Recent Trend of Moderation in Inflation is Expected to Persist


Thursday, October 14, 2021 / 08:27 AM / By Comercio Partners Asset Mgt / Header Image Credit: Comercio Partners Asset Mgt

Report Summary

The Macroeconomy

  • The IMF projects a GDP growth of 2.40% in 2021.
  • Headline inflation maintained its declining trend in August 2021.
  • The Naira weakened against the U.S. Dollar on the I&E FX Window.


The Financial Markets

  • Equity market recorded first quarterly gain in Q3 2021.
  • Local bond market was bullish in Q3 2021.
  • The Eurobond market saw renewed selling.


Our Expectation for the Coming Quarter

  • GDP growth should remain subdued in the long term.
  • The recent trend of moderation in inflation is expected to persist.
  • Full year earnings positioning should spur interests in equities in Q4 2021.


Job Growth Flatters In The Us, Amidst Talks On Tapering


The global financial market was greatly stirred-up with the news of an impending collapse of China’s property giant, Evergrande Real Estate Group. Now dubbed the world most indebted real estate company, Evergrande's balance sheet is riddled with debts more than $300 billion, and the timeline for an interest payment of an estimated $83.5 million due on an 8.25% five-year US Dollar-denominated bond has been missed. The company hopes the 30-day grace period given by bondholders before a default is officially declared will be adequate to meet due obligations to bondholders. Whilst Evergrande already began selling existing assets in a bid to weather the storm and meet the set deadline, the big question has been around the willingness of the Chinese Government to intervene by way of a bailout. Perhaps, the answer to this all-important question is embedded in understanding the importance of the real estate industry to China, and the portfolio of Evergrande. The industry accounts for at least 15% of the China's gross domestic product, and more than 70% of urban China's wealth is stored in housing. Evergrande is the second-biggest real estate company in China and is responsible for more than 1,300 building projects in more than 280 Chinese cities. Furthermore, the company noted it has over 200,000 employees and creates more than 3.8 million indirect jobs annually. We posit that the debilitating impact of Evergrande's possible default on the broader real estate sector in China would eventually warrant the Government to intervene, however subtle.

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The U.S. Federal Reserve has hinted that they may begin tapering before year-end, as it believes the recovering US economy no longer requires continued intervention by the monetary policy authority (at least not on the current scale). There is also the need to stem inflationary pressure and possibly cushion the effect of getting the system awash with excess liquidity considering the huge expenditure plans of the Fiscal Authority. However, this outlook was tainted by the September job numbers released by the U.S. Labor Department. The number printed for September not only missed the median estimates of analysts, but also represents the "smallest growth" so far this year. Non-farm jobs for September increased by 194,000, down by 47% from the revised 366,000 recorded in August and 61% shy of the 500,000 median projection. We see the Fed's crucial decision on tapering to be largely driven by fundamentals and the government's ability to ramp up vaccination in a bid to stem the rising tide of the delta variant of the Covid-19 virus.


On the local front, it would be yet another year of running a deficit budget for Nigeria as the President has presented a N16.4 trillion ($39.7 billion) budget for the year 2022 to the joint session of the National Assembly for review and approval. The proposed 2022 budget is about 25% larger than that of 2021, and a whopping N6.26 trillion, representing 38% of the planned expenditure, will be financed by borrowings. It is important to note that deficit component of the budget represents some 3.4% of GDP, 0.4% above the legal threshold of 3% stipulated in fiscal responsibility law. We believe the positive demand outlook in the international oil market will continue to drive oil prices and essentially support the revenue projection of the Government. However, the tensed political environment and the devastating security challenges across the country could severely impact revenue expectations from local sources. 


The Macro Economy


GDP Growth & Oil Production


Against a backdrop of a better-than-expected growth in Nigeria's service sector, the World Bank took a more optimistic stance on its expectation for economic growth in 2021. The Bretton Wood institution revised Nigeria's earlier growth projection of 1.80% made in June, positing that the oil-dependent economy is expected to grow by 2.40% in 2021. However, the outlook for Sub-Saharan Africa received a larger boost of 1.00% to 3.30%, reflecting the deeper structural fragility of the Nigerian economy. Nonetheless, with an aggregate half year real GDP growth of 2.76%, the possibilities of attaining the 3.00% growth target embedded in the 2021 appropriation bill appears bleak, while it is becoming increasingly likely that full-year 2021 real GDP growth will hover around IMF and World Bank estimates.


