- Nigeria to Raise $3.5bn in Foreign Loans to Fund Budget
Global Markets: Global markets traded mixed this past week amidst a number of factors. The markets got off to a positive start to the week on continued recovery in oil prices from recent slide, driven by announcement that Saudi and Russia are open to extending the OPEC oil production cut. Notably, Technology & Cybersecurity stocks surged on news of the global ransomware attack. Global market sentiment however weakened at mid-week on political pressures in the U.S. coupled with a batch of less-than-impressive fresh earnings releases. At week close, Asian markets closed mixed whilst U.S. and European markets rebounded from losses in mid-week.
Domestic Economy: Reports from the Budget Office indicate that Nigeria plans to raise $3.5 billion (c.1.068 trillion) and $4 billion (c.1.220 trillion) in foreign and domestic loans to fund the 2017 budget which has an estimated deficit of 2.21 trillion (c.2.2% of GDP). Breaking down the foreign borrowing, we see that $2bn of the planned borrowing would come from concessionary loans while the balance of $1.5 billion would be funded through Eurobonds. We recall that to fund 2016 capital expenditure, Nigeria raised $1.5bn in Eurobonds in Q1’17 at a weighted average yield of 7.75% amidst strong investor interest (6.8x oversubscribed). With yields on Nigeria’s Eurobonds falling in recent months (7.88% FGN FEB 2032 down c.100bps from issue), coupled with an improved outlook on oil earnings and foreign exchange liquidity at the NAFEX window, we anticipate strong investor demand for Nigeria’s Eurobonds.
Fixed Income: After opening the week mixed, the bills market turned bearish on Tuesday on the back of pressured system liquidity and higher than expected inflation reading for April. At mid-week, the Central bank of Nigeria (CBN) conducted a Primary Market Auction for bills offering and selling 111 billion at respective stop rates of 13.50%, 17.1490% and 18.70% — lower than secondary market levels. Bearish trading persisted as CBN mop up dampened buying sentiment. However, some buying interest resurfaced at week close as yields declined across the space. Meanwhile, the bond market opened the week slightly bullish before reversing trend amidst the April inflation figure and ahead of next week’s Monetary Policy Committee (MPC) meeting.
Currency: The CBN sustained its consistent interventions in the currency market, conducting a couple of spot and forward auctions. Worthy of note is the currency sale on Monday, where the CBN injected c.$457 million across the different FX windows. Over the week, the naira appreciated N0.83 and N6.50 at the respective NAFEX and parallel markets to close at N381.61 and N378.00 against the dollar.
What will shape markets in the coming week?
Equity market: Whilst the slowing appetite across most key sectors (amidst profit taking) spell a weak start to the week ahead, we believe sentiment will strengthen along the week as the key drivers behind the market rally persist.
Fixed Income market: Notwithstanding re-emerging demand on bills, we expect cautious trading in the fixed income market at the start of the coming week as all eyes turn towards the MPC meeting on Monday and Tuesday .
Currency: We expect CBN interventions to sustain liquidity in the foreign exchange market as investors continue to test the waters at the NAFEX window.
Focus for the week
APRIL INFLATION — Accelerating food prices drive inflation
Bucking expectations once more, Nigeria’s annual inflation registered at 17.2% in April, marginally lower than 17.3% in March but ahead of Vetiva and Consensus estimate of 16.9%. Month-on-month (m/m) inflation dropped to 1.62% (March: 1.72%), above the 12-month average of 1.33%. In keeping with this year’s trend, Food Inflation was the primary driver, clocking in at 19.3% – an 8-year high, as the food index rose 2.04% m/m (March: 2.21%). In contrast, steered by lower m/m inflation (April: 1.10% vs. March: 1.32%), Core Inflation moderated to 14.8% y/y, the lowest reading since the corresponding period of 2016.
