Inflation Maintained Its Declining Trend in September 2021 as Naira Depreciated on IEFX Window


Tuesday, November 09, 2021 /7:30 PM/ By Comercio Partners Asset Mgt / Header Image Credit: Comercio Partners

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Report Summary

The Macroeconomy

  • The IMF projects a GDP growth of 2.60% in 2021.
  • Headline inflation maintained its declining trend in September 2021.
  • The Naira depreciated against the U.S. Dollar on the I&E FX Window. 

The Financial Markets

  • Equity market was positive in October.
  • Local bond market weakened in the review period.
  • The Eurobond market sustained its bearish bias.


Our Expectation for the Coming Quarter

  • 2021 Annual GDP growth should print in line with Bretton Wood estimates.
  • The recent trend of moderation in inflation is expected to persist.
  • The equity market is expected to see some profit taking. 


U.S. Fed to Commence Asset Purchase Tapering in November 2021 

Across Asia, Europe and America, the world is currently faced with an unprecedented energy crisis that has seen prices of natural gas and electricity surge to multi-year highs on the back of soaring demand from industries to fire up their factories as the world opens to more economic activities. Turning to coal, which is considered the dirtiest fossil fuel yet and is not a sustainable option as the world transitions into a greener planet, there are reports that China may have increased production by more than 1.1 million tons in the last two months in a bid to meet rising local energy demand.

Nonetheless, the energy shortage is severely impacting the Asian giant's industrial sector and is slowing economic growth prospects in recent months, with economic growth slowing to 4.90% in Q3 2021 relative to a 5.20% forecast. As economic activities around the world continue to rebound, we expect the energy crunch to slackly persist, decelerating as supply levels gradually catch up with demand.


Economic growth in the U.S. slowed to 2% (year on year) in Q3 2021, as against 6.7% recorded in the preceding quarter and 0.6% shy of expectations. A 1.6% increase in personal consumption when compared to 12% recorded in the previous quarter weighed down growth as rising prices, transportation bottlenecks, supply chain challenges and the delta variant of the coronavirus constricted spending on good and services in the quarter under review. We expect a more impressive growth in the coming quarters as accumulated savings and the euphoria of the yuletide season are expected to spur household spending even as supply chain disruptions continuously moderate.


After months of intense debate on whether the Federal Reserve will commence tapering before the end of the year, it is now certain that there will be a $15 billion cutback from the current $120 billion monthly asset purchase pace in November 2021. Accordingly, we expect market participants to brace up for the sentiment of a Hawkish Fed, given that the aftermath of the tapering announcement has precipitated talks around possible rate hikes as the next step to stem the rising tide of inflation worries. 

However, the decision to hike rates will be largely dependent on the trajectory of economic growth, persistence of inflationary pressure and the number of new coronavirus cases recorded. Giving credence to this position is a statement made by the Fed Chair to quell rising insinuations of a possible rate hike in the near term saying, "I do think it's time to taper and I don't think it's time to raise rates". Also, the tone of the Fed reveals that the first-rate hike is likely to take place late in 2022, after the asset purchase program is completely phased-out mid-year. 


The Macro Economy 

GDP Growth & Oil Production 

Amidst a weaker expectation for global economic growth, the International Monetary Fund (IMF) has projected a slightly higher growth projection for Nigeria in the current year, citing higher oil prices and stronger non-oil sector growth as the major drivers behind this improved outlook. In the IMF's World Economic Outlook (WEO) for October 2021, global growth projection was kept constant at 4.90% for 2022 but reviewed downwards by 0.10% to 5.90% for 2021, on the back of the lingering impact of supply chain disruptions in advanced economies and the slower-than needed vaccination pace in emerging economies.

However, the Bretton Wood Institution's outlook for Nigeria saw some improvement, with the economic growth rates for 2021 and 2022 reviewed upwards by 0.10% to 2.60% and 2.70% in 2021 and 2022, respectively. Services sector growth continues to play a major role in buoying the non-oil sector improvement, while the local economy continues to struggle with a low oil output level. Nonetheless, while the growth projections for Nigeria improved relative to the IMF's previous forecast, it remains significantly below the global and sub-Saharan Africa growth expectations.