A key factor that continues to bedevil the pace of economic recovery across Sub-Saharan Africa is the pace of Covid-19 vaccination as greater access to these vaccines allow for a faster easing of restrictions and inhibits the spread of the virus. For economic giants like South Africa and Nigeria, growth in these countries continue to drag the entire region, as the exclusion of these countries from the regional computation will have the region growing at a faster pace of 3.60% in 2021.

Elsewhere, OPEC, in its monthly oil market report noted that Nigeria's oil production dipped by 6.35% in August 2021 to 1.24mbpd from 1.32mbpd in the preceding month. While the OPEC+ output curbs have been tapered by 2mbpd from August through December 2021, internal constraints to local production like the debilitated state of our oil infrastructure and the lack of adequate oil investments, have continued to subdue output level. In addition, OPEC retained its world oil demand growth forecast for 2021 at 6.0mbpd, leaving the total oil demand unchanged at 96.7mbpd. On the supply side, OPEC forecast a non-member supply growth of 0.9mbpd to average 63.8mbpd, down by 0.17mbpd relative to the preceding month's estimate. The downward revision in the supply estimate was driven by disruptions in North America and the lingering impact of hurricane Ida.


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Inflation sustained its path of moderation in August as the headline index grew by 17.01% YoY in August 2021, 0.37% lower than 17.38% recorded in July 2021. Likewise, food and core inflation respectively inched up by 20.30% and 13.41% YoY in August 2021, 0.73% and 0.31% lower than 21.03% and 13.72% recorded in July 2021. The drop in headline inflation marks the fifth consecutive decline following a 19-month uptrend that lasted from September 2019 till March 2021. The decline in the headline index was driven by the sustained moderation in the food subindex, while the core segment also supported the overall downtrend by reversing its uptick in August 2021.


On a month-on-month basis, headline inflation rose by 1.02%, representing a 0.09% increase from the rate of 0.93% that was recorded in the previous month. The yearly average rate rose to 16.60%, 0.30% greater than 16.30% recorded in the previous month. The increase in the monthly headline index was largely driven by the monthly increase in the prices of staple food items.


The food subindex rose by 1.06% MoM, reflecting a 0.20% increase from the rate of 0.86% recorded in July 2021. The yearly average rate rose to 20.50%, 0.34% greater than 20.16% recorded in July 2021. The food subindex resumed its monthly uptrend, on the back of disruptions caused by the heavy rainfalls, as well as the lingering shortages to supply.

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Core inflation stood at 0.77% MoM, down 0.54% from 1.31% recorded in July 2021. The yearly average rate also rose to 12.29% last month, 0.24% higher than 12.05% recorded in the preceding month. The highest increases were recorded in prices of shoes and other footwear, household textile, motor cars, garments, major household appliances whether electric or not, hospital services, catering services, appliances, articles and product for personal care and clothing materials, and other articles of clothing and clothing accessories.


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The high base effect continues to provide the impetus for moderation in the headline index with August marking the fifth consecutive month of disinflation. Moderation in the food and core subindexes jointly sponsored the decline in the rate of increase in the overall price level. The food segment benefited slightly from the green harvest season, while the core category enjoyed the reduced impact of Covid19 related disruptions particularly in sensitive sectors like health and related services. While the core subindex printed lower monthly, the headline and food monthly rate of inflation resumed a northward movement, on the back of the inadequacy and insufficiency of food supply. 


Capital Importation and Foreign Exchange Reserves


Nigeria's foreign reserves increased by 8.1% from $34 billion recorded in August to $36.8 billion in the month of September. This represents the biggest value of Nigeria's foreign reserves in over 20 months under analysis.


The total value of capital importation into the Nigeria economy through the I&E FX Window for the month of September edged up significantly to $1.74 billion, representing a 36% increase from $1.28 billion recorded in the previous month of August. The total value of FX inflow for the month of September represents the height recorded since March 2020 when the figure printed at $3.71 billion. Across listed channels of FX inflow into the country, other local sources, and inflow through the CBN contributed the most to total inflow, printing at $661 million and $616 million respectively. This is followed by FX Inflows from FPIs and other foreign sources which recorded $299 million and $165 million, respectively.


