Nigeria’s inflation long drawn out as drivers persist, analysts warn

• Shift in economic landscape sees Services leading
• Positive on banking‭, ‬telecom sectors

Against the backdrop of a challenging economic environment, analysts at Cowry Asset Management have projected that the outlook for inflation remains negative in the near term as the drivers of the current inflationary pressure are yet to abate.

The investment banking firm noted that the inflation rate in Nigeria reached 25.80 percent in August 2023, marking the eighth consecutive monthly increase so far in 2023 and the highest since August 2005. This, it observed, has contributed to a year-to-date (January-August) average of 22.88 percent, due to the increasing cost of food, fuel, and transportation following the government’s removal of fuel subsidies.

This is as the food index rose to 29.35 percent in August 2023, marking the highest level since September 2005 (29.50%) from 26.98 percent in July 2023.

In Cowry Asset’s view, the combination of inflationary pressures, foreign exchange shortages, rising debt levels, persistent insecurity, and a decline in capital inflows are likely to put pressure on economic growth and prevent the economy from reaching its full potential. These factors, it said, pose significant challenges for the government and the economy as a whole, making it difficult to achieve the desired level of economic growth.

The investment banking firm providing a robust background that informed its position, detailed the Nigerian economic scenario, noting that the Nigerian economy has faced a number of challenges in the past three quarters, including soaring inflation, currency adjustments, and subsidy removal.

It said this has resulted in GDP growth averaging 2.41 percent in 2023, falling short of the desired 5-6 percent growth target for more inclusive economic development.

According to the analysts, the second quarter economic performance highlights mixed sectoral dynamics, with the services sector growing strongly, the agriculture sector recovering, and the industry sector declining moderately.

It drew attention to the government’s efforts to address economic leakage, noting that the Nigerian government’s efforts to address two major sources of economic leakage – foreign exchange rates and fuel subsidies – are facing challenges due to a lack of foreign exchange reserves and rising global oil prices. As a result, the Nigerian naira has breached the psychological rate of N1000 to a US dollar at the parallel market, causing concern among citizens and businesses about the stability of the economy. This is leading to a decline in consumer spending and an increase in the cost of doing business, which could have a significant impact on the Nigerian economy.

Cowry Asset observed that in the midst of the current economic turbulence, President Tinubu appointed 45 ministers and tasked his new cabinet with the challenge of steering the economy out of its current difficulties. Notably, Wale Edun, the new minister of finance and coordinating minister of the economy, has a long history of working with the president and will be instrumental in shaping economic policy going forward. In addition to Wale Edun, President Tinubu has also chosen Olayemi Cardoso, a long-time ally, to serve as the new governor of the Central Bank.

Together, these two key appointees will be responsible for implementing the president’s economic policy, based on his “renewed hope” mantra, even as Nigerians anxiously await the outcome of the  president’s “renewed hope” mantra, which the president pledged would reignite the country’s economic growth and improve the standard of living for all Nigerians, the investment banking firm further observed.

In a recent economic report titled “Nigeria’s Economic Landscape: An Overview of Q3 2023”, Cowry Asset analysed the country’s Q2 GDP report released by the National Bureau of Statistics.

The report indicated that the economy grew by 2.51 percent year-on-year in real terms, marking the 11th consecutive quarter of expansion. Compared to the 2.31 percent growth in Q1’23, this represents an improvement of 20 basis points. It also showed that in nominal terms, the country’s aggregate GDP in Q2 2023 was N52.10 trillion, a significant increase from N45 trillion in Q2 2022, representing a year-on-year nominal expansion of 15.77 per cent.

This increase, according to Cowry Asset, is notable, as the economy has seen a shift in the economic landscape with the Services sector taking the lead in driving growth and economic contribution, making up 58.42 per cent of overall GDP, while Agriculture and Industry contributed 23.01 per cent and 18.56 per cent, respectively.

The report noted that the oil sector continued to face difficulties, contracting for the 13th straight quarter. This resulted in a decreased contribution of 5.34 percent to the overall real GDP in Q2 2023, compared to previous periods. It stated further that the lower crude oil production has posed challenges for government revenue, leading to increased borrowing needs.