This is understandable as both global and regional growth forecast masks certain contours that exists, with economies like Nigeria facing unique structural constraints that continue to dampen GDP performance. Sub-Saharan Africa is expected to grow by 3.70% in both 2021 and 2022, outpacing Nigeria's growth expectations for both years, while elsewhere, the Federal Government's Medium Term Fiscal Framework and Fiscal Strategy Paper still nests optimistic expectations for growth at 4.20% for 2022.


In other news, OPEC, in its monthly oil market report revealed that Nigeria's oil production dipped on a quarterly basis by 5.25% to 1.27mbpd in Q3 2021, revealing the adverse impacts of Nigeria's debilitated oil infrastructure and the lack of appetite for oil investments. However, the monthly oil production level improved in September, inching up by 0.65% to 1.25mbpd. We can credit the monthly improvement in September's oil output level to the 400,000 monthly output increase which started in August. In addition, OPEC estimated a demand growth of 5.8mbpd for 2021, 0.16mbpd lower than the preceding month's estimate, putting the total demand for the year at 96.6mbpd. On the supply side, OPEC forecast a non-member supply growth of 0.7mbpd to average 63.5mbpd, down by 0.3mbpd relative to the preceding month's estimate. The downward revision in supply estimate was largely driven by production disruptions in the U.S. Gulf of Mexico in the aftermath of the shuttering impact of hurricane Ida.

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Inflation continued its downtrend in September 2021. The headline index grew by 16.63% YoY in September 2021, 0.38% lower than 17.01% recorded in July 2021. Likewise, food inflation inched up by 19.57% YoY in September 2021, 0.73% lower than 20.30% recorded in August 2021. However, the core segment resumed its uptrend, rising by 13.74% YoY in September 2021, 0.33% higher than 13.41% recorded in August 2021. The drop in yearly headline inflation marks the sixth consecutive decline, following a 19-month uptrend that lasted from September 2019 till March 2021. The moderation in the headline index drew support from the sustained trend of disinflation in the food segment, while the core segment reversed the improvement seen last month as it nudged northwards in September.


In September 2021, headline inflation rose by 1.15% MoM, representing a 0.13% increase from the rate of 1.02% that was recorded in the previous month. The yearly average rate rose to 16.83%, 0.23% greater than 16.60% recorded in the previous month. With both food and core subindexes still on the uptrend, monthly headline inflation continued to rise.


The food subindex rose by 1.26% MoM, reflecting a 0.20% increase from the rate of 1.06% recorded in September 2021. The yearly average rate rose to 20.71%, 0.21% greater than 20.50% recorded in August 2021. The food subindex sustained its monthly uptrend, largely due to the lingering impact of supply chain bottlenecks.


Core inflation stood at 1.24% MoM, up 0.47% from 0.77% recorded in August 2021. The yearly average rate also rose to 12.55% last month, 0.26% higher than 12.29% recorded in the preceding month. The highest increases were recorded in the prices of gas, household textile, garments, motor car, game of chance, major household appliances (whether electric or not), passenger transport by air, hospital services, personal transport equipment, wine, clothing materials, other articles of clothing and clothing accessories, and non-durable household goods.

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Both yearly headline and food inflation rates continue to benefit off the impact of the high base effect, to secure half a year of moderation in their respective indexes. However, the core segment remains pressured by multiple inflationary drivers, particularly those pertaining to currency depreciation and rising energy cost. Also, the monthly rate of price increase for all relevant indexes inched up in September, due to the depreciation of the Naira, increase in the cost of cooking gas, and a rise in the price of diesel.

The Naira weakened in the review month, as the I&E FX rate weakened by ₦1.26/$ to average ₦412.76/$ in September. Similarly, diesel cost rose by ₦10 per litre to ₦295 per litre, while cooking gas price was up by over 15% in the review month. These factors, alongside the inadequacy of food production and supply disruptions, drove up prices monthly. 