Rising food prices confound
Food Inflation is at worryingly high levels. The index is up 8% in the first four months of the year and at current pace, national food prices would have risen 27% by the end of 2017. This price surge is a domestic phenomenon as Imported Food Inflation moderated – 18.1% in March to 17.0% in April – understandably given the improvement in liquidity in the foreign exchange market, relative stability of the exchange rate, and downtrend in global food prices. From a regional perspective, pressure on food prices is most apparent in the South-East and North-West regions, driven by food prices in Enugu and Kano respectively. Looking at data from the National Bureau of Statistics Select Food Prices Watch 2017, domestic food prices have been trending upwards, though average price of tracked items fell marginally (0.9%) m/m.
Energy prices ease Core Inflation
The moderation in Core Inflation can be partly attributed to a slower pace of inflation in Utilities – down from 18.9% in March to 16.0% in April. For petroleum products, this would have been driven by lower product landing costs in March compared to the first two months of 2017. Unsurprisingly, average household kerosene (HHK) and automotive gas oil (diesel) prices moderated for the second consecutive month. However, average premium motor spirit (PMS) prices rose slightly (0.3%) amidst a larger variation in regional prices.
Inflationary trend remains in 2017
2016 was a particularly tough year for Nigeria and some of its regional peers as they all experienced high levels of inflation, mainly due to currency depreciation and high energy prices. As those inflationary pressures wane and base effects kick in, the expectation is that inflation will moderate over 2017. However, we have observed differing experiences across countries. Ghana has been the most successful so far as its headline inflation rate has fallen from 18.9% in April 2016 to 13.0% in April 2017 – a reversal compared to Nigeria. This has permitted the central bank to continue its monetary easing cycle (250bps rate cut since November 2016).
Angola’s experience is most similar to Nigeria’s – inflation is moderating but remains higher than previous year’s levels, as well as the central bank’s benchmark interest rate. But unlike with food prices in Nigeria, Angola has no new source of inflationary pressure so the pace of moderation should pick up. Egypt has fared the worst this year as the devaluation of the Egyptian pound in November has stoked inflation which hit a 30-year high in April.
Policy powerless to tackle stubborn inflation
The Monetary Policy Committee of the Central Bank of Nigeria meets next week and they will mull over recent inflation figures. Unfortunately, we consider the policy levers in their arsenal as inadequate for tackling the current inflationary pressure in the country. Persistent CBN intervention in money and foreign exchange (FX) markets ensures minimal excess naira liquidity and current inflation is neither a demand nor monetary phenomenon. Instead, we expect a continuation of trend so far as food prices weigh on the consumer basket even as better FX liquidity stabilizes the currency and suppresses imported inflation. In light of this and with base effects kicking in strongly next month (largest m/m jump observed in 2016), we forecast inflation of 15.8% in May, bringing 2017 average inflation to 15.8%, notably higher than 15.6% recorded in 2016.
Oil Firms Borrowed N130B From Banks in February – CBN
Operators in the downstream, natural gas and crude oil refining sectors of the Nigerian oil and gas industry borrowed N130b from Nigerian banks in February amid the significant rise in global crude oil prices.
The debt owed by the oil and gas companies rose to N4.05tn in February from N3.92bn in January, according to the latest data obtained from the Central Bank of Nigeria on Monday.
Operators in the upstream and services subsectors owed banks N1.26tn in February, down from N1.27tn a month earlier.
The combined debt of N5.31tn owed by oil and gas operators as of February 2021 represents 25.29 percent of the N21tn loans advanced to the private sector by the banks, according to the sectoral analysis by the CBN of deposit money banks’ credit.
Oil and gas firms received the biggest share of the credit from the deposit money banks to the private sector.
The slump in oil prices in 2020 as a result of the coronavirus pandemic hit many oil and gas companies hard, forcing them to slash their capital budgets and suspend some projects.
A global credit rating agency, Moody’s Investors Service, said last month that the outlook for Nigeria’s banking system remains negative, reflecting expectations of rising asset risk and weakening government support capacity over the next 12 to 18 months.
“Nigerian banks’ loan quality will weaken in 2021 as coronavirus support measures implemented by the government and central bank last year, including the loan repayment holiday, are unwound,” said Peter Mushangwe, an analyst at Moody’s.
