Global Economy
Eurozone Inflation Sustains Downtrend Amid Recession Fears
During the week, Eurostat released the Inflation figures for the Euro Area for January 2024. Inflation slowed to 2.8% YoY (vs 2.9% YoY in December 2023). For more clarity, Core Inflation stood at 3.8% YoY (vs 4.0% YoY in Dec 2023) while Food, Alcohol & Tobacco inflation slowed to 5.6% YoY. On the contrary, energy inflation contracted by 6.1% while services inflation remained at 4.0%. The downtrend in inflation remains a major determinant for the ECB’s decision as regards rate cuts. Nonetheless, we opine that the ECB will keep rates steady at the next monetary policy meeting.
Israel’s economy contracts around 20% after Hamas’s war outbreak
During the week, Israel’s GDP figures for Q4 2023 were released. Israel’s annualized GDP contracted by 19.4% YoY. On a quarter-on-quarter basis, the economy contracted 5.2%. This can be attributed to the current conflict between the nation and Hamas, an event that has led to a decline in economic activities and a reduction in government spending on some economic sectors of the country. Currently, there are no signs that the conflict will subside anytime soon and we opine that the impact of the conflict will continue to influence fuel prices and influence geopolitical concerns.
U.S Initial Job Claims Dropped by 12,000
During the week, the number of Americans filing new claims for unemployment benefits unexpectedly decreased, reflecting a resilient labor market that may contribute to sustained job growth in February. Initial claims for state unemployment benefits dropped by 12,000 to a seasonally adjusted 201,000 for the week ended Feb. 17, beating economists’ expectations. Furthermore, the housing market showed signs of improvement with existing home sales rising by 3.1% in January to a seasonally adjusted annual rate of 4.00 million units, the highest level since last August, driven by lower mortgage rates and improved supply.
Domestic Economy
GDP – The “Renewed Hope”
During the week, the Nigerian Bureau of Statistics released the GDP report for Q4:2023 and 2023FY. According to the report, the Nigerian economy witnessed a 3.46% YoY expansion in Q4:2023, an increase compared to 2.54% YoY in Q3:2023 and a slight decline from 3.52% YoY in Q4:2022. To put it into context, the Oil Sector (+12.11% YoY) exited the abyss, after 14 consecutive quarters in the contractionary zone. The Non-oil sector also advanced by 3.07% YoY (vs 2.75% YoY in Q3:2023). The Major Subsectors of the Economy Services (+3.98% YoY) Agriculture (+1.13% YoY) and Industries 0.72% YoY all witnessed an expansion. Overall, the economy expanded by 2.745 YoY compared to 3.10% YoY in 2022FY.
Oil Sector: Journey Out of the Abyss – A Significant Milestone
The Oil Sector advanced by 12.11% YoY after a 14-month consecutive decline. This is according to our estimate as we had forecasted a positive growth in the quarter. We attribute this growth to factors such as the removal of subsidies, clampdown on oil theft, the devaluation of Naira, and improved oil production. To bolster our point, average oil production in the fourth quarter stood at 1.52mbpd compared to 1.43mbpd in Q3 2023.
The Non-Oil Sector
The Non-Oil Sector rose 3.07% YoY. We attribute this growth to improved performance of Agriculture (+2.10% YoY), Manufacturing (+1.38% YoY), and Financial and Insurance (+29.78% YoY). However, the ICT sector witnessed a slower growth of 6.33% YoY (vs 6.59% YoY).
Outlook
We forecast sustained positive performance in Q4 2023. Our outlook is based on several factors, including anticipated improvements in oil production for Q1 2024 (with January’s average production at 1.64mbpd), the ongoing positive effects of oil subsidy removal, the impact of base year effects, and enhanced performance in the services sector. Additionally, we project that the agriculture sector will maintain its strength, particularly considering the current harvest season.
