Global Economy
Stagnant Growth in the UK: Economic Challenges and Elevated Interest Rates Prevail
According to the Office of National Statistics, the UK economy is estimated to stagnate in the third quarter of 2023. The UK GDP is estimated to stagnate at 0.00% in Q3 2023 (vs 0.2% in Q2 2023). However, on a year-on-year basis, growth is expected to be at 0.6% YoY.
Source: ONS, Zedcrest Wealth
The stagnation in growth is primarily attributed to the impact of heightened interest rates amid stubborn inflation, which has constrained consumer spending. According to the report, the Services sector experienced a 0.1% QoQ decline, counterbalanced by a 0.1% QoQ rise in construction performance, while the production sector remained stagnant. Persistent inflation, well above the 2% target rate (September 2023 – 6.7% YoY), poses a major concern. With no anticipated rate cuts this year and a necessity to maintain elevated interest rates, we anticipate the continued suppressive effects of 14 consecutive rate hikes on economic growth in the upcoming quarter. The outlook suggests potential contraction, driven by diminishing wage growth and a weakening service sector.
Source: ONS, Zedcrest Wealth
China: Extended Disinflation Persists in China as Agricultural Surpluses and Decreased Demand Impact Prices
According to the latest data from the National Bureau of Statistics, China’s consumer prices experienced a 0.2% year-on-year decline in October, contrasting with the previous month’s flat figure. Similarly, it contracted by 0.10% on a month-on-month basis (vs 0.2% in September 2023). Vital indicators of domestic demand reflected unprecedented weakness, reminiscent of the pandemic period, and factory-gate deflation intensified, raising concerns about the feasibility of a comprehensive economic recovery. For the headline figure was influenced by a continued decline in pork prices, dropping by 30.1%, accelerating from a 22% decrease in September, attributed to an oversupply of pigs and subdued demand.
Source: NBS China, Zedcrest Wealth
Furthermore, core inflation, excluding food and fuel prices, decelerated to 0.6% in October from 0.8% in September. This indicates China’s ongoing struggle with disinflationary pressures, raising concerns about the potential for falling short of the government’s full-year headline inflation target set at approximately 3%.
We anticipate an improved year-end performance for China’s economy, driven by the government’s pro-market policies aimed at bolstering recovery. However, we do not foresee a substantial uptick in inflation in the coming months, as structural issues persist unabated.
Domestic Economy – Fitch Affirms Nigeria’s Credit Rating at “B-“
During the week, Fitch Ratings affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook.
As culled from the report released by Fitch, the key rating drivers Include:
Fundamental Strengths and Weaknesses: The agency noted Nigeria’s robust economy. a mature domestic debt market, and substantial oil and gas reserves. However, the rating is hindered by weak governance, persistently low non-oil revenue, heavy reliance on hydrocarbons, security challenges, elevated inflation, low net FX reserves, and continued weaknesses in the exchange-rate framework.
Stable Outlook: The government swiftly reduced fuel subsidies and accelerated exchange rate reforms beyond expectations, aiming for significant revenue increases. However, recent reform reversals, reduced FX market price discovery, and new CBN data revealing a weaker net foreign exchange position cast doubts on the sustained positive momentum. These factors contribute to the Stable Outlook.
Faster Reform Progress, Constraints Remain: Since President Bola Tinubu took office in May 2023, reforms progressed faster than expected. In June, fuel subsidies were removed (costing 2% of GDP in 2022), and multiple exchange rate windows were unified. The official investors and exporter rate depreciated by nearly 40%, with increased volatility in late October.
Challenging Exchange Rate Liberalization: Persistent FX shortages hamper economic activity and hinder foreign capital. Despite lifting the ban on FX for 43 items and efforts to clear USD 6.7 billion of unmet FX forwards, the gap between official and parallel exchange rates has widened since July, with a premium exceeding 30%. Average daily FX turnover at the official window dropped to USD95 million in September, nearing April 2023 levels.
Weaker Net FX Reserve Position: The CBN’s net foreign exchange position is weaker than understood, creating uncertainties. The lack of detailed information on certain off-balance-sheet commitments adds complexity.
Moderate Near-term External Debt Service: Near-term sovereign external debt service is moderate, providing a stable outlook. A forecasted flat current account surplus contributes to a manageable external debt situation.
Partial Oil Production Recovery: Oil production partially recovered to 1.57 Mbpd(including condensates) in September from a low of 1.25 Mbpd in September 2022. Anticipating a modest increase in 2024-2025, averaging 1.81 Mbpd, the improvement is attributed to enhanced onshore surveillance. Despite this, the output remains significantly below the 2019 level of 2.09 Mbpd, indicating chronic underinvestment and ongoing production outages.
Budget Deficits to Narrow: Fitch anticipates a 0.2pp narrowing of the budget deficit to 5.2% of GDP in 2023, driven by robust non-oil revenue growth and fuel subsidy removal. However, increased capital spending and underperformance in oil profits from the Nigerian National Petroleum Corporation Limited offset these gains. The projection includes a 1.1% pp rise in government revenue (2023-2025), reaching 8.5% of GDP. Despite these efforts, the ratio remains among the lowest for any Fitch-rated sovereign, supporting the forecast for the budget deficit/GDP to narrow to 5.0% and 4.6% in 2024 and 2025.
