The Trend of Disinflation is Expected to Persist in the Near Term - Comercio Partners


Thursday, August 12, 2021 / 4:00 PM / By Comercio Partners Asset Mgt / Header Image Credit: Comercio


Report Summary

The Macroeconomy

  • The IMF held Nigeria's growth forecast for 2021 constant at 2.5%.
  • Headline inflation moderated in June 2021.
  • The Naira weakened against the U.S. Dollar on the I&E FX Window.


The Financial Markets

  • Bulls snatched back dominance on the local bourse.
  • The Fixed Income market saw renewed buy interests.
  • The Eurobond market maintained its tepid performance


Our Expectation for the Coming Quarter

  • GDP growth is expected to inch up further this year.
  • The trend of disinflation is expected to persist in the near term.
  • Earnings season should provide some relief to a bearish equity market.


U.S. Labour Market Stages Robust Recovery 

Delta Variant Of Covid-19 Casts Doubt Over Global Recovery

The grand optimism which greeted the reopening of economic activities around the world is gradually regressing as the rising wave of the Delta Variant of the Covid 19 virus signifies a return to uncertainty, especially if deliberate and concerted efforts are not inaugurated around the world to stem the rising tide of the impending third wave. Delta variant The highly transmissible delta variant is now in at least 104 countries and according ravages global to data from the United States Center for Disease Control and Prevention, the new Pretty strain currently accounts for an estimated 83% of new coronavirus cases in the United States, a dramatic increase from earlier in July when the figure was just over 50%. Essentially, the spread of the Delta variant, along with increased social mobility and the inconsistent use of proven public health measures is driving an unprecedented increase in both case numbers and deaths around the world.


Responding to the virus resurgence, Central Banks around the world have noted concerns and reiterated the need for continuous support to their respective economics. In the United States for instance, growing calls for the Federal Reserves to Developed and normalize rates amid soaring inflation pressures which have remained more acute than expected have mellowed out, as the fast-spreading delta variant poses severe policy makers risks to the rebound in economic growth. Similarly, Central Banks across key markets maintain dovish in Africa at the end of their Monetary Policy meetings maintained status quo, with a leading economics like Nigeria and South Africa leaving benchmark interest rate and other key policy parameters unchanged, a decision they say is crucial to sustaining the fragile but significant economic recovery currently being witnessed.

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In the international oil market, after weeks of strained negations (majorly between Saudi Arabia and the United Arab Emirates), OPEC and allied nations reached an agreement to raise the production limits imposed on five countries (Iraq, Kuwait, OPEC+ tapered Russia, Saudi Arabia and the UAE) by 2022. Also, the Cartel agreed to boost production by 2 million barrels per day (bpd) by the end of 2021 by adding 400,000 barrels to its output on a monthly basis, from August through to December. The agreement puts an end to a dispute that agitated the oil market. Oil prices rallied above $70 per barrel on the news of the dispute resolution and essentially eased an impending supply squeeze.


In what many have described as a bold move by Nigeria's Central Bank to bulwark the Naira from the adverse effects of rising speculations in the FX market owing to the various unauthorised activities of Bureau de Change (BDC) operators, the CBN announced the cessation of FX sales to BDCs and halted the issuance of new licenses CBN rattled the including those in the pipeline. To remedy the consequences of the stoppage of FX sales to BDCs, the CBN noted that it would channel a significant portion of the weekly clamping down allocations to commercial banks who will in turn serve as a channel to meet the legitimate FX needs of retail investors. As expected, the naira depreciated in the aftermath of the Apex Bank's decision. However, the market in a matter of days witnessed an almost immediate upward retracement in the exchange rate as the stakeholders cautiously digests the nitty-gritty of the development, and eagerly awaits the policies and implementation strategies that the CBN will put in place to avert a prolonged FX crisis.



The Macro Economy 

GDP Growth & Oil Production


Against a backdrop of the existing structural issues that bedevils the Nigerian economy, growth expectations for 2021 have remained largely weak, with projections for subsequent years reflecting a lack of confidence in the policy framework and economic structure. In the latest World Economic Outlook Update from the IMF left Nigeria's International Monetary Fund (WEQO) released in July 2021, the Bretton Wood 2021 growth Institution reiterated its earlier growth projection for 2021, positing that the economy forecast should grow by 2.5%. This forecast falls behind a Global and Sub-Saharan African unchanged growth projections of 6.0% and 3.4%, respectively, in the same period. The divergence between the global and the Sub-Saharan African growth projections can be affiliated with inequitably vaccine distribution, with countries like Nigeria lacking adequate access to Covid-19 vaccines and also falling short on creating an efficient distribution structure. Consequently, low-income countries would take a longer period to achieve post pandemic economic normalization. However, asides from the fault lines created by the limited vaccine access, Nigeria remains troubled by its monocultural economic structure, massive infrastructural deficit, insecurity, and policy tardiness. Nonetheless, the IMF improved Nigeria's growth forecast for 2022 by 3 basis points to 2.6%, on the back of an expected improvement in global growth from 4.1% to 4.9% in the same period.

