Nigeria: Economic Dashboard @ 270123

Economy

CBN Tackles Inflation, Raises MPR to 17.5% 

For the fifth time, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) raised Monetary Policy Rate (MPR) at its just concluded first meeting of 2023. The Committee decided to increase the policy rate by 100bps from 16.5% to 17.5% while holding all other policy parameters constant. The MPC considered that continued upward risk to price development characterized by the forthcoming 2023 general elections; perennial scarcity of PMS; continued rise in other energy prices; exchange rate pressure; and rising insecurity would keep inflation high and thus decided to sustain the current stance of policy to further rein in inflation. Analysts believe inflation will moderate further but the decision would also slow down growth in Q1 2023 with higher lending costs affecting private-sector productivity. The hike might also trigger selloffs in the equity and fixed income market as retail investors demand higher interest rates. The treasury bill yields have remained relatively low with a very wide negative real rate of return. 

CBN Launches Cash Swap Program for Rural Communities 4 days to Deadline. 

To hasten the circulation of the new currency notes, the Central Bank of Nigeria (CBN) has launched a cash swap programme in rural areas. The CBN disclosed this in a circular to all Deposit Money banks, Mobile Money operators, super and other agents. The initiative allows residents of rural areas to exchange old notes for new naira notes with a maximum of N10,000 per person while amounts above N10,000 shall be treated as cash in deposits into wallets or bank accounts in line with the cashless policy. The service will also include individuals without bank accounts. According to the circular, agents are permitted to charge cash-out fees for cash swap transactions but prohibited from charging any further commissions to customers for this service. Analysts believe the initiative should hasten the circulation of the new notes, but 4 days might not be enough to effectively distribute the new notes considering the large population of the country.

Insufficient New Naira Notes Create Anxiety in Commodity Markets

Despite the scarcity of the new notes and pleas by citizens for an extension of the currency change deadline, the CBN has maintained its stance on not extending the deadline. With 4 days to the deadline, trade activities in the country are still heavily carried out in the old notes with little availability of new notes. The pressure to avoid having the old notes after the deadline has resulted in some Nigerians rejecting the old notes and the inadequate availability of the note has created a dilemma for citizens. Although there will be a huge adoption of online transactions from literate citizens, the major concern is the unbanked illiterate individuals (particularly market traders). With ATMs at the urban centres still dispensing old notes, the fate of the rural areas is definitely worse. The CBN claimed to have launched a cash swap programme in rural areas on January 23, but the circulation of the currency has not seen any significant improvement. Analysts are concerned that this drastic step can impede economic activities and worsen the welfare of average Nigerians, who would possess valueless currency. 

Imota Rice Mill would Raise Local Production Capacity

President Muhammadu Buhari has inaugurated the 32-metric tonnes per hour Lagos Rice Mill in Imota, Ikorodu. The rice mill, regarded as the largest mill in Africa and the third largest in the world, is expected to produce 2.5m bags of 50kg of rice annually and generate about 250,000 direct and indirect jobs. Analysts say the rice processing factory will raise the country's rice production capacity, reduce dependence on imported rice, and promote linkages with paddy rice-producing state. However, analysts believe the mill capacity is not still sufficient to bridge the rice production-to-consumption gap in the country which currently stands at 2m metric tonnes, albeit it would boost investment in the rice value chain. 

Lekki Deep Sea Port to Ease Congestion at Other Ports

The president also commissioned the Lekki Deep Sea Port at Ibeju Lekki. The project, valued at US$1.5bn, is a joint venture between the federal government through the Nigerian Ports Authority (NPA), the Lagos State Government, Tolarams Group (owners of the Lagos Free Zone), and China Harbour Engineering Company. Analysts believe the new deep seaport will decongest Apapa and Tin Can Island Ports by facilitating the direct berthing of large vessels with automated technologies while also attracting investment to the zone. 

