Comercio Partners May 2021 Macro-Economic Report - Trajectory of Inflation Points Northwards


Tuesday, June 15, 2021 / 10:58 AM / By Comercio Partners Asset Mgt / Header Image Credit: Comercio Partners Asset Mgt

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Report Summary

The Macroeconomy

  • Nigeria recorded positive real GDP growth in Q1 2021.
  • Headline inflation moderated in April 2021.
  • The Naira depreciated against the U.S. Dollar on the I&E FX Window.


The Financial Markets

  • Bears regained dominance in the equity market.
  • Fixed income market remained bearish.


Our Expectation for the Coming Quarter

  • We maintain our tepid expectations for GDP growth this year.
  • The trajectory of inflation still points northwards.
  • The equity market should maintain a seesaw performance.

Consolidated Recovery Seen Across Developed Economies

The global economic recovery continued in May as major developed economies eased restrictions. US nonfarm payroll came in below expectations but was solid in absolute terms. Meanwhile, retail sales in the US, the UK and the Eurozone remained strong. Forward-looking purchasing managers' indices highlight a surge in developed markets growth expectations as the UK and the Eurozone joined the US boom.


Supply bottlenecks are hampering production and driving up short-term inflation in some sectors. Global food prices are at a ten-year record and US housing inventory is tight, putting upwards pressure on housing prices. Labor shortages are fueling wage pressure in some industries. US inflation for April surprised sharply on the upside and readings for the UK and Eurozone have also been strong even if the base effect plays an important role. Inflation is also elevated across large emerging economies.

Countries are still at very different stages of reopening which continued to drive the level of local economic activity. The US and UK have mostly returned to normality over the month, while restrictions tightened in Singapore and Japan. India's situation showed some signs of improvement toward the end of the month. Vaccine roll-out continued to make good progress in the developed world, but most emerging economies remained far behind.


Geopolitical events included a flare-up of the conflict in the Gaza strip, a cyberattack on a major US pipeline and a standoff between the EU on one side, and Russia and Belarus on the other, which has potential to further deteriorate the already strained relationship between Russia and the west.


On policy, the Biden administration continued to negotiate an infrastructure program and revealed the most expansionary budget proposal since World War II, both of which may have to be scaled back in ambition amid rising concerns over fiscal responsibility and debt sustainability. Questions also remain about potential tax increases to fund the proposed fiscal programs. Australia also proposed an extremely expansionary budget in spite of its solid growth trajectory. The Federal Reserve minutes hinted at tapering asset purchases without committing to a timeline. The minutes reiterated the Fed's stance that the current inflation rally is transitory. Brazil's central bank reacted to inflation pressure by increasing short-dated rates and announcing another hike in the near future.


A Nigerian data driven think-tank and civil organisation, BudgIT, found about 316 duplicated projects in the 2021 budget. Analysis from the think-tank revealed over 115 duplicated projects were found in the Ministry of Health's budget breakdown, a disturbing news considering the health infrastructure deficit and the raging COVID-19 pandemic affecting the nation. BudgIT found out that there were no audit records of all approved budgets of the nation since 2015. According to the Nigerian Electricity Regulatory Commission, the Service-Based Tariffs System has improved Nigeria's power sector revenue. The agency said the improvement was largely due to the increase in electricity bill payment by consumers in bands A and B. In other news, the Federal Government said it expects most of the marginal fields, which investors bid for in the recently concluded bid round, to achieve first oil starting from next year. Recall that over 50 marginal fields were auctioned to several qualified investors earlier this year and the government has noted that it expects to generate at least $500 million from signature bonuses paid to the Department of Petroleum Resources by successful bidders. 


