The Naira Depreciated Against the US Dollar on IEFX Window as Nigeria's Oil Production Improved


Monday, May 17, 2021 / 11:42 PM/ By Comercio Partners Asset Mgt / Header Image Credit: Brand News

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Report Summary

The Macroeconomy

  • Nigeria's oil production improved.
  • Headline inflation inched up further in March 2021.
  • The Naira depreciated against the U.S. Dollar on the I&E FX Window.


The Financial Markets

  • Bulls regained dominance in equity market.  
  • Fixed income market remained bearish.


Our Expectation for the Coming Quarter

  • Local oil production is expected to improve.
  • Inflation is expected to further worsen.
  • The equity market should remain in the bearish territory.


Economic Data From Major Economies Signals Global Recovery 

Global growth is now in full swing driven mostly by developed economies. Manufacturing Purchasing Managers' Indices (PMI) which, as leading indicators, give a sense of the direction of the economies for the months ahead are at multi-decade highs for the US, UK and Eurozone. Service PMIs are now rapidly catching up as well as full reopenings are priced in. Labour Markets continue their recovery, especially in the US, which saw another enormous non-farm payroll gain in March. Consumer and business confidence is rising, and there has been a strong recovery in retail sales across major regions. The IMF has upgraded its global growth forecast for 2021 to 6%, a rate not seen in over four decades.


In this high-pressure economic environment, pent-up demand is meeting constrained supply, at least in the short term. Factories all over the world are struggling to keep up with soaring demand for all kinds of goods, and the semiconductor shortage has not abated, forcing large US car manufacturers to slow or halt production. Inflation in major regions has started to move higher partially due to base effects.


While the US and UK are enjoying a vaccine-induced reopening boom, COVID-19 is surging in some emerging markets, most notably India where restrictions were re-imposed regionally. France imposed another nation-wide lockdown, Japan declared its third state of emergency and Germany's parliament passed an empowerment law to override regional authorities to impose restrictions.


Geopolitical tensions shifted from China to Russia. The US imposed sanctions on Russia, prohibiting financial institutions from participating in the primary market for Russia's debt, while Russia expelled US diplomats in retaliation. There was also a brief buildup of Russian troops at the nation's border with Ukraine.


On policy, there were no changes in US monetary policy, while the European Central Bank expanded its purchase program. The Bank of Canada announced it would start tapering its asset purchase program. On the fiscal side, a $2.3 trillion spending plan is being discussed in the US. The proposed hike in the corporate tax rate, as well as calls for global minimum tax, were bad news for investors.


Back in Nigeria, the National Pension Commission (PENCOM) raised the minimum shareholder funds for Pension Fund Administrations (PFAs) to N5 billion from N1 billion with a deadline of December 2021 to meet the minimum. An NNPC memo revealed that Nigeria Governors' Forum sought to end petrol subsidy as the oil giant said it might not contribute to the month of May's Federal Allocation. In the month, the country's central bank removed the Board of Directors of First Bank of Nigeria Limited and its parent company, FBN Holdings Plc following the rash decision of the erstwhile directors of the bank to sack its Managing Director, Mr Adesola Adeduntan. The apex bank thereafter reinstated the sacked MD. The Senate passed the Asset Management Corporation of Nigeria Amendment (AMCON) bill after considering the report of its Committee on Banking, Insurance, and Other Financial Institutions. The amendment bill empowers AMCON to, among others, take possession, manage or sell all assets traced to debtors, whether or not such assets or property are used as security/collateral for obtaining a facility. It also empowers the corporation to access the special tribunal established by the BOFIA, 2020 for dealing with financial related matters.


The Macro Economy


GDP Growth & Oil Production 

Following a Covid-19 induced economic contraction and the subsequent tepid recovery recorded towards the tail end of the year, there appears to be a consensus about the direction of growth for 2021, and it is largely positive. This positive outlook rests against a backdrop of improved economic activities, higher crude oil prices and improved Covid-19 vaccinations. While these growth drivers held true thus far this year, the downside risks to growth have also retained a position of predominance, notably, rising cost of production, exchange rate instability, and the risks affiliated with running a single-commodity-dependent export segment, to mention a few.


The IMF sees growth printing at 2.5% in 2021, while the World Bank is far less optimistic, positing an expected growth of 1.1%. Nevertheless, higher than anticipated crude oil prices, as well as improved Covid-19 vaccinations helped tilt the growth expectations towards the best-case scenario. It is however imperative to note that even at the optimistic end of Nigeria's GDP growth projection spectrum, expectations are still sluggish at below 2.5%.


