Global Economy
Unites States – US Fed Holds Rate Stead, Cuts to be Expected Later in the Year
This week, the Federal Reserve took the decision to keep interest rates unchanged and hinted at multiple cuts before the year’s end. The Federal Open Market Committee (FOMC) decided to maintain the benchmark overnight borrowing rate between 5.25% and 5.50%, where it has remained since July 2023. Fed officials projected 75 basis points in cuts by the end of 2024.
Trend Analysis of U.S Inflation and Monetary Policy Rate
Source: Bloomberg, Zedcrest Research
Although Fed Chair Jerome Powell hinted at potential rate cuts, he emphasized the importance of key economic indicators like CPI, PCE, GDP, Unemployment, and Jobless claims in shaping their decision. Additionally, the dot plot showed three projected cuts for 2025, one less than December, with more expected in 2026 and beyond. We maintain our forecast for rate cuts in H2:2024.
Euro Area – Inflation Slows Down in February, Recession Fears Persist
According to data published by Eurostat, Inflation in the euroarea showed signs of moderation in February 2024. The headline inflation rate moderated to 2.6% YoY (from 2.8% in Jan. 2024). This marks a significant decline compared to February 2023, when inflation soared at 8.5% YoY. Similarly, headline inflation in the EU printed at 2.8% YoY in February (vs 3.1% YoY in Jan. 2024).
Trend Analysis of European Union Inflation and Euro Area Inflation
Source: Eurostat, Zedcrest Research
Inflation disparity persists across the eurozone. Latvia, Denmark, and Italy recorded the lowest annual inflation rates at 0.6% and 0.8%, respectively. In contrast, Romania (7.1%), Croatia (4.8%), and Estonia (4.4%) grappled with the highest inflation rates. We expect the ECB to keep rates steady till H2:2024 amid recessionary fears.
United Kingdom – Slower Inflation in the Horizon
During the week, the Office of National Statistics, United Kingdom released the Inflation figures for February 2024. Headline inflation rose 3.4% YoY (vs 4.0% YoY in Jan 2024). Similarly, Core Inflation rose 4.5% YoY compared to 5.1% YoY in Jan. 2024. On a month-on-month basis, Headline Inflation rose 0.6%. We attribute the downtrend in inflation to slowdown in the prices of food, hospitality, miscellaneous goods and services etc. We also believe that the slowdown in inflation speaks to the recent recessionary trend in the economy, an offshoot of the previous aggressive hikes.
Trend Analysis of United Kingdom’s Inflation and Interest Rate
Source: ONS, Zedcrest Wealth
Israel – Hamas War: Russia and China veto US resolution calling for immediate cease-fire in Gaza
During the week, the United Nations Security Council’s attempt to pass a resolution for an immediate ceasefire in Gaza hit a roadblock when Russia and China vetoed the proposed measure put forward by the United States. Russia’s UN ambassador, Vassily Nebenzia, criticized the resolution as being too politicized and argued that it effectively gave Israel the green light to heighten military actions in Rafah, a city in the southern Gaza Strip. Nebenzia, Russia’s ambassador to the UN, warned that such a move could lead to widespread destruction, devastation, or expulsion for the entire population of Gaza. He mentioned that an alternative resolution drafted by some non-permanent Security Council members offers a more balanced approach and urged members to consider supporting it. Meanwhile, U.S. Secretary of State Antony Blinken expressed optimism about ongoing talks in Qatar, focused on a potential six-week truce and the release of hostages and prisoners, believing that they could still lead to a viable agreement.
Domestic Economy
The Nigerian Debt Profile – The Need to Match Expenditure to Means
During the week, the Debt Management Office released the Nigerian debt profile for Q4:2023. According to the report, Nigeria’s total debt profile increased by 10.73% QoQ to 97.34trn in Q4:2023 (against 87.91trn in Q3:2023). On a YoY basis, the total debt surged by over 110% to 97.34trn as at Q4:2023 (from 46.25trn in Q4:2022). For more context, the total domestic debt increased to 59.12trn (from 55.93trn in Q3:2023) and the total external debt increased to 38.22trn (from 31.98trn in Q3:2023).
Trend Analysis of the FAAC Payments
Sources: DMO, NBS & Zedcrest Research
Given these figures, Nigeria’s Debt-to-GDP currently prints at 41.52% of the total Nominal GDP in 2023FY (2023FY total GDP: NGN234.43trn). Although this slightly exceeds the DMO’s debt/GDP ratio of 40.0%, it is still in line with the 55.0% threshold set by the World Bank/International Monetary Fund. Looking ahead, we foresee a hike in the Public Debt profile as the government plans to raise over NGN7.83trn worth of debt to finance the budget deficit and other securitization plans. So far in 2024, the government has raised about NGN2.39trn in terms of treasury bills (at 6 auctions), NGN2.38trn worth of bonds (at 3 auctions) and a special private bond sales of NGN2.36trn to clear the outstanding FX forwards. Furthermore, we forecast sustained uptrend in Nigerian debt figures in the coming months. We believe the funding of budget deficits and debt servicing and sub optimal oil revenue will further exacerbate the debt situation of the economy.
