shell offloading onshore oil assets in Nigeria. While the full implementation of the PIA is a high-hanging fruit, draft regulations from the Act remain the low-hanging fruit for keeping the industry together amidst its many challenges across the upstream, midstream, and downstream segments.     

Oil Prices End the Year on a Spike, Marking Second Straight Annual Bull Run

Oil prices mainly edged higher for the week and have posted second straight annual gains, albeit modestly on tight supplies and weakened oil demand. The tight supply was primarily due to the Russia-Ukraine war, the OPEC output cut, a strong dollar, and the embargos on Russian crude oil. On the flip side, the weakness in oil demand was primarily driven by surging COVID-19 cases in China and global recession fears due to frequent interest rate hikes.

Following a 50% jump in Brent crude futures in 2021, the benchmark rose by 5.98% YTD in 2022, while US WTI rose by 4.5% year-to-date (YTD) as of Friday, December 30, 2022., after closing higher by 55% in 2021. Although both benchmarks closed the year below their 50 and 200-Day Moving Average, the price cap effects, Fed's dovish pivot, and a recovery in demand from China would support higher crude oil prices of about US$90-100 per barrel in 2023. Locally, analysts expect the end of seasonal travels and movement to moderate fuel queues at filling stations, albeit human factors could extend the petrol scarcity. 

Brent had a weekly growth of +0.29% (see Table 1 below).

Metals

Gold advanced by +1.31% and Silver also advanced by +0.99% W-o-W (see Table 1 below).

Agriculture

Cocoa prices declined -2.23% W-o-W. 

Corn prices advanced by +2.18% W-o-W and Sugar prices declined by -3.40% (see Table 1 below).

Table 1: Commodity Prices

*Data for the 30^th of December 2022 is as of 2: 42 pm (Nigerian Time)

Commodities

Yellow Metal Begins to See Some Upside 

Gold Price was up 1.55% in the last trading session from US$1,795.3/troy ounce to US$ 1,823.1 /troyounce. After dropping to a more than 2-year low on September 26, 2022, at US$ 1,633.4/ troyounce, the bullion has gained US$ 190. The bullion traded mainly in the negative YTD zone for large parts of the remaining two quarters of the year, mostly resulting from strong interest rate hikes, rising real yields and dollar strength. Currently, the bullion has recovered following the FED's decision to slow down interest rate hikes and the easing of the lockdown from China. China is the largest gold consumer globally and announced that from January 8, inbound travellers would no longer need to go through a quarantine period. This announcement signals the possibility of higher demand for the yellow metal, further strengthening its recovery from the effect of rate hikes from the FED

Fixed Income Market 

Currency Market

The naira fell to N461.50 against the US dollar at the Investor and Exporter Fixing, by +1.10% Week-on-week and +6.09% YTD. The NAFEX fixing experienced a depreciation of +1.70% Week-on-week and +11.23% YTD to settle at N461.00/US$1 (see table 2 below).

Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market

Source: FMDQ, Proshare Research

Money Market

In 2022, funding rates hovered around double digits as liquidity stayed squeezed. The Open Repo rate (OPR) and Overnight rate (O/N) have a year-to-date increase of +13.30% and +4.44% but a week-on-week decline of -5.58% and -7.84% (see table 3 below).

Table 3: Money Market

Source: FMDQ, Proshare Research

Funding rates should drop to single digits next week as liquidity improves

Treasury Bills Market

The Nigerian Treasury bills experienced significant selloffs this year, with yields climbing to a double-digit, especially at the 364-day maturity. In December, buying interests improved, pushing yields down to single digits across all tenors. The NTB has a positive YTD growth of +19.10% and a W-o-W decline of-0.94%.

The OMO bill’s average benchmark yield dropped to 3.47% by -26.79% week-on-week and a YTD decline of -36.90% (See table 4 below). 

Table 4: Treasury Bills Market

Source: FMDQ, Proshare Research

The cherry-picking should continue in the coming week 

FGN Bond Market

Selloffs dominated the bond market this year. Yields spiked across all tenors with a YTD rise of +155.90%, +63.29%, and +12.40% at the short-tenor, Mid-tenor, and Long-tenor respectively. On a week-on-week basis, the average benchmark yield dropped by 37bps to 13.31% as buying interests were seen at the short and long end of the curve (See table 5 below).

