Nigeria’s financial markets slowed down the fast pace with which they started the year in January 2024 with activities of investors declining across the board. At the stock market, the year-to-date return of the index slowed to 33.7 percent in February from 35.3 percent in January, while market capitalisation fell by N650.5 billion to N54.71 trillion. Similarly, the bears extended dominance as market participants geared up for DMO’s historic N2.5 trillion FGN Bonds in the fixed-income space. However, there are indications of recovery in the last month of the first quarter. BAMIDELE FAMOOFO reports.
Across the financial market space in February, there was a drop in investment activities, the equities market being more pronounced as investors lost a whopping N651 billion and market capitalization dropped to N54.71 trillion.
Moving into the money market, liquidity squeeze in the financial system persisted in the review period as the NIBOR rates moved upward. Also at the foreign exchange market, the naira skids across markets as volatility persists. Here is how they stand.
Equities Market
February brought to a halt the four-month positive rally as uninspiring corporate earnings reports, CBN’s regulation on the bank’s net open position, MPC pronouncement, and the positive outlook in the fixed income space weighed on market performance.
As such, losses were recorded in 11 of the 21 trading sessions, dragging the benchmark index lower by 1.16 percent month on month to 99,980.30 points.
Similarly, the year-to-date return of the index slowed to 33.7 percent in February from 35.3 percent in January, while market capitalisation fell by N650.5 billion to N54.71 trillion.
In the same manner, investors’ sentiment across the market waned as measured by market breadth even as February recorded 25 top advancers as against the 80 that lagged.
Resultantly, stocks such as JULI (+433%), GEREGU (+72%), and MEYER (+57%) emerged as the best performers for the month while the likes of MORISON (-55.3%), LINKASSU (-37.6%), and ETERNA (-35.1%) were the top underperforming stocks.
Meanwhile, trading activity in the month was weak as the average volume and value traded declined 27.5 percent and 61.3 percent respectively to 543 million units with an average value of N3.7 billion.
Across the sectoral front, performance was largely in a lacklustre position as three of the five indexes under our purview retreated on the back of sell-offs.
Consequently, the Industrial goods, Insurance and Banking indexes all closed negatively in the month, down by 13.3 percent, 6.1 percent and 2.01 percent respectively due to price declines in BUA CEMENT, DANGOTE CEMENT, NEM, MANSARD, ACCESSCORP and STERLING. On the contrary, the Consumer Goods and Oil & Gas indices rose 16.5 percent and 4.1 percent in that order on the back of price uptick in BUAFOODS and SEPLAT.
“Investors’ sentiment across the market waned as measured by market breadth even as February recorded 25 top advancers as against the 80 that lagged”
Fixed Income Market
Moving ahead into the fixed-income market, the month of February saw the bears extend dominance as market participants geared up for DMO’s historic N2.5 trillion FGN Bonds auction as well as the hawkish outcome of the long-anticipated MPC meeting. In the secondary bond market, the average yield rose 2.77ppts month on month to 17.21 percent with a strong bearish print across the curve from 14.44% in January. Consequently, the short-dated bonds sold off the most (+3.4ppts), trailed by the mid (+2.7ppts) and long-dated (+2.1ppts) instruments.
At the February 2024 primary market auction, the DMO issued new 7-year (FEB-31) and 10-year (FEB-34) sovereign papers to raise N2.5 trillion as against the January offer of N360 billion and ahead of March’s N720 billion maturity.
However, demand fell short of offers on both tenors – 0.9x and 0.7x, respectively – as liquidity-constrained investors pre-empted DMO’s reluctance to raise the yield to a more fundamentally reflective level.
In the end, the DMO was only able to allot a total of N1.49 trillion (representing a 59.8% success rate), with yield clearing at 18.5 percent (7-year) and 19.0% (10-year) respectively as against a bid range of 18.0% – 30.0% for both tenors. Counting FGN bonds alone, the FG has successfully raised 31.36 percent (N1.91 trillion) of its N6.1 trillion 2024 domestic borrowings target.
Money Market
Moving into the money market, liquidity squeeze in the financial system persisted as the NIBOR rates moved upward.
Notably, the overnight NIBOR rose 6.06ppts month on month to close at 23.94 percent while across the various maturity gauges, there was an upward movement in rates by 4.46ppts, 5.01ppts and 5.25ppts to close at 19.50 percent, 20.81 percent and 21.38 percent month on month. Nonetheless, OPR and OVN rates increased by 3.65ppts and 3.56ppts month on month respectively to 23.0 percent and 23.94 percent respectively.
Also, the NITTY tenor gauges were in the northward direction by 8.13ppts, 10.1ppts, 10.3ppts, and 11.18pt respectively to close at 11.43 percent, 14.935, 17.90 percent and 24.14 percent for the 1-Month, 3-Month, 6-month and 12-Month NITTY rates respectively due to the expectations for further rise in yields at the Nigerian Treasury bills auctions. For the NT-Bills secondary market, average yield rose 9.4ppts m/m to 18.3 percent, following selloffs on the 91 (up 9.6ppts to 15.3%), 182 (up 10.2ppts to 17.7%), and 364- day bills (up 8.3ppts to 21.9%).
