Nigerian Economy
Nigeria’s Inflation Soars to 19.64%; Analysts Identify Naira Weakness as Major Factor
According to the National Bureau of Statistics, Nigeria registered a headline inflation print of 19.64% in July. With Inflation rising 104bp higher than the June print and hitting a 17-year high, Proshare Analysts question the potency of monetary policy levers in dealing with the current inflation worries. Analysts believe that the recent surge in Inflation can be attributed to the significant drop recorded in the Naira in July.
The core sub-index rose Y-o-Y by 16.26%, the highest core inflation data since January 2017, signaling long-term inflation concerns. Food prices rose by 22% Y-o-Y last month. On a month-on-month basis, all item inflation remained unchanged at 1.82%. In comparison, food price inflation dropped slightly to 2.04%, reflecting the moderation of food prices after the rise recorded in June on the early preparation for the ‘Eid celebration.
Shippers’ council calls for Improvement in Port Infrastructure; Analysts identify an Industrialization Nexus
A recent event organized by the Nigerian Shipper’s council identified the need for critical port infrastructure to achieve the industrialization of the Nigerian economy. Analysts believe the country’s inefficient ports are responsible for its high dwell time. Nigeria’s dwell time exceeds 20 days, the highest in West Africa. Analysts believe that import duties, tariff rates, and charges need to be modified to make Nigerian Manufacturers more competitive. Nigeria’s industrial sector has consistently contributed the least to Nigeria’s GDP due to a variety of factors namely: inhibitive cargo clearing logistics, inefficient transportation, multiple taxations, and sluggish enforcement of contracts by courts.
Analysts Call for Privatization of TCN as National Grid Collapses Again
Nigeria recorded its 7th system collapse on Wednesday due to industrial action by the National Union of Electricity Employees (NUEE). The Union members had on Tuesday picketed the TCN Board at the body’s headquarters to protest unpaid entitlement, a compulsory promotion interview for principal managers. Analysts noted that the Transmission end has continued to be the weak link in the electricity value chain, suffering from massive infrastructural challenges and mismanagement. Analysts reckon disruptions will decrease if the government privatizes the value chain.
Analysts consider Trade and FDI Prospects with Indonesia
The Nigerian Indonesian Chamber of Commerce and Industry has disclosed that it is increasing capital mobility and trade volume between Nigeria and Indonesia. Proshare Analysts note that as of Q 2022, Indonesia ranked fourth on the list of countries to which Nigeria exported with a total export of N474bn, the bulk of which was in crude oil. While Indonesia presents more significant trade opportunities, especially in non-oil commodities, analysts believe that much more needs to be done in terms of a complex and robust trade framework to attract Foreign Direct Investment from Indonesia and other parts of the world. According to the National Bureau of Statistics, the last time capital flows came from the Southeast Asian country was in 2019.
Global Economy
UK inflation surged 10.1% in July; Analysts expect inflation to further surge to 13% before year-end
CPI Data from the UK’s Office of the National Statistics showed that inflation accelerated to 10.1% in July from 9.4% in June, the country’s highest since 1982. The world’s fifth largest economy is projected to enter a recession that would last until late 2023. At its last meeting, the Bank of England raised rates by 0.50% to 1.75, the biggest hike since 1995, rising food Clothing, Footwear, and Housing costs pushed inflation higher in July. Meanwhile, Analysts see inflation climbing to over 13% when the energy price cap is removed in October.
Heatwave compounds Chinese Economic woes, Analysts cut GDP outlook see rising Inflation
Economists are turning even more bearish on China’s growth outlook, cutting their 2022 GDP forecasts, and casting more doubts on the government’s 5.5% 2022 goal. Goldman Sachs downwardly reviewed its projection for China’s GDP growth in 2022 to +3% from +3.3% while analysts at Proshare believe the world’s second-largest economy would only manage a +2.9% GDP growth in 2022. China’s economy has continued to be pressured by the government’s Covid Zero policy which restricts economic activities and would render the government’s stimulus inflationary. Analysts note that, apart from a deteriorating property sector, the heatwave in China would account for the slowdown in growth.
