Economy & Market

Rising Energy Price: Nigerians Can’t Seem to Catch a Break

In April, Nigerians were ushered into Q2 with the decision from the FG to end electricity subsidy by hiking the electricity tariff for consumers. The Nigerian Electricity Regulatory Commission (NERC) had announced 250.0% increase in electricity tariff (up to ₦225.00 per kWh consumed from ₦66.00 per kWh) for customers under the ‘Band A’ classification in the Nigerian Electricity Supply Industry (NESI). The NERC disclosed that the ‘Band A’ customers account for 15.0% (1.8m) of the 12.0m household users who receive an average of 20hrs/day supply of electricity. The view of the NERC is that the tariff hike would reduce FG’s subsidy in the electricity industry to the tune of ₦1.1tn as well as improving the quality of infrastructure needed to supply electricity. Taking cognisance of the potential wins the FG could achieve from the subsidy removal (e.g. funding other pro-growth CAPEX projects from the saved ₦1.1tn), we opined that the FG needs to be more deliberate towards improving the power infrastructure and ending the frequent collapse of National Grid.

For context, Nigeria generates only 4,059MW of its installed capacity of 13,097MW. Report by the NERC disclosed that Nigeria’s power grid experienced 46 collapses between 2017 and 2023. A report from IEA disclosed that Nigerians rely on PMS-powered generators to meet 40.0% of their electricity needs. Considering the use of generators and reoccurrence of fuel scarcity, this could further aggravate the cost of power supply. Taking a clue from the recent scarcity episode, we project that average PMS price could rise to ₦800.00 per litre compared to ₦696.76 per litre in March (NBS data), putting further inflationary pressure on households and corporates.

Talking about inflationary pressures, during the month, the NBS published the March 2024 CPI data where inflation rose to 33.2% y/y from 31.7% in the previous month. This makes it the 17th consecutive month of inflation uptick, which has seen it rise to heights not witnessed in almost 30 years. However, on a m/m basis, inflation moderated 10bps to 3.0% and we attribute that to improved farm and processed food inflation rates (down 42bps and 10pbs to 3.4% and 3.7% respectively). Our inflation model for April suggests an improvement in monthly farm inflation (3.0% m/m) on the back of off-season harvest in the North. Despite our cautious optimism for April, the ongoing fuel scarcity could throw a spanner in the works leading to CPI data for the month to rise to 34.4% y/y.

Moving on to more cause for optimism, the International Monetary Fund (IMF) revised its World Economic Outlook with the expectation that global inflation would improve by 0.9ppt to 5.9% in 2024 which would see global central banks embrace softer monetary policies which would support economic productivity. On the back of this, the Bretton Woods Institution raised its outlook for Nigeria by 0.3ppts to 3.3%, which is also backed by its 2024 CPI projection of 24.0% as against 28.9% in 2023. Despite IMF’s revised outlook, we stress the need to hold a cautious optimistic stance towards Nigeria’s economic outlook, on the back of lingering macroeconomic headwinds such as inflation uptick, instability in the FX markets and decline in oil production levels (OPEC reported that Nigeria’s oil production for March dropped to 1.2mbpd as against 1.3mbpd in February).

Lastly, the NGX released its Domestic & Foreign Portfolio Participation report for the month of March, indicating that total transaction on the bourse rose by 50.5% m/m to ₦538.5bn with transactions executed by domestic and foreign investors up by 52.1% and 43.2% to ₦444.3bn and ₦94.3bn, respectively. Compared to the corresponding period in 2023, we observed that total transaction advanced 268.3% while local and foreign transactions rose 224.2% and 925.7% respectively. Our view is that the improved outlook of foreign investors was influenced by various CBN’s policies aimed at strengthening the Naira. Despite that higher interest rates tends to have negative effect on equities, we believe that the improvement of the Naira together with discounted prices of equities provided a buffer for foreign investors to reallocate funds in the exchange to take a bet on risker assets. Looking ahead, we opine that improved performance from Q1 earnings results could provide a much needed positive catalyst for the equities market.


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