FAAC Allocation – What January’s Revenue Allocation Tells Us About Nigeria’s Economy
The Federation Accounts Allocation Committee (FAAC) announced a distribution of N1.15trn, marking a 1.77% increase from December’s allocation and signaling a positive shift in the nation’s revenue streams. January saw a total revenue of N2.07trn, with a distributable amount of N1.15bn. While some revenue sources like gross statutory revenue and Exchange Difference revenue experienced growth, VAT and Electronic Money Transfer Levy (EMTL) saw declines, an offshoot of burgeoning business operations cost. The Federal Government received N407.27 billion, followed by state governments (N379.41 billion) and local governments (N278.04 billion). Notably, derivation revenue for oil-producing states further contributed to their allocations. The Excess Crude Account (ECA) balance remained stable at $473.76 million, demonstrating a commitment to fiscal prudence.
Oil Sector: Journey Out of the Abyss – A Significant Milestone
The Oil Sector advanced by 12.11% YoY after a 14-month consecutive decline. This is according to our estimate as we had forecasted a positive growth in the quarter. We attribute this growth to factors such as the removal of subsidies, clampdown on oil theft, the devaluation of Naira, and improved oil production. To bolster our point, average oil production in the fourth quarter stood at 1.52mbpd compared to 1.43mbpd in Q3 2023.
MPC is set to hold its first MPR meeting in 7 months.
On the 26th and 27th of February, the Apex Bank is set to hold its first Monetary Policy Committee (MPC) meeting under Governor Yemi Cardoso. We expect the MPC to keep monetary policy tight given the current inflationary pressures and the plan of the CBN to attract foreign inflows by raising yield to levels that are attractive to foreign investors. Since the last MPC meeting was held in July 2023, when the central bank raised rates by 25bps to 18.75%, inflation remains unabated an offshoot of food scarcity, naira devaluation, and depleting foreign reserves.
Q4:2023 Capital Importation – Outcomes of Policy Adjustments
During the week, the National Bureau of Statistics (NBS) released the Capital Importation report for Q4 2023. As culled from the report, Total Capital Imported into the country rose 66.27% Q0Q and 2.62% YoY to settle at USD1.09bn (vs USD654.65mn in Q3:2023 and USD1.06bn in Q42022). To elucidate, Foreign Direct Investment surged 207.80% QoQ to USD183.97mn while Foreign Portfolio Investment soared 255.60% QOQ to USD309.76mn. Furthermore, Other Investments rose 17.14% QoQ to settle at USD594.75mn. For the most part, Total Capital Importation for 2023FY stood at USD3.90bn in 2023FY (vs USD5.33bn in 2022FY).
Foreign Direct Investment (FDI) – A New Era?
During the fourth quarter, FDI into Nigeria jumped significantly by 207.80% QoQ to USD183.97mn, the highest since Q4 2021. We attribute this to the flurry of policies implemented during the quarter. This is an offshoot of the surge in Equity (+207.84% to 183.96mn) investments. We believe this is an offshoot of the flurry of policies implemented by the new administration especially liberalization of the FX market and the CBN’s move to clear backlogs in the FX market. Also, the stellar performance of the equities market (especially the banking sector) drove this growth.
Other Investments:
Other Investment which accounts for 54.64% of Total Capital Importation in the quarter advanced by 17.113% to USD594.75mn. It is noteworthy that Loans account for 100% of this sector during the quarter.
Capital Importation by Countries
By country, the United Kingdom led with USD267.24 million invested in Nigeria, followed by Mauritius (USD226.18 million), Netherlands (USD149.93 million), Singapore (USD144.25 million), and South Africa (USD116.37 million).
Capital Importation by Banks
In the Banking Sector, Stanbic IBTC Bank led the chart with USD499.45mn followed by Citibank Nigeria Ltd. (USD229.06), Rand Merchant Bank (USD85.85mn) First Bank of Nigeria (USD57.97mn) and Zenith Bank (USD51.42mn).
Outlook
We forecast that capital importation figures for the next quarter will remain strong. The policies enacted by the CBN and the Federal Government are geared towards enhancing capital inflows into the country. The recent rise in yields in the Fixed Income market, coupled with the bullish performance of the Equities market and the downward trend in yields in major economies’ fixed-income markets are expected to sustain positive capital importation numbers.