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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Total FX outflow through the I&E FX Window for the month of September represents the highest in over a year. The September value increased by 43.1% to $1.7 billion when compared to the previous month of August which recorded a total outflow of $1.17 billion. FX outflows via other local sources apart from the CBN increased by 47.1% to record $1.1 billion, followed by outflows from FPIs and other foreign sources which recorded $446.3 million and $139 million, respectively. Outflows from the CBN however declined by 20% to $1.6 million.


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Consequently, I&E FX netflow for the month of September 2021 stood at $65 million, representing a 40.6% decline compared to the previous month of August which recorded a netflow of $10.9 million.

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Financial Markets


Fixed Income Market


Activity in the fixed income market picked up in September as volatility was seen across board. Nevertheless, the month ended on a bullish note, as buy interest was driven by a N318 billion coupon payment in September 2021. Monthly yields for the benchmark securities monitored declined across all maturities on a month-on-month basis. Average yields on the sovereign bonds with 3-year, 5-year, 10-year and 20- year maturities declined by 95 bps, 64 bps, 25 bps and 18 bps, respectively.


All eyes were on the MPC meeting which held on 17th September 2021 as market participants awaited the monetary authority's response and further clarity on its moves to clampdown on multiple FX rates. The persistent downtrend in inflation provided some level of comfort for the policymakers to sustain an accommodative policy stance as all twelve committee members unanimously voted to retain all policy parameters. The MPR was retained at 11.5%, with an asymmetric corridor of +100/-700 basis points around the benchmark interest rate; the CRR was retained at 27.5%; and the Liquidity Ratio was retained at 30%. However, the Apex Bank intensified the battle to protect the Naira from speculators by targeting the ownership, intent, and processes of Aboki FX, a popular source of black-market exchange rates.


At the bond auction held on the 22nd of September 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 13.00%, respectively. The subscription stood at N334.24 billion, while N277.05 was allotted. The auction had a bid to offer ratio of 1.20x.


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Eurobond Market


September ushered in a flood of Eurobond issuances, from Nigeria's biggest bank's 5-year fixed rate and perpetual bond, to 7-yr, 12-yr and 30-yr Sovereign bonds. There was a bandwagon of supply, not surprising given that covid-19 pandemic hindered many SSA countries from coming to the market. The market was overall bearish with average yields rising by 43bps MoM driven by increased supply.


Access Bank tapped into the strong demand for SSA papers with two issuances: a 5- yr Senior Unsecured Bond (Subscription: $1.6bn, Allocation: $500m and Yield: 6.125%) and a Perpetual Bond, the first of its kind in Nigeria (Subscription: $935mn, Allocation: $500m and Coupon: 9.125%). Nigeria on the other hand, had a strong oversubscription of 4.06x, leading to an allocation of $4bn versus the $3bn on offer. With its debt to GDP ratio which remains among the lowest in SSA (22%), a budget deficit and a strong demand witnessed at the last issuance, the DMO has hinted that it would be coming with another issuance in the coming months.


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Foreign Exchange Market


The average monthly value of the Naira depreciated by N1.26 at the I&E FX Window with the average exchange rate of the currency to a unit of the Dollar climbing to N412.76 in September 2021 from ₦411.49 in August 2021. Total monthly turnover traded on the I&E FX Window was up by 56.37% to $4.45 billion in September 2021 from $2.85 billion in August 2021.


The Naira fell at the I&E FX Window despite a significant 56.37% increase in dollar supply during the month. The local currency is still hitting record lows against the U.S. dollar at the black market despite the CBN clamp down on, a web portal that allegedly aggregates the Naira's exchange rate at the parallel market, and despite the news of Nigeria's Eurobond sales which is meant to boost the nation's reserves.


The average quarter value of the Naira depreciated by N0.9 at the I&E FX Window with the average exchange rate of the currency to a unit of the Dollar climbing to N411.88 in Q3 2021 from N410.98 in Q2 2021. Total Quarter turnover traded on the I&E FX Window was up by 51.23% to $10.12 billion in Q3 2021 from $6.69 billion in Q2 2021.


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Equities Market


The penultimate quarter launched with little appetite for tickers in the equities space as institutional accounts preferred the comfort of alluring money market rates. The first few weeks into the quarter were plagued with shallow trade metrics and would have remained so if the H1 earnings season did not kick in. The H1 earnings season commenced in July 2021, providing market the upliftment it needed from its slumber. The earnings season wave rode from July to September and was welcomed with strong bids for performing tickers. Market participants took the opportunity to position themselves ahead of the interim dividends that came after. 