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Table 5: FGN Bonds Market

Source: FMDQ, Proshare Research 

The buying interests should persist next week 

World Bank Suggests a Review of the RT-200 Programme 

According to the World Bank, the RT-200 programme launched by CBN in February 2022 needs to be reconsidered, seeing that it is an additional foreign exchange window to the existing ones. The bank stated that the window would further worsen the country's FX problems. The rising parallel-to-official rate premium will incentivize agents to settle transactions outside the I&E window after benefiting from the RT-200 rebate. It further said that the US$200bn repatriating goal seems ambitious as the country has only made US$49bn from non-oil exports over the past decade. The policy was created to stimulate non-oil export and improve FX supply in the country, which has generated a US$4.99bn inflow in 9 months of 2022. However, the extra foreign exchange window might give room for more arbitrage and further depreciate the value of the naira. Analysts believe the CBN should implement stringent measures to fish out arbitrageurs and ensure that the rebate is given to certified exporters. 

Senate Rejects Bill for Securitization of Ways and Means Borrowings 

At the senate meeting on Wednesday, the lawmakers rejected the President, General Muhammadu Buhari's request to restructure the N22.7trn Ways and Means Advances borrowed from the Central Bank of Nigeria. The ways and means advances, which are not part of the total public stock of N44.06trn, have risen to N23.77trn as of October 2022. The lawmakers classified the conversion of the loans to bonds as illegal and unconstitutional, stating that it violates the CBN Act section 38(b), which states that no repayment of temporary advances from CBN shall take the form of a promissory note or such other promise to pay at a future date or securitization by way of issuances of treasury bills, bonds, certificates, or other forms of security. Analysts expect the federal government to lobby the senate into approving the securitization while not desisting from borrowing more from CBN.

Equity Market

NGX – Listed Equities

• Year-to-date, the NGXASI maintained its positive position to close the week with a gain of +19.12% as market capitalization settled at N27.915trn.
• Sectoral performance across sectors was broadly positive YTD. At the close of trading on Friday, fourteen (14) sectors closed positive YTD while four (4) sector closed negative YTD. NGX GROWTH topped the gainer’s chart with a gain of +41.63% YTD while NGX INSURANCE sector index closed negative with -11.61% YTD (see chart 1 below).

Chart 1: Movement of NGXASI Index Points 4^TH JAN. 2022 – 30^TH DEC. 2022 (YTD)

Source: NGX, Proshare Research

NASD OTC Exchange - Unlisted Equities

The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week on a positive note.  The NSI and Market capitalization closed the week at 709.66 points and 932.51 with an increase of 0.80% respectively (see table 6 below).

Table 6 : NASD W-o-W Change

 Source: NGX, Proshare Research

Gote And Toni Index

Gote Index closed the week year at 136.23 index points from 134.71 index points recorded at the beginning of the year, representing an increase of 1.13% YTD. DANCEM closed the year positive with 1.56% YTD while NASCON and DANGSUGER closed the year negative with -15.91% and  -5.31% YTD respectively (see table 7 below).

Table 7: Gote Index W-o-W Change and YTD Performance

 Source: NGX, Proshare Research

Furthermore, the Toni Index closed positive at 115.01 index points from 109.63 index points recorded the at the beginning of the year, representing an increase of 4.91% YTD, TRANSCOHOT, UBCAP and TRANSCORP closed the year positive with 16.17%, 40.70% and 15.31% respectively while AFRIPRUD and UBA closed the year negative with -4.76% and -5.59% YTD (see table 8 below).

Table 8: Toni Index W-o-W Change and YTD Performance

 Source: NGX, Proshare Research

Contrary to analysts’ expectation, the equity market recorded a positive week-on-week performance, albeit at a slow rate.  Analysts expect a bearish market in the coming week as investors selloffs to remain liquid for the festive period and as trading activities slowed within the 2 days public holiday.

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