Headline Inflation Maintained Its Declining Trend in July 2021


Friday, September 10, 2021 / 1:13 PM/ By Comercio Partners Asset Mgt / Header Image Credit:  Comercio Partners Asset Mgt


Report Summary


The Macroeconomy

  • Real GDP growth printed positive at 5.01% in Q2 2021
  • Headline inflation maintained its declining trend in July 2021.
  • The Naira weakened against the U.S. Dollar on the I&E FX Window.


The Financial Markets

  • Equity market sustained bullish bias.
  • Mixed sentiment prevailed in local bond market.
  • The Eurobond market traded sideways.


Our Expectation for the Coming Quarter

  • GDP growth should sustain a positive trend, albeit at a lower rate.
  • The recent trend of moderation in inflation is expected to persist.
  • Earnings and corporate actions should drive interest in the local bourse.


Delta Variant Slows Labour Market Recovery In The U.S.

Hope for a significant and sustained economic recovery, following the debilitating pandemic that brought world economies to their knees, appears to be suffering a major setback as the Delta Variant of the Covid-19 virus continues to stifle efforts to bring major socioeconomic indicators to pre-pandemic levels. A noteworthy consequence of this resurgence is the "disappointing" job numbers reported by the U.S. Labor Department for the month of August, which missed expectations by more than 60% (nonfarm payrolls increased by 235,000 against the 733,000 median estimate of analysts). The leisure and hospitality sectors which in previous months accounted for most gains in new job numbers, saw its unemployment rate increase to 9.1%. The surge in infections is already curbing consumer activities and disrupting in person schooling and return-to-office plans, with many businesses growing more cautious about hiring, and workers discouraged from pursuing high-contact employment opportunities.


Accordingly, it is expected that the Federal Reserves may have to reconsider plans to taper its asset-buying programme by year-end, subject to how defiant the job numbers for the month of September will be. Recall that the Federal Reserves had inaugurated a $120 billion monthly bond-buying programme to provide much needed monetary support to the economy by injecting liquidity monthly.


In the international oil market, the Organization of the Petroleum Exporting Countries (OPEC), and their allies led by Russia, commenced the monthly pumping of 400,000 barrels per day (bpd) through December, on the back of the agreement reached by the bloc in July to gradually phase out record output cuts. According to reports from OPEC, oil demand growth expectations for 2021 remained unchanged from the previous month's assessment as demand is still estimated to increase by around 6.0 mb/d to average 96.6 mb/d.


On the local front, the Nigerian economy recorded a 5.01% real growth rate in the second quarter of 2021 as economic activities continue to rebound across board. The services sector advanced the most in the period under review, recording a real growth rate of 9.42%, while agriculture and industries recorded a growth rate of 1.3% and - 1.23%, respectively. The 2021 second quarter growth rate represents an improvement of 4.80% when compared to the preceding quarter (0.51%) and represents a sharp uptick of 11.12% relative to the growth rate recorded in Q2 2020 which stood at 6.10%.


The Macro Economy


GDP Growth & Oil Production

The Nigerian economy sustained its expansionary trend in the second quarter of 2021, as the recently released GDP report revealed a yearly real growth rate of 5.01% in the review period. This signals a consolidation of the recovery recorded in the previous two quarters, following a covid induced economic contraction in the second and third quarters of 2020. The Q2 2021 growth rate represents an improvement of 4.80% when compared to the preceding quarter (0.51%), and represents a sharp uptick of 11.12% relative to the growth rate recorded in Q2 2020 which stood at -6.10%. In nominal terms, aggregate GDP stood at ₦39.12 trillion in Q2 2021, up by 14.99% when compared to the amount recorded in the second quarter of 2020 which stood at ₦34.02 trillion.