The yield on the NTB benchmark 1- year bill declined 3 times out of 6 total auctions in Q3 2021. This however did not translate to an uptick in activity in the local bourse during the period. This came at no surprise given that there had been no material reaction since rates began to descend in May (dropped 285bps in 8 consecutive auctions). Furthermore, fixed income yields still looked more attractive when compared to the dividend yields of tickers that paid interim dividends. 

Market maintained its "no-reaction" stance even as fixed income yields started ascending in September. Market participants looked forward to Nigeria's Eurobond issuance ($4 billion) in September with the hope that funds would be deployed towards the lingering FX backlogs post-issuance. However, we are yet to see the Apex bank dip into the buffers to quell the FX crisis.


The NSE released the NGX Domestic and Foreign Portfolio Investment Report for August 2021. Foreign participation improved from N15 billion in the previous month to N25 billion. Domestic participation fell consecutively for the second month to N64 billion from N74 billion. Domestic participation had the higher share of total flows at 72%. AIRTELAFRI NL and SEPLAT NL remained choice tickers for foreign investors' repatriation strategy.


The sectoral indices performance for the month of September were as follows: two sectors were in the green while all other sectors recorded month-on-month losses. The Industrial and Consumer goods sectors gained 7.23% and 2.71% month-on-month, respectively. The Insurance, Banking and Oil & Gas sectors were down by 9.41%, 1.63% and 0.31% month-on-month, respectively. For the sectorial performance in Q3 2021, the Oil & Gas, Industrial and Banking sectors emerged the top performers, gaining 16.75%, 10.76% and 1.37% quarter-on-quarter, respectively. The Insurance and Consumer goods sectors lost 13.16% and 0.78% quarter-on-quarter, respectively.


Q3 2021 saw the benchmark ASI index settle at 40,221.17 points, recording a quarter-on-quarter gain of 6.10% and a month-on-month gain of 2.55% for the month of September. Year-to-date returns also improved, though remained at negative 0.12% at the end of September. The month of September had the best trade metrics in 6 months with total value traded at N64 billion, accounting for 42% of total value traded in Q3 2021. The total value traded in Q3 2021 came in at N154 billion, up 7% from N144 billion in Q2 2021.


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Our Expectations for The Coming Quarters


Expectation for growth remains largely subdued, as the economy stays in the peril of a weak economic structure. On average, we see real GDP growth settling between 2.40% and 2.80%, drawing further support from the sustained recovery of the non-oil segment. However, the outlook for local oil production remains gloomy, but we should see the additional 400,000 bpd monthly supply increase help secure some improvement, though insignificant.


On inflation, the base effect is expected to provide further support to the trend of disinflation in the headline index, but its is imperative to recognize the growing relevance and dominance of some downside risks. Notably, the FX situation has run amok. The weakening of the dollar is expected to remain, pending the full drawdown and utilization of the IMF SDR allocation and the Eurobond issuance in October. Also, the possible deregulation of the downstream oil sector which is expected to accompany the implementation of the Petroleum Industry Bill, threatens the trajectory of prices by way of higher cost of premium motor spirit (PMS) as the international oil market remains relatively bullish. However, we see monetary policy authorities finding comfort in the moderation seen in relevant inflation indexes, which would allow them the leeway to sustain their dovish policy commitments.


In the local bond market, we expect market volatility to persist in the coming months, as market direction remains unclear. However, in the Eurobond market, the global risk off sentiment is expected to wane in the near term, supported by the debt ceiling raised in the U.S. However, the outlook over the length of the quarter is largely bearish, as the anticipation of a second Eurobond issuance from Nigeria should mount further pressure on supply.


According to data Obtained from the Central Bank of Nigeria (CBN), Nigeria's foreign reserve was up by approximately $2.76 billion in the month of September 2021 to close at $36.78 billion by 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 which will ultimately reduce the pressure on the country's exchange rate in subsequent periods.


On equities, in the coming months, market participants are expected to start positioning themselves for the full year dividend payments of fundamentally sound tickers as they expect Q3 earnings. Market is also expected to look forward to how the Apex bank intends to improve FX liquidity.

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