Nigeria’s inflation to ease in Q2 ’24, say analysts at Cowry Asset

ONOME AMUGE & JOY AGWUNOBI IN LAGOS, NIGERIA

The first quarter of 2024 will be remembered as a turbulent period in Nigeria’s economic history, as the nation endured the wrath of inflationary turmoil. The headline inflation rate soared to 33.20 percent in March 2024, reaching its highest level since March 1996, a grim milestone that underscores the lingering impact of persistent challenges such as insecurity threatening food production, removal of fuel subsidies, and currency volatility.

Despite the looming shadow of inflationary pressures, a glimmer of hope appears to be shining through, as Cowry Asset Management Limited predicts that the inflamed inflation rate is likely to begin a gradual descent by the second quarter of 2024. This moderating trend, according to the firm, is predicated upon the Naira’s recent appreciation and the eventual offsetting of the inflation base effect, a scenario which could herald the beginning of the end for the country’s inflation crisis.

The investment banking firm however warned against overly optimistic expectations for a rapid decline in inflation, anticipating a more measured easing of inflation, with food prices expected to moderate at a more sluggish pace, hindered by the enduring grip of insecurity upon the country’s food supply chain.

Cowry Asset cautioned that, even with the anticipated downward trajectory of inflation, the relief felt by households could be muted at best, noting that the projected decline in inflation is not expected to have a substantial impact on the day-to-day lives of most households unless there is an increase in household income.  The firm also dismissed fears that a potential increase in public servants’ salaries could exacerbate inflationary pressures. It maintained that such concerns are without merit, given the wide gap that currently exists between average household incomes and the minimum income required to maintain an adequate standard of living.

In a recent presentation, Johnson Chukwu, the group managing director and chief executive officer of Cowry Asset Management Limited, dissected the Nigerian economy’s performance during the first quarter of 2024 and shared his insights into the projected trajectory for the first half of the year.

The comprehensive examination, titled “Nigeria’s Economic & Financial Market Review for Q1 and outlook for H1 2024,” dived into the complex financial market landscape of the country, shedding light on the prevailing issues and offering a glimpse into the potential outcomes that may unfold over the next six months.

Setting the stage for his comprehensive analysis, Johnson Chukwu underscored the symbiotic relationship between the global and Nigerian economies, highlighting the importance of understanding the wider world’s financial fluctuations in order to make informed forecasts for the country’s future. He cited the International Monetary Fund’s projections, which foresaw a measured expansion of the global economy at 3.1 percent in 2024, followed by an uptick of 3.2 percent in 2025.

Reiterating the IMF’s positive projection, Chukwu highlighted the economic dynamics that bolstered the forecast. He pinpointed the U.S as a pillar of resilience in the global economy, underscoring its role as a force of economic stability. He noted further that the rekindling of growth in China and the increasingly vibrant emergence of India and other developing economies illustrated a multifaceted engine of global growth, propelling the global economic engine forward, and by extension, setting the stage for potential reverberations in Nigeria’s economic landscape.

Concerning the domestic arena, Cowry Asset observed that Nigeria’s forex market witnessed considerable fluctuations and volatility in the local currency  in the first quarter of 2024, prompting the Central Bank of Nigeria to implement various policies to stabilise the Naira, bolster market confidence, and enhance transparency. 

“During the quarter, the Naira encountered significant depreciation across FX segments due to speculative activities, leading to historic lows of N1627.40/$1 in the official market and N1900/$1 in the parallel market, despite efforts by the central bank to support the currency,” it stated. 

Cowry Asset highlighted the measures taken by the CBN, revealing a notable narrowing of the exchange rate gap between the official and parallel markets. It noted that the fruits of the policy reforms began to emerge in 2024, particularly in February with an encouraging influx of foreign exchange inflows, a surge in remittance and increased foreign investment in Nigerian assets.

“Dollar reserves increased by 2.80% to $33.83 billion by March 2024 from $32.91 billion in December 2023, signalling enhanced foreign exchange inflow into Nigeria’s economy,” Cowry Asset observed. It noted further that the government plans to issue foreign currency-denominated domestic bonds in June 2024 to attract investors concerned about holding the Naira, aiming to stabilise the currency. 

Domestic equities market’s resilient performance

In its review of the domestic equities market, Cowry Asset observed a flourishing stock market, underpinned by a landscape of price growth in the first quarter of 2024. This is as the All-Share Index (ASI), a faithful barometer of the market’s vitality, soared to 39.84 percent Year-to-Date (YTD) growth to amass 104,562.06 points by the end of March 28th.

The review also showed that despite Nigeria’s economy facing challenges such as double-digit inflation, the market amassed impressive gains totalling N18.2 trillion, led by the industrial sector with a remarkable 78.49 percent YTD growth as the market cap of listed equities rose 44.50 percent to close the Q1:24 at N59.12 trillion after hitting the N60 trillion mark.