Analysts Fear that Kenyan Infrastructural Development to slow under President-elect William Ruto
The Election of Kenyan Deputy President William Ruto as the country’s next President has spurred reactions amongst economists. The President-elect, who had maintained an anti-China stance during his campaigns, is looking to broaden the country’s infrastructure and position it as an African technology hub. Analysts however note that although it may be unsettling that up to 81.4% of the country’s debt service cost (in the nine months to March this year) was made to China, the country’s infrastructural development over the years has been largely funded by China’s Belt and Road Initiative (BRI). Analysts note that with higher global lending rates, Kenya may record a major slowdown in capital infrastructure spending if it decides to pivot away from China.
US Retail Sales and Jobless Claims Data Signal Resilience, Analysts see a Hawkish Fed
Despite record high inflation, U.S. retail sales grew by 0.8% in July (same as June) beating expectations and further assuaging fears of a recession. Analysts attribute the maintained growth in retail sales to the retreat in gasoline prices from record highs in July. The weekly jobless claims data also came in at 250000, suggesting that 2000 fewer workers were laid off last week. Taking the recent data together with the strong wage gains in July, Analysts see the Federal Reserve keeping to its aggressive monetary policy tightening path. The recently released minutes of the Fed’s July meeting had also given similar indications.
Oil and Gas Sector
IEA Cuts Nigeria’s Sustainable Output
The International Energy Agency (IEA) has cut Nigeria’s sustainable oil production volume by 200,000 barrels per day (b/d) from about 1.5mb/d to around 1.3mb/d. The agency attributed the cut to persistent technical and operational issues such as pandemic-related disruptions, sabotage, and theft. Based on the estimate, sustainable output implies a production level that can be reached in 90 days and maintained for some extended period.
Analysts attributed the country’s production shortfalls to low crude oil flows in Bonny, Forcados, and Shell-operated EA oilfields related to the country’s large-scale oil theft and leakages. Following the return of OPEC’s 2020 output cut, the country should have returned to its pre-pandemic output level of 1.8mb/d under the OPEC quota. However, Nigeria’s crude output has remained low at about 1mb/d as of July 2022 compared with the July target/quota of 1.8mb/d, soaring its compliance level.
Analysts Observe That Subsidy Accounts for 13% of Crude Oil Revenue in Nigeria
Aside from the heavy import bill for petroleum products, which is taking a significant proportion of the country’s crude oil revenue, the subsidy regime has been another leakage to the system in Nigeria. Within the first half of 2022, subsidies accounted for about 13% of the country’s crude oil revenue. The average monthly crude oil revenue for the period stood at N2.08trn while the average monthly subsidy payment stood at N265.63bn. Energy analysts noted that underproduction and rising crude oil prices are the primary drivers of the country’s heavy subsidy bill.
Opportunities in Africa’s Oil and Gas: Looking Inward
Amidst the vast opportunities in Africa’s oil and gas despite the global energy transition, McKinsey analysts have suggested that oil and gas potentials in Africa can be harnessed by a combination of decarbonizing operations, investment in low-carbon infrastructure, and investment in renewable energy. Analysts expect that Africa will gain no support for its oil and gas development at COP27 later in the year due to the recent severity of climate change worldwide. However, with western nations reassessing their oil and gas investment positions, Proshare analysts believe it is time for Africa to ally to develop the continent’s fossil fuel projects, given the low severity of climate change and the high incidence of energy poverty on the continent.
Recent Efforts to Curb Oil Theft: Motion Without Movement
Nigeria, Africa’s largest oil producer, is dealing with security and operational issues along its oil and gas infrastructure. While the security agencies have scaled up their operations to dislodge vandals and oil thieves along the oil pipelines and production facilities, the NNPC Ltd has also developed a Crude Theft Monitoring Application, accessible on mobile phones and web browsers. Proshare analysts commend the NNPC Ltd efforts at curbing oil theft in the country but doubt the effectiveness of the mobile app in curbing the crude theft given the low internet penetration, lack of reporting incentives, and the large-scale of oil theft by members of the host communities whom the app targets for reporting incidences of vandalism and oil theft. With Oil theft becoming a national emergency, Proshare analysts expect more innovative approaches from industry players.