FIRS Collects N10trn in 2022 but Revenue Retention Remains a Concern

Nigeria’s Federal Inland Revenue Service (FIRS) disclosed that it raked in N10.1trn as tax revenues in 2022, the highest tax revenue in its history and a little lower than its target of N10.44trn. The Service earned N4.09trn in oil revenues and N5.96trn in non-oil revenues, 41% and 59% contribution, respectively. Companies Income Tax contributed N2.83trn, Value Added Tax contributed N2.51trn, Electronic Money Transfer Levy contributed N125.65bn, and Earmarked Taxes contributed N353.69bn. Analysts say the tax revenue is 58% above the N6.4trn earned in 2021, a notable improvement in tax collection for which the Service should be commended. However, analysts are concerned that the total revenue earned as of November 2022 was N6.5trn, suggesting that close to half of the tax revenue collected by the Service was retained. Analysts called on relevant authorities to provide clarity on the retention policy of revenue-collecting and generating agencies.

US Economy grows Strong in Q4 Amid Slowdown Fears

The U.S. economy grew at an annualized rate of 2.9% in Q4 2022 slightly ahead of analysts' consensus which expected the economy to grow by 2.8%. The Q4 growth raised hope the FOMC may knock down inflation without reversing economic growth. Combing the GDP data, Analysts say there are still areas of concern for the US economy as consumers spendings are still on the cautious side, the housing market is tight, and business investment is not so robust. Some analysts argued the strong growth data could be the last solid growth before the lag effects of FOMC rate hikes kick in.  

Oil and Gas 

Price Differentials May Deter New Industry Investments as Petrol Pricing Runs into Confusion

Three months into the shortages of Premium Motor Spirit (also called petrol) in Nigeria due to NNPC fuel import monopoly, increase in ex-depot prices, forex scarcity, and logistics issues, the market is yet to get clear direction as to pricing and sustainable resolution for the scarcity. Aside from deterring investment in the downstream oil industry, businesses are unable to make decisions on energy costs. Although the ministry of petroleum has rebutted the supposed increase in pump price, retail outlets of NNPC Ltd and other major marketers have adjusted their pump price upward to between N185 and N195/litre, thereby deepening the uncertainty in pricing.

In retail outlets belonging to independent marketers, pump prices also differ across stations, cities, and states. In Lagos, petrol is trading at around N230/litre. It sells at N240/litre in Ogun State and Port Harcourt, at N250/litre in Calabar, and between N300 and N400/litre in the black markets. It is increasingly difficult to establish the pump price in each city/state as stations along the same route dispense at different prices. Some marketers say the commodity may sell above N800/litre once the subsidy is removed, although analysts doubt the forecast, given the possible range of landing cost and ex-depot price. Analysts insist that the inability to resolve the long-standing scarcity and differential pricing shows a weak regulatory structure in the industry. Investors in the sector are likely to get skittish and the regulatory authorities seem to have lost control over both product supply chains and product pricing. Against this background Q1 2023 may witness dark industry clouds and rising consumer anger. 

Analysts Call for Other Stakeholders in the Committee to End Scarcity 

By assuming the current scarcity is a result of an arbitrary distribution model, the government intends to enforce sanity in the supply and distribution of petroleum products across the value chain. The Federal Government approved the construction of a 14-man Steering Committee on Petroleum Products Supply and Distribution management to find lasting solutions to disruptions in the supply and distribution of petroleum products. 

The Steering Committee, chaired by President Buhari as Minister of Petroleum Resource and the Minister of State for Petroleum Resources as Alternate Chairman, include leadership of Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), Minister of Finance, Ministry of Petroleum Resources, and Department of State Services (DSS). Others include the National Economic Adviser to the President, the leadership of the Nigerian Customs Service (NCS), EFCC, NSCDC, CBN, and NNPC Ltd. In terms of committee composition, Analysts say the committee ought to engage the primary operators in the oil and gas value chain. Marketers’ associations would better understand industry issues and encourage buy-in to the committee’s recommendations. Analysts would better curate the challenges from a third-party view for objective recommendations.   