The rating agency estimated that between 40 percent and 45 percent of banking loans were restructured in 2020, easing pressure on borrowers following the outbreak of the pandemic.
Another global credit rating agency, Fitch Ratings, had noted in a December 8 report that Nigerian bank asset quality had historically fallen with oil prices, with the oil sector representing 28 percent of loans at the end of the first half of 2020.
It said the upstream and midstream segments (nearly seven percent of gross loans) had been particularly affected by low oil prices and production cuts.
“However, the sector has performed better than expected since the start of the crisis, limiting the rise in credit losses this year due to a combination of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis,” it said.
The rating agency predicted that Nigerian bank asset quality would weaken over the next 12 to 18 months.
Fall in Economic Activities in Nigeria Created N485.51 Billion Fiscal Deficit in January -CBN
The drop in economic activities in Africa’s largest economy Nigeria led to a N485.51 billion fiscal deficit in January, according to the latest data from the Central Bank of Nigeria (CBN).
In the monthly economic report released on Friday by the apex bank, the weak revenue performance in January 2021 was due to the decline in non-oil receipts following the lingering negative effects of COVID-19 pandemic on business activities and the resultant shortfall in tax revenues.
In part, the report read, “Federally collected revenue in January 2021 was N807.54bn.
“This was 4.6 per cent below the provisional budget benchmark and 12.8 per cent lower than the collection in the corresponding period of 2020.
“Oil and non-oil revenue constituted 45.4 per cent and 54.6 per cent of the total collection respectively. The modest rebound in crude oil prices in the preceding three months enhanced the contribution of oil revenue to total revenue, relative to the budget benchmark.
“Non-oil revenue sources underperformed, owing to the shortfalls in collections from VAT, corporate tax, and FGN independent revenue sources.
“Retained revenue of the Federal Government of Nigeria was lower-than-trend due to the lingering effects of the COVID-19 pandemic.”
“At N285.26bn, FGN’s retained revenue fell short of its programmed benchmark and collections in January 2020, by 41.3 per cent and 7.5 per cent respectively.
“In contrast, the provisional aggregate expenditure of the FGN rose from N717.6bn in December 2020 to N770.77bn in the reporting period, but remained 14.4 per cent below the monthly target of N900.88bn.
“Fiscal operations of the FGN in January 2021 resulted in a tentative overall deficit of N485.51bn.”
The report noted that Nigeria’s total public debt stood at N28.03 trillion as of the end-September 2020, with domestic and external debts accounting for 56.5 percent and 43.5 percent, respectively.
NNPC Supplies 1.44 Billion Litres of Petrol in January 2021
The Nigerian National Petroleum Corporation (NNPC) supplied a total of 1.44 billion litres of Premium Motor Spirit popularly known as petrol in January 2021.
The corporation disclosed in its latest Monthly Financial and Operations Report (MFOR) for the month of January.
NNPC said the 1.44 billion litres translate to 46.30 million litres per day.
Also, a total of 223.55Billion Cubic Feet (BCF) of natural gas was produced in the month of January 2021, translating to an average daily production of 7,220.22 Million Standard Cubic Feet per Day (mmscfd).
The 223.55BCF gas production figure also represents a 4.79% increase over output in December 2020.
Also, the daily average natural gas supply to gas power plants increased by 2.38 percent to 836mmscfd, equivalent to power generation of 3,415MW.
For the period of January 2020 to January 2021, a total of 2,973.01BCF of gas was produced representing an average daily production of 7,585.78 mmscfd during the period.
Period-to-date Production from Joint Ventures (JVs), Production Sharing Contracts (PSCs) and Nigerian Petroleum Development Company (NPDC) contributed about 65.20%, 19.97 percent and 14.83 percent respectively to the total national gas production.
Out of the total gas output in January 2021, a total of 149.24BCF of gas was commercialized consisting of 44.29BCF and 104.95BCF for the domestic and export markets respectively.
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