Q3:2023 Labour Force Statistics Report -The Bane of Sturdy Structural Woes
Last week, the National Bureau of Statistics (NBS) released the Nigeria Labour Force Statistics Report (NLFSR) for Q3 2023. The report revealed that the unemployment rate moved up by 8bps to 5.0% (4.2% In Q2 2023). Furthermore, the Labor Force participation rate among the working-age population declined by 1.5% to 79.5% in Q3 2023 (vs 80.4% in Q2:2023) as the Employment-to-population ratio dwindled by 1.5% to 75.6% in Q3:2023. About 87.3% of workers in the Nigerian economy were self-employed while 12.7% were in Wage Employment. For the most part, the Informal Employment rate in Q3:2023 stood at 92.3% (vs 92.7% in Q2:2023).
Labour Force Participation Rate – Nigeria’s Workforce Shrinks: Participation and Employment Rates Dip in Q3 2023.
Nigeria’s labor force participation rate, which measures the aggregate of the working-age population (15 years and above), actively engaged in the labor market dipped by 9bps to 79.5% in Q3:2023 (vs 80.4% in Q2:2023). We believe that despite the decline, this figure further depicts the willingness of Nigerian youths to engage in labor amid the inability to secure decent jobs. For context, the average labor force participation rate in the United States and the United Kingdom in Q3:2023 stood at 62.7% and 62.9% respectively.
Employment-to-Population Ratio: Working-Age Population Underutilized, Employment Ratio Falls in Q3.
In Q3:2023, Nigeria’s Employment-to-Population ratio dipped by 150bps to 75.6% (vs 77.1%). In Q2:2023). This further reflects an increase in unemployment in the country. We believe that this is an adverse effect of the issues that permeated the third quarter of the year (subsidy removal, Naira depreciation, and economic slowdown).
Employment Status: Prevalence of informal work.
In analyzing employment in Nigeria, it’s crucial to consider the two main categories: employees and the self-employed. The employees consist of those who are working for pay in the form of salaries and wages, while self-employed refers to those who are own-account workers. In Q3 2023, Nigeria’s employment landscape unveiled a notable prevalence of self-employment, with 87.3% of the workforce being self-employed, while only 12.7% held formal employee positions. While this statistic may initially appear favorable, it underscores the challenges encountered by the formal sector, which has seen a decline in job opportunities for young individuals. It is a common trend in many underdeveloped and developing nations for a significant portion of the population to engage in self-employment rather than formal employment. This trend reflects the limited opportunities for graduates to secure formal employment amidst sluggish economic growth. Consequently, many graduates resort to self-employment as a means to sustain themselves. In Q3 2023, the proportion of employed individuals engaged in informal employment in Nigeria stood at 92.3%, further emphasizing the prevalence of informal economic activities in the country.
Education: A Potential Solution to Unemployment?
The Nigerian labour market faces challenges not from a lack of education, but rather from inadequate education, knowledge transfer, and employment opportunities. The recent phenomenon of “JAPA” reflects the deteriorating state of the labor market, as youths seek better prospects abroad due to the stagnant Nigerian economy. Additionally, the insufficiently educated workforce hampers efforts to modernize the agricultural sector and generate sufficient employment opportunities, exacerbating economic challenges.
We contend that simply increasing employment in the informal sector will not drive economic growth given the present circumstances. Instead, we advocate for a government-led initiative to raise the minimum wage or better still curb inflation aggressively to align with current economic realities, elevate living standards, and foster economic equilibrium. Comparing Nigeria’s minimum wage to that of major developed economies like the United States and the United Kingdom reveals a stark contrast, highlighting the challenges faced by ordinary Nigerians. Despite debates on Nigeria’s official minimum wage (reported at N65,000.00 which most contest to be around), further bolsters our analysis of how inflation differentials exacerbate the disparity in income between Nigeria and these developed nations.
Outlook and Recommendation
In conclusion, we opine that education alone does not fully address the prevalent underemployment or unemployment issue, as many informally employed individuals have at least a secondary school education. Rather, the root cause lies in inadequate skill levels, with employers often finding candidates lacking the necessary skills for available jobs. Additionally, low wages relative to inflation and insufficient infrastructure further dissuade Nigerian youth, resulting in talent outflows and exacerbating the brain drain in the economy.
Our recommendations for the government are as follows:
1. Take decisive action to curb inflationary pressures and safeguard the purchasing power of the Naira.
2. Enhance the agricultural sector to attract skilled labor and promote large-scale farming for increased food supply and export.