On the back of an Impending Proshare Report, Analysts Review the Sustained Incidence of Oil Theft
Following the interception of an oil supertanker fleeing Nigeria in Equatorial Guinea last week, the Nigeria Customs Service (NCS) said it had intercepted 3,998 jerry cans of Premium Motor Spirit (PMS), equivalent to 119, 940 liters along the Badagry waterways. Proshare analysts attributed the increased incidence of crude oil theft and smuggling in Nigeria to the high enticements, theft, and diversion associated with the weak policing of oil infrastructure and the market distortion in the country.
While the involvement of security agencies and the low probability of being apprehended and sentenced create incentives for crude oil thieves, the significant price differential between Nigeria and its neighboring countries continue to incentivize petroleum product smugglers. Proshare analysts believe weakening the motivations, and the supply chain infrastructure of oil thieves and smugglers will provide a short-term respite for the industry. But medium to long-term solutions may have to consider high-end solutions as recommended in the forthcoming Proshare Impact Report titled, “The Anatomy of Oil Theft in Nigeria: Understanding the Gravity.”
Brent had a weekly decline of -0.58% (see Table 1).
Commodities Market
Metals
Gold dropped by -2.77% while Silver also dropped by -7.19% W-o-W (see Table 1).
Agriculture
Cocoa prices dropped by -1.17% W-o-W.
Corn prices dropped by -0.40% W-o-W and Sugar prices dropped by -2.42% (see Table 1).
Table 1: Commodity Prices
| Commodity | 19-Aug-22 | 12-Aug-22 | 31-Dec-21 | Weekly Chg | YTD Chg |
| Brent | 97.24 | 97.81 | 78.54 | -0.58% | 23.81% |
| Gold | 1763 | 1813.2 | 1827.1 | -2.77% | -3.51% |
| Silver | 19.05 | 20.525 | 23.27 | -7.19% | -18.13% |
| Cocoa | 2370 | 2398 | 2546 | -1.17% | -6.91% |
| Corn | 622.75 | 625.25 | 595.5 | -0.40% | 4.58% |
| Sugar | 18.13 | 18.58 | 18.83 | -2.42% | -3.72% |
| Source: CNBC, Proshare Research |
*Data for the 19th of August 2022 is as of 05: 41 pm (Nigerian Time)
Additional Factors Driving Food Inflation Worry Analysts
The Federal Government of Nigeria claims to have taken steps to reduce food inflation by banning foreigners from purchasing food at farm gates. The Minister of Industry, Trade, and Investment inaugurated an inter-ministerial standing committee to oversee the implementation of a memo on the Promotion of Agri-Business in Nigeria through Right Farm Gate Pricing and Ban of Foreigners from Purchasing Agricultural Commodities at the Farm gates. He claimed that foreign middlemen mop up agricultural produce leaving little for indigenous traders as they deprive factories of fresh stocks.
Food prices have increased in domestic markets caused by a reduction in crop production, rampant Insecurity, and farmgate distribution problems.
Analysts Express Commodity Price Optimism as Ukraine Increases Grain Exports
Ukraine expects five ships to arrive at its Chornomorsk seaport. These ships were to load more than 70,000 tonnes of agricultural products in a solid move to clear the backlog of contracts. The Ukrainian port authorities indicated that these exports would include Wheat, Corn, and sun-seed oil. This comes after three ships left Ukraine with 33,750 tonnes of food. These vessels Sera, Efe, and Petrel S, were loaded with 8,000 tonnes of corn, 7,250 tonnes of sunflower oil, heading for turkey, and 18,500 tonnes of sunflower meal heading for Amsterdam bringing the number of ships that had left the Ukrainian ports under the UN-brokered grain deal to 24.
