This week, we spotlight the recent activities of the CBN, assess the July 2024 CPI data published by the NBS, and share our views on the likely impact of the 150-day suspension of import duties & exemption of VAT on certain basic food items by the FG on the economy.
To start with, earlier in the week, the CBN announced its recommencement of publication of key forward looking macroeconomic data, which in our view, is essential, given that the non-availability of these important publications have deprived stakeholders of adequate artillery to leverage for future personal and business strategies. This announcement was immediately followed by the release of the July 2024 Purchasing Managers’ Index (PMI) report – the first of such since December 2020.
For context, the PMI is a leading indicator that provides insight on the short-to-medium term direction of the broader economy by aggregating the assessment scores of sub-activities under key sectors of the economy into an index score. In Nigeria, the composite PMI reading is derived from the assessment scorecard of three key sectors – Industry, Services, and Agriculture. The PMI scores are generated from quantitative and qualitative responses to survey administered on a large pool of strategic players in key sectors of the economy. PMI above 50.0 points indicates an expansion, while a reading below 50.0 points signals a contraction.
For July, the composite PMI printed at 49.7 points, extending its contraction spell to a thirteenth straight month though with a slight improvement over June’s reading (44.8 points). The underwhelming reading of the composite PMI in July was largely driven by weak sentiment in the agriculture (49.7 points) and industry (48.3 points) sector. Precisely, new orders and employment level faltered across these business segments – an unsurprising development given the dual shocks of exchange rate and energy goods price volatility over the last 12 months, which are core to activities in these segments.
Meanwhile, for the second month in a row, the services sector PMI was upbeat (albeit modest) registering a 50.3 points print vs 50.1 points in June. However, key indicators within the sector exhibited mixed performance. While business activity and stock of raw materials inventory expanded, the level of new orders contracted during the review period. Notably, employment levels remained stagnant. A closer look at the sectoral composition reveals a mixed performance, with eight of the fourteen subsectors growing and six contracting. The Motion Pictures and Music Production subsector led with the highest expansion to 58.2 points (previously: 51.0 points), while the Management of Companies subsector saw the largest decline to 42.3 points (previously: 49.3 points).
Shifting focus, NBS data revealed that the y/y headline inflation rate fell 79bps to 33.4% in July, marking the first decline in 19 months. While this disinflation outcome was in tandem with our expectation, the magnitude was disappointing. Recall that we estimated that the y/y headline rate would decline by 107bps in a base case to 33.1% in July, supported by high base year effect and decline in the price of certain farm outputs such as yam, pepper, and vegetables owing to gains from early harvest. However, resurgent in PMS scarcity (since mid-July) and exchange rate shock (NAFEM rate depreciated by 6.4% m/m to ₦1,608.73/$ in July) kept pressure on the core inflation sub-basket (27.5% y/y from 27.4% y/y previously). Meanwhile, pressure eased on the food inflation rate sub-basket (down 12.55ppts to 39.5%, first time in 19 months), conforming to our expectation.
Looking ahead, the weaker-than-expected decline in July inflation, sustained contraction in Agriculture PMI, and underwhelming Industry PMI suggest that the headline inflation rate in H2:2024 may deviate from our year-end estimate of 28.9% and annualized average of 31.7%. However, the successful implementation of the 150-day window of zero-import duties and tariffs on selected basic food items, complemented be efforts to improve security in the agrarian sector, along with sustained liquidity tightening by the CBN, could keep our projection on track.
Addressing the duty-free import window initiative, earlier in the week, the FG directed the Nigeria Customs Service (NCS) to begin the implementation of the policy initiative. Recall that in July, the Minister of Agriculture announced the FG’s plans to tackle rising food prices, through suspending import duties and tariffs on key food commodities like maize, rice, wheat, and cowpeas. Following this, the NCS released a list of guidelines to govern the implementation of this policy and they include:
I. To participate in the zero-duty importation of food items, a company must be incorporated in Nigeria and have been operational for at least five years.
II. It must have filed annual returns and financial statements and paid taxes and statutory payroll obligations for the past five years.
III. Companies importing husked rice, grain sorghum, or millet need to own a milling plant with a capacity of at least 100 tonnes per day, operated for at least four years, and have enough farmland for cultivation.
IV. Those importing maize, wheat, or beans must be agricultural companies with an out-grower network for cultivation and;
V. Companies must keep records of all related activities, which the government can request for compliance verification.
Interestingly, the NCS also expressed concerns about the policy, stating that the agency may lose revenue worth ₦188.4bn due to the implementation of the 150-day tariff-free policy. While NCS argument is valid, we opine that the estimate revenue loss cannot be compared to the groaning pains of the populace due to multiple shocks experienced in the last fourteen months owing to FG’s reforms. For emphasis, the World Bank in a recent Nigeria Development Update (NDU) report estimated that 4.0m more Nigerians fell below the poverty line ($1.90/day) in 2023, due to inflation-eroded purchasing power in the aftermath of FX and PMS subsidies removal. Given FG’s claim that it saves more than ₦400.0bn monthly from PMS subsidy removal, it is safe to say that it is economically prudent for the FG to sacrifice potential revenue of ₦188.4bn in six months to prevent economic shutdown like that of the 10 days #EndBadGovernment protest which caused the nation about ₦500.0bn (according to the minister of industry, trade & investment).
