ThinkBusiness Today - July 13th

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and a warm welcome to ThinkBusiness Nigeria, your Monday – Friday dose of commentary, contexts, and insights on business and economic news that matter to you.

The Naira breached the N800 value against the US dollar yesterday at the street market. I am sure many people expect the inflow of the US dollar to rapidly follow the adjustment in the exchange rate. Not that fast! Both demand and supply are inelastic, for similar reasons. Supply requires further improvement in Nigeria’s business environment and “attractive” opportunities, and dealing with crude oil theft, while demand requires fundamental improvement in business environment, education, healthcare etc. All the measures will take time. I therefore warn in my commentary below that urgent measures are required so the largely “free” float does not collapse.

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Markets

• NGX ASI declined by 2.47% Wednesday. The benchmark NGX All-Share Index (ASI) plummeted 1,622.36 points to close at 64,046.93, representing a week gain of 4.1%, a 4-week gain of 14.51%, and an overall year-to-date gain of 24.97%. Key share price changes include FBN Holdings (- 10%) E-Tranzact International (-10%), N.E.M. Insurance Company (-10%) and Transcorp Nigeria (-10%). No one will be surprised about FBN, given the messy fight for the control of the bank.

• Oil prices rose on Wednesday, with Brent breaching US $80 a barrel for the first time since May, after U.S. inflation data (See details below) spurred hopes the Federal Reserve may have fewer interest rate hikes in store for the world's biggest economy. Brent futures rose by 91 cents, or 1.2%, to US $80.33 a barrel while US West Texas Intermediate (WTI) crude was up US $1.08, or 1.4% to close at US $75.81 a barrel.

• Naira’s value againt the US dollar was mixed yesterday. At the I & E window, it gained 0.76%, closing at a rate of N782.49, while it depreciated by 1.00% on the streets, reaching N803.00.

• U.S. natural gas futures slid about 3% on Wednesday as maintenance work limits the amount of gas flowing to the country's liquefied natural gas (LNG) export plants.

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National Headlines

• N500 billion for palliatives – President Tinubu wrote to the House of Representatives for the amendment of the 2022 budget to accommodate N500 billion for palliatives following the government removal of fuel subsidies. First, recall that President Buhari had requested that the capital expenditure component of the 2022 budget be extended to 2023-year end. The House Speaker Tajudeen Abbas says it will be considered at the plenary on Thursday. However, the letter did not state what the N500 billion will be used for – a permanent intervention such as increases in salaries or temporary or collective palliative measures such as transportation and logistics.

• Naira’s N800 to the US dollar – As mentioned above, the Naira has breached the N800 barrier to the dollar since the aggregation of all exchange rate windows into the I & E window. At the stroke of that policy, the Naira depreciated by about 40% at the I & E window. On the streets, it has now depreciated by about 8% since the start of the year. Many are asking why the Naira is depreciating, especially since it is now largely freely traded. Also, the Bank of America suggested two weeks ago that the Naira is currently overvalued and believe it should be at about N650 to the dollar. It is complex, but the summary of the problem is supply whereas the demand for US dollar is grossly inelastic (demand does not respond to price in a significant way). Loads of work is still required on supply side, including providing “attractive” investment opportunities and dealing decisively with crude oil theft. Otherwise, the largely “free” float will collapse.

• First Bank Shares and fight for its control – First Bank shares fell by 10% in trading yesterday. It followed the news that the Securities and Exchange Commission (SEC) is investigating the acquisition of 4.7 billion shares of FBN Holdings by Oba Odudeko, a former Chairman of the bank. Before then, on the 7^th, Ecobank wrote to FBN in relation to a N13 billion debt owed it by Oba Otudeko and Honeywell. In a copy of another letter seen by ThinkBusiness, Wole Olanipekun & Co, lawyers for Oba Otudeko and Honeywell have requested that FBN dismiss the request by Ecobank on the basis that the judgement claim by Ecobank in the letter never existed. As I mentioned yesterday, my concern is not the fight for the control of the bank by the various shareholders, my concern is whether SEC is alive to its responsibilities and ensure that none of its regulations and guidelines are broken, while also ensuring that small shareholders interest is protected.

Global Headlines

• US inflation lowest since March 2021 – The rapid rise in the interest rates in the US by the country’s Fed has paid off. US Consumer Price Index (CPI) rose by mere 0.2% and June inflation was 3%. While this is good news, it raises another complexity to the expected decision by the Fed over the coming months. Fed will meet next July 25 – 26. It is all but certain that it will raise rates by 0.25%. However, this new inflation data may mean another pause when it meets September 19 – 20. Inflation had been a big problem in the last two years, reaching 9% in 2022.

• Long term support for Ukraine – While NATO denied Ukraine a straightaway membership and timetable, the G7 within the security alliance – US, UK, France, Germany, Japan, Canada, and Italy have committed to long term security protection for the country. In the declaration signed, the alliance says, “We will stand with Ukraine as it defends itself against Russian aggression, for as long as it takes”. We are in for a long haul.

• Rate hike in Canada – As expected, the Bank of Canada on Wednesday hiked its key overnight rate by a 0.25% to a 22-year high of 5.0%, saying it feared that efforts to return inflation to its 2% target could stall amid excess consumer spending. This is the second consecutive month it has raised rates after a five month pause. Canada inflation rate is currently 3.4% for June 2023.

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The Week Ahead

• Saturday July 15, the NBS will release the inflation report for June 2023, the first since the removal of fuel subsidy.