Q1’22 SSA Outlook - The uphill struggle

What shaped the past week?

Global: Following Russia’s military operation in the South-eastern part of Ukraine, global investors were largely sellside driven this week. In the European region, the Russian RBX was the worst performer w/w, falling 28.03% as investors sought safety from the strict sanctions imposed by Western powers. In Germany, according to a report from the research institute GfK, Consumer confidence worsened in February from -6.7 to -8.1. Additionally, ECB Governing Council member Robert Holzmann has stated that he will favor two rate hikes before the end of 2022. Thus, combined with the aftermath of investors’ wariness concerning ongoing geo-political tensions, the German Dax and French CAC fell sharply, easing 4.14% and 3.35% respectively w/w. In Asia, markets in the region recorded losses as well, with all major indices closing in the red. The Shanghai Composite eased 1.13%, while the Hang Seng index and Nikkei 225 fell 6.41% and 2.38% respectively. Finally, in the U.S., although FY’21 numbers are still trickling in, investor sentiment remains weighed by the conflict in the Ukraine. U.S. President Joe Biden has announced sanctions on the Nord Stream 2 AG and its corporate officers, in an attempt to pressure Moscow to halt its military operation in Donbass. Meanwhile corporate earnings from Moderna, saw its share price surge 15% on Thursday; the pharmaceutical firm saw revenue climb to $7.2 billion while Net income rose to $4.9 billion. At time of writing, the S&P 500, NASDAQ Composite, and Dow jones were down, 0.98%, 0.25%, and 2.11% respectively.

Domestic Economy:

Recently, the Statistician General of the Federation, Simon Harry has announced plan store base the country’s Consumer Price Index (CPI) and Gross Domestic Product (GDP). While the rebasing of the GDP would be concluded in 2023, the rebasing of the CPI could be concluded by the end of 2022. The National Bureau of Statistics would be engaging in a fresh Nigerian Living Standard Survey (NLSS) that could make the base year for the CPI series a more recent year (other than 2018/19 earlier chosen). We regard the move as timely due to the significant changes in the economy over the years. While the rebasing exercise could result in artificial improvement in key economic indicators such as debt-to-GDP and fiscal deficit-to-GDP, this is purely a statistical exercise that does not translate into better living conditions. Investors could however keep a watch on the newly rebased CPI figures to ascertain inflation-adjusted returns.

Equities: The local market ended on a warm note, as the NGX recorded a marginal 0.40% w/w performance. The Oil and Gas space remains a beneficiary of higher crude prices, as the sector rose 3.89% w/w; SEPLAT fueled gains in the space, rising 7.49% w/w. Other than that, interest across the market was subdued, with the Banking sector rising 0.21% w/w, driven by interest in UBA (+1.75% w/w) and FCMB (+1.67% w/w). On the other hand, investors took profit across the Consumer Goods space, as FLOURMILLS, GUINNESS, and DANGSUGAR dipped 8.83%, 2.86%, and 7.10% w/w respectively. Moving to the Industrial Goods space, marginal sell side action in WAPCO (-0.38%) saw the sector ease 0.01% w/w).

Fixed Income: The secondary market traded on an active note this week, with interest seen across all market segments. The bonds market remained buy side driven the entire week with yields easing 23bps on average w/w. In the OMO and NTB segments, demand spurred by post NTB auction sentiments caused average yields to moderate 85bps w/w and 71.80bps w/w respectively.

Currency: The Naira remained unchanged at the I&E FX Window at N416.00

What will shape markets in the coming week?

Equity market: We foresee a tepid session to start off the week as investors take position in names that have seen price declines in recent session. Also with the 364 days NTB currently trading sub 4.5%, this should further support buy interest going into the new week.

Fixed Income: We expect the current bullish momentum in the T-bills market to continue in the coming week as investors trade post-NTB auction sentiments. Meanwhile, activity in the bonds market is expected to slow, as players cautiously trade selected maturities in the absence of clarity on interest rate direction.

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.

Q1’22 SSA Outlook The uphill struggle

Africa has been on the center stage recently over coups in some countries. Within the next one year, three of our coverage economies would be heading to the polls. Amid a heated political climate, we review the growth expectations of the International Monetary Fund (IMF). We find that although growth could slow in 2022, these economies could perform better than pre-pandemic levels.

Despite the recovery in these economies, preexisting challenges are getting more pronounced from fuel subsidies in Nigeria to fiscal uncertainties in Ghana. While reform implementation could be difficult in uncertain times, rating agencies have resumed action, responding to country-specific issues and issuing downgrades where necessary. Thus, African economies may shy away from the international debt market, due to both domestic risks and international factors.

The ongoing policy support withdrawals could culminate in rate hikes by advanced economies. Emerging economies could follow suit by raising interest rates. Hawkish monetary policy stance could also support portfolio investments in economies with positive real yields. However, geopolitics could keep commodity prices elevated, resulting in pressure on non-resource-dependent currencies.

A key theme across our coverage countries in recent times has been the difficulty in implementing key reforms. Nigeria deferred its decision to remove costly fuel subsidies by 18 months. In Nigeria, the price of gasoline ($0.4/litre) remains below both the landing cost of gasoline ($0.71/litre) and the global average ($1.26/ litre). Apart from Nigeria, Angola and Kenya also operate fuel subsidy regimes. In Kenya’s case, however, consumers contribute to a stabilization fund, which is used to tame prices and keep inflation anchored during periods of high oil prices. Nonetheless, multilateral institutions regard subsidy regimes as poorly targeted and inefficient. Already, Moody’s has regarded Nigeria’s subsidy decision as credit negative given its impact on fiscal deficit. However, the rating agency expects the Dangote Refinery to reduce dollardenominated petroleum demand drastically once it comes online

In 2022, elevated commodity prices could contribute to broad-based currency depreciation. As decreasing stockpiles and geopolitics pushes oil prices further, oil-dependent economies such as Nigeria and Angola could improve their trade balances. However, as we have seen in the recent past, force majeures could prevent them from ramping up oil production significantly. In addition, possible increase in oil supply from Iran could cause a descent in oil prices. While high oil prices could dent Kenya’s trade balance, resilient remittance receipts and buoyant horticulture exports could support the Shilling. The Ghanaian Cedi could benefit from geopolitical tensions, which have propped up gold prices. However, Ghana’s position as a net importer of petroleum products could yield more pressure on the Cedi, amid fiscal concerns and risk-off sentiments. Finally, while the Rand could be supported by high metal prices and hawkish monetary policy, high oil prices could also remain a cause for concern

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.