Elsewhere, OPEC, in its monthly oil market report noted that Nigeria's oil production improved marginally by 0.35% in March 2021 to 1.43mbpd from 1.42mbpd in February 2020. Likewise, the 2021 first quarter oil production level averaged 1.40mbpd, representing a 9.48% rise from the level it was in the last quarter of 2020. The quarterly improvement was driven by the positive impact of the ease on the local production limit following the additional output cuts implemented in the past months to compensate for non-compliance in the earlier months of 2020, 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 addition, OPEC marginally improved its world oil demand forecast for 2021 by 0.10 mbpd to average 96.50 mbpd relative to the preceding month's estimate on the back of a stronger economic rebound which stems from large stimulus spending, improved Covid-19 vaccinations, and the further easing of Covid-19 restrictions in major economies. On the supply side, OPEC forecasted a supply growth of 0.90 mbpd to average 63.8 mbpd, down by 0.03 mbpd relative to the preceding month's estimate.


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Headline inflation grew by 18.17% YoY in March 2021, 0.84% higher than 17.33% recorded in February 2021; food inflation grew by 22.95% YoY in March 2021, 1.16% higher than 21.79% recorded in February 2021; while core inflation stood at 12.67% YoY in March 2021, 0.29% higher than 12.38% recorded in February 2021.


In March 2021, headline inflation rose by 1.56% MoM, representing a 0.02% increase from the rate of 1.54% that was recorded in the previous month. The yearly average rate rose to 14.55%, 0.50% greater than 14.05% recorded in the previous month. Prices continue to be impacted by supply disruptions and shortages in the food segment, as well as the pass-through effect of rising energy cost on production in the economy.


The food sub-index rose by 1.90% MoM, reflecting a 0.01% increase from the rate of 1.89% recorded in February 2021. The yearly average rate rose to 17.93%, 0.68% greater than 17.25% recorded in February 2021. The monthly food subindex rose due to the lingering impacts of supply disruptions.


Core inflation stood at 1.06% MoM, down 0.15% from 1.21% recorded in February 2021. The yearly average rate also rose by 10.01% last month, 0.76% lower than 10.77% recorded in the preceding month. The highest increases were recorded in the prices of passenger transport by air, medical services, miscellaneous services relating to passenger transport by road, hospital services, pharmaceutical products, paramedical services, vehicle spare parts, dental services, motor cars, maintenance and repair of personal transport equipment, and hairdressing salons and personal grooming establishment.


Inflation has now crossed the 18.00% threshold, a level seldom attained. To put this in better context, March's inflation rate, at 18.17%, is just 53 basis points shy of the 12-year peak of 18.70% (Reached in Jan 2017). The food sub-index remained the main driver behind the uptick, as we witnessed a significant spike in both yearly and monthly rates. Prices of staple food items have maintained a northward trajectory, buoyed by the lingering impact of supply shortages and disruptions, and exacerbated by the pass-through effect of higher energy cost and a depreciating Naira. We however noticed a slight slowdown in the monthly core inflation rate, reflecting the impact of improved economic reopening and reduced Covid-19 concerns on the cost of air transport and medical services. Nevertheless, price increase in these segments remain the major driver of the core segment upsurge. 


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Capital Importation and Foreign Exchange Reserves 

Total foreign capital inflow into the Nigerian economy through the I&E FX Window improved slightly in the month of April 2021, though we witnessed declines in all sources of foreign FX inflows on the I&E window, safe for inflows from the CBN and other local sources. The Apex Bank recorded a sharp uptick of 2,137.5%, from $6.4 million in the preceding month to $143.2 million in the review period. We however witnessed declines in inflow from FPIs which worsened by 82.2% in April 2021 from $175.2 million in the previous month to $31.1 million. Likewise, FX inflows from other foreign sources, which consists of FDIs and Other Corporates, dipped by 2.8% from $38.7 million in March 2021 to $37.6 million in April 2021. However, FX inflows from other local sources improved marginally, as it increased to $352.3 million in April 2021 from $331.1 million in March 2021.


On the outflow front, outflows from other local sources dominated total outflow in the I&E Window, as it accounted for 61.7% of the total outflows. Overall, total I&E FX outflows fell by 13.1%, underpinned by a decline in outflows to other local sources which fell by 40.2%. FX outflows to other foreign sources increased to $43.2 million in April 2021 from $3.9 million in February 2021. Similarly, FPI FX outflows inched up by 169.1% to $163.1 million from $60.6 million. However, FX outflows by other local sources dropped to $331.6 million in April 2021 from $554.5 million in the preceding month. Accordingly, the total I&E FX NetFlow settled at $26.3 million in April 2021.


Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Purchasing Managers' Indices 

The CBN, for the first time this year, reported on the state of economic and business activities as measured by the PMI. Embedded in the Apex Bank's monthly economic report, the PMI data for January 2021 revealed a slowdown in economic activities when compared to the numbers as at December 2020. The composite PMI for both the manufacturing and non-manufacturing index stayed in the contractionary region, with the manufacturing PMI declining further to 44.9 from 49.6 recorded in the preceding period. All 5 subcomponent indexes declined in the review period, save for supplier delivery time. The CBN cited the weakened demand that succeeded the year-end festive season, supply disruptions, and the rising cost of production, as major drivers behind the weak performance in January 2021. Likewise, the non-manufacturing PMI for January 2021 dipped to 43.3 from 45.7 in December 2020, driven by declines in all 4 subcomponent indexes.


