ThinkBusiness Today - June 20th

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.

Yesterday, President Bola Ahmed Tinubu sacked all service chiefs and appointed new ones. It was expected, for two reasons. First, it was widely perceived that they have not performed well, going by security indices. Second, because they were appointed by the former President and represent a key component of the failure of the last eight years. The President also dissolved all boards of government parastatals. That is also expected, especially because many of them were constituted in the twilight of the last administration.

Now, it is also widely perceived that the new appointments are not entirely based on merit. So, the question is, how do we build institutions when a great number of appointments, some will argue all, are based on the whims of the President?

I think if we are going to build institutions through concrete and genuine measures, the goal should be that those changes only happen for nonperformance, and it is widely seen to be. That is when we begin to have a New Nigeria, and it is possible.

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Markets

• Benchmark NGX All-Share Index (ASI) inched up 15.16 (0.03%) points to close at 59,016.12, representing a 1-week gain of 5.52%, a 4-week gain of 13.25%, and an overall year-to-date gain of 15.15%. Top share price changes include TANTALIZER (+10%), UNIVINSURE (+10%), supported by slight movement in large cap stocks like DANGOTE SUGAR (+2.17%), Zenith (3.23%) and GTCO (4.74%).

• Market Expectation – UACN Plc AGM holds Wednesday 21^st June 2023, with plans for 22k dividends for every ordinary share to be paid Thursday 22^nd June 2023; Transnational Express Plc AGM holds Wednesday 21^st June 2023, with the plan to pay 2k for every ordinary share to be paid on Monday 26^th June 2023. NPF Microfinance Bank Plc AGM holds Thursday 22^nd June 2023 and will pay 10k on the same day. Skyway Aviation Plc AGM holds Friday 23^rd June 2023 with the plan to pay 16.5k for every ordinary share to be paid on the same day.

• Oil prices fell on Monday as questions over China's economy outweighed OPEC+ output cuts. Also, oil price fell despite seventh straight drop in the number of oil and gas rigs operating in the United States. Brent crude fell 66 cents, or 0.90%, to US $75.95 a barrel while U.S. West Texas Intermediate (WTI) crude lost 69 cents, or 0.96%, to US $71.09. Trading volumes were thin due to a US holiday.

• For the first time since 2016, the exchange rate value at the I & E traded higher than the street market rate. The Naira depreciated by 12.15% to N770.38 at the I & E window. However, it appreciated slightly at the street market by 0.04% to N755.67.

• US natural gas futures rose 1.48% to US $2.67/MMBtu, the highest level in four weeks, supported by a smaller-than-expected stock build, rising demand, and decreased supply. A heatwave forecast from June 23-30 is expected to increase gas demand, notably for electricity generation utilized in air cooling.

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National Headlines

• External Reserves decline - The external reserves decline by US $438 million in the first two weeks of June to $34.66 billion, maintaining the downward trend from last month, according to data from the Central Bank of Nigeria (CBN). Meanwhile, the CBN continued its market friendly reform by removing restrictions on the access to foreign currencies in domiciliary accounts. Before now, domiciliary account holders were permitted to utilise cash deposits not exceeding US $10,000 or its equivalent via telegraphic transfer. With the new guidelines, forex transfers can now be made from one domiciliary account to another, including to other banks. In effect, Nigeria now operates a multiple currency system and there is very little left of any restriction on capital movement into and within the country. Great news. What is not great news is that the motivation and need for extensive use of domiciliary accounts in Nigeria is because of macroeconomic instability.

Global Headlines

• China cut lending rates – Following reports shared yesterday here that market expectation is of a lower growth rate, the People’s Bank of China cut two of its lending rates early today. According to CNBC reports, the Bank cut the one-year loan prime rate and five-year loan prime rate by 10 basis points each. Yesterday, Goldman Sachs had joined in the chorus that the Chinese economy will grow lower than expected by about 0.5% - 0.6%.

• Global framework for digital currencies - The International Monetary Fund (IMF) said yesterday that it is working on a platform for central bank digital currencies (CDBCs) to enable transactions between countries. The IMF wants central banks to agree on a common regulatory framework for digital currencies that will allow global interoperability. Failure to agree on a common platform would create a vacuum that would likely be filled by cryptocurrencies. Authorities have always been concerned about regulation and transparency of digital currencies.

News Analysis - Will Foreign Exchange Reforms lead to improvements in Nigeria’s Foreign Reserves?

The data from the CBN shows that the Nigeria external reserve has consistently declined since the start of the year. It declined by 6.3% or US$2.3billion between January and June 2023. The decline became more steep as the new administration began May 29, 2023.

Nigeria’s Foreign Reserves in US $ billion

In two weeks, the new government has carried out two major policy reform on exchange rates. First, it aggregated all CBN’s exchange rate transactions into the I & E Window. By this, the CBN removed all previous forms of distortions and allocation. Second, it has removed restrictions on amounts and interbank transactions on foreign currencies. Effectively, the Bank has removed virtually all forms of capital control, with the expectation that this will boost supply, strengthen the Naira, and support Nigeria’s macroeconomic stability.

It will help, but it is grossly insufficient.

• It is important that the government does not focus entirely on removing capital controls, but also on the fundamentals of the demand and supply dynamics in the economy.

• The work of the government on crude oil losses is critical. If successful, it will make immediate impact because it improves US $ receipts instantly.

• Work on government budget deficits. The removal of fuel subsidies should begin to impact government revenues, but the expectation is that the “savings” will not be wasted by the Federal and State governments.

• Government assets for sale. I expect that the government will understand that some assets of the government will need to be sold. I don’t want to go into details of what those assets should be. But government needs an upward of US $20 - $30 billion injection into the economy for a measure of stability.

• In addition to asset sale, what are the quick investment portfolios that can be sold and attract foreign direct investment? This can be another US $10 – US $15 billion.

• Removing capital controls without dealing with the fundamental drivers of the demand and supply dynamics will only lead to a run on the reserves. Mind you, we only have US $35 billion. It can be wiped out in three months.

• Finally, the long-term improvement in Nigeria’s business environment will come from price stability and improved national savings. In my 25 years of studying economies, I have not seen a country develop without these two ingredients.

This Week

• The National Bureau of Statistics (NBS) will release Q1, 2023 Terms of Trade Report Thursday 22^nd June 2023 and Nigerian Ports Statistics 2022 on Friday 23^rd June 2023.

• The Bank of England Monetary Policy Committee meets on Thursday 22 June 2023. the Bank of England's Monetary Policy Committee (MPC) announced it had raised interest rates for the 12th meeting in a row. Rates were increased by 0.25 percentage points to 4.5%. It will be preceded by the release of inflation report for May on Wednesday 21^st June 2023.