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The oil sector marked its fifth consecutive period of contraction despite the bullish bias seen in the international oil market, as it recorded a real growth rate of -12.65% y/y in Q2 2021. The Q2 2021 negative growth rate seen in the oil sector represents a - 6.02% decline when compared to the rate recorded in Q2 2020 (-6.63%) and reflects a -10.44% decline relative to the rate printed in Q1 2021 (-2.21%). Oil sector growth was dampened by the local production level, as output stood at 1.61mbpd on average, reflecting a decline of 0.19mbpd when compared to the production average seen in Q2 2020 (1.81mbpd). However, the non-oil sector recorded a real growth rate of 6.74% y/y in the review period, which is up by 12.80% and 5.95% relative to the rate recorded in Q2 2020 (-6.05%) and Q1 2021 (0.79%), respectively. The improvement seen in the non-oil sector was driven by the rebound in activities in the overall economy, and the recovery in sectors that fell sharply in base period.


Elsewhere, OPEC, in its monthly oil market report noted that Nigeria's oil production dipped by 1.27% in August 2021 to 1.32mbpd from 1.34mbpd in the preceding month. Oil output remains hampered by factors like OPEC+ quotas, deteriorating oil infrastructure, and dwindling investment. In addition, OPEC retained its world oil demand forecast for 2021 at 6.0mbpd, leaving its total oil demand estimate unchanged at 96.58mbpd. On the supply side, OPEC forecast a supply growth of 1.10mbpd to average 64.0mbpd, up by 0.27mbpd relative to the preceding month's estimate.


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In line with our earlier expectation, we saw a further moderation in headline and food inflation in July 2021. The headline index grew by 17.38% YoY in July 2021, 0.37% lower than 17.75% recorded in June 2021. Likewise, food inflation inched up by 21.03% YoY in July 2021, 0.80% lower than 22.83% recorded in June 2021. However, the core segment resumed its upsurge, rising to 13.72% YoY in July 2021, 0.63% higher than 13.09% recorded in June 2021. The drop in headline inflation marks the fourth consecutive decline, following a 19-month uptrend that lasted from September 2019 till March 2021. The decline in the headline index rode on the back of a further moderation in the food subindex, while the core segment resumed its uptick.

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In July 2021, headline inflation rose by 0.93% MoM, representing a 0.13% decline from the rate of 1.06% recorded in the previous month. The yearly average rate rose to 16.30%, 0.37% greater than 15.93% recorded in the previous month. The slowdown in the headline index was driven by a moderation in the monthly price change of goods in the food basket.


The food subindex rose by 0.86% MoM, reflecting a 0.25% decline from the rate of 1.11% recorded in June 2021. The yearly average rate rose to 20.16%, 0.44% greater than 19.72% recorded in June 2021. The food subindex sustained its monthly uptrend, largely due to the impact of the green harvest season.


Core inflation stood at 1.31% MoM, up 0.50% from 0.81% recorded in June 2021. The yearly average rate also rose to 12.05% last month, 0.29% higher than 11.75% recorded in the preceding month. The highest increases were recorded in the prices of garments, shoes and other footwear, clothing materials, other articles of clothing and clothing accessories, vehicle spare parts, major household appliances whether electric or not, pharmaceutical products, cleaning, repair and hire of clothing, furniture and furnishing, medical services and hospital services.


The trend of moderation in the headline index extended to a fourth consecutive month, drawing support from a similar trend of disinflation in the food subindex. The key driver behind the moderation seen has been the impact of the high base effect, but the recent headline rate also received support from improved supply of certain food items like yam and maize as the economy entered the middle of the Southern green harvest season in July. Accordingly, the monthly rate of food and headline inflation rose at a decreasing rate in the review period. However, the core segment resumed its monthly and yearly uptrend, as the impact of other active inflationary drivers filtered into this segment. Notable amongst these drivers is the prevailing FX crisis and lingering supply chain disruptions.


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Capital Importation and Foreign Exchange Reserves

Foreign capital inflow into the Nigeria economy through the I&E FX Window fell to $877 million in the month of August, a 17.3% decline from the $1.06 billion recorded the previous month of July. Across all listed channels of FX inflow into the country, other local sources were the only decliner, posting a decline of 36% from the previous month to record $354 million inflows. FX Inflows from FPIs, other foreign sources and the CBN edged up by 3.6%, 17.6% and 0.8% respectively when compared to the $165.4 million, $44.4 million, and $279.4 million recorded in the previous month.