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Elsewhere, OPEC, in its monthly oil market report noted that Nigeria's oil production Local oil dipped by 2.31% in June 2021 to 1.31mbpd from 1.34mbpd in the preceding production month. Likewise, the production level for Q2 2021 fell by 4.56% to 1.34mbpd. While dipped in June the OPEC+ quotas continue to constitute a drag on local production, other 2021 constraints, like reduced demand from major trading partners, declining quality of oil infrastructure and lack of adequate oil investments, have been the major drivers behind the lower output level in recent months. In addition, OPEC retained its world oil demand forecast for 2021 at 6.0 mbpd, leaving the total oil demand unchanged OPEC lowered at 96.58mbpd. On the supply side, OPEC forecasted a supply growth of 0.81mbpd 2021 oil supply to average 63.8mbpd, down by 0.03mbpd relative to the preceding month's forecast estimate. The downward revision in the supply estimate was driven by lingering concerns and uncertainties around Covid-19 and the fast-spreading delta variant.


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The year-on-year (YoY) movement in headline, food and core inflation moderated in the month of June 2021, tailoring the lines of our earlier expectations that the high YoY Inflation base effect would kick in towards the middle of the year. The headline index grew by 17.75% YoY in June 2021, 0.18% lower than 17.93% recorded in May 2021.

Likewise, food inflation inched up by 21.83% YoY in June 2021, 0.45% lower than 22.28% recorded in May 2021. Also, the core segment halted its upsurge, falling to 13.09% YoY in June 2021, 0.06% lower than 13.15% recorded in May 2021. The drop in headline inflation marks the third consecutive decline, following a 19-month uptrend that lasted from September 2019 till March 2021. The decline in headline inflation continues to draw support from the moderation in the food subindex, and we also saw the core subindex end its 6-month uptick; hence, contributing to the decline in the overall index.


In June 2021, headline inflation rose by 1.06% MoM, representing a 0.05% increase rate continued to from the rate of 1.01% that was recorded in the previous month. The yearly average rate rose to 15.93%, 0.43% greater than 15.50% recorded in the previous month.

The increase in the monthly headline index remains buoyed by the uptick in food prices.


The food subindex rose by 1.11% MoM, reflecting a 0.06% increase from the rate of inflation nudged 1.05% recorded in May 2021. The yearly average rate rose to 19.72%, 0.54% greater than 19.18% recorded in May 2021. The food subindex sustained its monthly northwards uptrend on the back of the continued disruptions to food supply.


Core inflation stood at 0.81% MoM, down 0.43% from 1.24% recorded in May 2021. The yearly average rate also rose to 11.75% last month, 0.25% higher than 11.50% recorded in the preceding month. The highest increases were recorded in prices of uptrend garments, passenger travel by air and by road, motor cars and vehicle spare parts, shoes and other footwear, pharmaceutical products, medical services, hairdressing salons and personal grooming establishments, cleaning, repair and hire of clothing, clothing materials, other articles of clothing and clothing accessories, furniture and furnishing and fuels and lubricants for personal transport equipment.



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The moderation in YoY headline inflation for the month of June 2021 rode on the back of a decline in the yearly inflation rate for the food subindex. The drivers that sponsored this decline were the interplay of the high base effect and the green harvest season in the south. Also, it was observed that the core segment halted its cushioned YoY persistent uptick, recording a decreasing rate of increase on a monthly and yearly basis. Following the currency unification in May and the ensuing sharp depreciation of the naira, the weakening of the local currency in June was relatively less aggressive hence, translating into a slower rise in the core subindex. Nonetheless, the uptick in food prices remain largely untamed as evidenced by the persistent rise in the monthly food subindex. Dominant drivers remain active, notably, food supply disruptions and  the lingering insufficiency in supply that succeeded the protectionist government posture on agriculture.



