Nigeria FY’22 Trade Report – Trade emerges from pandemic lows

Global: It was a bearish trading week across global markets as global investors become increasingly concerned about the future path of the U.S Federal Reserve’s monetary policy.

Starting in Asia, the Bank of Japan kept rates steady at -0.10% as Governor Kazuo Ueda kicks off his tenure as head. Additionally, in mainland China, it comes as no surprise that President Xi Jinping was chosen as leader for the CCP for a third consecutive term.

In Europe markets were dragged by investors concern over the latest batch of economic data out of the region. Inflation in Germany printed at 8.7% y/y, further heightening investors’ bets that the European Central Bank will raise rates at its next policy meeting.

Finally, in the U.S. investors are becoming increasingly unnerved ahead of this month’s FOMC meeting which is slated for March 21-22. Investors are concerned about the future path of the FED’s monetary policy following statements from Chairman Powell this week. Mr. Powell struck a more hawkish tone in his briefing to congress, highlighting that the bank would need to raise rates further for longer as investors remains high.

Domestic Economy: According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), crude oil production (excluding condensates) in Nigeria reached a 13-month high of 1.30 million bpd in February 2023. This represents a 3.8% increase in monthly output over January 2023, but it falls short of OPEC’s 1.8 million bpd allocation. In February, oil output increased primarily due to increased oil production at key terminals such as Bonny and Trans Forcados. Oil output has steadily increased over the last five months as a result of reduced oil theft and the minimal disruptions to oil infrastructure. With oil prices remaining high, continued growth in oil output could increase crude export earnings (a key source of FX) and improve CBN’s ability to defend the naira.

Equities: The local bourse traded mixed this week, although closed in the green with WTD return at 0.48%. For sectoral indices, the Industrial Goods sector posted the strongest gain, up 1.71%. The gains were driven by JBERGERs performance with the counter rising 10% w/w, and DANGCEM which posted a 3.60% w/w return. Meanwhile all other sectors posted losses, with the oil & gas sector finishing as the worst performer. The sector declined 3.82%, driven by profit taking activities in MRS (-18.99%) and CONOIL (-18.89). Also, the banking sector lost 1.82% to close at 453.73, while the consumer goods industry declined 0.82% to settle at 693.67

Fixed Income: The fixed income space saw strong demand across the bonds and NTB segments, while the OMO segment remained quiet. As liquidity levels remained positive, buy-side interest persisted across the bonds segment. For context, yields on benchmark bonds eased 23bps w/w on average fueled by broad-based interest across the curve. Similarly, the NTB space saw yields decline 54bps w/w, as investors sought to fill lost bids at the PMA.

Currency: The Naira appreciated ₦0.25 w/w at the I&E FX Window to ₦461.50.

With petroleum products making up the largest portion of imports, we expect the completion of the Dangote Refinery and other modular refineries to lower Nigeria’s import bill. In summary, we believe there is room for a positive trade balance in 2023; however, disruptions to oil production, unrest in the Niger Delta region, an escalation war in Ukraine, renewed lockdowns, and naira weakness are key risks to the outlook.