Federal government to fully deregulate downstream petroleum sector

What shaped the past week?

Global: - The global market space traded in a positive manner last week, as investors expressed optimism over the global economy, fueled by easing lockdowns in the U.S. and throughout the globe. In Europe, investor sentiment in the region, was further improved by an announcement of a proposed 100 billion stimulus package from the German government; according to media reports, the measures in the new package are aimed at spurring growth and activity in car manufacturing and airline industries. In Asia, China’s Markit Services PMI data, showed an increase in growth for services sector in the month of May, following the easing of lockdowns in Wuhan. Meanwhile, the ECB President Christine Lagarde, stated that the European Central Bank (ECB), would be expanding its €600 billion Pandemic Emergency Purchase Program, to a total of 1.35 trillion, stating that program has prevented a “spiral downwards in financial markets”; the President also stated that growth in the region should contract by 8.7% for Q2’20. On Thursday, the South Korean Government announced a $29 billion stimulus package, to counter the impact of the COVID-19 virus, on its economy. Markets ended the week, on a strong note following the release of the strong ADF Non-farm payroll report from the U.S. which revealed that the U.S. added 2.5 million jobs in the month of May.

Domestic Economy: Last week Thursday, the Federal Government announced the move to fully deregulate the downstream petroleum sector. This means the price ceiling on the pump price of premium motor spirit (PMS) will be lifted and petrol marketers will be able to import and sell their products at prevailing market prices. The Petroleum Products Pricing Regulatory Agency (PPPRA) would take up a more advisory role, serving as an adviser to the Nigerian National Petroleum Corporation (NNPC) and oil marketers in the price determination process. Downstream deregulation will require the PPPRA to keep a close eye on the pricing methods for petrol and other petroleum liquids. This is because, unlike many other consumer products that are price elastic, petroleum liquids are inelastic and a deregulation could result in consumer exploitation if marketers’ operations are left unchecked. The deregulation could offer consumers more competitive prices for petroleum products as marketers could adopt price competition as a strategy to outdo one another.

Equities: The local bourse closed in the red last week losing 98bps, driven by losses recorded in the Industrial Goods (-314bps w/w) and Banking (-181bps w/w) sectors. In the Industrial Goods space, losses observed in BUACEMENT (-476bps w/w) and JBERGER (-22.73% w/w) weighed on the sector. Meanwhile, in the Banking Space, profit-taking activity in the sector, notably, on ACCESS (-634bps w/w), amongst others, saw the index close the week as one of the worst performers. In the Oil and Gas space, loses recorded in TOTAL (-652bps w/w), was enough to see the sector shed 63bps w/w. Finally, the Consumer Goods space was the lone sector, to close in the green, despite of the losses recorded in GUINNESS (-850bps w/w) and NB (-300bps w/w).

Fixed Income: The fixed income market witnessed increased activity in the space this week, as the level of system liquidity supported trades across the secondary market, notably in the OMO space. Yields in the OMO space eased 97bps w/w, while advancing 121bps w/w on average in the NTB space. On the other hand, the bond market traded in a positive manner this week, as the average yield on benchmark bonds eased 10bps w/w due to renewed interest across the short-long end of the bond space.

Currency: The Naira appreciated 0.27 w/w at the I&E FX Window to settle at 386.50 and closed flat w/w at 445.00 against the dollar in the parallel market.

What will shape markets in the coming week?

Equity market: The equities market witnessed mixed sentiment in the week, with the Bulls controlling the trading sessions at week start while profit taking were recorded at week end. With the index trading in the overbought region of the 14 day RSI, we expect some level of corrections upon resumption next week, while stability is expect to be restored as the week progresses.

Fixed Income market: We expect the secondary market to trade in a positive manner at the start of next week, as market participants seek to deploy idle funds following this week’s OMO repayment. Furthermore, we expect bond participants to remain on the sidelines, as they await the DMO auction for guidance on bond rates.

Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week

NIGERIA MONETARY POLICY COMMITTEE - CBN delivers 100bps surprise rate cut, lowers MPR to 12.5%e Monetary Policy Committee (MPC) of Central Bank of Nigeria (CBN) joined the global easing cycle triggered by developed economies and unanimously voted to lower the monetary policy rate (MPR). 7 out of the 10 committee members in attendance voted to lower the MPR by 100bps - at its May’20 meeting – as there is a need to signal commitment to strengthening domestic output, as the pandemic persists. Of the other 3 members, two voted for a 150bps cut while the last member voted for a deeper cut of 200bps..

Votes in favour of the growth objective, amid mounting external risks

Monetary Policy Committee (MPC) members were at a crossroads of a coronavirus trilemma: a looming pandemic-led recession, rising inflation (Apr’20:12.34% y/y), and a fragile external position. Although GDP growth in Q1’20 - reported by the National Bureau of Statistics (NBS) – bucked the global contraction trend, it was the slowest since Q4’18 at 1.87% y/y. The lockdown has also resulted in a slowdown in economic activity, and is on course to plunge the economy into a recession. Furthermore, partial lockdowns - in a bid to contain the spread of the virus - have disrupted food distribution channels and put pressure on food prices, and by extension the headline inflation while weak external demand and anticipated decline in remittance inflows poses a threat to external stability. In such a situation, especially in oil–dependent countries with pegged currencies and limited external reserves to defend the peg, any monetary policy action is plagued with unavoidable consequences. However, the MPC made a bold move by voting in favour of a 100bps rate cut to try and revive animal spirits in the economy, while the unanimous cut voting pattern reflects the bank’s pro-growth bias - given the crossroads of unintended monetary policy consequences. The unexpected outcome can be a result of the underestimation of mounting risks in the external sector that can also have adverse butterfly effects on critical real sector components (such as agriculture and manufacturing). Therefore, a possible deterioration of the country’s external profile could limit the ability of monetary policy to stimulate economic growth.

Limited scope for monetary policy action

Countries that are a lot more reliant on oil receipts for their FX earnings have limited monetary policy space to support economic growth. The situation is tighter for countries whose exchange rate regimes are somewhat pegged with limited reserves to defend the peg, as they do not enjoy the external shockabsorber effect that a floating regime provides. Countries like Nigeria and Angola are in this category. The Nigerian economy may face shocks - from the coronavirus outbreak - that can be transmitted through wider sovereign risk premiums on commercial. borrowings. Other channels of shock transmission may include a drop in resource earnings - on the back of weak external demand for the country’s key export (i.e. oil) - and a sharp slowdown in GDP growth that could widen the country’s foreign currency gap, weaken its external position, and raise its foreign debt burden amid volatile revenue streams. The possibility of lower remittance flows also doubles down the country’s bleak external sector outlook and could heat up the local foreign exchange market – putting pressure on the naira exchange rate. With advanced economies experiencing a downturn, and immigrants supposedly the most affected by recession-induced layoffs, the outlook for remittance flows is clouded. Considering that Nigeria - ex oil - is a net importer of merchandise, the MPC may be compelled to maintain status quo on monetary policy parameters through the rest of the year as it tries to balance existing economic risks in both the real and external sectors of the economy.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.