The committee is expected to ensure national strategic stock management, visibility on the NNPC Limited refineries rehabilitation programme, and end-to-end tracking of petroleum products to establish daily national consumption and eliminate smuggling. These initiatives echo analysts’ positions. Nevertheless, the government needs to allow the market to run its course, albeit subject to regulatory guidance. 

Falling Naira Raised Diesel Prices in 2022, as Inflation Fears Persist 

Challenges in the downstream oil industry are not limited to scarcity and pricing uncertainty of Premium Motor Spirit (PMS, also called Petrol). According to the December Petroleum Price Watch of the National Bureau of Statistics (NBS), the retail price of Automotive Gas Oil (AGO, also called diesel) surged by +184.03% between January (N288/litre) and December 2022 (N818/litre). With diesel being the major energy source for big businesses and heavy-duty vehicles, Analysts say diesel prices are pretty much higher in most parts of the country at around N850/litre and it’s a major contributor to rising inflation. Operators in the industry attributed the increase to the high cost of crude oil; high refining costs; marketers' margin; multiple taxes and other government policies, and imbalances between demand and supply of diesel. Analysts believe that although diesel prices are unregulated, a multiple exchange rate system is a disincentive for investors and competitive pricing of diesel in addition to the falling value of the naira which is raising the landing cost of the fuel.  

Edo Modular Refinery Begins Operations Amid Concerns 

After a series of concerns raised by analysts on the lack of feedstock for new modular refineries in the country, the management of Edo Modular Refinery announced it has finally gotten its first feedstock of 10,000 barrels per day (b/d) from Decklar Resource Inc and Millennium Oil and gas Company Ltd. The Refinery also disclosed it has begun production at its 6,000 b/d plants in Ologbo to produce 500,00litres of diesel, 300,000litres of naphtha and 200,000litres of Low Pour Fuel Oil (LPFO). Analysts say the operation of the refinery and its sister refinery – Duport Refinery would feed a meaningful proportion of local consumption and support investment inflow in Edo State. Howbeit, the arbitrary pricing of petroleum products and upstream industry challenges could undermine the sustainability of production from modular refineries.  

Local Modular Refineries Face Poor Feedstock and Weaker Investment.

Although Nigeria’s crude oil production has been on an upward trend, operators of modular refineries continue to decry the lack of access to feedstock. Analysts say out of the 30 plus licenses awarded for modular refineries by the default Department of Petroleum Resources in 2015, only Ogbele Refinery (with a capacity of 11,000b/d), Edo refinery (with an initial capacity of 6,000b/d) and Waltersmith refinery (with an initial capacity of 5,000b/d) are currently operational, having secure feedstocks. Members of the Oil Refiners Association of Nigeria (CORAN), who are the promoters of modular refineries, have consistently pleaded with the upstream regulator to address its challenges. The major challenges of the local refiners include lack of access to feedstock and foreign exchange, complications in clearing equipment at the ports, high cost of license renewal, and failure of the government to uphold its duty waiver for modular refineries as approved by the president. Analysts believe the drag in finalizing the PIA regulations that provide for reserving of crude oil for domestic refiners underscores the low commitment to boosting fuel supply and promoting local content. The lack of specific regulations on currency for crude oil transactions is also a major concern for local and foreign investors.

Africa’s Leadership of OPEC May Attract Fresh FDI 

Analysts believe dwindling investments, poor infrastructure, and other challenges have threatened the growth and sustainability of energy in Africa. Nigeria’s Minister of State for Petroleum Resources, Timipre Sylva, has appealed to the presidency of OPEC to promote the course of Africa and attract more investments into the oil and gas industry in the continent. The minister made the appeal when he received Gabriel Lima, Equatorial Guinea’s Minister of Mines and Hydrocarbons who also doubles as the 2023 President of OPEC and Gas Exporting Countries Forum (GECF). Lima expressed the need for Africa to focus on reducing its energy poverty while the world is focusing on energy transition as there are over 600 million Africans without access to electricity and other products. Analysts say that with Africa accounting for seven out of the thirteen OPEC members and occupying critical positions, the continent needs to become a major force in the cartel, defend its energy policy, and attract investment for its oil and gas industry. 

