Lower oil price, Inflation, treasury bill yields and other Economic Updates: Sept'14


Tuesday, October 07, 2014 6.43 AM / ARM Research


Inflation extends rising trend on farm produce pressures

The National Bureau of Statistics (NBS) reports that headline inflation for August 2014 rose 8.5% YoY—20bps and 10bps quicker than July reading and our forecasts, respectively. However, MoM CPI eased for the second consecutive month (-15bps from July’s reading to 0.5%) on account of a 20bps cutback in MoM food index to 0.6% even as core inflation rose 20bps to 0.4%. YoY Core inflation declined for the second consecutive month—by 90bps to 6.2%—and though YoY food inflation was flat from August at 9.9%, it remained the key driver of the increase in headline numbers.


In particular, farm produce prices which rose 11.2% YoY in August (July: 9.7%), incorporating a significant base effect, contributed significantly to food inflation. Notwithstanding the modest MoM uptick in farm produce (0.4% MoM; July: 1.3% MoM), average MoM farm produce price rise (90bps) in the 2014 lean season is 20bps and 40bps higher than in 2012 and 2013 respectively and suggests insurgency-induced pressures persist. This view is corroborated by FEWSNET’s assessment of farming activities and trade flow patterns.


Given the foregoing, the lean season pressures may linger and we expect inflation will push to a peak in September with harvests driving some moderation thereafter. Consequently, our forecast for September inflation is for another 20bps MoM rise to 8.7% (+/- 20bps).

Sombre oil price outlook taking a toll on naira?

On the heels of 40bps MoM softness in USDNGN to N162.45/$ in August, the naira weakened a further 74bps MoM in September to N163.65/$. The foregoing occurred despite a 25% MoM jump in RDAS sales to N3.1 billion—even as the CBN intervened at the interbank—and suggests a significant pickup in dollar demand. Incidentally, foreign reserves contracted for the first time since May (-10bps MoM to $39.5 billion). Whilst we had anticipated some pressure on the naira as foreign investors likely underweight Nigeria ahead of the February 2015 elections, we believe the persistent decline in Brent crude oil prices, which fell 8.3% MoM to $94.71/bbl in September further dented outlook, with impact on the currency. Furthermore, the N1.70k MoM contraction in interbank/BDC spread to N4.51 in September implies the BDC segment’s recovering demand was well met, especially as 50 additional operators were accredited earlier in the month. 


Looking forward, crude oil receipts are likely to be softer largely on the back of still depressed oil prices as well as a drop-off—from August peak—in crude oil export volumes. The foregoing, combined with a possible ramp up in demand from traders to fund importation ahead of festive season, portends further pressure on the exchange rate. Nonetheless, given the current level of foreign reserves $39.5 billion (~7 months of import cover) we believe the CBN should be able to significantly moderate the rate of depreciation.

Little change in treasury bill yields despite aggressive CBN mop-up

In line with our expectations, the MPC kept policy metrics unchanged. However, with a simple majority of 6 voting for status quo (vs. 5 for tightening) it is clear that domestic system liquidity remains a worry even as the committee noted that banks’ placement at the SDF remains elevated, at a daily average ~N300 billion. Responding to the high system liquidity, the apex bank ramped up OMO issuance to N872 billion (+33% MoM) despite the 23% MoM decline in OMO maturities to N631 billion, resulting in the first net issuance (N240 billion) in 3 months. Nevertheless, impact on T-bill yields was limited to 8bps increase on average to 10.45%, 10.40% and 10.15% for the 91day, 182day and 354day papers, respectively. At the long end of the curve, bond yields, however, spiked 71bps MoM on average to 11.96% 11.94% and 12.29% for the 2017, 2019 and 2022 bonds respectively. We believe the uptrend in bond yields was initially driven by a sell-off by position-exiting domestic players, after the expected wave of FPI inflow into the bond market on inclusion of the FGN 2024 failed to materialise. In addition, we believe depressed oil prices, after a further 8.3% MoM decline in September (July 2014: -2.3%) likely heightened FPI sensitivity to long tenured government paper, triggering further sell-off.


