Weekly Economic Update (July 8th – 12th)

Market Update

·         US inflation moderates to 3%, prompting increased bets on interest rate cut

US inflation dropped for the third consecutive month to 3% in June, the lowest since June 2023, down from 3.3% in May and below the consensus forecast of 3.1%. Additionally, monthly inflation fell by 0.1%, marking the first significant decline since May 2020. This lower inflation rate has led investors to increase their bets on interest rate cuts. The Federal Reserve is closely monitoring these developments as it contemplates reducing interest rates from their current high levels. Despite signs of a cooling labour market, Fed Chair Powell stressed that future rate decisions will depend on incoming economic data.

Implications

Lower inflation rates raise the likelihood of the US Federal Reserve reducing interest rates as soon as September. This development holds considerable significance for the Nigerian economy. Firstly, decreased interest rates will alleviate burdens on mortgages and credit card payments, enhancing the capacity of Nigerians abroad to send funds home, thereby bolstering Diaspora remittances. Moreover, lower interest rates will diminish the expense of dollar-denominated obligations, lessening fiscal stress on the government and enabling greater investment in infrastructure projects. Reduced interest rates in the US will also mitigate capital outflows from emerging markets like Nigeria, alleviating pressure on local currencies.

·         NNPC to borrow an additional $2 billion crude oil-backed loan

The Nigerian National Petroleum Corporation (NNPC) plans to borrow an additional $2 billion crude oil-backed loan from international creditors to boost its finances. This move follows the company's existing $3.3 billion loan from Afreximbank, aimed at shoring up foreign exchange reserves after fuel subsidy removal and naira devaluation.

NNPC faces significant financial challenges, including a $6 billion debt to international oil traders and rising subsidy costs. The new $2 billion loan is crucial for managing these expenses and supporting production growth. Despite claiming no issues with gasoline payments, NNPC’s financial woes have led to delayed payments to suppliers and increased financial pressure due to maintaining fuel price stability.

Nigeria's oil and gas sector, crucial for government revenue, suffers from underinvestment, oil theft, and a challenging economic environment, leading major companies to invest elsewhere. This has hindered efforts to boost crude oil production, affecting the country's foreign exchange earnings.

Implications

Although the additional $2 billion loan is anticipated to alleviate financial stress on NNPC and boost dollar inflows into the country in the short term, it will also raise Nigeria's external debt and decrease future earnings from crude oil.

Market Update

Oil market Oil prices began the week on a bearish note, dropping to a three-week low of $84.66 per barrel on July 9 before recovering to close the week at $85.03 per barrel. The initial decline was influenced by the impact of Hurricane Beryl on US refineries and the potential for a ceasefire deal in Gaza, which eased supply concerns. Later in the week, prices were bolstered by hopes that the Federal Reserve might begin rate cuts as early as September due to a decline in US inflation. On average, Brent crude prices fell by 1.90%, decreasing to $85.18 per barrel from $86.83 per barrel the previous week. Outlook

Oil prices are anticipated to stay volatile due to shifting demand and supply dynamics. The summer season and the upcoming easing of monetary policy in the US are likely to increase oil demand and drive prices higher. However, China's economic difficulties and the potential for a ceasefire in Gaza could lead to lower prices.

Forex Market

In the parallel market, the Naira remained stable at N1,535/$ during the first two days but then depreciated by 1.60% to N1,560/$ by mid-week before recovering to end the week at N1,545/$. Meanwhile, at the NAFEM window, the currency fluctuated between N1,523.85/$ and N1,563.8/$. It steadily depreciated during the first three days of the week, appreciated on the fourth day, and then depreciated again to close the week at N1,563.8/$. The initial depreciation was due to a limited dollar supply amid increased forex demand for summer holidays. The Apex Bank however intervened by mid-week, boosting dollar availability. The CBN sold $245.34 million to authorized dealers between Wednesday and Friday. Consequently, total forex turnover climbed by 39.42% to $1.03 billion from $740.92 million. While the

The gross external reserves maintained its steady accretion, gaining 1.47% to close at $35.28 billion on July 11 from $34.77 billion at the end of the previous week. Outlook We anticipate the naira will continue to face pressure due to limited FX supply from the CBN and low inflows from Foreign Portfolio Investors (FPIs).

Money market The market was largely illiquid, recording short position all through the week. On average, banks’ opening position was N1.14 trillion short compared to a short position of N951.18 billion in the preceding week. This liquidity squeeze led to a spike in the average short-term interbank interest rates to 32.19% from 30.73% in the prior week.