3. Invest in technological advancements and training to enhance productivity across
various sectors of the economy.
4. Improve the educational sector to equip graduates with practical skills alongside
theoretical knowledge, making them better prepared for the workforce.
Bureau De Change (BDC) Industry Faces Potential Shakeup as CBN Hikes Capital Requirements.
The Central Bank of Nigeria (CBN) proposed a significant shakeup for the Bureau De Change (BDC) industry, suggesting a two-tier licensing system with minimum capital requirements of N2bn and N500mn for Tier 1 and Tier 2 operators, respectively. This represents a drastic increase from the current N35 million requirements. The proposed guidelines aim to combat irregularities in the forex market and reduce reliance on the black market. However, industry association ABCON strongly opposes the capital hike, arguing BDC operations are not capital-intensive and advocating for consolidation instead. This potential policy shift could lead to significant consolidation in the sector, with smaller BDCs merging or being acquired. The CBN’s strategy seeks to enhance regulatory oversight and stabilize the forex market but faces resistance from industry players.
CBN Steps In New FX Rate Rule Aims to Stabilize Import Duty Assessment.
The Central Bank of Nigeria (CBN) has announced a new policy aimed at addressing concerns over fluctuating import duty assessments. Effective February 26th, the “closing rate on the date of opening Form M” will be used for all import duty calculations. This replaces the previous, more volatile system, and aims to bring about several positive changes. Firstly, businesses will now be able to plan more effectively with predictable import costs, potentially leading to more stable pricing for consumers. This is because the new rule eliminates the uncertainty caused by fluctuating exchange rates, which often results in businesses having to adjust their prices accordingly.
Secondly, the new rule increases transparency in duty assessments, benefiting both importers and the Nigeria Customs Service. This is because the closing rate on the date of opening Form M is a publicly available figure, which means that both parties will know exactly what to expect in terms of import duties. Finally, the CBN believes that this move will create a stable and predictable market environment, fostering investment and economic growth. By eliminating uncertainty and increasing transparency, the CBN hopes to attract more foreign investment into Nigeria, which will ultimately lead to job creation and economic development. While short-term volatility is expected as businesses and the Customs Service adjust to the new system, the CBN is confident that this reform will stabilize the market and promote long-term economic development.
The Nigerian Equities Market- Mixed Performance Week Ends in Red.
After a mixed performance this week, the local bourse closed bearish with the NGX All Share Index (ASI) shedding -3.44% week-on-week and printing at 102,088.30 points. Despite this dip, year-to-date returns remain positive at 36.53%. Leading the price gainers were JULI (+45.34% to N2.34), VERITASKAP (+13.43% to N0.76), and SUNUASSUR (+10.00% to N2.09). On the flip side, leading the top price decliners were MORISON (-26.43% to N1.67), ABCTRANS (-21.88% to N0.75), and CONHALLPLC (-17.22% to N1.25). We expect selloffs this week due to negative system liquidity.
The Nigerian Fixed Income Market – The Bears Continue to Roar
At the close of the primary NTB auction this week, the average stop rate declined slightly by 25bps
to 17.83% (vs 18.08% at the previous auction). There was a significant decline in the stop rates across the curve as the 91-day and 182-day instruments closed at 17.00% (vs 17.24% at the previous auction) and at 17.50% (vs 18.00% at the previous auction) respectively while the 364-day paper maintained a 19.00% stop rate. Similarly, At the primary bond market, the DMO moved to raise an all-time high of 2.5 trillion naira through two (2) new instruments (FEB2031 & FEB2034). The market experienced an uptick as the average stop rate increased significantly by 300bps to settle at 18.75%. For context, the FEB2031 and FEB2034 had a stop rate of 18.5% and 19% respectively. The bearish momentum continued in the Secondary Treasury Bills market as average yields rose 1.19% WoW to settle at 16.67%. Similarly, the FGN Bond market closed bearish with the average yield rising by 0.68% WoW to settle at 16.80%. This was driven by buying interest on the short end and selling interest on the mid to long end of the curve. The FGN Eurobond market also ended bearish as the average yield leaped by 20bps WoW to 9.87%. For the most part, the Naira Fixed Income market concluded the week on a bearish note, with the average yield further rising by 1.19% WoW to settle at 16.67%.