Oil Prices Maintain Uptrend as Global Uncertainty Persists

Oil prices traded higher for the week, marking a third straight week of gains as the Lunar New Year holiday in east Asia and concerns about a global economic slowdown were offset by the prospect of an economic recovery in top oil importer China, expectations that OPEC will maintain its current output, less than expected US crude stocks growth, and stronger than expected US economic growth. Oil investors are also waiting to get more clarity on the February 5 EU embargo on Russian refined oil and the ensuing reshuffle of trade flows. Analysts expect oil prices to maintain the current trajectory in hope that OPEC will maintain output policy and uncertainty around Russian oil. In the domestic market, analysts expect petrol prices to trade around N300 per litre with extended queues across major cities in Nigeria.   

Fixed Income

Fixed Income Market 

Currency Market

The naira gained for most trading sessions this week at both Investor and Exporter FX fixing (I&E) and Nigerian Autonomous Foreign Exchange fixing (NAFEX) fixing. However, the naira depreciated at both windows on a weekly basis by 0.05% and 0.03% to settle at N461.75/US and N461.40/US respectively. (See table 1 below).

Table 1: Naira/Dollar at the I&E FX Window and NAFEX Market

Source: FMDQ, Proshare Research

Money Market

The large deposits to banks as the swap deadline approaches kept the interbank rates low all through the week. On Friday, the Open repo rate (OPR) and Overnight rate (O/N) dropped to 10.50% and 11.00%, a week-on-week fall of -4.55% and -4.35% (see table 2 below).

Table 2: Money Market

Source: FMDQ, Proshare Research

Interbank rates should move up in the coming week as the FGN Bond auction mops liquidity.

Treasury Bills Market 

Despite the rate hike on Tuesday, the Nigerian Treasury bill had strong buying interest all week. The average benchmark yield dropped to 1.61% on Friday, a weekly decline of -57.52%. 

Similarly, the OMO bill’s average benchmark yield also contracted to 2.71% by 424bps week-on-week (See table 3 below). 

Table 3: Treasury Bills Market

Source: FMDQ, Proshare Research

We expect a quiet market next week with investors’ attention diverted to the FGN bond auction.

Nigerian Treasury Bill Primary Auction 

Excess Demand Pulls Down Rates at the Nigerian Treasury Bill Auction 

In the face of rate hikes, higher inflation, and negative real return, investors’ interests remained strong in the fixed-income market, particularly in the short-term end of the market. Rates at the Nigerian treasury bill market have dropped to a record low compared to the previous year when they rose to double digits. At the treasury bill primary auction conducted on Wednesday, the Debt Management Office (DMO) offered N220.53bn but had an oversubscription of N1044.22. The DMO sold exactly the amount offered with the stop rates of the 91-day, 182-day, and 364-day dropping to 0.29%, 1.80%, and 7.78% respectively. Analysts can attribute the robust liquidity and bearish equity market to the buying interests (see table 4 below). 

Table 4: Nigerian Treasury Bills Auction Result

Source: Commercio paper

FGN Bond Market

The robust liquidity aided the bond market this week. The buying interest was seen across all tenors, bringing the average benchmark yield down to 13.57% on Friday. The yield fell by 265bps week-on-week (See table 5 below).

Table 5: FGN Bonds Market

Source: FMDQ, Proshare Research 

Analysts expect the buying interests to persist next week.

Julius Berger Issues Commercial Paper to Raise N30bn as Inflation Crimps Yield

Julius Berger Nigeria Plc issued a N30bn commercial paper.  The unsecured debt instrument has series 1 and 2 at 182-day and 267-day tenors with a discount rate of 13.09% and 13.52% and an implied yield of 14% and 15% respectively. Investors can subscribe with a minimum of N5m and multiples of N1000 thereafter. The offer will run till January 30, 2023. The issuer has a rating of A from Datapro, showing a low risk and strong ability to meet their ongoing obligations. Although the yield is lower than the current inflation rate at 21.34%, analysts still expect investors to be attracted to the issuance as only long-dated risk-free instruments have such yields. 