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Overall FX outflow through the I&E FX Window dropped to $801.4 million in the month of August, a 19.8% decline when compared to the previous month when $999.6 million was recorded. In the month under review, there was 30.6% and 28.7% reduction in outflow from other local and foreign sources, while outflows from FPIs and the CBN increased by 8.3% and 81.8% respectively.


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Consequently, I&E FX Netflow for the month of August 2021 stood at $75.5 million, a 24% increase from the previous month when $60.5 million was recorded. It is important that to note that August 2021 netflow places as the highest recorded in over a year.


Financial Markets


Fixed Income Market

Activity in the Bond market was relatively mixed in the month of August, with demand picking up on the short- to mid- end of the curve whilst sell interest was sustained on the long-end of the curve. Average monthly yields for the benchmark securities monitored declined across the short- to mid-tenor maturities on a month-on-month basis, with average yields of the sovereign bonds with 3-year, 5-year and 10-year maturities declining by 68bps, 80bps and 41bps, respectively. Yields rose by 28 bps on the 20-year maturity.

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At the Bond auction held on 18th August 2021, the DMO offered N150.00 billion worth of FGN FEB 2028, FGN MAR 2036 and FGN MAR 2050, with stop rates of 11.60%, 12.75% and 12.80%, respectively. Total subscription stood at N360.02 billion, while N260.09 was allotted. The auction had a bid to offer ratio of 2.71x.


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Eurobond Market

The Eurobond market traded sideways for the most part of August 2021, as inflationary concerns coupled with the resurgence in covid-19 cases continued to dampen investors sentiment. On 30th August, Zainab Ahmed, the Minister of Finance of the Federal Republic of Nigeria, stated during a press conference that the much-anticipated Eurobond issuance will launch on 11th October 2021. The anticipated issuance would help fund the 2021 budget deficit of which N2.343tn ($6.2tn) is expected to be derived from external borrowing. However, it seems just half of the external borrowing would be funded by Eurobonds as the finance minister stated that the Federal government plan to raise about half in Eurobonds and the other half through other windows such as multilateral and bilateral borrowings.


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Foreign Exchange Market

The average monthly value of the Naira depreciated by N0.11 at the I&E FX Window with the average exchange rate of the currency to a unit of the Dollar climbing to N411.49 in August 2021 from ₦411.38 in July 2021. Total monthly turnover traded on the I&E FX Window was up by 1.32% to $2.85 billion in August 2021 from $2.81 billion in July 2021.

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This depreciation seen was partly driven by the lingering impact of the Apex Bank's policy decision to ban the sale of FX to BDC operators due to unethical practices that CBN views as a major driver of the instability in the FX market. Nonetheless, despite the ban on FX sales to BDCs, operators remain operational, as they now rely majorly on peer-to-peer transactions to fund their dollar supplies. Exchange rates are still transacted at exorbitant black-market rates rather than the rates preferred by the Central Bank, and the prevailing dollar scarcity persists; hence, resulting to a relatively weak Naira against the dollar.


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Equities Market

As the wet season got heavier in Lagos State, it was also raining H1 financials on the local bourse. The month of August started on a quiet note albeit with pockets of buy and sell orders as market participants took advantage of the interim dividend season. The allure of possible higher profit margins triggered investors to take positions in the equity market. The yield-drop in the fixed income market continuously remained ignored as investors were more concerned with changes in monetary policies. The NTB auction held in the second week of August closed with the benchmark 1-year bill shedding 85bps from 8.20% to 7.35%. The subsequent NTB and bond auctions also recorded declines in yields and investors did not budge.

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On a brighter note, a few consumer goods' tickers enjoyed some bullish interest on the back of their impressive financials for the period ended 30th June 2021. FLOURMILL NL recorded a strong topline growth in Q1'21/22 with sustainable drivers of the revenue. The Flour giant leveraged on new product launches and exports, driven by the aggressive expansion of toll-milling activities in the North to push growth. Total revenue grew by 51% to N234 Bn while PAT grew by 10% to N5Bn. The ticker recently paid its full year dividend which also bolstered market interest in it.