The oil sector’s decline was attributed to several factors, such as reduced investment, pipeline vandalism, and oil theft. In Q2, the average daily crude oil output was 1.22 million barrels, a decline from 1.51 million in Q1 and 1.43 million the previous year.

On the other hand, the non-oil sector registered a real growth rate of 3.58 percent in Q2 2023, accounting for 94.66 per cent of the overall GDP, driven by diverse sectors such as telecommunications, financial institutions, and trade.

According to the investment banking firm, high and volatile inflation rates, surging exchange rates, and an unhealthy labour market are creating significant headwinds for corporate performance. This has resulted in a significant increase in the cost of doing business and challenges in maintaining profitability.

The report recalled that the central bank’s foreign reserves fell to $33.24 trillion in September 2023 from $37.07 trillion in January 2023, marking a 10.36 per cent year-to-date decrease. The decline in reserves,it explained, has been driven by weak foreign exchange earnings and the central bank’s efforts to defend the naira.

“This decline is attributed to a number of factors, including reduced oil production, oil theft incidents, increased debt service payments, and foreign exchange swap transactions,” it noted.

The report discussed the $3 billion crude repayment loan agreement between the NNPC and AfreximBank, which was aimed at boosting dollar liquidity and stabilising the naira’s exchange rate. However, it noted that progress towards accessing this loan has been slow, as recent reports suggest that Afrexim bank is still searching for oil traders to purchase the crude oil. This delay, according to Cowry Asset could have implications for the Nigerian economy and its ability to access much-needed foreign exchange liquidity.

“There are unsettled foreign exchange obligations to local lenders, of up to $10 billion, and this backlog is limiting the availability of dollars on the official market, forcing businesses and individuals to seek them at the black market. The loan will go some way in easing this burden,” Cowry Asset remarked.

Presenting a sectoral analysis of the economy in the third quarter of the year, the report noted that the banking sector demonstrated an impressive year-to-date (YTD) growth rate of 59.6 percent. It noted that this notable performance reflects investor confidence and heightened interest in banking stocks, adding that investors have been engaging in bargain-hunting and selectively choosing stocks, particularly following the release of financial statements.

“Among the banks, Tier-1 institutions have emerged as standout performers. These banks have reported commendable earnings figures, both in terms of revenue (topline) and profitability (bottom line).

Additionally, they have capitalised on foreign exchange (FX) gains resulting from asset revaluation, largely influenced by Nigeria’s FX translation dynamics. The banks have equally seen a significant increase in their net interest income as a result of the hike in the monetary policy rate (MPR),” the report stated.

The report predicted a positive outlook for the banking sector, driven by the country’s robust economic growth and the increased banking activity and lending opportunities that will result. It noted that initiatives aimed at increasing financial inclusion are broadening the customer base for banks, while the expansion into previously underserved markets creates new opportunities for growth.

The report noted that initiatives aimed at increasing financial inclusion are helping to expand the customer base for banks. It also highlighted that the expansion of banking services into previously underserved markets will be beneficial for the sector’s future growth. The report added that government-led reforms aimed at creating a conducive business environment and fostering economic stability are also contributing to the positive outlook for the sector.

Cowry Asset noted that the industrial sector has shown a 10.8 percent year-to-date growth rate, driven in part by the buy-back of 0.71 percent of Dangote Cement Plc shares, which helped boost the share price and positively impacted the overall index.

However, it pointed out that the sector has also faced significant challenges due to difficulties in accessing foreign exchange, particularly for businesses that rely on importing raw materials. It added that the recent removal of fuel subsidies by the new administration has increased operating costs for companies in the industrial sector.

Despite the challenges facing the industrial sector, the report said there are also reasons for optimism. Government initiatives to promote industrialisation, increasing domestic demand, and investments in infrastructure are expected to drive growth in the sector. It stated further that while cost concerns may impact pricing for consumers, the sector remains resilient and promising.

A key driver of this optimism, according to the report, is the government’s commitment to industrialisation, as it aims to stimulate economic growth and create jobs.

Cowry Asset noted that the unification of the foreign exchange market had a negative impact on the Fast-Moving Consumer Goods (FMCGs) sector, as companies like Guinness, Nestle, and International Breweries reported significant foreign exchange losses in their H1 2023 financial statements.