The Macro Economy


GDP Growth & Oil Production

The economy started off the year 2021 on a positive note, as GDP nudged higher, recording a real growth rate of 0.51% in the first quarter of the year. While the Q1 2021 growth rate represents an improvement of 0.40% when compared to the preceding quarter (0.11%), it is however still down by 1.36% relative to the growth rate recorded in Q1 2020 which stood at 1.87%. The real GDP growth recorded was buoyed by an improvement in the non-oil sector which ticked up by 0.79% y/y in the review period, down 0.76% and 0.90% relative to the rate recorded in Q1 2020 (1.55%) and Q4 2020 (1.69%), respectively. It is imperative to note that the first quarter performance was relatively weak due in part to the tepid level of economic activity usually occasioned at the year's start, but stemmed largely from the lingering impacts of the pandemic on economic activities and the persistent rise in inflation. However, the oil sector remained in the contractionary region, as the sector recorded a real growth rate of -2.21% y/y in the first quarter of 2021. The Q1 2021 negative growth rate seen in the oil sector represents a 7.27% decline when compared to the rate recorded in Q1 2020 (5.06%) but reflects a 17.55% improvement relative to the rate recorded in the fourth quarter of 2020 (-19.76%).


Nigeria's crude oil production remained weak in the first quarter of 2021, as it stood at 1.72mbpd, reflecting a decline of 0.35mbpd when compared to the production level in Q1 2020. This decline was on the back of the output cut implemented by OPEC+ in a bid to stabilize the market in the wake of the Covid-19 induced price collapse. The Q1 2021 oil production level was however higher than the 1.56mbpd output level recorded in Q4 2020 driven by the positive impact of the ease on the local production limit following additional output cuts implemented in the final months of 2020 to compensate for non-compliance in the earlier months, as well as the increased output from the bloc following the decision to reduce output curbs by 500,000 bpd at the start of 2021. In terms of GDP contribution, the oil sector accounted for 9.25% of total GDP in the review quarter, while the non-oil sector's contribution stood at 90.75%.


Of the three major activity sectors, Services retained the largest quotient in terms of GDP contribution, at 53.90%. Hence, Industries and Agriculture contributed 23.75% and 22.35%, respectively to the GDP in Q1 2021. This explains the weakness seen in real GDP growth, as the Services sector, which accounts for the lion share of the GDP, contracted by -0.39% in the review period. Conversely, we recorded a 2.28% and 0.94% expansion in Agriculture and Industries, hence, making these two sectors the drivers behind the growth recorded.

Also, while it was interesting to see the Industrial sector claw its way out of a 3-quarter long contraction to support the Agricultural sector in driving overall GDP growth, the performance of the Services segment is concerning, as it slipped back into contraction in Q1 2021 following an impressive growth in the last quarter of 2020 (1.31%). The Services sector performance is reflective of the fast-rising rate of inflation and the lingering impact of the Covid-19 disruptions.


Elsewhere, OPEC, in its monthly oil market report noted that Nigeria's oil production dipped by 3.99% in April 2021 to 1.37mbpd from 1.43mbpd in March 2020. This reduction evidences the increased occurrence of local production disruptions and vandalisms in the period.


In addition, OPEC retained its world oil demand forecast for 2021 at 96.50mbpd. On the supply side, OPEC forecasted a supply growth of 0.70mbpd to average 63.6mbpd, down by 0.02mbpd relative to the preceding month's estimate. 

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Headline inflation grew by 18.12% YoY in April 2021, 0.05% lower than 18.17% recorded in March 2021; food inflation grew by 22.72% YoY in April 2021, 0.23% lower than 22.95% recorded in March 2021; while core inflation stood at 12.74% YoY in April 2021; 0.07% higher than 12.67% recorded in March 2021. In April 2021, headline inflation rose by 0.97% MoM, representing a 0.59% decline from the rate of 1.56% that was recorded in the previous month. The yearly average rate rose to 15.04%, 0.55% greater than 14.55% recorded in the previous month. Prices continued to be impacted by the rising cost of energy, as well as the depreciating Naira. However, the slowdown in the uptick of the food segment helped support the headline index.


The food subindex rose by 0.99% MoM, reflecting a 0.91% decline from the rate of 1.90% recorded in March 2021. The yearly average rate rose to 18.58%, 0.65% greater than 17.93% recorded in March 2021. The food subindex eased its uptrend, receiving support from improved mobility and the weakening protectionist stance of the federal government in terms of border management.