Global Equities Market: Positive Outing amid Disinflation and Dovish Monetary Stance Expectations
This week, the global equities market reflected an interplay of economic data, corporate earnings, and central bank policy expectations. While there were pockets of volatility, positive economic indicators and strong corporate performance helped stabilise and, in some cases, boost investor confidence across these markets. In the US, the latest CPI report revealed that inflation moderated to 2.9% y/y in July, the lowest since March 2021, bolstering expectations that the FED might cut interest rates in September. The anticipation of lower interest rates coupled with a resurgence in consumer confidence from strong retail sales data and upbeat earnings reports from major retailers and tech stocks, positively affected market sentiment. As such, the US S&P 500 and NASDAQ indices rose 3.6% and 4.9% w/w respectively.
In the Euro Area, although UK’s inflation rate unsurprisingly increased to 2.2% y/y in July, the BOE’s cautious approach to interest rates played a role in maintaining investor confidence. Also, better-than-expected retail sales data provided some relief, propping gains in the market. Consequently, UK’s FTSE All share index rose 1.7% w/w. Similarly, France’s CAC 40 and Germany’s XETRA DAX indices rose 2.3% and 3.2% w/w respectively supported by corporate earnings resilience & rebound in consumer spending for the former, and strong export figures & a rebound in manufacturing activity for the latter. Meanwhile, in Asia, weak economic data and concerns over the property sector (China) weighed on the market. However, hopes for policy easing from the Chinese government and reassurances from the Bank of Japan about maintaining supportive monetary policies provided major support. Hence, Hong Kong’s Hang Sang and Japan’s Nikkei 225 indices rose 2.0% and 9.0% w/w respectively.
In the BRICS region, performance was upbeat as 4 of the 5 indices under our purview closed in the green w/w. In Russia, government’s measure to stabilise the economy amid fluctuating oil prices and geopolitical tensions surrounding the Ukraine conflict proved abortive as the RTS index posted a loss of 1.0%. Elsewhere, the ongoing tensions between China and the US continue to cast a shadow over investor sentiment, leading to uncertainties around trade. In turn, the China Shanghai Composite index marginally rose by 0.6%. Brazil’s Ibovespa index recorded an uptick of 3.1%, driven by solid performance in the agricultural and industrial sectors. Similarly, India’s BSE Sens and South Africa’s FTSE/JSE All Share indices rose 2.0% and 2.5% respectively following strong performance in key sectors of the economy and positive earnings reports.
In the African markets under our radar, performance was bullish as all indices closed northward save Nigeria’s NGX All Share index which fell 1.5% w/w. Egypt’s EGX 30 index advanced 3.1% w/w buoyed by positive reactions to the country securing $8.0bn funding support from the IMF to address its FX shortage and soaring inflation. Meanwhile, Ghana’s economy is undergoing a transformation with the launch of the Great Transformational Plan (GTP) by Alan Kyerematen aimed at overhauling the economic framework. Nevertheless, Ghana’s GSE Composite index marginally rose 0.3% w/w as investors remain cautious due to ongoing economic challenges.
In Asia and Middle Eastern region, a combination of economic recovery, favourable monetary policies, strong corporate earnings, oil price stability and increased foreign investment led to a bullish performance in the equities market. Looking forward, we expect the global equities market to experience cautious optimism mixed with volatility as key factors include upcoming economic data releases from the US, central bank signals regarding future interest rates, corporate earnings reports, and geopolitical developments, dictate market direction.
Domestic Equities Market: Bears Pervade Customs Street… ASI down 1.5% w/w
The bourse closed four of the five trading sessions negative, culminating in a 1.5% w/w loss. As a result, the NGX-ASI and market capitalisation fell to 97,100.31 points and ₦55.1tn sequentially, while YTD return dipped to 29.9% (previously 31.9%). Similarly, activity level waned as average volume and value traded fell 24.1% and 14.0% w/w to 406.6m units and ₦8.4bn respectively. The volume chart was led by GTCO (248.2m units), VERITASK (172.0m units), and ACCESSCORP (124.2m units) while GTCO (₦11.3bn), OANDO (₦3.8bn), and NESTLE (₦2.5bn) led in terms of value traded.
Across the sectors within our purview, performance was mixed as three indices gained while the other three lost. Topping the gainers, the Oil & Gas index advanced 5.3% w/w spurred by price appreciation in TOTAL (+19.7%) and ETERNA (+11.1%). Following, the Insurance and Consumer Goods indices rose 80bps and 40bps w/w respectively, buoyed by gains in MANSARD (+8.5%), AIICO (+2.8%), NASCON (+11.6%), and DANGSUGAR (+10.8%). On the flip side, the Industrial Goods index led the laggards, down 5.2% w/w following selloffs in CUTIX (-17.5%) and BUACEMENT (-14.8%). Trailing, the Banking and AFR-ICT indices shed 2.3% and 2bps w/w sequentially, following losses in FBNH (-6.9%), ETI (-6.2%), CHAMS (-10.2%), and CWG (-8.7%).
