According to the recently released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) increased by 9.7% m/m to 1.40mb/d in June (May: 1.28mb/d) – after four consecutive months of decline. Accordingly, average crude oil production (including condensates) settled at 1.39mb/d in Q2-22 (Q1-22: 1.56mb/d and Q2-21: 1.66mb/d). Notably, crude oil production declined significantly across the Bonny (-59.0% q/q), Brass (-29.0% q/q), Qua Iboe (-22.0% q/q), and Forcados (-13.7% q/q) production terminals. The persistent low crude oil production volume reflects the lingering passthrough impact of (1) infrastructure decay, (2) massive theft and vandalism, and (3) divestments, given the challenging business environment amidst the shift to cleaner energy sources. The consistent low crude oil production volume suggests that the oil GDP could drag overall growth in 2022FY amidst the continued resilience of the non-oil sector. Overall, we do not expect a significant improvement in crude oil production over the short term, given the nature of challenges hampering production. Despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short term.
Inflows to the Investors and Exporters Window (IEW) improved as the CBN’s non-oil export proceeds repatriation rebate scheme appears to be bearing fruit. According to the data obtained from FMDQ, total inflows to the IEW rose by 62.0% m/m to USD1.84 billion in June (May: USD1.14 billion) – its highest level since December 2021 (USD2.42 billion), albeit still significantly below Q1-20 monthly average (USD3.68 billion). The improvement was primarily due to a 70.3% m/m increase in inflows from local players (88.4% of total inflows). Notably, we highlight that inflows from exporters (193.7% m/m to USD1.02 billion) rose to their highest level since the CBN created the IEW, reflecting the impact of the CBN’s rebate scheme to attract non-oil exports. Meanwhile, we highlight that inflows from foreign investors (USD213.60 million vs May: USD181.10 million) remain tepid relative to the pre-pandemic level (Q1-20 average: USD1.28 billion), reflective of FX liquidity challenges and an overvalued currency. While we acknowledge the recent liquidity influx at the IEW, we expect inflows to remain below pre-pandemic levels over the short-to-medium term. Our prognosis is hinged on the (1) limited inflows from the CBN in line with the little accretion to the gross FX reserves and (2) tepid foreign inflows given the existing FX challenges. Accordingly, we expect the local currency to remain pressured in the near term.
Capital markets
Equities
Negative sentiments dominated trading activities in the Nigerian equities market as the All-Share Index dipped by 0.5% w/w to close at 51,557.41 points. Particularly, sell-offs in INTBREW (-14.3%), UBN (-9.8%), FBNH (-8.6%), FCMB (-7.5%), and NASCON (-6.4%) led the weekly loss. Consequently, the MTD and YTD return settled at -0.5% and +20.7%, respectively. Likewise, activity levels were weaker than the prior week, as trading volume and value declined by 39.0% w/w and 57.7% w/w, respectively. Sectoral performance was largely bearish, following losses in the Insurance (-2.7%), Banking (-0.5%), Consumer Goods (-0.5%), and Oil and Gas (-0.1%) indices. The Industrial Goods index closed flat.
With the moderation in the prices of bellwether stocks this week, we expect savvy investors to take advantage of this and make re-entry ahead of the H1-22 earnings season. However, we do not rule out the possibility of continued profit-taking activities. As a result, we think the local bourse will likely exhibit a choppy pattern. Therefore, we advise investors to take positions in only fundamentally justified stocks.
Money market and fixed income
Money market
The overnight (OVN) rate was unchanged at 14.0%, as the funding conditions in the system deteriorated further, with system liquidity closing the week in a net short position of NGN127.41 billion (vs a net short position of NGN168.26 billion in the prior week).
We expect the OVN rate to remain elevated in the coming week, as expected outflows for CBN’s auctions (NTB, FX & OMO) are likely to pressure the system further in the absence of any significant inflow into the financial system.
Treasury bills
The Treasury bills secondary market ended the week on a bearish note, as the average yield across all instruments expanded by 131bps to 6.7%. We attribute the bearish performance to the sustained sell-offs on short- and mid-dated bills as the dearth in liquidity persists. Across the segments, average yield expanded by 142bps and 98bps to 6.8% and 6.3% at the NTB and OMO secondary markets, respectively.
As we anticipate another liquidity squeeze, we expect T-bills yields to maintain their uptrend. Also, we expect quiet trading at the NTB segment as participants position for next week’s PMA, with NGN143.27 billion worth of maturities on offer.
Bonds
The Treasury bonds secondary market remained bearish this week as investors sold off positions across the curve in anticipation of an uptrend in bond market yield. As a result, the average yield across all instruments inched higher by 11bps to 11.3%. Across the benchmark curve, short (+34bps), mid (+4bps) and long (+5bps) dated instruments were at the brunt of the sell-offs as investors took profit off the APR-2023 (+98bps), FEB-2028 (+10bps), and APR-2049 (+16bps) bonds, respectively.
We maintain our expectation of an uptick in FGN bond yields in the medium term as the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.
Foreign Exchange
This week, Nigeria’s FX reserve recorded another accretion, growing by USD170.75 million w/w to USD39.34 billion (07 July 2022). Across the FX windows, the naira depreciated by 0.3% w/w to NGN426.13/USD at the I&E window and by 0.3% to NGN617.00/USD in the parallel market. At the I&E window, total turnover (as of 07 July) declined by 19.3% WTD to USD507.02 million, with trades consummated within the NGN410.00 – NGN450.58/USD band. In the Forwards market, the naira weakened across the 1-month (-0.7% to NGN427.55/USD), 3-month (-0.8% to NGN435.52/USD), 6-month (-1.2% to NGN449.17/USD), and 1-year (-1.1% to NGN472.14/USD) contracts.
Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.
