Weekly Economic Update (April 15th - 19th)

Key Economic Events

• IMF revises Nigeria’s 2024 GDP growth forecast upwards by 0.3% to 3.3%

The IMF, in its April 2024 World Economic Outlook (WEO), expects the global economy to expand by 3.2% in both 2024 and 2025, maintaining the same growth rate observed in 2023. This forecast for 2024 represents a slight increase compared to the projection made in January 2024, and it is 0.3% higher than the forecast made in October 2023. The upward adjustment in the global GDP growth outlook primarily reflects the resilience of the economy despite potential downside risks. Specifically, advanced economies are anticipated to see a modest increase in GDP growth from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025, while emerging markets and developing economies are expected to experience a slight slowdown in GDP growth from 4.3% in 2023 to 4.2% in both 2024 and 2025.

The IMF has maintained its forecast for Sub-Saharan Africa (SSA) GDP growth in 2024 at 3.8%, unchanged from the January projection, reflecting an improvement from the 3.4% estimated in 2023. However, Nigeria's GDP growth projection for 2024 has been revised upward by 0.3% to 3.3% from the previous projection of 3.0%. This new forecast is 0.4% higher than the estimated growth rate of 2.9% in 2023. Meanwhile, South Africa's GDP projection for 2024 has been reduced by 0.1% to 0.9%, although it remains higher than the 2023 estimate of 0.6%.

Despite the upward adjustment, the IMF anticipates that Nigeria once considered the economic powerhouse of Africa, will slip to the fourth position in terms of economic size in 2024, with a GDP of $253 billion. This places Nigeria behind South Africa ($373 billion), Egypt ($348 billion), and Algeria ($267 billion). This decline is primarily attributed to the devaluation of the currency. In 2022, the IMF ranked Nigeria as the largest economy in Africa, with a GDP of $477 billion. However, currency devaluation led to Nigeria losing this position, dropping to third place in 2023 with a GDP of $375 billion, trailing behind Egypt ($394 billion) and South Africa ($378 billion). By 2024, Egypt relinquished its position as the largest economy in Africa, descending to the third position, while Nigeria further slid down the rankings to fourth place on the continent. This downward shift is attributed to the devaluation of the Naira and the Egyptian Pound. Year-on-year, the Naira depreciated by 39.84%, while the Egyptian Pound depreciated by 35.67%.

Implications The upward revision in Nigeria’s GDP growth indicates a further boost in economic activities, which is likely to bolster investor confidence, increase government revenue, stimulate job creation, and reduce poverty levels.

• Nigeria’s inflation to drop to 26.3% in 2024 - IMF

According to the IMF, global inflation is expected to fall from an average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging markets and developing economies. Similarly, Nigeria’s inflation is projected to moderate to 26.3%, 23%, and 18% in 2024, 2025 and 2026 respectively. The World Bank, in its recently published Africa Pulse publication also expects Nigeria’s inflation to decline to 24.8% in 2024 and settle at 15.1% in 2026. This slowdown will be largely supported by the tight liquidity conditions due to the CBN’s hawkish monetary policy stance, coupled with the 7.94% adjustment in the exchange rate for import duties payment to N1,147/$ from N1,238.1/$, and lower diesel prices (down 16.67% to N1,000/litre).

Implications Lower inflation rates will boost consumer purchasing power and increase living standards. According to the World Bank, rising inflation and weak earnings pushed 10 million Nigerians into poverty in 2023.

• CBN reduces the loan-to-deposit ratio to 50% from 65%

The Central Bank of Nigeria (CBN) has reduced the loan-to-deposit (LDR) ratio for Deposit Money Banks (DMBs) from 65% to 50%, representing a 15% decline. This adjustment aligns with the Apex Bank’s shift towards a more contractionary monetary policy stance. Previously, the CBN had raised the Cash Reserve Ratio (CRR) for DMBs to 45% from 32.5%, and for merchant banks to 14% from 10%.

Implications Undoubtedly, the decrease in the LDR will limit the availability of credit to businesses, potentially leading to higher interest rates. Nonetheless, it will play a role in reducing the risks associated with excessive lending and ensure the judicious utilization of depositors' funds, thereby bolstering the stability of the banking sector. Banks are urged to maintain strong risk management practices and the CBN has emphasized its commitment to closely monitoring compliance and adjusting the LDR as necessary to align with market dynamics, ensuring the continued effectiveness of the policy.

Market Update

• Oil market records volatile trading due to Middle East crisis & global demand concerns

The oil market was volatile during the period under review. In the first two days of the week, Brent crude prices stabilized at $90 per barrel as the US unveiled intentions to impose new sanctions on Iran after its drone assault on Israel during the weekend. However, prices dipped in the subsequent two days, reaching $86.66 per barrel due to concerns regarding global oil demand and a larger-than-anticipated increase in US oil inventories. Eventually, prices rebounded to conclude the week at $90.54 per barrel, spurred by reports of Israel's strike on Iran. The average price of Brent crude during the week stood at $89.02 per barrel, marking a slight decrease of 1.2% from the preceding week's $90.10 per barrel.

Outlook The escalation in the Middle East conflict is likely to keep oil prices elevated in the coming week as Iran is OPEC’s third largest oil producer, accounting for 11.98% of the cartel’s production.