Nevertheless, the recent data from the CBN is not reflective of the current state of the economy, given the notable increase in economic activities that followed an improved economic reopening. 


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Financial Markets


Fixed Income Market 

The fixed income market sustained its relatively weak trend in the month of April, as the tight system liquidity dampened market sentiment. 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 184 bps, 174 bps, 160 bps and 176 bps, respectively.


The Bond market started the month on a relatively quiet note with selling pressure across board as the weak market sentiment coupled with the tight system liquidity continued to dampen market momentum. The Bond auction held on the 21st of April 2021 closed relatively strong as the DMO sold N274 billion worth of bonds after offering N150.00 billion at its auction with a bid to cover ratio of 1.77x and stop rates printing as follows; 7-year, 15-year and 25 year at 12.25%, 13.34% and 13.85% respectively. 


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Foreign Exchange Market 

The average monthly value of the Naira depreciated by N0.50 at the I&E FX Window with the average exchange rate of the currency to a unit of the Dollar climbing to N410.36 in April 2021 from N409.85 in March 2021. Total monthly turnover traded on the I&E FX Window declined to $1.2 billion in April 2021 from $1.5 billion in March 2021, a 22.9% decline. The Apex bank resumed FX sales to FPIs during the month, which supported the naira on the I&E FX Window.


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Equities Market 

The local bourse's performance in April kickstarted with a lingering bearish tone from Q1 2021. This came at no surprise given the continued rise in fixed income rates, rising inflation and a haunting FX illiquidity. With the end of the FY 2020 Earnings Season in sight, the market is expected to struggle to find its next catalyst to shore up equity prices. Activity was quite tepid in the initial weeks as the bourse continued to book daily losses given that most participants were on the sidelines. Local accounts focused on booking profit on tickers that had been marked down for dividend payouts. Offshore accounts were generally subdued but would occasionally emerge to reinvest stranded dividends while also exiting some positions. CBN's resumption of FX sales ($80 million) to FPIs for the first time this year could have driven some foreign accounts to present their offers.


It was speculated that another interest rate hike in the NTB Auctions slated for the month would further dampen market's momentum. However, the market did not react to the NTB Auction results even as the 1-year paper inched up by 100 bps to 9%. The market remained indifferent and focused on Q1 2021 results and market disclosures instead. SEPLAT announced that it would pay quarterly dividends going forward and DANGCEM announced that its shareholders would vote to renew DANGCEM buyback at its next AGM. The first quarter results were quite impressive and propelled positive sentiment in the local bourse.


The sectoral indices performance at the end of the month were as follows: All sectors except the Banking and Insurance sectors posted month-on-month gains. The Consumer Goods, Industrial, and Oil & Gas sectors gained 3%, 3% and 2% respectively. The Banking and Insurance sectors declined by 5% and 1% respectively.


The benchmark ASI settled at 39,840.28 points, recording a month-on-month gain of 2.04% for the month of April, the second monthly gain of the year. The year-to-date return of the index came in at negative 1.07%.


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Our Expectations For The Coming Quarters 

OPEC+ seeks to taper existing output curbs by over 2 mbpd; hence, we expect to see some improvement in the oil production of member countries including Nigeria. Nevertheless, growth expectations for the country remain weak largely due to the deep structural issues that continues to stifle growth, as well as the gradual erosion of the purchasing power of consumers in an inflated economy.


Despite the active inflationary drivers, we anticipate some measures to curtail the uptick in the coming months, forcing inflation to moderate. Inflation has crossed into a critical territory, crossing into levels that we believe would necessitate policy responses, particularly from the monetary authorities. In addition, improved distribution of Covid-19 vaccines will help relieve the pressure on prices in medical and related services, which will help curb the uptick in the core segment. Nevertheless, prices of staple food items continue to be of concern, and a relaxation of the protectionist posture of the fiscal authorities may be one of the few stopgaps to pause the rise. In the absence of any policy intervention, inflation is expected to maintain the northward trajectory in the near term until we see the impact of base effect kick-in towards the end of H1 2021.


We expect to see some improvements in both the manufacturing and non-manufacturing PMI, as the Covid-19 inoculation should help ensure a faster recovery in the broad economy. However, a notable downside risk in the fast-rising rate of inflation and its pass-through effect on cost of production.


We expect the Bond market to maintain its relatively weak trend in the coming months as system liquidity remained pressured.


The I&E window is likely to receive more inflows from the Apex bank in the near term seeing as sales have resumed. The global resurgence of COVID-19 could affect crude price and demand, translating to lower accretion to the foreign exchange reserves.


In the near term, the equities market is expected continue its current bearish path, with participants cautiously trading and reacting to macros and corporate disclosures. The inverse relationship between fixed income yields and equity prices might have been cut short seeing the lack of reaction this month.

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