Weekly Economic Update (Aug 19th – Aug 23rd)

• FG launches a $500 million domestic dollar bond

The Federal Government of Nigeria (FGN) has issued a $500 million domestic dollar bond, which opened for subscription on August 19, 2024, and will close on August 30, 2024. This bond is part of a larger $2 billion domestic dollar bond program, open to a wide range of investors, including Nigerian residents, Nigerians with savings abroad, Nigerian Diaspora, and qualified institutional investors. Notably, the bond is structured as a five-year investment with an annual yield of 9.75%, and semi-annual coupon payments.

Implications

The issuance of this dollar bond will further strengthen the government's efforts to enhance liquidity in the foreign exchange market, boosting gross external reserves and stabilizing the Naira. According to the latest CBN report, diaspora remittances—a key source of dollar inflows—rose 130% year-on-year to $553 million in July 2024, marking the highest monthly inflow. This increase was driven by recent CBN policy actions, such as licensing new International Money Transfer Operators (IMTOs), implementing a willing buyer-willing seller model, and ensuring IMTOs have timely access to naira liquidity.

Market Update

Oil market – Chinese demand concerns, heightened Middle East conflicts & a potential US rate cut influencing market dynamics Brent crude prices declined steadily during the first three days of the week but rebounded to close the week at $79.02 per barrel. The initial downward trend was driven by weak economic data from China, which triggered worries about a potential decrease in demand. However, an escalation in the Middle East conflicts coupled with a larger-than-expected decline in US crude inventories and growing expectations of a rate cut by the Federal Reserve at the September meeting bolstered prices towards the end of the week. On average, oil prices decreased by 4.04% to $77.43 per barrel from $80.69 per barrel in the preceding week. Outlook

Oil prices are likely to trend higher in the coming week as the escalation in the Middle East tensions reignites concerns about potential disruptions to oil supply. This would be further supported by a possible interest rate cut by the Federal Reserve at the upcoming meeting. However, concerns about a potential decline in Chinese demand, a major oil importer could slow the pace of price increases.

Forex Market – Volatile movement due to demand and supply imbalances In the parallel market, the Naira depreciated steadily during the first three days of the week, hitting a 5-month low of N1,615/$ before stabilizing at N1,600/$. Volatility was also observed in the official market, with the currency fluctuating between N1,543.84/$ and N1,592.06/$. This instability was primarily driven by imbalances in demand and supply. Forex turnover at the official window decreased by 9.53% to $728.05 million during the review period, down from $804.73 million the previous week, likely due to the continued depletion of the external buffers. The gross external reserves dropped by 0.25% to $36.43 billion on August 22, from $36.52 billion the week before. Outlook

We expect the currency to remain relatively stable as the ongoing dollar bond issuance signals a potential boost in dollar inflows, which would shore up the gross external reserves.

Money market – Market liquidity boosted by coupon payments and FAAC inflows The banking system faced tight liquidity at the start of the week, with the market opening in a short position for the first two days. However, liquidity improved afterward despite the settlement of the FGN bond and NTB primary market auctions. This boost was mainly due to coupon payments and FAAC inflows. On average, the opening position of banks rose by 18.53% to N473.11 billion from N399.15 billion in the preceding week. Consequently, average short-term interbank interest rates dropped significantly by 659 basis points to 28.23%, down from 34.82% the prior week. Outlook

We expect liquidity to be influenced by major injections or withdrawals from the system.

Fixed income market – Bullish sentiment due to lower inflation and reduced bond offer

There was a primary market bond auction at the beginning of the week, where the three existing bonds [5-year (FGN APR 2029), 7-year (FGN FEB 2031), and 9-year (FGN MAY 2033)] were re-opened. Notably, the DMO offered N190 billion across these three tenors (N70 billion each for the 5-year and 7-year bonds, and N50 billion for the 9-year bond). The auction was oversubscribed by 242.2%, driven by strong interest in the 9-year bond. Meanwhile, the DMO allocated N374.75 billion, reflecting an allotment rate of 81.44%. The stop rate for the 5-year bond increased by 0.41% from the previous auction, settling at 20.30%. Conversely, the stop rates for the 7-year and 9-year bonds decreased by 0.10% and 0.48%, closing at 20.90% and 21.50%, respectively.

In the secondary bonds market, there were mixed activity levels, with the average benchmark yield slightly dipping to 19.31% at the end of the week, down 0.01% from the previous week's 19.32%. The FGN bond auction triggered quiet trading at the beginning of the week with interest mostly centered on the short- to mid-term bonds.

There was also a primary market treasury bill auction during the review period with strong demand, particularly for the 1-year bill, which experienced an oversubscription rate of 250.53%. Total subscriptions across the three tenors amounted to N1.02 trillion, significantly surpassing the N409.98 billion offered. Meanwhile, the CBN allotted N291.03 billion. Stop rates decreased across all tenors compared to the previous auction, with the 91-day and 182-day tenors each falling by 0.3%, and the 364-day bill dropping by 0.99%, closing at 18.20%, 19.20%, and 20.90%, respectively.

In the secondary treasury bills market, bullish sentiment persisted, with the average benchmark yield dropping by 2.80% to 22.33% by the end of the week, down from 25.13% the previous week. The 1-year bill notably experienced a significant decline of around 1.0%, driven by strong system liquidity and the effects of the auction, as investors sought to meet unmet bid positions, particularly on longer-dated bills.

Outlook

We anticipate that the bullish sentiment will continue in both the treasury bills and bonds markets.

Stock market – Bearish sentiment as sell-off persists

The Nigerian stock market closed on a negative note during the review period. The NGX ASI lost 1.16% to close at 95,973.45 points on August 23rd from 97,100.31 points on August 16th. Similarly, market capitalization declined by 0.004% to close the week at N55.13 trillion from N55.13 trillion in the preceding week. This largely reflects persistent sell-offs and profit-taking activities. The average trading volume increased by 177.49% to 1.13 billion units from 406.61 million, while the average trading value fell by 21.59% to N6.61 billion from N8.43 billion. Market breadth for the week was positive, with 39 stocks recording gains, 32 stocks experiencing losses, and 68 stocks remaining unchanged. RTBRISCOE led the gainers with a 59.41% increase, closing at N2.71 per share. TANTALIZER followed with a gain of 54.55% to close at N0.68 per share, while OANDO rose by 33.47% to close at N47.85 per share. The stocks that performed poorly included CUTIX (-37.37%), DANGCEM (-10.00%), THOMASWY (-9.71%), BETAGLAS (-9.43%), and UPDCREIT (-7.07%). Outlook

We expect bullish momentum to prevail in the stock market, fueled by renewed investor interest. Stocks that have seen substantial declines now offer appealing entry opportunities for investors looking to strategically position themselves, particularly in banking stocks that have recently dropped. Additionally, optimism surrounding better GDP growth and easing inflation is likely to boost sentiment in the equities market. However, occasional profit-taking is anticipated, especially as yields in the fixed-income market remain attractive.