Friday, September 09, 2016 4.49AM / ARM Research
In this update, Researchers at ARM present the latest macroeconomic data for August 2016 as well as activities in the fixed income and currency markets.
Macro picture worsens as economy sinks into recession:
In an avalanche of data at the end of August, the National Bureau of Statistics (NBS) provided empirical evidence of the scale of the deterioration in the Nigerian macro-economy over H1 2016. Starting off, the bureau confirmed Nigeria’s entry into recession with Q2 16 GDP growth printing negative for the second consecutive quarter (-2.06% YoY). Dissecting the components, oil GDP extended negative reading into its third consecutive quarter with YoY shrinkage of 17.6% (Q1 16: -1.9% YoY) reflecting the plunge in crude oil production to a 14 year low of 1.69mbpd in Q2 16 (YoY: -16%, QoQ: -19%).
On the non-oil leg, where growth (-0.4% YoY) is at a 12-year nadir, our attribution analysis reveals that weakness stemmed from contraction across Services (-1.8% YoY), Construction (-6.3% YoY), and Manufacturing (-3.4% YoY) segments which offset stronger growth in Agriculture (+4.5% YoY).
For Services, pressures emanated from ICT where decline in mobile subscriber base (Q2 16: -0.6% YoY, vs. average growth of 8.5% YoY post-rebasing) dragged the subsector’s growth to a thirteen quarter low of 1.4% YoY while slowing activities in the luxury real estate market largely weighed on real estate activities (-5.3% YoY). Elsewhere, manufacturing output was impacted by declining real wage growth and FX supply shortage even as weaker capital expenditure by state and federal government dragged the contractionary trend in construction to its fourth quarter.
Going forward, whilst the main militant group behind much of H1 16’s attacks has agreed to a cease fire with the FG, the absence of talks to firm up the truce and continued copy-cat attacks by smaller militant groups should discourage IOCs from embarking on full scale repairs on damaged oil installations. This points to sustained weakness in oil GDP in the coming quarters.
Elsewhere, thinning scope for increasing tele-density and mobile subscriber base as ICT approaches maturity phase as well as protracted over supply of office space in urban centers looks set to leave services GDP depressed for the remainder of 2016. In addition, subsisting FX shortages and declining consumer discretionary income which dampens prospects for manufacturing rebound on the one hand and potential impact of flood on agricultural activities on the other underpins our gory expectation for non-oil leg. On balance, we revise our 2016 GDP growth forecast 60bps downwards to -1.4% YoY.
…even as labour data flounders
Similarly, the NBS reported further deterioration in labour market in Q2 16 with unemployment rate climbing for the seventh consecutive quarter to 13.3% (+120bps QoQ) while underemployment rose for the third consecutive quarter to 19.3% (+20bps QoQ)2. Unbundling the numbers, labour market slack stemmed from continued increase in labour force (YoY: +7.9%, QoQ: +1.8%) as well as a decline in the number of people in full-time employment (YoY: -1.4%, QoQ: -0.7%)3. The cutback in labour demand mirrors underlying weakness across segments of the economy with companies in recession-hit Manufacturing, Industrial and Construction sectors mitigating economic hardship by slashing head count. Unsurprisingly, the agency reported a 12.8% YoY decline in labour productivity to N637.5 reflecting a faster increase in the number of hours worked relative to output growth. The trend in productivity remains exceptionally weak as productivity growth has averaged 0.3% in the last 6 quarters.
Figure 1: Trend in unemployment and underemployment rate
Source: NBS, ARM Research
Our Q3 16 expectation of a further deterioration in the labour market mirrors recent trend in leading indicators. Notably, the extended contraction in manufacturing (August: 42.1) and non-manufacturing PMI (August: 43.7) for the eight consecutive month in August point to sustained spate of layoffs across the private sector.
Inflationary pressure subsists, but at a slower pace
July 2016 headline inflation rose 60bps from prior reading to an eleven-year high of 17.1% YoY – 70bps lower than our forecast. Parsing through the subcomponents, food inflation rose to 15.8% YoY (+48bps from prior reading) while core inflation rose at a quicker pace (+73bps) to 16.9% YoY. Pressures in the latter continues to reflect elevated energy costs (Kerosene: +57% YoY, Diesel: +42% YoY, PMS: 38% YoY). On the former, higher prices stemmed from both farm produce (+55bps from prior reading to 17.3% YoY) and currency induced pressure on imported food (+37bps from June 2016 to 20.4% YoY). According to the NBS, despite early green harvest for cereals and tubers, pressures on farm produce largely reflected higher YoY prices in the Bread & Cereals and Livestock groups. However, on a MoM basis, the CPI basket expanded at its slowest pace in six months (46bps slower than June 2016 reading) largely reflecting the progressively weaker effect of energy cost on the core basket seeing that PMS prices moderated (-0.59%) relative to the preceding month.
