Nwizu:  Subsidy Removal, Smooth Transition Will Enhance FX Inflow

Nigeria recorded a steady decline in capital importation from $2.2 billion in Q4’21 to $1.06 billion in Q4’22. But the Co-Managing Partner/Founder, Comercio Partners Limited, an investment banking company during an interview on the performance of the financial markets in the first quarter of 2023, said the Nigerian economy will soon experience a reversal in the downward trend in foreign exchange inflow. He explained how the expected removal of fuel subsidy and a smooth transition come May 29, 2023 will enhance foreign exchange inflow into the economy and hence appreciation of the naira. Excerpts

Given the various challenges that characterised the economy in Q1 ’23, what is your assessment of the performance of the stock market, vis-a-vis the over 8% YTD return of the NGX?

Despite the challenging macroeconomic environment characterized by the cash crunch, election jitters, inflationary pressures, and a 50-basis point hike in the monetary policy rate by the Central Bank from 17.5% to 18%, the NGX remarkably delivered a year-to-date return of over 8%. This is even more impressive considering the reported 25% decline in sales by manufacturers. The NGX demonstrated its resilience by ending Q1 on a positive note, as evidenced by the robust performance of key market indicators. The Benchmark All-Share index rallied by 6.33%, closing the quarter at 54,861.87 points, while market capitalization increased from N28.11 trillion at the start of the quarter to N29.65 trillion, indicating an improvement in investor sentiments. Although the value traded decreased by 22.04%, the volume traded increased by 66.04%, reflecting heightened investor activity. Notably, the consumer goods index led the sectoral performance, gaining 19.32%, followed by the oil and gas index at 10.45% and the banking index at 8.50%, the latter being exposed to Ghana’s debt restructuring. It is worth mentioning that stocks such as Tripple Gee and Company Plc, International Energy Insurance, John Holt, and Geregu Power emerged among the top gainers in Q1.

Developments in the FX market were largely negative in Q1’23. Turnover in I&E window dropped by 45% year-on-year to $6.5 billion; external reserves shed 4.1% to $35.57 billion; Naira depreciated by 50 kobo to N461.5/$ in I&E window, and by N19 to N755/$ in the parallel market. What were the factors behind these negative developments and how soon are we going to see a reversal of these trends?

Despite CBN’s best effort to stabilize the exchange rate and its several interventions through the RT 200 policies and its naira4dollar scheme the Naira continued to weaken against the greenback in Q’1 2023. This was quite anticipated given the political and macro-economic landscape experienced during the quarter.

Election spending, associated with the conduct of the presidential and gubernatorial elections held in Q’1 2023, contributed to the decline in the value of the local currency. Elections are usually associated with huge volume of cash moving around. Aside from campaign spending by various aspirants, the Independent National Electoral Commission (INEC) was allocated over N300 billion to fund the conduct of the general elections. The effect of this projected cash movement was however stalled by the CBN Naira redesign policy leading to a cash crunch due to limited supply of the new note. Furthermore, risk-aversion among investors also contributed to the slide in the value of the Naira against the dollar. Rational investors tend to display risk aversion during pre-election period to safe heaven asset like the U.S dollar making other currencies drop in value. Another factor that contributed to the decline in Naira value was rising prices. Despite the CBN’s best efforts to curb inflation by hiking its monetary policy rate by 150 basis points to 18%, the Nigeria headline CPI index printed at 21.91% in February 2023, up from 21.34% in December 2022. Inflation decreases consumers’ purchasing power and erodes the value of money. On the global front, the United States Federal Reserve hiked its benchmark interest rate by 25 basis points during the first quarter, significantly strengthening the greenback. Other macroeconomic fundamental issues like low crude oil production and low sales by the CBN at the auction, are identified causes that contributed to the Naira’s decline in value against the dollar during the quarter. In the same breath, total foreign reserve plummeted to its lowest level since September 2021. Available data on the CBN’s website reveals that Nigeria’s foreign reserves decreased to $35.74 billion on the 24th of March 2023. This could largely be attributed to the CBN efforts to maintain exchange rate stability by selling the dollar at FX auctions. The sale of the USD at the auctions from the country’s foreign reserves posed a significant challenge to the apex bank.  There are two major events that have the potential to reverse these negative trends in the short term. The first is the smooth transfer of power to the next administration. With the new administration in place, we anticipate that the political landscape will become more stable, which will help to soothe the wave of risk aversion among existing and potential investors. The second is the successful phase-out and removal of fuel subsidies will result in a savings of more than $6 billion, a portion of which can be used to bolster the nation’s reserve. Given the foregoing, as well as projections of a probable change in monetary authority and the breakdown of the multiple foreign exchange rate regime, we expect to begin to see some reversal as early as the beginning of Q’3 2023.

The CBN intensified its monetary tightening with two additional hikes in the Monetary Policy Rate, in January and March. How did these hikes influence interest rate dynamics and performance of the fixed income investment during the quarter?