Capital Importation and Foreign Exchange Reserves


The total value of capital importation into Africa's biggest economy stood at $876 million in the second quarter of 2021, a 54.1% decline from the $1.91 billion recorded in the first quarter of the year, essentially erasing gains of more than 47% accumulated since the second quarter of 2020 when economic activities bounced back globally following the lock down protocol that was introduced to contain the Covid 19 pandemic. This sharp decline is a consequence or a combination of economic and political structural cracks, particularly the unfavorable FX situation. Other investments (which include trade credits, loans, currency deposits, and other claims) steered the decline, shedding 68.3% from the previous quarter, while FDls and Portfolio Investments charted the same course with a decline of 49.6% and 43.4% respectively. The value recorded in the second quarter of 2021 represents the lowest capital investment into the country since the first quarter of 2016 when the value printed at $711 million.


On a sectoral or nature of business basis, the banking sector led the pack with a contribution of $295.6 million representing 33.9% of total investment inflow, while financing and shares contributed 23.5% and 22.2% respectively. The United Kingdom retained its soot as the leading origin of capital investments into Nigeria with $310.3 million followed by South Africa and United States of America which contributed $212.4 million and $83.4 million, respectively. Lagos State received about 89% of the total capital investment flow into Nigeria, while the outstanding 11% was split between Abuja and Ogun state, with Ogun state accounting for a negligible portion.

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Activities in the Nigerian foreign exchange market edged up in the month of July as foreign capital flow into the Nigerian economy through the I&E FX window increased to $1.06 billion from $901 million recorded in the previous month of June. The 9.7% increase in the month's inflow positively impacted the Nation's foreign exchange reserves which rose marginally by 0.2% to $33.40 billion for the month of July from $33.32 billion in the previous month. Other local sources of FX inflow into Nigeria contributed 52.2% to total inflow for the month of July, followed by inflows from the CBN and FPls which contributed 28.1% and 15.6% respectively.


There was 10.9% increase in total outflow through the I&E window in the month of July as the Central Bank continued to enforce measure put in place to ease the constraints of forex availability in the market. The increase recorded in the month of July corresponds with a total outflow of $999.60 million, compared to $901.20 million posted in the foregoing month. Other local and foreign source contributed 68.44% and 31.45% respectively, while outflow through the CBN accounted for 0.11% of total outflow in the month under review.


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The difference between the I&E FX inflow and outflow resulted in a positive netflow of $60.5 million for the month of July 2021, a 7.8% decrease from the preceding month where $65.6 million was recorded.



Financial Markets 

Fixed Income Market


The bearish trend in the fixed income market waned in July 2021 as the impact of the N561 billion Bond maturity coupled with the less than anticipated supply at the Bond auction spurred investors' appetite. Yields for the benchmark securities monitored declined across all maturities on a month-on-month basis, with average yields on the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities declining by 63 bps, 44 bps, 35 bps and 96 bps, respectively. Also, the Bond auction held on 22nd July 2021 closed relatively strong with a bid to cover of 1.9x and stop rates printing as follows; 7-year, 16-year and 30-year at 12.35%, 13.15%, and 13.25% respectively.


The MPC meeting was also held on 27th July 2021. The committee left the benchmark interest rate unchanged at 12.5% as policymakers remained trapped in the cross arrows of rising prices and tepid growth, leaving dovish or hawkish adjustments unfitting.


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Eurobond Market


The Eurobond market maintain its relatively quiet trend in July 2021, as the market traded sideways for the most part of the month. At the beginning of the month, the Eurobond market traded on a relatively weak trend as the decline in the U.S. 10-year treasury yields was overshadowed by a global risk-off sentiment caused by the fast- spreading delta variant of Covid-19. Market sentiment waned further towards the end of the month as the growing Covid-19 concerns continued to dampen activities.


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Foreign Exchange Market


The average monthly value of the Naira depreciated by $0.08 at the I and E FX Window, with the average exchange rate of the currency to a unit of the Dollar climbing to 4411.38 in July 2021 from 411.30 in June 2021. Total monthly turnover traded on the I&E FX Window was down by 6.53% to $2.81 billion in July 2021 from $3.01 billion in June 2021.


The CBN sent jitters through the FX market this month, after announcing its intentions to clampdown on BDC operators for conducting their business in a manner that is antithetical to the intent of their establishment. The ensuing impact of this was a knee- jerk reaction characterized by a sudden depreciation of the naira at the parrel market, before a gradual retracement that was later supported by expectations of increased dollar liquidity from the IMF and from a Eurobond issuance.