• Forex market

At the parallel market, the Naira sustained its steady appreciation at the beginning of the week, strengthening to a six-month high of N1,055/$ on April 16, before depreciating to close the week at N1,230/$, losing 8.54% compared to the closing rate of N1,125/$ at the end of last week. Similarly, the official rate (NAFEM) appreciated to N1,072.74/$ on April 17 before depreciating to close the week at N1,169.99/$, a loss of 2.36% relative to the closing rate of N1,142.38/$ at the end of last week. The CBN’s intense efforts to restore confidence and promote transparency in the forex market boosted foreign investors' participation in the Nigerian market, pushing up the dollar supply. However, there are concerns about the Apex Bank depleting its reserves to defend the Naira. This is as the country’s gross external reserves levels plunged by 4.35% to $32.11bn on April 18 from $33.57bn on April 2. However, the CBN Governor maintained that the decline in external reserves is not a result of the CBN defending the currency but rather the payment of debt and other financial obligations.

Outlook The Naira is expected to remain relatively stable in the coming week as tight liquidity conditions weigh on forex demand. This is because the high yield in the fixed-income market due to the CBN’s hawkish monetary stance is incentivizing investment in fixed-income securities, thus reducing system-wide liquidity and the available Naira to demand for forex. However, as the Summer season approaches, there is likely to be a surge in dollar demand for travel. If this doesn’t coincide with a boost in dollar supply, the currency is likely to depreciate.

The gross external reserves are likely to deplete further in the coming month as the CBN strives to meet Nigeria’s external financial obligations to keep the country’s credibility intact. However, a sustained boost in foreign portfolio investment due to the sanity in the forex market as well as the high yield in the fixed-income market will slow the pace of depletion. Notably, the FG has disclosed plans to introduce a Diaspora Bond before the end of the year, aimed at attracting funds held abroad by Nigerians at home and in the Diaspora. In addition, the Finance Minister, at the 2024 Spring Meetings of the IMF and World Bank mentioned that Nigeria is qualified for a World Bank loan of $2.25bn at 1% interest with a 40-year tenor, and 10-year moratorium. The FG is also in talks with the African Development Bank for budget support funding at a low-interest rate. All these are expected to boost forex inflows, boosting the gross external reserves in the medium term and supporting the stability of the Naira.

• Money market

The opening position of banks was negative all through the week, emphasizing the tight liquidity conditions in the system. The average opening position during the week was N814.53bn short compared to a long position of N9.5bn in the preceding week. This sharp drop in banking liquidity position led to an increase in the short-term interest rates. Average NIBOR (OBB/ON) rates rose by 2.81% to 30.82% pa from 28.01% in the preceding week.   Outlook Interest rates are expected to remain high in the coming week, reflecting the tight liquidity conditions. There will be a primary market t/bill auction next week. We expect yields to remain elevated.

• Fixed income market

The average yield along the Federal Government of Nigeria (FGN) bond curve declined by 0.22% to 18.96% on Friday from 19.18% at the end of the prior week. Notably, positive sentiments prevailed mainly in the short-term and mid-maturity segments of the curve due to demand for short-dated and mid-maturity bonds despite limited liquidity. The FGN-2026 bond fell by 53bps, closing at 18.70%, whereas the FGN-2027 bond remained unchanged at 19.28%. In the mid-maturity range, the Feb-2034 bond closed at 19.06%, while yields stayed relatively stable across the longer end, with the 30-year bond closing flat at 18.45%.

However, a bearish sentiment was observed across the Nigerian Treasury Bills (NTB) curve due to selling pressure in the mid-maturity and long-term segments amid ongoing liquidity constraints. As a result, the average yield on the benchmark curve increased by 615 bps (w-o-w) to 25.14% on Friday, compared to 18.99% at the end of the previous week. Outlook Fixed income yields are expected to remain high as the Apex Bank continues its drive to attract foreign investment by offering high-yield treasury bills and FGN bonds.

• Stock market – Bearish Market Sentiment

The stock market performance was largely bearish this week. The NGX ASI lost 2.71% to close the week at 99,539.75 points from 102,314.56 points at the end of last week. Market capitalization also declined by 2.7% to N56.3 trillion on April 19 from N57.86 trillion on April 12. This bearish market sentiment was driven by the tight liquidity as investors shifted to safer instruments with higher yields in the fixed-income market. In addition, this release of corporate earnings did not result in the expected gains in the market.

Market activity showed a negative trend during the week. The average trading volume declined by 43.57% to 319.39 million units compared to 565.99 million units in the preceding week. Similarly, the average trade value dipped sharply by 54.89% to N6.46 billion from N14.32 billion in the previous period. Morison topped the gainers’ list with a 45.31% increase in its share price. This was followed by Guinness (10.00%), Academy Plc (9.77%), Prestige (8.93%), and ThomasWY (8.63%). The laggards were led by GTCO (-19.08%), Unity Bank (-19.00%), Livestock (-18.99%), Japaulgold (-18.54%) and Chams (-16.67%).

Outlook The equities market is likely to remain bearish in the near term as we approach the end of the earnings season. We expect more depression from current levels, even as the market looks up to a stimulant to determine its further direction. In addition, investors will continue to rebalance their portfolio in favour of fixed-income securities due to the impressive yields on offer, leading to a fall in market activity and liquidity.