“NGX demonstrated resilience, surpassing international benchmarks and achieving a 39.84% increase in ASI, amidst macroeconomic challenges and consecutive Monetary Policy Rate (MPR) hikes by the Central Bank of Nigeria. Sector-wise, NGX Industrial Index led with a 78.49% increase YTD, followed by Consumer Goods (+43.66%), Banking (+14.76%), Oil & Gas (+24.09%), and Insurance (+26.20%),” Cowry Asset observed.

In its review of the Nigerian fixed income and money market, the investment banking firm unearthed a decidedly bearish trend in the secondary bonds market, with long-term bonds taking the brunt of the hit. It observed that the first quarter of 2024 saw average yields undergo an increase, soaring from a relatively sedate 12.03 percent in December 2023 to 19.41 percent by March 2024. The review noted that the dramatic upsurge was fueled by a wave of sell-offs, largely spurred by the CBN’s interest rate hikes. The shifting winds of investor sentiment in the Nigerian fixed income and money market, as captured in Cowry Asset Management Limited’s review, revealed a marked preference for shorter-dated instruments in the first quarter of 2024.

Wary of mounting interest rates and inflationary pressures, investors sought refuge in the relative safety of these instruments, perceiving them as a more stable hedge against volatility.

Dwelling on this, Cowry Asset stated; “The DMO’s shift towards larger bond sales aims to align with the cash flow needs of the Federal Government of Nigeria (FGN) and reduce reliance on Central Bank of Nigeria (CBN) financing. This strategy may result in increased issuance in the short term due to timing discrepancies between fiscal collections and budgeted expenditures, potentially raising interest rates.”

Interest rate poised to remain elevated in Q2 2024

The Nigerian financial landscape was left reeling in the aftermath of a joint liquidity purge by the Central Bank of Nigeria (CBN) and the Debt Management Office (DMO), which saw about N12.7 trillion wiped from the system over the course of four short months from January 2 to April 15, 2024. Cowry Asset, in its review of the fiscal manoeuvrings, pinpointed the pair’s draconian measures as the driving force behind a steep rise in interest rates.

“We project that interest rates will remain elevated in Q2 2024 before we begin to see some moderation by July. This is further reinforced by the pressure to sustain the gains recorded in foreign exchange rates,” it stated.

Cowry Asset further noted that massive borrowing by the CBN and federal government  would also lead to significant increase in banks’ deposit rates as corporate organisations’ increased offer of commercial papers provide alternative short-term investment outlets for bank depositors. 

Concerning the exchange rate movement, Asset Cowry noted that the Naira has experienced significant appreciation against the US dollar starting from the month of March to close at N1,080/$ and N1,136.04/$ at the Parallel and NAFEM markets respectively by the close of business on April 15, 2024. 

The investment firm projected that the government’s plan to issue foreign currency denominated bonds in June will further boost forex liquidity in Q2’ 2024. It however pointed out that the ability of CBN to sustain the current Naira defence is doubtful given the huge cost of the adventure. 

“We therefore expect that the current Naira appreciation will moderate in Q2’ 2024. This is further reinforced by the consistent decline in crude oil production,” it predicted. 

Cowry Asset analysts turned their critical eye toward the Nigerian equities market in the second quarter of 2024, predicting a significant southwards trajectory for prices based on the following factors:

– Current over-valuation of many stocks beyond their intrinsic value.

– Elevated yield on fixed income instruments with attendant portfolio rebalancing by Fund Managers.

– Likely weak performance by many of the quoted companies due to the country’s harsh economic environment. 

In its fixed income markets outlook, Cowry Asset projected that the CBN’s priority to uphold price stability as observed in the hawkish monetary policy stance will result in persistent higher rates in the fixed-income sector, as observed in Q1 2024, as they try to combat inflation. 

The investment banking firm observed that in the bid to attract foreign inflows, the CBN has been intentional with higher rates on auctions, issues, and reopening. Given the persisting challenges in the FX market, it expects the offers to continue in Q2’ 2024 though as reducing volume and rates.

As the Eurobond market navigates the turbulent waters of a global economic landscape, Cowry Asset anticipates that yields on instruments issued by advanced economies would mellow as inflation and interest rates begin to abate. However, the investment firm painted a divergent picture for emerging and frontier economies’ Eurobonds, predicting that yields would remain  high as a persistent demand for sufficient risk compensation from investors would keep a firm grip on the market, particularly in relation to instruments issued by countries or corporations perceived to carry a higher default risk. 

It added that the demand for higher interest rates on developing economies Eurobonds will also constrain primary market activities.