Economy & Market

Macroeconomy: Pockets of Gains as CBN Keeps Foot on Gas Pedal

Afrinvest Monthly Market Report analyses the Nigerian economy.

To begin with, the International Monetary Fund (IMF) released the post-Article IV Consultation assessment note in which the Fund noted that improved oil production (January’s 1.6 million barrels per day is the highest in 24 months) and anticipated improvement in the second half of 2024 harvest should support realisation of a 3.2% output growth in 2024 (2023: 2.7%), although price and currency instability and monetary measures to counter the headwinds are potential risks for growth. On agriculture, the IMF noted positively that FG’s recent approval of an effective and well-targeted social protection system, including the directive to release grains, seeds, and fertilizers, as well as the introduction of dry season farming, are correct steps for addressing food insecurity affecting about 8.0% of the population. Still on vulnerable population, another laudable policy highlighted by the IMF was FG’s decision to fully implement the Targeted Social Safety Net Programmes before the complete removal of fuel and electricity subsidies (estimated to gulp c.3.0% of the Gross Domestic Product in 2024). Lastly, the current path of monetary policy to tighten the benchmark rate (amongst others) was commended as necessary for curbing persistently high inflation.

That said, we maintain an optimistic but cautious outlook on domestic output growth for 2024 (bluesky case: 3.0%) due to the inability of the fiscal authorities to lead by example in cutting down on non-essential consumptions which in our view, is pivotal to the reform prognosis of the current administration. Furthermore, we are currently oblivious of any new framework for the revamped Social Safety Net Programme which IMF staff dubbed “effective and well-targeted”. Hence, we hold that any unwholesome adjustment to the scheme’s framework under the Buhari administration (where no clarity was provided on the criteria used for picking beneficiaries and the register for the over 3.0m beneficiaries could not be accounted for) would also deliver a sub-par outcome.

Will Inflation Peak in Q2?

Moving to price developments, domestic headline inflation rate advanced for the fourteenth consecutive month by 180bps y/y to 31.7% in February 2024 – a new record high in over three decades based on the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS) data. From a m/m perspective, the headline rate printed at 3.1% (prior month: 2.6%), reflecting continued price pressure on both the food and core inflation sub-baskets. Diving deep, the food inflation index nudged higher to a record 37.9% (previously: 35.4%), while the m/m reading printed at 3.8% from 3.2% in January 2024, making it the highest since the NBS began tracking the data in 2009. We hold that the rising food prices is due to local supply shortfalls resulting from prolonged insecurity and large-scale sabotage, negative pass through of high energy goods prices on logistic costs, imported inflation, as well as continued Naira depreciation (the official NGN-USD rate fell further by 9.6% to ₦1595.11/$ at the end of February). As per the core inflation sub-basket (which represents all items less farm produce & energy), the y/y reading accentuated by 153bps to 25.1%, although on a m/m basis the index tempered by 7bps to settle at 2.2% – the first decline in four months.

Against the backdrop of strong inflation print in February and uninspiring March outlook (CBN staff: 32.6%, Afrinvest: 32.2%) the apex bank at the end its second policy meeting for the year raised the benchmark Monetary Policy Rate (MPR) by 200bps to 24.75%. At the same time, the asymmetric corridor was revised to +100/-300 bps around the MPR (previously +100/-700bps) while the CRR and Liquidity ratio were left at 45.0% and 30.0%, respectively. Also, the CRR for Merchant Banks was raised by 400bps to 14.0%. We note that the previous hike implemented in late February was not reflected in the consumer inflation print for February due to response lag. However, the positive effect was noticeable on exchange rate, partially due to signaling effect, and more importantly, aggressive mop-ups via paper sales at higher rates and resumption of FX supply to Bureau de Changes (BDCs) as FX reserves recorded net inflows (+0.7% MtD to $34.3bn). Similar to the previous episode where yields on benchmark T-bills and FGN bonds repriced upwards by 241bps and 80bps to 19.2% and 17.6% respectively, we expect a bearish response to the March MPR hike, clearing the path for average yield on benchmark FGN bonds to climb above 20.0%. We note that the adjustment to the rate on the Standing Deposit Facility to -300bps (21.75%) should drive NT-bills yields higher to match the CBN window. For equities, we highlight that bullish sentiment continues to be reinforced by market listings and cherry-picking based on FY:2023 earnings. Nonetheless, improvement in fixed-income yields should strengthen the case for rotation out of equities, more so that valuation of some tickers has largely delinked from fundamentals, and dividend yields are underwhelming.

Lastly, the CBN on March 28th announced the upward review of the minimum capital requirement for lenders in the country to mitigate the impact of external and domestic shocks via negative exchange rate movement and elevated inflation. The Apex bank mandated minimum capital of ₦500.0bn, ₦200.0bn, and ₦50.0bn for Commercial Banks with International, National, and Regional licenses respectively. Likewise, the CBN also raised capitalisation baseline for Merchant (₦50.0bn) and Non-interest Banks (National: ₦20.0bn; Regional: ₦10.0bn). The CBN specified that minimum capital for existing banks should comprise only paid-up capital and share premium. For proposed banks (new banking license applications after April 1, 2024) the paid-up capital should meet new standards. The recapitalisation exercise is expected to commence from April 1, 2024, through March 31, 2026.

Based on our analysis of the latest financial data, we estimate that listed commercial banks, excluding Union Bank, would require a combined ₦2.8tn to meet the new baseline capital requirements. This should necessitate capital raising efforts from both domestic and international markets. Assuming the re-engineering of retained earnings to bolster eligible capital levels (that is share capital and share premium as defined by the CBN for the recapitalisation exercise), our estimation indicates that approximately ₦901.8bn combined would be needed by Wema, FCMB, Fidelity, Unity, and Sterling banks to reach new benchmarks. That said, we anticipate further clarification on the treatment of retained earnings from the CBN as implementation week commences. From our initial assessment, positives from the recapitalisation drive includes (1) strengthening the capacity of lenders to support credit creation in the real sector, (2) the potential influx of capital into the domestic economy through offshore capital-raising endeavours (3) and the likelihood of the emergence of stronger and more resilient banking entities post-recapitalisation. However, potential headwinds can materialise in form (1) the dilution of returns for shareholders, (2) the risk of lenders inadvertently generating bad risk assets or engaging in high-risk behaviours to deploy additional liquidity, and (3) the possibility of high industry concentration following consolidations, leading to oligopolistic influence.

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