GCR assigns a Stable Outlook Rating for MTN Nigeria’s Operations

GCR assigns AAA(NG) rating to MTN Nigeria Communication Plc’s N115bn series 1 (Tranche A and B) Senior Unsecured Bond issue with a Stable outlook. The rating reflects the issuer’s strong competitive position, robust financial profile, and the group’s overall performance. The stable outlook suggests that GCR expects sustained strong earnings and cash flow performance which should support MTN Nigeria’s liquidity and leverage positions. Despite the increase in debt in 9M 2022, the rating company believes MTN Nigeria should remain financially strong and liquid. However, pressure could result from higher CAPEX costs amid foreign exchange illiquidity. Analysts believe Nigeria’s slow economic growth might affect the company's performance and the rating seems overly optimistic. The depreciating welfare of Nigerians should affect data consumption and sim registration, leading to a possible drop in revenue. 

Ecobank Transnational Incorporation (ETI) Issues Eurobond at 11.84% yield 

Ecobank Transnational Incorporation (ETI) has issued a 2031 Eurobond with an indicative yield of 11.84% per annum and 8.75% coupon rate. The Eurobond has an indicative price of $91.54 and a minimum investment amount of $10,000. The coupons will be paid every June and December till the maturity of the Eurobond (June 2031). Analysts expect investors to rally towards the issuance, considering the elevated inflation and currency devaluation in the place of operation of the Pan-African group, investors will view it as an opportunity to evade inflation. Also, the attractive yield should stimulate investors as against the risk-free Eurobond yield, Nigeria’s 8-year Eurobond yield was at 10.64% as of 20^th January 2023. ETI has a fitch rating of 

Equity

NGX – Listed Equities

• The Nigerian bourse ended the week on a positive note as investors gained N17.14bn for the week. The NGXASI closed the week with a gain of 0.12% as against a 0.16% gain recorded last week. 
• Year-to-date, the NGXASI closed positive for the week with a gain of 2.74% as market capitalization settled at N28.68trn.
• Sectoral performance across sectors was broadly positive for the week as eleven (11) sectors closed positive while five (5) sectors closed negative. NGX GROWTH topped the gainer’s chart with a gain of +4.20% W-o-W while NGX MERIGRW sector index closed negative by -1.21% W-o-W (see chart 1 below).

 Chart 1: Movement of NGXASI Index Points 3^rd JAN. 2022 – 27^TH JAN. 2022

Source: NGX, Proshare Research

NASD OTC Exchange - Unlisted Equities

The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week on a negative note.  The NSI and Market capitalization closed the week at 703.23 points and N924.06bn, a decline of 0.53% (see table 6 below).

Table 6: NASD W-o-W Change

 Source: NGX, Proshare Research

Gote and Toni Index

Gote Index closed the week positive at 139.42 index points from 138.51 index points recorded in the previous week, representing an increase of 0.66% W-o-W. DANCEM  closed the week positive with 0.72% while DANGSUGER closed negative with -0.59% WoW and NASCON closed the week flat ( see table 7 below).

Table 7: Gote Index W-o-W Change

Toni Index closed positive at 121.58 index points from 121.48 index points recorded previously, representing an increase of 0.08% W-o-W. UBA closed the week positive at 0.62% while TRANSCORP, UBCAP and AFRIPRUD all closed negative for the week by -1.63%, -0.34% and -1.64%, respectively. TRANSCOHOT stayed flat for the week (see table 8 below).

Table 8: Toni Index W-o-W Change

Analysts expect a bearish market in the coming week as the monetary policy rate hikes, election uncertainty, and increase in energy costs weigh in on investors. 

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