ThinkBusiness Today - July 26th

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.

Hello and good morning, all.

We have been told to expect the list of Ministers tomorrow. I do not have huge expectations. I will be very delighted to have just 10 – 12 solid people that are reform conscious, understand the economy, know what it takes to attract investment and create jobs, and disciplined enough to follow through on reforms and process.

Please have a great day.

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Markets

• Equity market sustained the positive gains started Monday, with NGX ASI up by 1.11%, increasing by 722.74 points to close at 65,991.02, representing a week gain of 3.49%, a 4-week gain of 11.46%, and an overall year-to-date gain of 28.76%. Key share price movement include Ikeja Hotels (10%), FTN Cocoa Processors (10%), Seplat Petroleum Development Co. (9.99%) and Skyway Aviation Handling Co. (9.83%).

• Oil prices rose again Tuesday on optimistic forecasts published by the International Monetary Fund (IMF), raising its 2023 global growth estimates by 0.2 to 3%. WTI traded at US $79.70 up $0.96 (1.22%) on the day while Brent crude rose above $83, up $0.86 (+1.04%).

• At the I & E window, Naira remained largely flat, appreciating by 0.13% and closed at N791.42 against the US $. On the streets, Naira saw a modest depreciation of 0.58%, reaching a value of N871.75 against the US dollar. The gap is between the two rates are widening.

• US natural gas futures traded around $2.7/MMBtu on Tuesday, following a 6.9% gain in the previous week driven by expectations of heightened demand for air conditioning amid hotter-than-usual weather forecasts until at least August 4.

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National Headlines

• CBN raised rates again – The Monetary Policy Committee of the CBN raised rates to 18.75%, the highest in the history of MPRs. (See analysis Below).

• Bail and custody of Godwin Emefiele – What a coincidence that the first meeting of the CBN monetary policy committee, which he chaired the last one, happened on the same day that the former governor was arraigned at a Federal High Court in Lagos. The suspended governor was granted bail in the sum of N20 million on two counts of illegal possession of firearms and ammunition. What I still do not understand is why security forces are jostling and fighting over who keeps him. Do they think he carried the CBN with him?

• 3.2% growth expectations for Nigeria – The IMF, in its latest economic outlook has retained its 3.2% growth forecast for 2023 but lowered its Sub-Saharan Africa projection by 0.1 to 3.5%. It is not clear yet if the IMF has taking into consideration the ongoing economic reforms in the country.

Global Headlines

• A better outlook for the global economy – The IMF on Tuesday in its World Economic Outlook Report raised its 2023 global growth estimates by 0.2 to 3%, betting on resilient economic activity in Q1 to continue but warned that persistent challenges were dampening the medium-term outlook. The report acknowledges the lower direction of inflation and the acute stress in the banking sector in the US and some sections of Europe had receded, but the balance of risks facing the global economy remained tilted to the downside and credit was tight. Meanwhile, it raised growth forecast for India to 6.1%, expected to be the fastest growing major economy in the world in 2023.

• Technical skills for manufacturing in the US – The U.S. semiconductor industry faces a shortfall of roughly 67,000 workers by 2030, according to an industry association study published on Reuters. The chip industry's workforce is projected to grow to 460,000 by the end of the decade, up from roughly 345,000 this year. This area of manufacturing has become critical in the US following recent changes by Biden administration to expand manufacturing in the US, “derisk” China, and mitigate supply chain risks that emerged during and immediately after the Covid – 19 pandemic. This has led to surge in demand for technical workers in the US. According to the report, 1.4 million positions may go unfulfilled in the US 2023.

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News Analysis - CBN raised rates

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate (MPR) by 25 basis points to 18.75% from 18.5%, highest interest rate in 22 years. This is the conclusion of the first meeting under President Bola Tinubu, the first under the chairmanship of the Ag. CBN governor Folashade Shonubi.

Before the July meeting, NBS released the June surprising inflation numbers of 22.7% that showed lower than expected impact of the fuel subsidy removal. Inflation is expected to rise further following second and third order impact of fuel subsidy removal. Notwithstanding, demand’s response to price changes is weak due to structural issues and further interest rate hikes only worsen the situation. First, a chunk of the Nigeria economy is not dependent on credit. Second, the major pass through of inflation is the exchange rate. Third, there is extremely accommodative monetary policy through fiscal deficits and significant supply constraints.

The major impact of the rate hike will be on businesses with bank loans. They will receive letters today about what the rate hike means for the interest they pay on their bank loans. Currently, the prime lending rate which stood at 14.71% and the maximum lending rate which is 28.31% will be adjusted upward with the new hike in the MPR. This higher borrowing costs for businesses is weakening businesses and the banks and slowing down economic activity. Few weeks ago, we analyzed here how there has been a shift by the businesses towards commercial papers, with an average rate of about 14% – 16%.

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