NIGERIA GROSS DOMESTIC PRODUCT – Growth slows on domestic headwinds
What shaped the past week?
Global: Wall Street traded in a mixed manner as investors closely monitored Congressional negotiations on raising the debt ceiling to avoid a potential government default. Zoom Video Communications Inc. released positive earnings results. Concerns over a historic default weighed on major stock indexes, while US composite PMI showed growth and new home sales increased. The possibility of a debt ceiling agreement remained uncertain, leading to market declines. Nvidia’s strong performance and upbeat economic data provided some respite, while progress in debt ceiling talks boosted investor sentiment, resulting in positive market openings on Friday.
European stock markets experienced bearish performances throughout the week amid ongoing concerns about the debt ceiling negotiations in the United States. Consumer confidence in the Eurozone showed a slight improvement in May. However, market indexes closed with losses as the deadline for a debt ceiling deal approached. Discouraging economic updates, including a deterioration in the German business climate and higher-than-expected UK inflation, contributed to negative market sentiment. European stocks closed lower on Thursday, influenced by disappointing German GDP numbers. However, a breakthrough in the debt ceiling negotiations and positive UK retail sales data led to significant gains in the market on Friday.
Wall Street traded in a mixed manner as investors closely monitored Congressional negotiations on raising the debt ceiling to avoid a potential government default. Zoom Video Communications Inc. released positive earnings results. Concerns over a historic default weighed on major stock indexes, while US composite PMI showed growth and new home sales increased. The possibility of a debt ceiling agreement remained uncertain, leading to market declines. Nvidia’s strong performance and upbeat economic data provided some respite, while progress in debt ceiling talks boosted investor sentiment, resulting in positive market openings on Friday.
Domestic Economy: At its third meeting of the year, the Monetary Policy Committee (MPC) decided to raise the benchmark rate by 50 basis points, to 18.50%. Ten of the eleven members who were present supported this decision, whereas one member advocated a 25bps raise. Cutting interest rates was not an option since it might create macroeconomic instability, increase the negative real interest rate margin, and harm domestic finances. The growing inflation outlook made a hold stance less appealing, which could jeopardize the Bank’s determination to control inflation. As a result, the apex bank made the decision to raise rates to restrain overall demand and manage demand-pull inflation. In the near term, the MPC will likely maintain its hawkish posture if inflation continues to trend upwards.
Equities: Nigerian equities had a positive week, with most key indices closing in the green. The ASI returned 1.51%, driven by strong performances in the Banking, Oil and Gas, and Consumer Goods sectors. The Banking sector stood out with a 5.63% increase, reflecting widespread interest. The Consumer Goods sector continued its strong momentum, delivering a 3.10% return. The Oil and Gas sector also saw gains of 3.24% due to increased interest in the oil marketing space. However, the Industrial Goods sector experienced losses, primarily driven by BUACEMENT, resulting in a 0.70% decline for the sector.
Fixed Income: It was a relatively tepid week of trading in the fixed income market, as investors digested the latest macroeconomic data for the country and interest rate decision from the CBN. The CBN decided to raise its cash rate by 18.50% in response to ongoing inflationary pressures in the country. In the bonds space, we observed no notable yield movements during the week, with yields closing flat w/w. Meanwhile, in the NTB space, an improvement in system liquidity, coupled with lower stop rates printed at this week’s auction, spurred some buying activity in the space, as yields eased 2bps on average.
What will shape markets in the coming week?
Equity market: As we enter the final month of Q2’23, we anticipate a mixed trading pattern in Monday’s session, while we expect investors to react to any major take away from the inauguration of a new administration on Monday.
Fixed Income: Looking ahead, we expect the sentiment in the bonds market to remain stable, largely influenced by the latest MPR decision from the CBN. However, it is worth noting that the potential for buy-side action in the NTB segment cannot be ruled out, particularly if there is an improvement in system liquidity levels.
NIGERIA GROSS DOMESTIC PRODUCT – Growth slows on domestic headwinds
Nigeria’s economy grew by 2.31% year on year in Q1’23, according to the National Bureau of Statistics (NBS) (Vetiva: 2.80% y/y). This follows a 3.10% year-on-year increase in Q1’22. We attribute the slower growth to the currency-swap induced cash crunch which led to the first contraction in the agricultural sector, since the rebasing of the GDP in 2010. While favourable base effects spurred a minor recovery in the industrial sector, a slower but modest service sector expansion kept GDP growth above water.