Before the war in Ukraine, the country had an export volume of between 5 million to 6 million tonnes of agricultural products monthly. Now faced with a backlog of about 18 million tonnes of grains left over from last year’s harvest, the country aims to attain 3 million tonnes of export in the coming months to cover this backlog and start selling new crops. Soft commodities have witnessed a high YTD, with Cocoa standing among the least profitable at a -5.4% YTD.
Analysts take a Snap Look at the Global Grain Market
After rising for most of last week, wheat prices have begun to fall. Reports of better weather conditions have seen a positive reaction from the market as analysts noted a drop in prices of grains, particularly wheat and corn, from the close of Friday 12th of August 2022 until Tuesday 16th of August 2022. Exports from Ukraine have also helped pull down prices as they continue clearing the backlog of contracts.
Analysts look at these factors and project that should no attack against any ship leaving Ukraine takes place, and weather conditions in the US and other economies don’t get worse than they already have, the sustained pressure on these grains would continue as the major exporters enter their harvest in the lower end of the year.
Rising Fertilizer Prices Threaten to Push Sri Lanka into Food Crises.
Sri Lanka used to be self-sufficient in rice production but returned to the market last year to import about 149,000 tonnes of rice and has already placed contracts to import about 424,000 tonnes of rice. The stunted growth in many farms worsened their importation of rice caused by reduced production as fertilizer gets scarce and more expensive. Fertilizer shortage reflects the inability of the country to import adequate fuel for farm machinery and trucks to transport rice to the markets.
With prices of Urea going up by above 2000%, from 1,500 rupees (US$4.23) to 40,000 rupees (US$112.68), and herbicides going up by almost ten times their previous price, standing at 100,000 rupees (US$281.69), diesel prices also going up by 179% on the black market, the problems seem large. As fertilizer prices stay high and farmers continue to struggle for availability, the risk of a food crisis going through the country’s doorstep is high.
Analysts Note Negligence and Double Standards in Nigeria’s Agriculture Sector
Stakeholders in the Nigerian agricultural sector have spoken against the European Union for their double standard and NAFDAC for its negligence about pesticide use in the country. They highlight how certain chemicals used as pesticides were banned and withdrawn in Europe but allowed their production and export to other countries, including Nigeria, to continue. Among the pesticides used in 4 states in Nigeria, 65% are said to be Highly Hazardous Pesticides (HHPs), as some of them show signs of chronic human health effects. They also claimed that NAFDAC had not updated its database on newer harmful pesticides, claiming that the last update was in 2008.
The effects range from health problems to the export of commodity products. Using these pesticides, which could have this residue could cause residue remains in food products and could have a dangerous effect on the Nigerian population, who might not check for the residue in the farm produce they buy. Global trade could also witness a general increase in the rejection of exports of the country’s food crops which would worsen the nation’s international trade.
Fixed Income
Currency Market
For most of the trading sessions this week, Naira depreciated at the I & E FX window as FX scarcity persists. On a week-on-week basis, the Naira appreciated by -0.13% to N429.05/US$ at the close of trading on Friday at the I&E FX window.
The Naira closed on Thursday at N427.88 at the NAFEX (spot market), depreciating by +0.72% week-on-week basis (see table 2 below).
Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
| Average Benchmark Yields | |||
| 12-Aug-22 | 19-Aug-22 | % Change | |
| I&E FX | 429.62 | 429.05 | -0.13% |
| 11-Aug-22 | 18-Aug-22 | ||
| NAFEX ($/N) | 424.83 | 427.88 | +0.72% |
Source: FMDQ, Proshare Research
Money Market
Maintaining its double-digit momentum all week, the funding rate edged higher on a week-on-week basis. The Open Repo rate (OPR) climbed up to 14.67 by +22.25% (W-o-W) and the overnight rate (0/N) rose to its resistance level of 15.00 by +15.38% (W-o-W) (see table 3 below).
Table 3: Money Market
| Money Market Rate | |||
| 12-Aug-22 | 19-Aug-22 | % Change | |
| OPR (%) | 12.00 | 14.67 | +22.25% |
| O/N (%) | 13.00 | 15.00 | +15.38% |
Source: FMDQ, Proshare Research
The interbank rates should maintain the double-digit trend as liquidity frails
Treasury Bills Market
The hike in the inflation rate weighed on investors’ decisions this week as the Nigerian treasury bills market was somewhat quiet all through.