Figure 2: Inflation forecasts
Source: NBS, ARM Research
Over the rest of the year, heavy rainfall as seen in August which resulted in flooding across 14 states poses risk to main season harvest in September-October. We buttress our view with a recent FEWSNET report4, wherein Nigeria Hydrological Service Agency (NHIS) reported that the increased flooding along Niger-Benue trough is allowing water levels reach benchmark heights which could lead to major flooding in 16 states, mostly in the food producing Middle belt region. The foregoing alongside continued NGN weakness at the parallel segment (-8% MoM) points to sustained food pressure.
Elsewhere, whilst we expect PMS prices to continue to moderate over the rest of the year, pressures from higher (YoY) energy costs should continue to drive core basket higher, albeit at a slower pace. Incorporating developments across food and core baskets, we estimate a 70bps MoM rise in August headline inflation to 17.8% YoY.
Elevated paper issuance at short end keeps yield curve humped:
Amidst subsisting monetary tightening aimed at supporting the nation’s currency, the naira yield curve maintained its uptrend in August rising 36bps MoM to 16.75%—highest since December 2012. As in July, average treasury bill yields tracked higher (+98bps MoM to 18.32%[ Highest in three years]) while bond yields declined 26bps on average MoM to 15.18% leaving the yield curve humped.
Figure 3: Trend in average T-bill and Bond yields
Source: NBS, ARM Research
Extending pattern since naira floatation, the CBN maintained its hawkish posture across markets with net OMO issuance (fivefold higher MoM to N379.4 billion) at elevated rates (avg. OMO clearing rate: 18.2% vs. 17.4% in July 2016) in August. Consequently, average system liquidity dipped 13.3% MoM to N239 billion. In a similar vein, the fiscal authorities continued to borrow heavily at higher rates at the short end of the curve with average marginal clearing rates climbing 3pps MoM on average to 16.9%.
At the long end, DMO continued to display sensitivity with marginal rates at the August bond auction at 15.3%. The higher rates at the short end of the curve (18.3%) relative to 15.2% at the longer end of the curve has resulted in term premiums6 extending its negative trend for the second consecutive month at -2.62% (July: -1.67%).
Figure 4: Movement in yield curve
Source: FMDQ, ARM Research
Ordinarily, the onset of an economic recessionary environment should raise prospect for monetary easing over the near term. However, CBN’s continued preference for attracting FPI to bolster FX market liquidity constrains scope for easing at the September MPC. Farther out, the worsening growth picture drives increased prospects for an accommodative policy stance.
CBN measures widen parallel market premium to interbank
In contrast to the prior two months, where the USDNGN cumulatively shed 61%, the currency appreciated 1.7% MoM to N316.24/$ at the end of August.
This appreciation largely reflects modest improvement in FX market liquidity with FMDQ attributing gains to inflow of $270 million FPI flows into the FX market in August. However, at the parallel market, naira continued to depreciate, losing 8.3% MoM to close at a record low of N413/$. The renewed pressures at the parallel segment stems from two measures introduced by the apex bank over the month. Firstly, the CBN required mandatory registration of all money transfers unions (MTU) operating in Nigeria.
The measure, which included licensing fees of $1 million cut out smaller MTUs leaving only three players left.
Exacerbating pressures at the segment was CBN’s ban of nine banks from participating in the interbank forex market for failing to remit $2.3 billion NNPC/NLNG dollar deposits to the Treasury Single Account (TSA) on the 24th of August. These two developments trumped impact of CBN’s re-admission of BDC to the interbank market and increased access to weekly dollar sales from banks ($50,000 vs. $30,000 previously). Notably, the naira fell to N400/$ at the parallel segment on the day of the announcement.
Though the apex bank would reverse these two decisions by the end of the month with the licensing of 11 new MTUs and reinstatement of the ousted banks, the parallel market rate would be downward sticky with premium to interbank 13.1pps higher MoM at 31.4%.
Figure 5: Trend in interbank and parallel market premium
Source: FMDQ, ARM Research
Over the rest of the year, CBN reversals and measures to improve FX market liquidity’s should boost liquidity at the interbank market. However, the still bearish outlook on oil prices as well as expected decline in FPI flows to equity market (78% of 2016 FPI flows on average) underpins our bearish outlook on the currency.
1 Data commences in 2010
2 Under the old NBS measurement Q2 16 unemployment is 32.6%.
3 First decline in full-time employment since the introduction of the new unemployment classifications in 2015
4 Boko Haram conflict continues to drive Emergency food insecurity in Lake Chad Region