According to the recently released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) declined by 1.9% m/m to 1.49mb/d in March (February: 1.52mb/d). Accordingly, average crude oil production (including condensates) settled at 1.56mb/d in Q1-22 (Q4-21: 1.51mb/d and Q1-21: 1.74mb/d). The persistent low crude oil production volume reflects the passthrough impact of (1) infrastructure decay, (2) massive thefts and vandalism, and (3) divestments, given the challenging business environment amidst companies’ move to cleaner energy sources. Notably, crude oil production declined across the Escravos (-7.9% q/q), Bonga (-12.6% q/q), Egina (-5.7% q/q), and Agbami (-1.2% q/q) production terminals. 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.
According to the recently released data from the Nigerian National Petroleum Corporation (NNPC), the corporation incurred NGN245.77 billion as PMS under-recovery cost in March (February: NGN219.79 billion). The under-recovery cost for the review month consists of the previous months’ outstanding and part of the February 2022 value shortfall. The tally brings the total under-recovery cost in Q1-22 to NGN675.94 billion– 3.4x the size in Q1-21 (NGN197.74 billion). That said, the NNPC further estimated that it would deduct NGN671.88 billion from April proceeds due to be shared by the three tiers of government at the May FAAC meeting. The estimated deduction consists of NGN519.00 billion as PMS under-recovery cost in April and NGN152.88 billion for March. We expect under-recovery costs to increase significantly over the short-to-medium term, given the rise in crude oil prices compared to the 2021FY levels. Consequently, we estimate PMS under-recovery cost to settle at NGN3.55 trillion (or 56.8% of our estimated FGN’s retained revenue) in 2022E (vs 2021FY: NGN1.61 trillion or 34.3% of FGN’s retained revenue).
Capital markets
Equities
Despite the shortened trading session, the bullish momentum in the local bourse gained steam as sustained bargain hunting activities in blue-chip stocks pushed the All-Share Index above the 50,000 psychological mark to close at 50,937.01 points – the highest level since March 2008. Interestingly, the market traded positively in all three trading sessions. Pertinently, investors’ demand for bellwethers — PRESCO (+18.6%), GUINNESS (+18.3%), NB (+22.7%), OKOMUOIL (+15.7%), BUACEMENT (+8.2%) and MTNN (+6.1%) drove the benchmark Index 2.6% higher. Consequently, the MTD and YTD returns increased to +2.6% and +19.2%, respectively. However, activity levels were weaker than in the prior week as volume and value traded decreased by 24.6% w/w and 16.9% w/w, respectively. Sectoral performance was broadly positive, as the Consumer Goods (+7.3%), Industrial Goods (+3.2%), and Banking (+0.6%) indices advanced, while the Insurance (-2.0%) and Oil and Gas (-1.1%) indices closed in the red.
Given that the Q1-22 earnings season has run its course and the upward repricing of cyclical stocks that ensued, we expect a subdued market performance in the week ahead. The bears will likely dominate market performance, as investors cash out on the gains across bellwether stocks over the past two weeks. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate ended the week lower, as it crashed by 7.58ppts w/w to 4.9%. The contraction was supported by inflows from FAAC allocations (NGN448.46 billion) and OMO maturities (NGN20.00 billion) which subdued outflows for CBN’s weekly OMO and FX auctions.
Next week, we expect the OVN rate to trend upwards, as the NGN40.00 billion expected from OMO maturities may not be sufficient to offset the outflows from CBN’s auctions (NTB, OMO and FX).
Treasury bills
Just as we envisaged, activities in the Treasury bills secondary market were bullish, as the buoyant system liquidity drove demand for bills. Thus, the average yield across all instruments contracted by 3bps to 3.8%. Across the segments, the average yield contracted by 12bps to 4.1% at the OMO, while the NTB average yield was flat at 3.7%. Notably, the CBN held an OMO PMA on Thursday after a 5-week hiatus. At the OMO auction, the CBN offered and allotted NGN50.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors – 110DTM: 7.0%, 187DTM: 5.8% and 362DTM: 10.1% – as with prior auctions.
We expect yield in the T-bills market to trend upwards, with system liquidity expected to be tight in the coming week. At the NTB segment, we believe the outcome of the NTB auction scheduled for mid-week will shape sentiments. At the auction, the CBN will roll over NGN127.47 billion worth of instruments to market participants.
Bonds
Trading in the Treasury bonds secondary market was broadly bearish this week, as demand for FGN bonds remained tepid. We believe this is reflective of expectations regarding higher yields in the near term. Consequently, the average yield expanded by 12bps to 11.3%. Across the benchmark curve, the average yield expanded at the short (+4bps), mid (+24bps), and long (+3bps) ends as investors took profit off the MAR-2027 (+28bps), FEB-2028 (+30bps), and MAR-2036 (+10bps) bonds, respectively.
In the medium term, we maintain our expectation of an uptick in yields in the bonds market, as both the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.
Foreign Exchange
This week, Nigeria’s FX reserves decreased by USD152.55 million w/w to USD39.43 billion (04 May 2022). However, the naira appreciated by 0.5% to NGN417.00/USD at the I&E window (IEW) and by 0.2% to NGN589.00/USD at the parallel market. At the IEW, total turnover (as of 05 May 2022) decreased by 57.1% WTD to USD379.18 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira was flat at the 1-month (NGN418.43/USD) contract, but depreciated at the 3-months (-0.1% to NGN424.11/USD), 6-months (-0.1% to NGN432.79/USD) and 1-year (-0.2% to NGN449.55USD) contracts.
In our outlook, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. 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.