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Equities Market


The first month in the second half of the year began with the annulment of the inverse relationship between stock prices and fixed income rates that was witnessed last year. The slow descent in the rate of the 1-year bill continued to have little to no impact on the cautious resolve taken on by both institutional and retail accounts. The elevated money market rates (Bank Placements) are also to blame for this as they are more appealing and less risky to big local institutional players. The latest PENCOM data also supported this as it showed that PFAs invested an extra N160bn into bank placements between January 2021 and April 2021. This corresponds with the time frame that they were net sellers of local equities. Hence, the first weeks into the month of July saw shallow trade metrics and would have remained so if the H1 earnings season did not kick in. At least 8 bellwether names flooded the local bourse with their unaudited H1 results towards the end of the month. Market participants were excited and cheered the tickers who outperformed with strong bids. Half year results for Tier-1 banking tickers are expected to be released this month as the deadline for audited financials fall due.


The NGX released the Domestic and Foreign Portfolio Investment Report for June. The report showed a declining market participation up until June 2021. Both local and offshore participation diminished significantly, hitting 10-month and 7-year lows respectively in May 2021. The recovery in June was quite weak, as domestic and foreign participation were up by 1% and 15% respectively. Nothing much has changed as foreign players continued their repatriation strategy with fungible names (SEPLAT and AIRTEL), switching between the one with the cheaper repatriation rate at point of exit. However, the illiquidity of both tickers in the local bourse causes offshore sellers to miss the days of NEWGOLD NL. The ticker comfortably recorded a monthly trade value in excess of N10bn which is higher than what is done by both SEPLAT and AIRTEL.

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Asides the excitement from Half year results, some corporate actions stirred up activity

from speculators. OANDO NL announced that it has entered a settlement with the SEC regarding all matters of litigation, bringing an end to the 3-year saga. This saw OANDO NL enjoyed an entire week of gains as speculators picked it up. The tickerwas up 49% month on month in July 2021. Also, Dangote Cement got the SEC's approval to carry out the second tranche of its share buyback program. Accordingly, market participants have started to position themselves awaiting the announcement of the date of the buyback.


The sectoral indices performance for the month were as follows: 4 sectors recorded month on month gains, except for the Insurance sector which declined by 0.75% month-on month. The Oil & Gas sector maintained its position as the top gainer, recording a whooping month-on-month gain of 19.83%, supported by gains in SEPLAT and OANDO NL. It was followed by the Industrial, Consumer Goods and Banking sectors, which gained 4.72%, 4.56% and 4.24% month-on-month, respectively.


The benchmark ASI in the month of July closed at 38,547.08 points, recording a month-on month gain of 1.69%. Year-to-date return retraced to -4.28%


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Our Expectations for the Coming Quarter


The economy is expected to benefit off a low base effect in the second quarter of 2021, which should help pull the oil sector out of the contractionary region it slipped into in the corresponding period of 2020. Also, the 2mbpd output increase from August through December should help support oil sector growth, amidst a bullish oil market that has stayed above $70 per barrel for weeks. Nevertheless, the long-term forecast remains unchanged, as GDP growth is expected to return to its tepid trend.


We expect this trend of moderation in inflation to persist, largely due to the impact of the high base effect. Also, the green harvest season would continue to provide some comfort for the prices of specific items in the food basket, like yam and maize. Also, concerns around the FX market have been temporarily allayed, given the massive dollar inflows expected from the IMF SDR allocation and the Eurobond issuance. The major downside risk to inflation is the impact of a sharp rise in the pump price of PMS, should the implementation of the PIB lead to a proper deregulation of the downstream oil sector.


On the policy end, this inflation numbers will provide further comfort to the monetary authorities, wading off any possible hawkish tilt, as witnessed in July's MPC meeting where all policy levers were left unchanged.


In the FGN local bond market, we expect the bearish trend to resume in coming months as market participants remain on the sidelines due to the lack of market clarity. Also, we expect the Eurobond market to weaken further in the coming month on the back of the anticipated issuance coupled with the global growth concerns.


The expected dollar inflows from the IMF's SDR allocation and from the anticipated Eurobond issuance should provide some support for the Naira in the interim, serving as a stopgap to a debilitating FX crisis.


Our outlook for the equities market in the near term remains bearish, although we expect more releases of positive half-year financials to provide some support. The local bourse would continue to see less participation from big local institutions if money market rates continue to skyrocket.


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