On Friday, the Nigerian treasury bill closed bearish with the average benchmark yield rising by +7.03% (W-o-W) to 8.22.
On a contrary, the Average benchmark yield for OMO bills fell by -7.41% (W-o-W) to settle at 10.37 (See table 4 below).
Table 4: Treasury Bills Market
| Average Benchmark Yields | |||
| 12-Aug-22 | 19-Aug-22 | % Change | |
| T. Bills (%) | 7.68 | 8.22 | +7.03% |
| OMO Bills (%) | 11.20 | 10.37 | -7.41% |
Source: FMDQ, Proshare Research
The bearish sentiment should persist next week as inflation expectation worsens
FGN Bond Market
The average benchmark yield pivoted outward at the close of trading on Friday as multiple selloffs dominated all tenors. It grew by +1.00% (W-o-W) to 13.02% from 12.89% recorded last week (See table 5 below).
Table 5: FGN Bonds Market
| Average Benchmark Yields | |||
| 12-Aug-22 | 12-Aug-22 | % Change | |
| Short Tenor | 11.95 | 12.09 | +1.17% |
| Mid Tenor | 12.89 | 12.92 | +0.23% |
| Long Tenor | 13.44 | 13.68 | +1.79% |
Source: FMDQ, Proshare Research
The average benchmark yields should trend upward in the coming week as investors seek higher yields.
Higher yields from FGN Bond Auction
Following the primary auction on the 15th of August, the amount offered was slightly undersubscribed by -10.9% at N200.57 bn worth of bonds as against the N225bn offered. The spread of the low subscription came from the -69.3% and -45.6% decline in investor’s interest for the 2025 and 2032 tenors as rising inflation expectations shrinks real return, however, 2042 was overly subscribed by +144.4% as investors seeks higher yields to cushion inflation. The rates for 2025, 2032, and 2042 maturities rose by 150bps, 50bps, and 25bps to settle at 12.50%, 13.50%, and 14.00% respectively. The bid-to-cover across the three maturities were 0.31x, 0.54x, and 2.44x accordingly (see table 6 below).
Table 6: Nigerian Bond Auction results Auction
| Nigerian Bond Auction | |||||
| Tenor | Amount offered (N’bn) | Total subscription (N’bn) | Amount sold (N’bn) | Stop Rate (%) | Previous Stop Rate (%) |
| 2025 | 75.00 | 23.01 | 4.21 | 12.50 | 11.00 |
| 2032 | 75.00 | 40.79 | 28.84 | 13.50 | 13.00 |
| 2042 | 75.00 | 183.28 | 167.53 | 14.00 | 13.75 |
Source: Debt Management Office (DMO)
Analysts Eye Nigerian Bond Market Yield Inversion
Scanning through the yields across different tenors, analysts noticed the four years and seven years tenors indicate an inverted curve, where the four years yield is at 12.76 while the seven years is at 12.62, contrary to the standard yield curve. However, the two and ten-year tenors maintained the upward slope at 10.97 and 13.26, respectively. The inverted yield at the four and seven years suggests investors are becoming pessimistic about the economic prospects, especially the inflation expectation. Usually, the inversion of yields serves as an indicator of recession with the 10-year to two-year treasury spread being the generally accepted indicator in most countries. Analysts believe the inverted curve in the 4-year to 7-year signals that the 10-year to 2-year will soon succumb to the pressure as multiple selloffs persist at the short end of the curve in recent times (see chart 1 below).
Chart 1: Bond Average benchmark yields as of 18th August 2022
Source: FMDQ, Proshare research
Suspension of Emirate Airlines Operation in Nigeria Raises Aviation Sector Fears Note Analysts
Emirate Airlines announced the suspension of its flight operation in Nigeria from September 1, 2022, mainly due to its inability to repatriate funds as FX scarcity persists. The decline in the country’s foreign exchange earnings from the oil production fallout has made it difficult for CBN to make dollars accessible for repatriation. The president of the association of foreign airlines recently stated that more international airlines might follow suit as over $1 bn dollars held have not been repatriated, which is a significant concern with the funds needed for maintenance and payment of staff. Analysts believe the withdrawal of Emirate airlines would weigh on the already high airfares as rising demand drags up the prices of other airlines.
