Global Economy
Preliminary estimates from the United States (US) Bureau of Economic Analysis show that the US economy expanded by 1.6% q/q in Q1-24 (Q4-23: +3.4% q/q) – the lowest point since the contraction in 2022 (-0.6% q/q) – well below market expectations (+2.5% q/q).
The slow growth was driven by a slowdown in consumer spending (+2.5% q/q vs Q4-23: +3.3% q/q), exports (+0.9% q/q vs Q4-23: +5.0% q/q) and government spending (+1.2% q/q vs Q4-23: +4.6% q/q), amid stronger imports growth (+7.2% q/q vs Q4-23: +2.2% q/q). However, we note that the pace of growth in residential investments (+13.8% q/q vs Q4-23: +2.3% q/q) and the services sector (+4.0% q/q vs Q4-23: +3.4% q/q) edged higher.
We attribute the slower growth print to several factors, including (1) the depletion of pandemic-era savings, (2) a more conservative fiscal policy, (3) the feedthrough impact of the US Fed’s tightening cycle, and (4) increased geopolitical tensions. However, price pressures have remained elevated primarily due to the resilience of the services sector and wage growth. Looking ahead, we think the actual numbers will print marginally higher than the preliminary estimates, reflecting more economic data.
We believe that the US Federal Reserve is likely to prioritize addressing the underlying inflationary pressures over the slowdown in economic growth, potentially leading to a delay in rate cuts. Indeed, the CME FedWatch tool now indicates probabilities of “HOLD” decisions at the May to July policy meetings, with a 41.9% probability of a rate cut in September.
At its April monetary policy meeting, the People’s Bank of China (PBoC) maintained its key lending rates as anticipated. Specifically, the one-year loan prime rate (LPR) and the 5-year mortgage rate were held steady at 3.45% and 3.95%, respectively. This decision followed the release of strong economic growth data, with the Chinese economy expanding by 5.3% year-on-year in Q1-24 (compared to +5.2% y/y in Q4-23 and +4.5% y/y in Q1-23). The Central Bank’s choice to keep rates unchanged occurred alongside its recent actions, which included rolling over maturing medium-term loans and withdrawing liquidity from the banking system using bond instruments. However, it is worth noting that both benchmark rates are currently at historically low levels, underscoring the government’s commitment to supporting economic recovery in the near term. Looking ahead, we think that several factors may constrain the Central Bank’s ability to ease monetary policy further including, (1) the weakening of the yuan, (2) the possibility of the US maintaining interest rates at their current levels for an extended period, and (3) ongoing improvement in economic activities within China.
Global Equities
Global stocks rebounded in this week’s trading as the relative easing of geopolitical tensions in the Middle East restored investors’ interest in risky assets as they pared back holdings of safe haven assets. Having scaled back bullish positions in the last few weeks, US investors renewed their interest on the back of positive earnings releases, particularly from mega-cap tech stocks, even as preliminary GDP growth numbers dampened sentiments. As such, US equities (DJIA: +0.3%; S&P 500: +1.6%) are poised to end the week higher. Similarly, European equities (STOXX Europe: +1.3%; FTSE 100: +2.8%) are on track for a rebound from last week’s losses as investors digest positive earnings releases. Asian equities (Nikkei 225: +2.3%; SSE: +0.8%) were also positive as technology stocks in the region tracked the rebound of US peers. We note particularly that Japanese stocks were further supported by the general doubt of further interest rate increases, given the Bank of Japan’s outlook on future economic growth. Lastly, the Emerging Markets Index (MSCI EM: -2.2%) closed lower, undermined by bearish sentiments in India (-2.2%) and Taiwan (-5.8%). The Frontier Markets index (MSCI FM: -2.9%) also posted losses driven by huge selloffs in Vietnam (-7.1%). The Emerging (MSCI EM: +2.4%) and Frontier (MSCI FM: +1.2%) market indices also posted gains, driven by the positive performance in China (+0.8%) and Vietnam (+3.0%), respectively.
Nigeria: Domestic Economy
Based on CBN’s Quarterly Statistical Bulletin, the Federal Government’s (FG) fiscal deficit widened by 52.85% to NGN12.87 trillion (5.6% of GDP) in 2023FY (2022FY: NGN8.42 trillion or 4.22% of GDP) as a higher fiscal expenditure (40.70% to NGN18.84 trillion) outweighed increases in retained revenue (19.88% to NGN5.97 trillion). We highlight that the increase in fiscal revenue was primarily driven by revenue generated independently and exchange rate gains. The increase in aggregate expenditure was driven by higher capital (130.69% to NGN4.36 trillion) and recurrent (25.83% to NGN 11.50 trillion) expenditures. Nevertheless, we highlight that the 2023FY actual deficit was 6.60% lower than the budgeted deficit of NGN13.78 trillion as aggregate expenditure was lower than the approved budget expenditure of NGN24.82 trillion amid a lower-than-budgeted retained revenue of NGN8.63 trillion. Looking forward, we expect FG’s retained revenue to underperform the budgeted estimate (NGN15.95 trillion) in 2024E, primarily due to the shortfall in oil revenue. At the same time, we think higher debt service, given the hike in interest rates, will push up FG’s expenditure. Overall, our baseline expectation is that the fiscal deficit will print NGN14.26 trillion or 5.37% of GDP (including GOEs) in 2024E.