Agricultural Sector: Cash crunch drives downturn
For the first time since the rebasing of the GDP, the agricultural sector contracted. Declining by -0.9% y/y (Q4’22: 2.0% y/y), the sector was dragged largely by the livestock sub-sector, which contracted by 30.6% y/y. This mirrors the impact of the cash crunch on poultry farmers in Q1’23. According to Poultry Association of Nigeria, farmers lost c.₦30 billion due to scarcity of Naira notes, despite deep discounts. Growth in crop production, which accounts for more than 90% of total agricultural output, slowed to 1.9% y/y in Q1’23 (Q1’22: 3.0% y/y). This could be linked to government interventions which has kept the sector afloat. Due to a strong contraction in the agricultural sector (from an expansion in Q3’22), the growth in Q1’23 was 49bps lower than our in-house estimate (2.31% y/y).
Industrials: Construction and manufacturing spurs growth
Moving on to the industrial sector, after 7 consecutive quarters of contraction, the broad sector expanded by 0.3% y/y in Q1’23 (Q1’22: -6.81% y/y). Growth in the manufacturing (+1.6% y/y) and construction (+3.3% y/y) sectors aided the industrial sector’s expansion, supported by a milder downturn in the oil sector (-1.3% y/y). Although the oil sector contracted in Q1’23, the decline was moderated to -4.2% y/y (Q1’23: -13.4% y/y). Oil production (including condensates) increased by 12.4% q/q in Q1’23 to 1.5 mb/d (Q4’22: 1.35 mb/d), due to renewed pipeline surveillance efforts. However, this was insufficient in lifting oil beyond its 2022 peak of 1.56 mb/d in Q1’22.
Aside from the oil sector, the manufacturing sector expanded by 1.6% year on year in Q1’23, down from 5.9% y/y in Q1’21. High energy prices, election-related slowdown, and the Naira scarcity contributed to the slowdown. As a result, we saw a contraction in major sub-sectors such as the textile sector (Q1’23: -3.7% y/y). Meanwhile, growth in the Cement sub-sector slowed to 1.6% y/y (Q1’22: 9.6% y/y) as elections hampered business activities. Growth in the Food, Beverage, and Tobacco sub-sector also moderated significantly to 3.9% y/y (Q1’22: 9.8% y/y), due to the cash crunch. The construction sector expanded by 3.3% in Q1’23 (Q1’22: 4.8% y/y), amid completion of public projects.
Services Sector: Telecoms, Trade and Finance remain key drivers
Finally, we observed a 4.4% increase in the services sector (Q4’22: 5.7% y/y). ICT, trade, and financial sector growth were the driving forces behind this expansion. Although the ICT sector rose at a slightly slower pace in Q1’23 (10.3% y/y; Q1’22: 11.7% y/y), growth could be linked to the huge dependence on online and mobile transactions during the cash crunch. The trade sector, which is largely dependent on cash, recorded a significantly slower growth of 1.3% y/y in Q1’23 (Q1’22: 6.5% y/y). The financial services industry expanded by 21.4% y/y, benefitting from large electronic payments processing during the cash crunch. Telecommunications (ICT), financial services, and crop production were the major contributors to overall output.
Outlook: Oil sector brightens outlook as refining commences soon
We anticipate further support from the service sector, particularly from the ICT and finance sectors, in Q2’23. The diminishing effects of the cash crisis may also contribute to improved trade outcome in Q2’23. Moving on to the industrial sector, oil output has so far recovered as a result of the measures to monitor pipelines. In April oil production including condensates decreased (-18% m/m) to a seven-month low of 1.24 million barrels per day (mb/d) due to a strike by ExxonMobil employees. However, following swift resolution, we foresee a recovery in oil production beyond the Q2’22 average of 1.39 million barrels per day. Thus, we expect the oil sector to exit recession in Q2’23.
Finally, refining of petroleum products is set to begin in Q3’23, following the commissioning of the Dangote Refinery. A 20% capacity utilization of the newly commissioned refinery could buoy national refining output by 12x and contribute 0.2% to overall GDP. Thus, we expect real GDP to grow by 2.73% y/y in Q2’23 and 2.66% y/y in 2023 (2022: 3.10% y/y).