Capital Importation and Foreign Exchange Reserves 

Nigeria's foreign exchange reserves continued trending upwards, reaching $41.83 billion in month of October up by 13.7% from the $36.78 billion recorded in September. This is the highest level the reserves have reached in over two years.


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(As at print time), the total value of capital importation into the Nigerian economy for the month of October increased to $2.3 billion in the month under review, up by 33.3% compared to $1.74 billion recorded in the previous month of September. Whilst inflow via the CBN, FPIs and local sources increased by 43%, 54.9% and 25.8% to record $881.5 million, $463.2 million, and $831.2 million respectively, inflows from other foreign sources decreased to to $144.3 million from $164.6 million recorded in the previous month of September.

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Overall FX outflow through the I&E FX Window for the month of October increased by 38.7% to reach $2.3 billion when compared to the previous month of September when $1.7 billion was recorded. FX outflows via the CBN accounted for 0.09% of total outflows in the month of October, standing at $2.2 million; while outflow through the FPIs and other local sources increased by 52% and 43.4%, to settle at $678.3 million and $1.6 billion respectively in the month under review.

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Consequently, a negative I&E FX NetFlow of $3.6 million was recorded in the month of October 2021, a 105.6% decline compared to the previous month of September when a NetFlow of $64.6 million was recorded. The FX NetFlow posted in the month of October stands as the first negative NetFlow since the Month of May when a negative flow od $22.4 million was recorded. 


Financial Markets 

Fixed Income Market 

The Fixed Income market mostly weakened in the month of October 2021, especially on the mid to long end, as market participants traded on a cautious note given the lack of clarity on direction. Monthly yields for the benchmark securities monitored rose across all maturities on a month-on-month basis except on the 3-year benchmark. Average yields on the sovereign bonds with 5-year, 10-year and 20-year maturities rose by 29 bps, 17 bps and 34 bps, respectively, while the average yield on the 3-year benchmark declined by 26 bps.

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The Bond auction held on the 20th of October 2021 closed relatively strong as the Debt Management Office (DMO) sold N192.76 billion worth of bonds after offering ₦150.00 billion at its auction, with a bid to cover ratio of 1.66x and stop rates printing as follows; 5-year, 15-year, and 30-year at 11.65%, 12.95% and 13.20% respectively.

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Eurobond Market

Market sustained its bearish trend in the month of October. The bandwagon of supply brought in another corporate issuance from Fidelity Bank. Fidelity bank issued a $400m 5-year Eurobond at a coupon of 7.625% and yield of 7.65%.


Uptick in US 10-year Treasury paper, inflation worries, and general risk-off sentiment underpinned the selloffs experienced in the month. It was however not a bear play throughout the period, as the approval of the raising of the U.S. debt ceiling and stronger crude oil prices offered respite for the risk off sentiment mid-month, resulting in a renewed interest for most of SSA papers. This reversal in trend was however short-lived as market players sold off in reaction to the anticipation of the announcement of the commencement of tapering by the US Fed.

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Foreign Exchange Market 

The average monthly value of the Naira depreciated by N2.34 at the I&E FX Window with the average exchange rate of the currency to a unit of the US Dollar climbing to N415.10 in October 2021 from N412.76 in September 2021. Total monthly turnover traded on the I&E FX Window was down by 13.4% to $3.86 billion in October 2021 from $4.46 billion in September 2021. This currency weakening could be attributed to the significant 13.4% decrease in dollar supply during the month.


Meanwhile, Nigeria's foreign reserve was up by approximately $5.037 billion in the month of September 2021 to close at $41.83 billion as of the end of the month. This is a welcoming development, as the apex bank now has more foreign exchange at its disposal to intervene in the forex market.


In other news, Nigeria's President, Muhammadu Buhari, on Monday 25th October 2021, unveiled the Central Bank of Nigeria's digital currency, also known eNaira. However, economic, and financial experts have said among other things, that the eNaira will not change or affect the value of the naira in the foreign exchange market.