Core inflation stood at 0.99% MoM, down 0.07% from 1.06% recorded in March 2021. The yearly average rate also rose to 11.25% last month, 0.24% higher than 11.01% recorded in the preceding month. The highest increases were recorded in prices of pharmaceutical products, vehicle spare parts, hairdressing salons and personal grooming establishments, garments, furniture and furnishing, medical services, hospital services, non-durable household goods, fuel and lubricant for personal equipment.


Headline Inflation has finally ended a persistent uptrend that lasted 19 months, as the index, although still at historically high levels, rose at a slower rate in the month of April 2021. The moderation in inflation provides a temporary relief to an economy that is simultaneously struggling with a high level of unemployment and sluggish growth. While the Core segment resiliently stuck to its northward trajectory, the food subindex however provided support for the headline rate, as prices of staple food items increased in the month of April, albeit at a decreasing rate. The inflationary drivers that pushed the food index northward thus far remain largely active, but cost of transportation, which pushed up food prices in previous months, became less of a problem in the review period, as improved economic reopening and increased Covid-19 vaccinations helped ease the prevailing disruptions to movement and supply. This assertion was evidenced by the core segment report, as transportation cost failed to appear on the list of the "highest increases" for the first time since the pandemic began its full rage on the economy. Also, the impact of the partial land border reopening early this year might be a contributing factor to the moderated uptick in food prices. 

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Capital Importation and Foreign Exchange Reserves 

Total foreign capital inflow into the Nigerian economy through the I&E FX Window inched up in the month of May 2021, as we witnessed improvements in all sources of FX inflow on the I&E window. FX inflows from FPIs recorded a sharp uptick of 522.2%, from $31.1 million in the preceding month to $193.5 million in the review period. Likewise, the Apex Bank recorded an improvement of 203.9%, from $143.2 million in the preceding month to $435.2 million in the review period, while FX inflows from other foreign sources, which consists of FDIs and Other Corporates, improved by 50.5% from $37.6 million in April 2021 to $56.6 million in May 2021. FX inflows from other local sources increased marginally by 1.3%, as it jumped to $356.8 million in May 2021 from $352.3 million in April 2021.


On the outflow front, total I&E FX outflows increased by 97.9%, underpinned by an increase in FPI FX outflows, which inched up by 198.7% to $487.1 million from $163.1 million. Similarly, FX outflows to other local sources increased by 51.5% to $502.4 million in May 2021 from $331.6 million in the preceding month, while the outflows to other foreign sources increased by 24.5% to $53.8 million in May 2021 from $43.2 million in April 2021.

Accordingly, the total I&E FX NetFlow settled at -$22.4 million in May 2021.


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Financial Markets


Fixed Income Market 

The Bond market started the month on a relatively quiet note with mixed sentiment seen across board as market participants continue to trade on a cautious note. Average monthly yields for the benchmark securities monitored rose across all maturities on a month-on-month basis, with average yields of the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities increasing by 249 bps, 114 bps, 109 bps and 89 bps, respectively.


The Bond auction held on the 21st of May 2021 closed relatively strong as the Debt Management Office (DMO) sold N175.246 billion worth of bonds after offering N150.00 billion at its auction with a bid to cover ratio of 1.60x and stop rates printing as follows; 7-year, 15-year and 28-year at 13.10%, 14.00% and 14.20% respectively.


The Central Bank of Nigeria left its monetary policy rate unchanged at 11.5% during its May 2021 meeting. The move is expected to allow further economic growth, despite persistent inflationary pressures, after the country exited recession last year.


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Foreign Exchange Market 

The average monthly value of the Naira depreciated by N0.92 at the I&E FX Window with the average exchange rate of the currency to a unit of the Dollar climbing to N411.27 in May 2021 from N410.36 in April 2021. Total monthly turnover traded on the I&E FX Window was up by 111.73% to $2.5 billion in May 2021 from $1.2 billion in April 2021.