Ghana’s cedi ranked the second worst-performing currency in the world raises concerns
Ghana cedi has been ranked the second worst-performing currency in the world after Sri Lanka’s rupee as it depreciated by 35% against the US dollar this year. on Wednesday, the currency dropped to its lowest of about GH9/$ as headline inflation surged to 31.7% from 29.8% in the previous month. According to Bloomberg, the persistent fall in the cedi is due to the high forex demand amidst low supplies coupled with high debts and low investor confidence as bond yields spike. In a trail to support the currency, the Bank of Ghana has raised its interest rate to a record high of 22% and sought a bailout from the international monetary fund as the high cost of living spikes. Analysts observed that most emerging countries are faced with a falling currency enigma with the current global turmoil.
Equities Market
Nigeria Exchange Limited (NGX)
- The Nigerian bourse ended the week on a negative note as market sentiment remained red. The NGXASI closed the week -0.59% as against the +0.70% gain recorded last week. The Nigerian Exchange lost N158.30bn in naira terms (see chart 2 below).
- Year-to-date, the NGSAXI remained positive to close the week with a +15.58% gain as the market capitalization settled at N27,3trn at the end of the week.
- Sectoral performance across sectors was Bullish. At the close of trading on Friday, 14 sectors recorded gain while NGX- Premium recorded the highest loss for the week with -4.96%.
Chart 2: Movement of NSEASI Index Points 8 AUG 2022- 19 AUG. 2022
Source: NGX, Proshare Research
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 754.04 points and 992.53 with a decline of-1.07% respectively (see table 7 below).
Table 7: NASD W-o-W Change
| Parameter | 12-Aug-22 | 19-Aug-22 | WoW Chg |
| USI | 762.18 | 754.04 | -1.07% |
| MKT Capitalization (Bn) | 1,003.35 | 992.63 | -1.07% |
| Volume Traded | 60,475.00 | 57,506.00 | -4.91% |
| Value Traded (000) | 7,479,538.00 | 10,516,761.96 | 40.61% |
| Deals Executed | 13.00 | 6.00 | -53.85% |
Source: NGX, Proshare Research
Gote Index closed the week negative with 135.11 basis points from 135.36 basis points recorded the previous week, representing a decline of -0.18% WoW DANGCEM remained flat while DANGSUGAR recorded a loss to close with -4.38%, and NANCON closed positive with +0.91% WoW (see table 8 below).
Table 8: Gote Index W-o-W Change
| DANGOTE INDEX | |||
| COMPANY | 12-Aug-22 | 19-Aug-22 | % Chg |
| DANGCEM | 258.80 | 258.80 | 0.00% |
| DANGSUGAR | 16.70 | 16.00 | -4.38% |
| NASCON | 11.10 | 11.00 | 0.91% |
Source: NGX, Proshare Research
Furthermore, the Toni Index closed negative at 106.53 basis points from 107.02 basis points recorded the previous week, representing a decline of -0.46% WoW UBA closed the week positive with +0.71% while UBCAP closed the week negative with -4.84% and, AFRIPRUD TRANSCORP, TRANSCOHOT closed the week flat WoW (see table 9 below).
Table 9: Toni Index W-o-W Change
| TONI INDEX | |||
| COMPANY | 12-Aug-22 | 19-Aug-22 | % Chg |
| AFRIPRUD | 5.80 | 5.80 | 0.00% |
| TRANSCOHOT | 6.25 | 6.25 | 0.00% |
| TRANSCORP | 1.07 | 1.07 | 0.00% |
| UBA | 7.05 | 7.10 | 0.71% |
| UBCAP | 12.40 | 11.80 | -4.84% |
Source: NGX, Proshare Research
