ThinkBusiness Today - July 18th

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.

Yes, I was genuinely surprised by the inflation data released yesterday. I have provided my thoughts on what may have caused those surprising dynamics in the analysis section below.

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Markets

• The NGX All-Share Index (ASI) moved up 373.62 (0.6%) points to close at 62,943.35, a week loss of 2.57%, a 4-week gain of 6.33%, and an overall year-to-date gain of 22.81%. Unilever Nigeria led the gainers with 10%, followed by Fidelity Bank (+10%), Daar Communications (+10%) and Sterling Bank (+9.97%).

• Oil prices fell by about 1% in early Asian trade on Monday after major Libyan oilfields resumed production over the weekend following a brief shutdown and after China reported second-quarter economic growth below expectations. The U.S. benchmark WTI Crude was trading down by 0.98% at US $74.68 per barrel, while Brent Crude traded below the US $80 per barrel mark it had reached last week for the first time since May, down by 0.96%, at US $78.88.

• Naira appreciated by 1.00% at the I & E window yesterday, closing at a rate of N795.28 against the US dollar. Similarly, on the streets in the street market, it was a modest appreciation of 0.25%, reaching a value of N801.00 against the US dollar.

• U.S. natural gas futures eased about 1% to a fresh three-week low on Monday on rising output and forecasts for less hot weather over the next two weeks than previously expected.

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National Headlines

• Surprising inflation numbers – As expected, the National Bureau of Statistics (NBS) released the June inflation numbers yesterday. As expected, headline inflation figure went up for the 6^th consecutive time to 22.79%, a new 17 year high. What is surprising though is the slight impact that the removal of fuel subsidy had on the June inflation numbers, despite it being year on year. (See analysis).

• Head you lose, Tail you lose – This is the story of the leadership of the All-Progressive Congress (APC). Though the party won the elections, it was clear at the time leading to the elections that President Bola Tinubu did not have the support of the party leadership. Not surprisingly, that leadership had to go. The only pattern established and clear since the return to democratic rule in 1999 is that the party leadership serve at the instance of the President. It is the reason why opposition parties are weak. So, why pretend? Lets just have appointed party leaders.

• Power subsidies – Since privatization of government electricity assets in 2005, electricity prices have not risen enough to eliminate subsidies. Subsidies is estimated at N2.8 trillion in 7 years, while it is about N57 billion since the start of this year. The planned price increases this month have not been give the nod yet, especially following the removal in fuel subsidies and the aggregation of all Central Bank’s exchange rate windows.

Global Headlines

• Chinese economy is weakling and dragging global economy down – China’s economy grew by 0.8% Q2 2023 on q /q basis, showing continuous weak economic data from China. On an annual basis, the economy expanded by 6.3%, reflecting markets estimates I shared few weeks ago, but below forecast of 7.3%. There is now considerable concern that the weak growth is weakening the prospects of stronger growth in the global economy, especially in the Asian region. At the release of the data, the Yuan lost 0.37% of its value against the US dollar, trading at 7.17, after recently hitting an 8-month low.

• Let’s war on everything – That is perhaps what Vladmir Putin, and Russia is saying after pulling out of the deal that allowed the export of Ukrainian grain, raising fears of another round of rises in global food prices. The deal, reached in July 2022 for a year expired yesterday and Russia said it was not going to renew. Reports suggest that Russia pulled out of the deal because the country is prevented from exporting its own food. After the Russia / Ukraine war started in February 2022, grain and other food prices had skyrocketed, and slightly stabilized since the deal was reached a year ago. Ukraine accounts for 10% of global wheat market, 15% of the corn market and 13% of the barley market.

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News Analysis – Surprising Inflation Numbers

As mentioned above, the NBS released inflation figures for June yesterday, with surprising numbers after the removal of fuel subsidies at the start of the month. Inflation was 22.79% in June, a mere 0.38% from May figure of 22.41%. Year on year, it was 4.19% points higher. It is now the sixth consecutive month of increases in inflation, an 17 year high, and well beyond the 6% – 9% target of the Central Bank of Nigeria (CBN).

Inflation Dynamics in Nigeria June 2022 to June 2023

While it was always expected that the shock may take 12 – 24 months before the shocks fully works itself through the price system, it was also expected that the first impact will be greater than what its reported. As I have discussed before, the three layers of impact is through transport and logistics, food prices, and then salary and wage adjustments.

In the report released, food inflation accelerated to 25.25% in June compared to 24.82% in May 2023 while core inflation increased from 20.06% to 20.27% during the same period. Besides the removal of fuel subsidies in June, it was expected that the data would reflect the inflationary pressure occasioned by the Eidel-Kabir celebration and the planting season effect.

Given this data on inflation, my thoughts are as follows:

• First, as mentioned above, the impact will not be felt only in a single month. There are still many dynamics ahead, following the removal of fuel subsidy.

• It is also possible that inflation was about to peak before the removal of fuel subsidy. In that context, the removal of fuel subsidy has merely triggered another round of increases in prices of goods and services and will reflect in the inflation data going forward.

• It may also reflect the weights in the data and especially that the impact on the other weights in the basket will become prominent in the coming months and not the initial impact.

• So, we expect inflation to remain elevated in the coming months but may not reach the 25% before the year end, which was consensus number.

The Week Ahead

• Canada is expected to release its inflation data on today Tuesday 18^th July 2023, UK inflation rate Wednesday, 19^th July 2023, while Jobless claim data by the US to be release on Thursday, 20^th July, 2023.