FAAC Allocation – Bigger Figures
During the week, the National Bureau of Statistics released the Federation Account Allocation Committee (FAAC) disbursement. As outlined in the report, the sum of NGN2.07trn, derived from the total revenue generated in January 2024 was disbursed to the three tiers of government in February 2024.
Trend Analysis of the FAAC Payments
Source: NBS, Zedcrest Research
The statutory allocation, which is the primary contributor to the total allocation, grew by 31.39% MoM to NGN1,150.15 trillion (compared to NGN875.38bn in October). For context, the exchange gain saw an increase of 66.48% to settle at N479.03 billion (compared to N287.74 billion in January). The Electronic Money Transfer Levy (EMTL) and Value Added Tax (VAT) declined 10.76 % MoM and 14.57% MoM, to settle at NGN16.59bn and NGN420.73bn, respectively.
As stated in our previous report on the FAAC allocation, we forecast sustained uptrend in FAAC allocation as the removal of subsidies, the liberalization of the FX market, and improved oil production amid elevated oil prices.
Price Watch (Diesel, Petrol and Gas) – Chronicles of FX Woes and Geopolitical Tensions
During the week, the NBS released the Price Watch for Automotive Gas Oil (AGO – Diesel), Premium Motor Spirit (PMS – Petrol) and Liquefied Petroleum Gas (LPG – Cooking Gas) for February 2024. According to the report, PMS surged by 157.57% YoY to NGN679, AGO soared by 50.20% YoY to NGN1,257, and LPG (12.5kg) increased by 46.88% YoY to NGN15,060. On a month-on-month basis, the PMS, AGO and LPG prices rose by 1.65%, 9.02% and 28.33% respectively.
Trend Analysis of the Diesel, Petrol and Cooking Gas Prices
Sources: NBS & Zedcrest Research
We attribute the surge in the petrol prices to 1) the recent upsurge in energy prices following geopolitical tensions 2) the significant depreciation of Naira that pervaded February 2024.
We expect prices Cooking Gas and Diesel to moderate in the coming month following the moderation in FX volatility in the Nigerian space.
CBN Settles Valid Forex Claims, Boosts Naira Value
During the week, the central bank of Nigeria (CBN) announced that it has cleared all verified foreign exchange (FX) backlog. The apex banks stated that it disbursed USD1.5 billion to commercial banks to settle outstanding legitimate claims from customers, the last tranche of the total USD7bn backlog.
The CBN governor, Olayemi Cardoso had stated the commitment of the current administration to clear all backlogs at the commencement of his duties. He also emphasized that only legitimate transactions were settled after independent verification. Claims lacking proper documentation were flagged for further investigation by relevant authorities.
Following these actions, there have been an increase in CBN’s dollar reserves to USD34.11 billion as of March 7th (a near eight-month high). Similarly, the 400bps hike in interest rate which has spurred foreign investors interest in the economy has also bolstered the currency’s value. We expect a moderation in the FX market in the coming months.
The Nigerian Equities Market – The Bulls Take a Breather
After two bullish consecutive weeks, the local bourse rounded up the mixed sentiment week on a bearish note. Only the Insurance sector (+8.92% WoW) and the Banking sector (+4.19% WoW) witnessed a bullish rally in the week. The NGX All Share Index (ASI) declined by 49bps WoW to settle at 104,647.37 points. The year-to-date returns settled at 39.95%.
Leading the price advancers were JULI (+46.10% to N7.86), NEM (+45.11% to N9.65), and INTENEGINS (+22.95% to N1.50). On the flipside, leading the top price decliners were JBERGER (-17.15% to N60.15), DAARCOMM (-14.10% to N0.67), and UPDCREIT (-12.73% to N4.80).
The Nigerian Fixed Income Market – Diamonds in the Mud
At the last bond auction this week, the DMO offered a total of NGN450bn across three bond instrument maturities; MAR-2027 (New), MAR-2031 (Reopening) and MAR-2034 (Reopening). Although the total bid amounted to NGN615.02bn, a total of NGN475.7bn was sold resulting into high stop rates of 19.94%, 20.00% and 20.45%. The average bid-to-cover ratio printed at 1.29x as against 1.27x at the February bond auction. During the week, the DMO/CBN also sold bonds worth NGN2.36trn across three maturities (2026, 2027 and 2028) to banks and offshore investors at a special private auction to finance the outstanding FX forwards.
At close of market this week, the Nigerian Secondary Treasury Bills maintained its bullish stance as the average yield declined by 91bps WoW to settle at 17.70%. We attribute this bullish stance to the selloffs of mid-tenor and long-tenor treasury bills as they offer yields as high as 21.00%. On the other hand, the secondary bond market closed the week maintaining its bearish momentum as the average yield soared by 86bps WoW to close at 19.26%. This is following major selloffs across the curve particularly on the short-end and mid-end. For the most part, the fixed income market closed the week in the positive territory as average yield shed 3bps WoW to settle at 18.48%.
We saw a bullish stance at the Eurobond market this week as the average yield declined by 60bps WoW to 9.48%. This rally could be attributed to market expectation around rate cuts following hints by the US Fed to cut rates and positive sentiments in frontier market bond instruments.