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Equities Market 

The month of October kicked off on an enthusiastic note with the year-to-date loss of the benchmark ASI index paring to its lowest level in the tenth month's first trading session. Market saw a slight resurgence in local buying interests backed by some positives. The optics for the local equity market looked good with oil prices trending northward throughout the month and global benchmark Brent Futures touching a three-year high of $86.70. The OPEC+ supply restraint to produce an additional 400,000 barrels per day (bpd) from August 2021 to December 2021, bolstered the rally, keeping brent futures price at high levels.

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The highlight of the month would have to be the upsurge seen in the banking sector with focus on FBNH. The Systematically Important Bank was on full bid on multiple trading sessions, fueled by the gigantic volumes of the stock being bought by an individual. As expected, the speculative market picked up on this and joined the bullish bandwagon, further pushing the ticker upward.

The bank ticker gained a whopping 37% month on month and hovered close to its three-year high of N12.70 in a session. FBNH released a corporate notice during the month, explaining the abrupt change in its price from N7.50 to above N12. An individual shareholder, Mr. Otedola Olufemi Peter, and his nominee, Calvados Global Services Limited had acquired 5.07% of FBNH shares. The purchase was done gradually in the prior months. However, a bulk purchase in October caused FBNH's price to skyrocket to high levels.


Another highlight in the month was the listing of NGXGROUP on the main board of the Stock Exchange, the last major step of the demutualization process of the bourse, a process that had been in play for the best part of the last decade. The ticker gained c.9.3% in its first trading session and was mostly sought after by member firms and key stakeholders.


In its Domestic and Foreign Portfolio Investment Report for September 2021, the local bourse noted that foreign participation dropped from N25.4bn in the previous month to ₦24.4bn. Domestic participation improved to ₦93.8bn from N64bn. Domestic participation has the higher share of total flows at 79%, extending the waning interest of foreign players.


The sectoral indices exhibited a stellar performance for the month of October with all sectors in the green. The banking sector as expected was the ringleader, gaining 10.66% month-on-month. It was trailed by the Oil & Gas, Industrial, Insurance and Consumer goods sectors, each gaining 6.43%, 4.21%, 3.98%, 0.41% on a month-on-month basis, respectively.


The month of October saw the benchmark ASI index settle at 42,038.60 points, recording a month-on-month gain of 4.52%. Year-to-date returns have turned positive at 4.39% gain.

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Our Expectations for The Coming Quarters 

Growth expectations for Nigeria are expected to hover around the estimates of the International Monetary Fund, drawing support from the weak pandemic base year to print at the upper handles of 2.00% for 2021. However, despite the OPEC+ monthly supply increase from August through December 2021, local oil production levels are expected to stay challenged, hence, keeping oil sector growth subdued despite having oil prices at some of the highest levels in three years.


The base effect impact is expected to linger, providing further support for a decelerating rate of increase in the yearly rate of inflation in coming months. However, we nest a great deal of concern as regards the persistent rise in the price of diesel and gas, and on the depreciation of the Naira. As at print time, the I&E FX rate was close to its an all-time low of N414.55/$, and further delays from the Apex bank to dip into the pockets of our foreign reserves to provide significant support to the market will only worsen the Naira's depreciation in November.

Likewise, the persistent rise in the price of crude oil and the global gas shortage could further worsen energy prices in the local economy, and we could see the pass-through effect on production costs to a material extent. Nonetheless, the moderation in the yearly headline index should continue to provide comfort to monetary policy makers, thus wading off the possibility of a hawkish tilt at the next policy meeting.


In the local bond market, we expect yields to hover around current levels on the back of the anticipated reduced supply. However, in the Eurobond market, we expect the announcement to reduce the purchase of Treasury securities by the US Fed to further weaken the SSA markets. The intensity of expected selloffs might however be less, given that this announcement has largely been priced in.


In the FX market, we anticipate a significant increase in FX turnover during the month of November as the Apex bank is expected to deploy the reserves to help ease the pressure on the Naira and provide a temporary relief to the debilitating FX crisis.


On equities, following the significant rally witnessed across several stocks, we expect to see some correction in the market as investors look to take profit.

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