Nigeria – Macroeconomics Commentary

Inflation lost steam in October: False alarm or disinflation? The NBS put out CPI data for October which showed that headline inflation came in at 21.09%, behind market expectations for 21.3%. This reflects a second month of deceleration in the monthly print to 1.24% (September: 1.36%) due to a slowdown in food inflation. However, dissecting food CPI reveals that much of the moderation came from processed foods which declined strongly for as yet unclear reasons while farm produce jumped to 1.57% (last: 1.11%) likely reflecting pass-through impact of the floods on food supplies. Normalizing the cutback in processed foods, inflation would have come in at 1.5% with the annualized print at 21.3-4% region that markets were expecting. Given the violent gyrations in the exchange rate over the month, its likely the benign trends in processed foods unwind over November pushing inflation towards 21.5-6%. Overall, barring any fresh shocks to fuel prices (which is not unlikely given increasingly frequent petrol scarcity issues), headline CPI is likely to peak in November given large base effects over December.

Figure 1: Monthly Inflation – 2022

Source: NBS, Authors Calculation

Despite improved liquidity, FG borrowings remain costly: At the penultimate monthly bond auction, a build-up in system liquidity as the CBN elected to tolerate FAAC credits resulted in a well-bid bond auction. Relative to the NGN225billion on offer, bids came in at 1.5x (October: 0.5x) which allowed the DMO upsize its borrowings to NGN269billion though at a higher average clearing rate of 15.38% (October: 15.17%). Over the January-November period, gross bond sales are on track to make 2022 a record year at NGN2.8trillion (2021: NGN2.7trillion). Adjusted for maturities, total bond sales are at NGN2.2trillion relative to a domestic borrowing target of NGN2.57trillion. Looking across NTB borrowings, the DMO has sold NGN4.3trillion relative to maturities of NGN3.9trillion which implies net issuance of around NGN438billion. This would suggest that annual borrowings already exceed domestic borrowing target but given the shut-out on the offshore leg (NGN2.6trillion) due to US Fed tightening, the DMO probably feels better served loading up on its local side to plug the FGN deficit.

Money markets remain rather tight: Despite the relatively loose liquidity, interbank borrowing rates remained elevated and have crept back towards 20% after sliding towards 16.5% likely reflecting outflows to fund the bond auction sales. But given the FX movements, there is the possibility that some banks who are long USD but are unwilling to unwind their dollar bets now need recourse to Naira funding. This is applying upward pressure on the interbank rates. Banks remain net borrowers to the CBN discount window.

Nigeria’s oil production recovered in October as Bonny and Forcados resume liftings: Data from the upstream O&G regulator, NUPRC, shows that Nigeria’s oil production climbed to 1.23mbpd in October (September: 1.13mbpd). Looking through the breakdowns, the improvements stemmed from a pick-up in output at Bonny (+744% m/m to 59kbpd) and Forcados (+1765% m/m to 79kbpd) following the completion of major repair work in trunklines feeding these terminals. To a lesser extent, Escravos also showed a pick-up in output (+22% to 146kbpd). Overall, following concerted effort after a lot of media attention, Nigerian authorities are now working to return oil production on the onshore platforms (which remains 60-70% below 2020 levels).

Private activity recovers, public sector remains in ‘recession’: The NBS put out GDP data disaggregated by income and expenditure for H1 2022 which helps to explain underlying structural trends in the economy. Nigeria’s economy grew 3.5% over the first half of 2022 and the NBS data suggests that on the income side, the impetus came from improvements in real wages and corporate profitability which grew 5.2% and 2%. The continued expansion in real wages would seem to explain the surprising ‘solidity’ observed in improved corporate earnings thus far in 2022. On the expenditure side, household spending grew some 12% over H1 2022 while investment spending was up nearly 5%. Overall, the non-public sector seems to have recovered its resilience while despite higher announced nominal spending plans, Nigeria’s public sector across the three tiers remains stuck in recession. Over the last six quarters, spending by Nigeria’s government across board has shrunk in real terms (down 12% in the first half of 2022).

Figure 2: Nigeria – Real GDP by Expenditure

Source: NBS, Authors Calculation

The Week Ahead

There will be an NTB auction to refinance the NGN214billion worth of NTB paper maturing on Thursday amid small FGN Bond coupon payments (NGN18billion) and OMO maturities (NGN40billion). The DMO has launched its annual NGN100billion Sukuk issuance sale at a rental rate of 15.64%. This delivers some spread over the 10-year at the secondary market (14.9%) and the 15.2% yield cleared at the November 2022 FGN bond auction.

The last hike to round off 2022: The CBN commences its two-day monetary policy meeting today and the market has been in bullish mode due to the inflation data. The MPC will have noted the softening trend in inflation and their in-house forecasts are likely to point to an inflection in CPI in 2023 due to large base effects. Though I think future adjustments to petrol prices and the exchange rate could as yet drive a return to surging inflation over 2023 once the elections are out of the way. On the macroeconomic front, Nigeria’s growth continues to hold-up and the insights from the structural GDP data suggests that the economy is much more resilient than most analysts (myself included) like to think. This leaves the FX rate and USD supply as the main item of concern. On this front, the CBN remains in a quagmire: oil production is only starting to recover, and any improvements will reflect over Q1 2023. On the other hand, foreign portfolio flows remain weak given higher US interest rates, continued unease over EM/frontier and the onset of another testy political cycle. If anything, it would appear the CRR liquidity tightening delivered at the last MPC meeting looks to be achieving the desired effect: raising the cost of short-money agents holding USD positions. This suggests limited need to change tack if anything the CBN might take the slowing momentum as validation of its policy.

Ahead of the elections in February, the CBN is likely to go into a neutral posture in January, which leaves the November MPC as the last chance to carry out any pre-emptive strikes and my sense is that we will likely get a more symbolic hike (50-100bps) to round out on an incredible year of volte-face in monetary policy.

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