Investor sentiment, as measured by market breadth, weakened to -0.1x (previously 0.1x) as 37 stocks advanced, 46 lost, and 67 closed flat. RTBRISCO (+33.9%), TOTAL (+19.7%), and JBERGER (+18.2%) were the top performing stocks for the week while CUTIX (-17.5%), BUACEMENT (-14.8%), and OANDO (-11.7%) were the most underperforming stocks for the week. Next week, we anticipate an extended bearish outing, fuelled by cautious reaction to the mixed H1 earnings performances and improved valuation of the FI instrument owing to the modest decline in the headline inflation rate in July.
Foreign Exchange Market: Divergent Outing in the Currency Market
This week, oil price was relatively steady amid concerns over reduced expectations of demand growth from China (top oil importer) and optimism buoyed by stronger-than-expected U.S. economic data. Specifically, retail sales in the U.S. rose by 1.0% (projected: 0.3%), while weekly jobless claims declined by 7,000 (below expectations), thereby alleviating concerns over economic downturn in the U.S. and potentially boosting oil demand. Overall, Brent crude oil price closed at $79.68/bbl. (previously $79.66/bbl.).
Domestically, the CBN’s 30-day moving average FX reserve balance depreciated 0.9% w/w to $36.7bn (as of 15/08/2024). Meanwhile, the activity level in the NAFEM window increased 64.0% w/w to $1.1bn. At the official window, the Naira fell 0.4% w/w against the USD to close at ₦1,579.89/$1.00, while at the parallel market, the Naira rose 0.6% w/w to close at ₦1,585.00/ $1.00. In the coming week, we expect rates across FX segments of the market to follow a similar trend, barring any market shock.
Money Market: Positive Outing in the Secondary T-bills Market
This week, system liquidity closed at ₦201.1bn, 53.7% lower than prior week’s level, though minute inflow from primary market repayment (₦1.4bn) hit the system. Despite the weak liquidity, the interbank market rates OPR and OVN closed the week lower at 32.3% and 33.0% respectively from 33.4% and 34.0% in the previous week.
Deferring previous week’s bearish momentum, the secondary T-bills market returned positive as average yield declined 79bps w/w to 25.0%. This was influenced by buying interest in the mid and long tenors as yield dipped 178bps and 98bps to 20.3% and 25.7%, respectively. Conversely, yield on the 91-day instrument rose 39bps to 24.0%.
In the coming week, barring excess CRR deduction by the apex bank, we estimate a net inflow of ₦508.0bn due to offsetting impact of inflows from paper maturities (₦741.0bn) and coupon payment (₦366.5bn) over estimated outflows from scheduled PMAs (Bonds: ₦190.0bn, NT-Bills: ₦410.0bn). In the secondary market, activity would likely be muted ahead of the auction while buy interest from lost bids should spur interest at the end of the week.
Bonds Market: Bullish Momentum Dominates Domestic Bonds and SSA Eurobonds Markets
This week, the DMO held an investor roadshow for the planned FG’s debut domestic-issued FCY bond worth $500.0m as part of efforts to shore up fiscal capacity. Although the offer’s comprehensive prospectus is yet to be released to the public, the coordinating minister of the economy, Mr. Wale Edun has hinted that total issuance could expand to $2.0bn should the initial offer ($500.0m) be met with healthy demand beginning from next Monday. Additionally, the instrument would be listed on both the NGX and FMDQ platforms to enhance liquidity and accessibility while also appealing to a diverse investor base.
Meanwhile, in the secondary bonds market, bullish sentiment prevailed with strong buying interest across all five trading sessions. Consequently, the average yield across tenors contracted by 37bps w/w to 19.5%. The short-dated bonds attracted the most buying interest, with average yield declining by 55bps, driven by demand for the APRIL 2029 and MAY 2029 papers. Also, the mid and long-dated bonds saw gains, with average yields dipping by 50bps and 20bps, respectively.
In the SSA Eurobonds market, sentiment was shaped by widespread expectations that the Fed will ease its grip on interest rates following the release of softer inflation data in the US. Consequently, all papers in this market segment witnessed yield decline save the Gabon 2024 (+0.3%) and Benin 2038 (+8.6%) papers. Specifically, the strong performance of Ghana 2025 (-7.2%) and Ghana 2026 (-1.5%) instruments drove the average yield down 21bps w/w to 19.8%. Similarly, the average yield on Corporate Eurobonds under our coverage dipped 1bp w/w to 8.2%. Yield decline on the Office Cherifien Des Pho 2025 (-11bps) and Eskom Holdings 2025 (-9bps) instruments majorly drove performance.
Next week, the DMO has scheduled FGN bond sales of up to ₦190.0bn on the APR 2029, FEB 2031 and MAY 2033 instruments. As such, we anticipate next week’s trading to be largely influenced by the outcome of the PMA. For the SSA market, we expect bullish sentiment to persist as investors continue to price in the possibility of a rate cut in September.
Afrinvest