“However, surprisingly the sector outperformed other sectors in Q3 and even the ASI, hitting 92.28% ytd, some of this owing to the proposed merger between Dangote Sugar, Nascon and Dangote Rice. This move to consolidate these three companies into the Dangote Food is believed to be a welcomed development by investors as they largely believe that Dangote foods would contend with the highly capitalised BUA food also listed on the exchange,” it stated.

The proposed merger between Dangote Sugar and Nascon resulted in all-time highs for both companies’ share prices, driving the consumer goods index upwards. In addition, Presco, a major player in the agricultural oil palm sector, acquired Salt Nigeria Limited, expanding its planted area by 15,000 hectares and its mature area by 40.1 per cent. Cowry Asset said these developments are expected to have a positive impact on the agricultural sector, with increased production capacity and potentially lower prices for consumers.

In its outlook for the consumer goods sector, Cowry Asset said, “With various agricultural policy reforms and pronouncement under the new administration, we expect to see an appreciable northward price movement in agricultural stocks which appear to be very defensive during uncertainties and downturn.

Ellah Lakes’ right issue of 1,000,000,000 units of ordinary shares which would be made available to qualifying shareholders at N2.90 per share by the 9th of October, 2023 for application, we project further expansion in the consumer good sector as we are optimistic that such shareholders funds would be plunged into the business to realise more gains for the company and her shareholders.”

In its assessment of the oil and gas sector, the report noted that the sector has demonstrated a year-to-date (YTD) growth rate of 97.63 per cent, in a very positive performance, driven by stocks such as MRS, Conoil and Oando.

“In addition to the positive impact of President Bola Ahmed Tinubu’s decision to discontinue the fuel subsidy, companies in the sector also reported significant foreign exchange gains in their Q2 2023 financial statements,” it added.

The report said the outlook for Nigeria’s oil and gas sector is currently positive, driven by several key factors. These include the expectation that oil prices will remain high in the near term and an overall improvement in the investment climate, along with enhanced security conditions in the Niger Delta region.

It also stated that the recent implementation of the Petroleum Industry Act (PIA) and the consequent removal of subsidies have implications for earnings expectations within the industry, particularly among upstream players. These changes,it said, are likely to drive positive returns for shareholders and, in turn, foster improved investor sentiment.

Cowry Asset however emphasised that despite the positive outlook for the oil and gas sector, there are potential risks to consider. It said the war in Ukraine, global economic conditions, and the production cuts agreed upon by OPEC+ members could all impact oil prices and, therefore, the sector’s performance.

It noted further that global economic slowdown could also dampen oil demand, posing a challenge to the sector’s growth, warning that investors should be mindful of potential risks, rather than just focusing on the sector’s growth potential.

In its outlook for the  telecoms sector, the report said as the population continues to grow, the telecoms sector can expect an increase in demand. It noted that The Central Bank of Nigeria’s cash withdrawal limits have resulted in more digitalised transactions, necessitating increased expenditure on data services. This presents a great opportunity to capitalise on the growth of the industry.

With the MTNN 5G and also with AIRTEL having launched their own 5G networks in the third quarter, Cowry Asset anticipates a surge in individual adoption of 5G technology, adding that the increasing demand for fast internet among users is expected to continue driving the growth of data revenue.

Concerning the fixed income and money market, the report noted that the market conditions in Nigeria’s fixed income markets during the third quarter appear to be influenced by a combination of factors, including changes in interest rates, liquidity conditions, and government policy actions. These factors have contributed to higher bond yields and adjustments in the behaviour of market participants, particularly banks.

Cowry Asset found that bond yields in Nigeria have increased significantly over the third quarter, rising by approximately 150-160 basis points (bps) since the end of July. This, it said,suggests a bearish sentiment in the fixed income markets.

According to the report, the increase in bond yields can be attributed, in part, to tightening financial system liquidity. This tightening,it noted, started in the middle of August and continued into September.

The report was pessimistic about the future of Nigeria’s forex market, as the country continues to be overly dependent on oil exports. It called for diversification of the economy and foreign exchange earnings, through increased exports, foreign investments, and reduced imports. It warned that without these measures, the country’s foreign reserves will continue to be under pressure, impacting the availability of foreign exchange and the overall economy.