The CBN formally adopted the NAFEX rate as its official rate in a bid to achieve exchange rate unification. It also extended the "Naira4Dollar" scheme to attract more foreign remittances. Regardless of all effort, the reserves shed 1.9% month on month in May to close at $34.2 billion. This could be attributed to the backlog of FX demand and the low foreign exchange earnings from Nigeria's crude oil sales due to the resurgence of the COVID-19 in India, one of the highest buyers of Nigerian crude.


The Apex bank sold at least $25 million twice a week in May to Foreign Portfolio Investors, selling roughly $200m; evenly split between spot and the 5-month forwards.


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Equities Market 

The month of May saw a continuation of the lackluster performance in the local equity space as it recorded only 7 days of gain. The local bourse was constantly buried in bearish sentiments as profit taking was the dominant theme. Speculative traders remained the most active, followed by offshore accounts while local institutional accounts were on the sidelines. Trade metrics were shallow in most sessions indicating a higher participation from retail accounts.

Offshore accounts had to halt their repatriation through NEW GOLD in April as traction slowed on the ticker. The ETF became popular last year as a channel for foreign accounts to repatriate funds given that it is a fungible stock. Though, the CBN resumed FX sales to FPIs, foreign accounts still explored other means to quickly move cash out. SEPLAT NL became the next option as repatriation through the ticker was considerably cheaper than AIRTELAFRI NL. Uptick in oil price (Brent) coupled with the firm's proposed quarterly cashflows also enhanced the trajectory of the ticker. On a month-on-month basis, SEPLAT NL was up 21% in May, closing at N688.


The MSCI semi-annual review was released in May and the index provider continues to maintain its special treatment of Nigerian equities (no addition or deletion of Nigerian equity) due to the lingering FX illiquidity. Nigeria now has the 7th largest weight compared to having the 4th largest weight in May 2020. Nigeria may remain underweight compared to its peers in the long run if the FX liquidity situation ceases to improve.


NTB auctions had little or no impact on the local bourse even with the 1-year bill down by 10 bps at the last auction. The MPC also maintained status quo at its recent meeting, a decision which did not necessarily spur any excitement in the equities market.


The sectoral indices performance at the end of the month were as follows: the Oil & Gas sector recorded a month-on-month gain of 14.21%, the highest amongst other sectors. The Insurance, Banking and Consumer goods sectors gained 1.44%, 1.24% and 0.63% respectively. The Industrial sector declined by 3.47%.


The benchmark ASI in the month of May settled at 38,437.88 points, recording a month-on-month loss of 3.52% compared to April. Year-to-date return came in at negative 4.55%. 


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Our Expectations For The Coming Months


The progress in vaccination should bode well for the economy, as we expect to see further improvements in economic activities. Also, the dovish stance from monetary authorities remains a positive driver for economic growth, but some downside risks remain predominant, notably, the fast-rising rate of inflation which still sits above 18%, the lingering FX challenge, as well as the infrastructural deficit in the economy. Nevertheless, we maintain our tepid expectations for GDP growth this year.


Inflation remains in a distress region, and although at a decreasing rate, prices are still rising. The trajectory however still points northwards, as we are faced with drivers, such as a depreciating naira, higher energy cost with the possibility of a further increase and renewed economic restrictions to curb the fast-spreading Covid-19 virus. Nevertheless, this moderation would temporarily allay concerns of the monetary authorities who have been reluctant to deploy hawkish policies to tackle inflation, and limit the upsurge of fixed income rates.


We expect the Bond market to maintain its relatively quiet trend in coming months albeit with a bullish bias as market participant would be looking to take advantage of the liquidity expectation in July.


The apex bank is expected to continue to work towards providing liquidity for the I&E FX window and reducing the gap between the multiple exchange rates.


The equities market is expected to continue to trade based on speculations and market disclosures in the short-term pending any policy change to improve FX liquidity further. It would maintain its cycle of pockets of demand followed by profit-taking.

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