The amount disbursed by the Federation Account Allocation Committee (FAAC) to the three tiers of government in April (based on March revenue) declined by 2.6% m/m to NGN1.12 trillion (March: NGN1.15 trillion), representing 60.1% of the total revenue (NGN1.87 trillion) generated in the month, after deductions for (1) NGN69.54 billion for cost of collection and (2) NGN674.88 billion for interventions and refunds. In addition, we highlight that significant declines were recorded across inflows from excise duties, oil royalties, petroleum profit tax (PPT), electronic money transfer levy (EMTL) and custom external tariffs (CET) levies, while receipts from import duty, value-added tax (VAT), gas royalties, and companies’ income tax (CIT) increased. We expect the currency depreciation accompanying the FX market liberalisation to continue supporting oil revenue in naira terms. However, relatively lower crude oil production may likely ensure oil revenue remains underwhelming relative to pre-pandemic levels. At the same time, we maintain our expectation that non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2023 Finance Act.
Capital Markets: Equities
The domestic equities suffered another week of losses following broad-based declines across market bellwethers, even as some of the banks have started to show signs of recovery. The NGX ASI declined by 1.4% w/w, led by selloffs in MTNN (-9.8%), FBNH (-16.3%), and NESTLE (-11.6%), amid recoveries in GTCO (+6.0%), STANBIC (+3.6%) and ZENITHBANK (+1.6%). At current levels, the ASI (98,152.91) is now 7.2% below its 52-week high (105,722.78), with the Month-to-Date and Year-to-Date returns settling at -6.1% and +31.3%, respectively. The trading activity level was stronger, with a 15.2% increase in the total trading volume and a 6.0% increase in trading value. On sectors, the Banking (-3.1%), Oil and Gas (-1.4%) and Consumer Goods (-1.2%) indices declined, while the Industrial Goods (+0.4%) index advanced. Meanwhile, the Insurance index closed flat.
As we have noted previously, the current negative trend is likely to persist in the short term in the absence of any positive catalysts to drive a rebound. However, we highlight that the current favourable entry points of beaten tickers may spark bouts of recovery, even as investors weigh earnings releases.
Money market and fixed income
The overnight (OVN) rate expanded by 100bps w/w to 31.3%, as the debits for net NTB issuance (NGN219.88 billion) outweighed inflows from FGN bond coupon payments (NGN185.55 billion). As such, the average system liquidity remained at a net long position, closing at NGN1.07 billion (vs. a net long position of NGN1.03 trillion from the previous week).
Next week, we expect the OVN rate to likely maintain current elevated level as the expected inflows from FGN bond coupon payments (NGN53.35 billion) and OMO maturities (NGN36.00 billion) might be inadequate to saturate the financial system.
Treasury bills
Activities in the T-bills secondary market turned bullish this week as market participants moved to the secondary market to compensate for lost bids at the week’s NTB PMA. Thus, the average yield across all instruments contracted by 206bps to 21.4%. Across the market segments, the average yield at the NTB segment declined by 289bps to 22.3% but advanced by 35bps to 18.8% in the OMO segment. At this week’s NTB auction, the CBN offered instruments worth NGN142.57 billion – NGN7.85 billion for the 91-day, NGN12.95 billion for the 182-day and NGN121.77 billion for the 364-day – to market participants. Demand at the auction was lower than the previous PMA, as the total subscription level settled at NGN757.85 billion (previous auction: NGN1.82 trillion). Eventually, the CBN allotted instruments worth NGN362.45 billion – NGN16.48 billion for the 91D, NGN11.99 billion for the 182D and NGN333.98 billion for the 365D – at respective stop rates of 16.24% (unchanged), 17.00% (unchanged) and 20.70% (unchanged).
In the coming week, we anticipate a possible wane in demand for instruments in the Treasury bills secondary market given our expectation of a potentially tight liquidity in the system. Thus, we envisage yields will rise from current levels.
Bonds
Similarly, the Treasury bonds secondary market closed on a bullish note this week, driven by demand for short and mid tenured instruments. Consequently, the average yield declined by 11bps to 18.9%. Across the benchmark curve, the average yield contracted at the short (-12bps), mid (-15bps) and long (-7bps) segments due to buying interest in the JAN-2026 (-67bps), JUN-2033 (-27bps) and JUN-2038 (-76bps) bonds, respectively.
Looking ahead, we expect sustenance of demand for short-dated instruments in the Treasury bonds secondary market as the weak liquidity and macroeconomic profile continue to drive trading pattern. Over the medium term, we expect yields to remain elevated, driven by the (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
This week, Nigeria’s FX reserves paused the five-week descent as the gross reserves level increased by USD10.76 million to USD32.12 billion (24 April). At the Nigerian Autonomous Foreign Exchange Market (NAFEM), the naira depreciated by 12.6% to NGN1,339.23/USD, even as the CBN sold c.USD80.00 million to banks within the range of NGN1,100.00 – NGN1,150.00. Total turnover at the NAFEM (as of 25 April) decreased by 37.5% WTD to USD893.56 million, as trades were consummated within the NGN1,000.00 – NGN1,435.00/USD band. In the Forwards market, the naira rates depreciated across the 1-month (-13.3% to NGN1,351.53/USD), 3-month (-13.1% to NGN1,393.75/USD), 6-month (-11.9% to NGN1,444.89/USD) and 1-year (-10.8% to NGN1,577.43/USD) contracts.
We highlight that the pressures in the FX market remained despite CBN’s interventions due to the sustained exit of FPIs from the domestic capital market, given the lingering external concerns such as the heightened geopolitical tension. Additionally, we note a relaxation in CBN’s monetary tightening, as yields on naira-denominated assets appear to have plateaued. Looking ahead, we anticipate continued pressure on the naira, given CBN’s constrained FX reserves and limited FPI inflows.
Cordros