Meanwhile, in February, the CBN conducted two rounds of NT-bills auctions with a combined offer of N1.27 trillion across the 91, 182, and 364-day instruments. Investors’ appetite was fairly strong with the overall bid-to-offer ratio of 3.3x, albeit weaker than January’s 38.7x.
The 364-day instrument recorded the strongest buy interest with bid-to-offer ratio of 4.3x (January: 40.9x). Following, the 91-day instrument saw a bid-to-offer ratio of 1.9x while the 182-day instrument was the least competitive with a bid-to-offer ratio of 0.9x. Overall, stop rates on the 91, 182, and 364-day instruments rose 12.0ppts, 10.4ppts, and 7.5ppts respectively to 17.0 percent, 17.5 percent and 19.0 percent.
Foreign Exchange Market
In February, the crude oil market continued to see mixed signals as price volatility remained high. The underlying fundamentals appeared to point towards a continued tight supply situation.
However, concerns about global economic growth and potential disruptions to Russian oil exports kept a lid on prices. Thus, the Brent crude oil price rose 0.2 percent month on month to close the month of February at $81.91 per barrel. Locally, the Bonny Light crude oil price experienced significant improvement by 3.51 percent month on month to close at $88.07 per barrel from $85.08 per barrel in January.
Also, the gross foreign reserves saw a marginal uptick by 1 percent to $33.7 billion and were primarily supported by the month-on-month improvement in Nigeria’s crude oil production to 1.4 million daily barrels and several FX policy reforms by the CBN.
In the foreign exchange market, the naira exhibited a negative outing across various fx segments, depreciating by 8.75 percent month on month at the official market to close at N1595.11 to the dollar from N1455.59 per dollar and also weakened by 2.57 percent month on month at the parallel market to close at N1555 to a dollar.
Also, the average monthly turnover in the NAFEM segment rose impressively by 196.5 percent month on month to $306.75 million from $103.46 million in the previous month on the back of strong winds from the ongoing reforms by the apex bank to drive stability.
Policy Interventions
The Monetary Policy Committee, in its first meeting under the new management of the Central Bank of Nigeria, and Yemi Cardoso, the new CBN Governor, took to a more aggressive tone in its rate hike, adopting the inflation-targeting framework by raising the MPR by 400 basis points to 22.75 percent from 18.75 percent.
This move aligns with the earlier expectations for an increase in the benchmark interest rate and marks the ninth consecutive meeting since May 2022, during which the committee has adopted a hawkish stance to clip the wings of rising inflation.
It is worth noting that the decision for aggressive tightening by the committee was unanimous while members consider the decision as a trade-off between output growth and maintaining price stability in the short to medium term.
Also, the committee noted that option to either hike or hold was premised on previous hikes which have shown a slow rate of inflation acceleration as well as the impact of various reforms within the past months such as the unification of the foreign exchange market; the adoption of the willing buyer; willing seller model within the foreign exchange market; the strengthening of surveillance and guidance in the banking system on the revaluation of foreign exchange gains; the introduction of a two-way quote system in the fx market as part of efforts to encourage price discovery and clip the wings of speculators, among others.
The market as well as Cowry Research’s expectations had been for a material increase in the benchmark rate at above 20 percent, as a measure to curb inflation, despite recognizing that many inflationary pressures are beyond the scope of monetary policy. Nevertheless, the committee’s choice to raise rates was influenced by ongoing global and domestic economic uncertainties, elevated general price levels, and the need to find a dove landing for economic growth.
In contrast to some advanced economies experiencing a downward trajectory in inflation, Nigeria’s headline inflation took a faster foot of athleticism to a 28-year high of 29.90% in January 2024 on the back of insecurity challenges, supply chain disruptions, removal of subsidy on PMS and the pass-through effect of naira devaluation. This reflects a sustained build-up of inflationary momentum, with price increases observed in various divisions, including food and non-alcoholic beverages, housing, transportation, and others.
The decision to implement an aggressive rate hike indicates the committee’s commitment to addressing inflation concerns amid the heightened outlook. By this model of inflation-targeting, the committee aims to demonstrate that the current policy is effectively curbing rising inflation, discouraging excessive aggregate demand in the face of declining output growth, and narrowing the negative real interest rate gap. Furthermore, the decision was based on expectations of liquidity injections into the economy from recent policy developments and their potential impact on inflation.
Consequently, all members agreed to adjust the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points while expanding the Cash Reserve Ratio to 45.00% from 32.5% and maintaining the Liquidity Ratio at 30%, respectively.
Several factors continue to pose downside risks to output growth and present significant challenges to the policy environment.
These include the uncertain overall outlook for domestic and global economic recovery, geopolitical tensions such as the war in Ukraine, the slow recovery of the Chinese economy, and ongoing uncertainties in trade flows due to the bricsification process. Additionally, insecurity in farming communities, high prices of petroleum and other energy products, as well as foreign exchange market pressures, add to the complexity of the current economic situation.