However, the star of the local bourse in August was HONYFLOUR NL. The ticker was trading at full bid and recording 52-week highs in almost every trading session. On a month-on-month basis, HONYFLOUR NL was up 155%. Honeywell plays a major role in the production and distribution of wheat-based products in Nigeria. The company was able to ramp up its factory capacity to accommodate for the fast-rising demand for pasta products. Specifically, it ramped up the pasta production capacity of its world-class factory in Sagamu to 138,600 metric tonnes in the 2021 financial year.


The relevance of the company's product mix in terms of the huge market demand, and the improvements in its production capacity, have helped buoy the company's revenue, causing sales to surge by 25% in the financial period ended 30th June 2021. A moderation in the cost component of the finance segment consolidated the top-line performance, causing the PBT and PAT to each grow by 233%.


The NSE released the NGX Domestic and Foreign Portfolio Investment Report for July 2021. Foreign participation declined to N15 bn from N23 bn in the previous month. Domestic participation equally dwindled by 4% to N74 bn from N77 bn. AIRTELAFRI NL and SEPLAT NL remained choice tickers for foreign investors' repatriation strategy.


The sectoral indices performance for the month were as follows: all sectors were in the red as they all recorded month-on-month losses. The Banking, Industrial, Insurance, Oil & Gas and Consumer goods sectors' all shed 0.7%, 0.8%, 3.1%, 3.3% and 8.5% month-on-month, respectively. Regardless of the negative trend seen across all sectors, the NSE ASI gained in the month of August on the back of monthly gains of 21.95% and 4.55% recorded by AIRTELAFRI and MTNN respectively.


The benchmark ASI in the month of August closed at 39,219.61 points, recording a month-on-month gain of 1.74%. Year-to-date return retraced to negative 2.61%.


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Our Expectations for The Coming Quarters

The pace of improvement in economic activities is expected to speed up, supported by improvements in vaccination against Covid-19. This improvement should translate to a further uptick in real GDP growth, particularly in the non-oil sector. The growth in the overall economy is however expected to slowdown as we move past the recessionary base period and the economy return to a stable growth path. On the policy end, these numbers are partly reflective of the dovish commitment of the monetary and fiscal authorities, and policymakers are expected to sustain their current policy stance to continue supporting growth, given that inflation has halted its uptrend. Nonetheless, the fast-spreading delta variant constitutes the major downside risk to growth.


The recent trend of moderation in inflation is expected to remain, drawing support from a high base effect. Also, the expected dollar inflows from the IMF SDR allocation and the proposed Eurobond issuance should help ease the pressure in the FX market in the near term, providing the Apex bank with the necessary ammunition to clear out the exiting backlog and to tackle speculation. Hence, the consequential improvement in our exchange rate position should help alleviate the upward pressure on prices. However, the recently signed Petroleum Industry Bill poses a significant downside risk to the expected improvement in inflation, as the swift and proper implementation of the bill would bring about a sharp uptick in the price of Premium Motor Spirit, which would then trickle into the various items in the inflation basket. Nonetheless, on the policy end, the slowdown in inflation would keep the monetary policy authorities at ease with their current dovish stance, leaving consolidation of economic growth as the policy priority in the interim.


In the local bond market, we expect yields to continue its downward trend in coming months, as we expect the anticipated Eurobond issuance to ease the pressure on domestic borrowing. However, we expect sentiment in the Eurobond market to remain fragile as the resurgence in covid-19 cases continues to dampen global economic growth. On the Eurobond issuance, we expect a strong showing, as Nigeria has averaged a bid to cover of 4.0x in all the Eurobond issuances since 2013, while we expect spot rates to reflect secondary market rates.


The FX market is expected to remain pressured, pending the deployment of the IMF SDR allocation and the expected dollar inflow from the Eurobond issuance.


Our outlook for the equities market in the near term is bullish as we expect more bellwether banking tickers to release their H1 results which may be accompanied by interim dividend announcements. With the retracement of fixed Income yields, it will be instructive to watch how banks will adjust their placement rates. A decline in placement rates could drive traffic to the local equity space.

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