Local investors as well as markets participants are quite concerned about the CBN’s monetary policy stance. Most investors have questioned the effectiveness of these tools in taming inflation. The rate hike in January was quite expected but the market expected the CBN to adopt a wait and see approach in March to allow some time to see the effects of the previous hikes, but again the apex bank monetary policy committee voted to increase the rate by half a percentage point to 18%. This event drove mixed sentiment in the fixed income market during the first quarter of 2023. Yields were down on the short term note by an average a full percentage point while the bears dominated the long end of the curve during the first quarter of 2023. Deposit money banks and other financial institutions in a bid to avoid CRR debit from the CBN now participate heavily in the buying of short dated bonds and Treasury bills and this accounted for the bullish sentiments in the short-term notes.

The global financial markets experienced some earth tremor with the collapse of two regional banks in the U.S while regulators had to intervene to save a number of banks. But there are fears that these developments may spread and affect banking systems in other countries. Should investors in Nigeria be concerned and what is your advice to them in terms of how to respond to this development?

The U.S economy with a GDP of $23.32 trillion (2021 world bank estimate) stands to be the largest economy in the world today. History has also taught many investors to fear and worry when there is a crisis in major economy like the U.S. The CBN however addressed these concerns and worry in its 147 monetary policy committee held on Monday 20^th March to Tuesday 21st March 2023 and allow me quote a section of the Communiqué. “The MPC hence took time out to discuss the recent bank   failures  in the US and Switzerland, an event that occurred following the persistent interest rate hikes in the US, and how this has adversely impacted  the broad portfolio of banks in the US. It noted that whereas MPR was increased by 500 basis points in Nigeria, from 12.5 per cent in 2022 to 17.5 per cent in January 2023, the Financial Soundness Indicators (FSIs) in Nigeria shows that the Nigerian banking system remain resilient due largely the stringent prudential guidelines put in place by the CBN which has resulted in a strong build-up of not only the Cash Reserve Ratio (CRR) in Nigeria, but also the Liquidity Ratio and Capital Adequacy Ratio.” Having established these positions from the apex bank perspective, investors are advised not to panic. Historically, what creates a run; in global events like this is when investors panic and begin to act on it, which can cause a wave across the financial industry. So far, the U.S Federal Reserve has joined other regulators in lifting the $250,000 per account deposit insurance for customers of the affected banks, reducing the risk of a possible financial contagion. Investors are highly advised, however, to be more diligent while making financial decisions. They should desist from investing without conducting due diligence on the banks. Potential and existing investors must be aware of the risks associated with the investments they hold. Understanding risk is critical to lowering investor anxiety.

What are your projections for the financial markets and the economy in general in Q2’23?

Despite the challenges faced in Q1 2023, including political unrest, fuel scarcity, and cash constraints, there are expectations of a more stable economy for Nigeria in Q2 due to the swearing-in of a new government that is expected to implement reforms that would stimulate growth and investment. Nonetheless, the global economy’s highly volatile nature remains a threat to Nigeria’s economy. The interbank market is expected to receive over N2 trillion  in Q2 2023 of which the most is concentrated at the end of April from OMO maturity, bond coupon payments, and bond maturity. Despite the projected liquidity, we expect the market to remain generally bearish during the quarter. Our position is premised on the central bank’s hawkish monetary policy stance, which translates into higher rates on government bonds. Also, expected CRR debt will mop up liquidity and reduce  banks’ ability to extend excess cash into the system. Despite this, there is still a possibility of minimal demand for the newly issued one-year treasury bill, as the rate remains relatively attractive. Overall, it is expected to be a slow quarter for the fixed income markets. For the Nigerian stock market, the easing of the cash crunch is expected to lead to positive financial results for companies, which should in turn have a positive impact on Q2 GDP numbers, thus representing an improvement from Q1. However, in light of the persistent uptick in inflation and the high-interest rate environment, operating expenses and production costs are expected to remain high, thereby affecting companies’ bottom line. Nevertheless, there is optimism for an improvement in the NGX ASI in Q2. With the proposed removal of the fuel subsidy, change in monetary authorities and successful transition of power to the new administration, we expect to see some appreciation in the local currency against the greenback in Q’2. As the nightmare of historic flooding during the latter part of the year 2022 is now behind us, we expect improved activities in the agricultural sector while service sector components like Information and Communication will act as major catalysts to non-oil growth. However, our optimism regarding the non-oil sector still recognizes the existence of legacy issues like insecurity and unchecked disturbances to local food production, poor road networks and infrastructure as well as the perennial FX crisis and its ripple effect on the cost of production. Furthermore, we expect the improvement in oil production to continue its positive trend and perform even better than last year. We expect these improved activities to nudge the GDP growth above 3.2% reflecting better performance compared to the 3.1% GDP growth of 2022.