ESG Considerations: Nigeria has an ESG Relevance Score of ‘5’ for Political Stability and Rights, Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. This reflects weak institutional capacity and governance concerns.
Macroeconomic Projections: GDP is projected to slow in 2023 and then expand in 2024, driven by the services sector and higher oil production. Inflation is expected to moderate in 2024 but remains high.
Policy Measures: Despite policy tightening by the CBN, liquidity and credit growth remain strong, indicating relatively loose policy settings.
Furthermore, they also noted factors that could, individually or collectively, lead to negative rating action/downgrade such as:
1. External Finances: Increased risk of heightened external liquidity stress, indicated by a potential decline in the CBN’s net FX position. This could result from factors such as reduced oil receipts, severely limited external financing sources, or a failure to implement exchange-rate reforms, leading to capital outflows or banks not renewing FX swaps with the CBN.
2. Public Finances: Elevated risk of challenges in debt servicing. This may arise from a growing fiscal deficit, a further rise in the cost of domestic government debt with weakened demand, and continued constrained access to Eurobond financing.
3. Macro: Heightened macro-instability, characterized by entrenched high inflation or significant GDP growth volatility. This could be attributed to factors such as continued central bank fiscal financing, loose monetary policy, unanchored inflation expectations, and more acute foreign currency shortages in the economy. Additionally, they identified factors that could, either individually or collectively, result in positive rating actions or upgrades, such as:
1. External Finances: Reduction in external vulnerabilities, for example, due to a sustainable recovery in the CBN’s FX position, easing of domestic FC supply constraints or sustained current account surpluses.
2. Public Finances: Structural improvement in public finances, potentially arising from a sustained increase in oil revenue, and stronger mobilization of domestic non-oil revenue.
3. Macro: Improved credibility and consistency in monetary policymaking and FX management, resulting in a sustained reduction of inflation and distortions in the FX market.
While this development is positive for the Nigerian economy and likely to attract foreign investor interest, addressing certain structural challenges is crucial for enhancing the overall economic outlook. Key areas that require attention include:
1. Enhancing FX reserves and liquidity in the market.
2. Improving oil production and revenue to sustain government expenditure and reduce budget deficits.
3. Attracting foreign investors to the Nigerian market.
4. Addressing and eliminating longstanding security concerns in the country
Oil Production Status: Structural Challenges Impede Oil Production Growth
According to the oil production status report released by the Nigerian Upstream Regulatory Commission (NUPRC), the overall crude oil production, including condensates, experienced a month-on-month decline of 0.65%, settling at 1.56mbpd in October 2023 compared to 1.57mbpd in September. In contrast, crude oil production, excluding condensates, showed a marginal increase of 0.30%, reaching 1.35mbpd. Despite substantial growth at the Bonga terminal (+18.91% MoM) and Odudu terminal (+10.94% MoM), the decline in oil production at the Forcados (-3.70% MoM) and Escravos (-4.68% MoM) terminals offset the overall progress. Persistent challenges such as oil theft, vandalism, insufficient maintenance structures, and inadequate infrastructure continue to hinder sector growth.
Source: NUPRC, Zedcrest Wealth
The Nigerian Equities Market –Bullish Sentiment Sustained on the Local Bourse
The Nigerian equities market closed the week on a positive note, with the NGX All-Share Index (ASI) adding 93 bps WoW to settle at 70,849.38 points. The market saw gains throughout the entire week, with Year-to-date (YTD) returns settling at 38.24%. All sectors under our coverage closed on a bullish note, except for the Insurance sector, which experienced a slight decline of -0.53% WoW.
Leading the gainer’s chart are JAPAULGOLD (+55.91% to NGN1.98), RTBRISCOE (+39.53% WoW to NGN0.60), and GLAXOSMITH (+29.44% WoW to NGN16.05). The top losers for the week were CALVERTON (-13.64% WoW to NGN1.33), TIP (-10.53% WoW to NGN1.02) and NNFM (-10.00% WoW to NGN18.00). We expect mixed sentiments in the coming week as investors may embark on profit-taking activities following the consecutive bullish run.
The Nigerian Fixed Income Market – Marginal Rise in Stop Rates at Primary Auction Despite Prevailing Bullish Sentiment in Secondary Fixed Income Market.
At this week’s primary NTB auction, the average stop rate rose by 225bps to 11.58% (from 9.33% previously). The bid-to-cover ratio fell by 308bps, settling at 2.82% (compared to 5.90% before). All instruments experienced increased demand. The Treasury Bills market closed the week bullishly, with the average yield dropping by 93bps WoW to 13.36%. In contrast, the secondary bond market ended the week bearishly, with the average yield rising by 6bps WoW to 15.67%, driven by selloffs across the curve. Overall, the Naira Fixed income market closed the week bullishly, with the average yield decreasing by 44bps WoW to 14.52%. We expect continued bullish sentiment