How sectors fared in 2023
The Nigerian economy grew at the slowest pace in three years to 2.74 percent in 2023 from 3.10 percent in 2022, according to the latest GDP report by the National Bureau of Statistics.
In the fourth quarter of last year, the country’s GDP grew by 3.46 percent, down from 2.54 percent in the previous quarter.
“This growth rate is lower than the 3.52 percent recorded in Q4 of 2022. The performance of the GDP in Q4 was driven mainly by the services sector, which recorded a growth of 3.98 percent and contributed 56.55 percent to the aggregate GDP,” the GDP report said.
The country’s full-year GDP growth is lower compared to the World Bank and International Monetary Fund projection of 2.9 percent.
A breakdown of the NBS report showed that the ICT sector slowed to 7.91 percent in 2023 from 9.76 percent in 2022. The manufacturing sector grew by 1.40 percent, down from 2.45 percent; while trade’s growth slowed to 1.66 percent from 5.13 percent.
The growth of the construction sector also slowed to 4.54 percent from 3.57 percent, and transportation and storage contracted by 30.17 percent as against 15.20 percent. The financial and insurance sector improved to 26.53 percent from 16.36 percent.
It said the agriculture sector grew by 2.10 percent, from the growth of 2.05 percent recorded in the fourth quarter of 2022.
“The slowdown last year compared to other years is a combination of the impact of the currency crunch in the first quarter as well as the pass-through impact of some of the reforms initiated by the new administration in the second half on the economy,” a senior economist at BancTrust & Co, Omobola Adu, said.
The GDP report also revealed that two sectors which are other services, transportation and storage dropped to a negative growth rate in 2023 from a positive growth rate in the previous year.
Other services recorded a negative growth of -5.68 percent in 2023, compared to a positive growth rate of 1.07 percent in 2022.
The transportation and storage sector recorded a negative growth rate of -30.17 percent from a positive growth rate of 15.20 percent.
Mining and quarrying recorded a negative growth rate year-on-year to -2.84 percent from -18.16 percent.
Electricity, gas, steam and air conditioning supply recorded a positive growth rate of 5.56 percent from a negative growth rate of 2.21 percent.
The public administration sector recorded growth of 2.12 percent in 2023 from 1.9 percent in 2022.
The Nigerian Economic Summit Group, in its recent report, said since the economy rebounded from the recession induced by the Covid-19 pandemic, its growth has exhibited fragility.
“This deceleration was attributed to policy adjustments and reform shocks, prominently the implementation of the Naira redesign policy, resulting in a cash crunch that impacted various sectors, particularly the informal economy,” the report said.
Best and worst-performing sectors
Best-performing sectors
Financial and insurance
The finance and insurance sector growth rate increased to 26.53 percent in 2023 from 16.36 percent in 2022.
The sector also grew by 29.78 percent in Q4 from 28.21 percent in the previous quarter.
Water supply, sewerage, waste management and remediation
The sector saw a decline in growth rate to 12.65 percent in 2023 from 13.62 percent in 2022.
It also dropped to 7.44 percent in Q4 from 11.93 percent in Q3.
“Several factors continue to pose downside risks to output growth and present significant challenges to the policy environment”
Information and communication
The information and communication sector dropped to 7.91 percent in 2023 from 9.76 percent in 2022.
Its growth also declined to 6.33 percent in Q4 from 6.69 percent.
Electricity, gas, steam and air conditioning supply
The electricity, gas, steam and air conditioning supply sector expanded to 5.56 percent in 2023 from a contraction of 2.21 percent in 2022.
The sector recorded a growth of 6.17 percent in Q4, up from 1.91 percent in Q3.
Arts, entertainment and recreation
The arts, entertainment and recreation sector recorded a marginal decline of 4.28 percent in 2023 compared to 4.29 percent in 2022.
The sector recorded a slower growth of 4.13 percent in Q4 from 4.45 percent in Q3.
Worst performing sectors
Transportation and storage
The transportation and storage sector contracted to -30.17 percent in 2023 from 15.20 percent in 2022. The sector has been in recession since Q2.
Other services
Other services recorded a negative growth of -5.68 percent in 2023, compared to a positive growth of 1.07 percent in 2022.
The sector recorded a growth of 0.05 percent in Q4 from 0.63 percent in the previous quarter.
Mining and quarrying
The mining and quarrying sector was still in recession in 2023. It recorded a negative growth rate of 2.84 percent compared to 18.16 percent in 2022. A recession is two consecutive quarters of contraction.
But in Q4, the sectors expanded to 8.04 percent from a negative growth of 1.96 percent.
Administrative and support services
The administrative and support services sector recorded a growth rate of 0.62 percent in 2023 from 3.16 percent in 2022.
The sector recorded a growth rate of 1.61 percent in Q4 from 2.77 percent in Q3.
Agriculture
The agriculture sector recorded a growth rate of 1.13 percent in 2023 compared to 1.88 percent in 2022.
The sector’s growth rate increased to 2.10 percent in Q4 from 1.30 percent in the previous quarter.