Looking ahead, liquidity is likely to remain elevated, on the back of maturing OMO paper of ~N840 billion in October as well as N1 trillion AMCON repayment scheduled for the 31st of October. Surely, amidst recent currency pressures, the apex bank will attempt to rein in liquidity via a ramp-up in OMO paper. Nonetheless, we believe that the quantum of maturities should limit overall impact on T-bill yields. At the long end of the naira curve, bearish near-term outlook for oil prices suggests further FPI aversion, a situation rendered inauspicious by uncertainties around the forthcoming elections. Nonetheless, we believe further upward impact on yields will be limited though expected monetary policy response also limits scope for full expression of incoming liquidity on yields. On balance, we expect yields to be range-bound around current levels.

Lower oil prices trim trade surplus

Brent crude oil prices declined a further 8.3% MoM in September (July: -2.83%) to $94.71/bbl after OPEC oil supply hit a nearly two year high (30.96mbpd) largely on increased output from Libya (+280kbpd MoM to ~800kbps). The foregoing, alongside lower oil exports (-5% MoM to 2.1mbpd) on account of a series of shutdown of trunklines and pipelines at various terminals hints at a moderation in overall exports. On the other hand, we believe an increase in external purchases ahead of the festive season likely pushed imports bill higher. Overall, we believe lower exports amidst marginally higher imports trimmed trade surplus in September.


The outlook for oil demand remains dampened on weak economic prospects for Europe amidst moderation in China’s growth. On the supply side, global oil supply remains robust—on US and Libya’s output. Put together, oil prices are likely to remain depressed which alongside flat oil exports at 2.1mbpd suggests overall export receipts will stay around current level.  On the other hand, we expect increased importation of goods in preparation for festive sales and used car imports as the January 2015 implementation timeline for hike in import tariff draws closer to raise the import bill.  On balance we expect stable level of exports amidst modest uptick in imports to trim trade surplus for October.

Recovery in oil GDP aids output growth

The National Bureau of Statistics (NBS) reports Q2 14 real GDP growth of 6.54% YoY--33bps and 110bps higher than in Q1 14 and Q2 13 respectively. Interestingly, while YoY non-oil GDP growth eased to its slowest in six quarters at 6.7%--220bps lower than recorded growth in corresponding quarter of 2013 and 130bps softer than in Q1 14, oil GDP growth bucked the contractionary trend of the last 6 quarters, rising 5.1% YoY. The positive trend in oil GDP, despite force majeure on major sections of the 850kbpd Trans-Forcados pipeline over much of Q2 2014, reflects strong base effects from Q2 2013 when mean oil production was at a four-year low of 2.11mbpd vs. 2.21mbpd. Non-oil GDP expansion slowed on the back of deceleration in manufacturing and services GDP, which jointly account for ~64% of non-oil output. Specifically, manufacturing GDP growth eased 10pps YoY to 12.2% whilst Services GDP slowed 3.4pps YoY to 7.2%. Softness in the former largely stemmed from food, beverage and tobacco (FBT) segment where growth shrank (-7.9pps YoY to 5.2%), which is consistent with tamer revenues reported by FMCG companies listed on the NSE. On the other hand, Services slowdown reflects contraction in the heavier weighted ICT (-1.3pps YoY to 7.9%) and Real estate (-10.9pps to 4.9%) subsectors.


Going forward, developments with some sub-component of non-oil GDP suggest scope for further slack in this component. In particular, FEWSNET report on disruptions to trade flow in some parts of the north alongside subdued consumer discretionary incomes, suggest weak volumes growth outlook for Food and Beverage companies which could dampen manufacturing GDP. In addition, developments with the NE insurgency could result in tepid agricultural GDP growth, with FEWSNET affirming significant impact on area under cultivation now restricted to about a quarter of available land. On the other hand, removal of force majeure on Forcados and on-streaming of Shell’s Bonga North-West field on the 6th of August 2014 should extend improving trend in oil production. Indeed, Bloomberg loading schedules hit a three year high in August (2.2mbpd) and combined with strong base effects from Q3 13, when oil GDP slumped 15% YoY on production outages, increases scope for extension of the positive reading in oil GDP growth into Q3 14.

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