ThinkBusiness Today - May 31st

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Tinubu moved markets

I sympathise with the President. He could not wait to end the folly fuel subsidies of over 50 years. Following his announcement, queues and chaos followed at filling stations across the country.

Could there have been a better timing? Not really. Many people think that it is the ordinary man that is against the removal of fuel subsidy. That is not the case. The greatest beneficiaries of fuel subsidies are the “establishment”. The best time to ditch fuel subsidies was 50 years ago. The next best time is now.

Every talk and discussion around preconditions and conditionalities are meant to prolong the debate and buy more time for corruption. As explained yesterday, the opportunity cost is Nigeria’s investments, growth, and jobs.

Now that the queues and chaos have emerged, it is the time for the President to hold his nerve and not go back. If he does, we are back to excuses and perhaps the first step to the failure of his presidency.

Markets

• Nigerian equities rose 5.2% on Tuesday as investors reacted positively to President Bola Ahmed Tinubu's inauguration speech. The benchmark NGX All-Share Index (ASI) rose 2,764.47 (5.22%) points to close at 55,738.35, marking a 6.43% one-week gain, a 6.36% four-week increase, and an 8.76% year-to-date gain.

• Crude oil prices slid on Tuesday - Brent crude by about 5% close at US$ 73.81 while West Texas Intermediate traded below US $70 per barrel. With the next OPEC+ meeting taking place this Sunday and the U.S. debt ceiling saga set to draw a conclusion around the same time, oil markets are sure to be on edge all week.

• Nigeria’s Parallel market reacted positively on the inauguration day of Bola Ahmed Tinubu as Nigeria’s 16th President. Naira on Tuesday strengthened against the US dollar, gaining 1.58 percent or N12 at the parallel market. The dollar was quoted at N755 compared to N767 /US $ quoted in the morning.

• Continued outlook for mild temperatures had natural gas futures trading lower to test technical support early Tuesday. The Natural gas futures was down 7.1 cents to $2.23/MMBtu. This trend may continue in the near term as traders are expecting the weather pattern to remain unfavorable for natural gas prices in the first week of June.

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National Headlines

The President’s economic team? – Yesterday, the President met with two critical people – the Governor of the Central Bank of Nigeria (CBN) Godwin Emefiele and the Group CEO of the Nigeria National Petroleum Corporation (NNPC). Both because of the fuel queues and chaos that emerged after his announcement on Monday and what is widely accepted that the economy is the number one issue in this administration. In the coming days, attention will shift to who and who becomes a minister in the federal republic of Nigeria under President Bola Ahmed Tinubu. I hope the President will break with the most recent tradition of appointing those with weak knowledge of how the economy works, but appoint knowledgeable and courageous individuals into the economic team – Ministers of Finance, Trade and Industry, Transport, Telecoms, Agriculture, Chief Economic Adviser etc. I then hope that they will focus on the following minimum:

• Deal with leakages, wastes, and corruption (in that order) in government expenditure so Nigerians can get serious value for every kobo

• Embark on serious reforms in the civil service, tax, land use, foreign exchange, and trade, remove overlapping government agencies

• Sell to the private sector unproductive and idle federal government assets

Then, ensure the listing of state owned enterprises, such as NNPC on the Nigeria’s stock market

Global Headlines

• Debt ceiling vote expected later this morning - The compromise bill to raise the debt ceiling that House Republicans released on Sunday passed its first major test on Tuesday in the House Rules Committee, with a 7 to 6 votes in favour. A floor vote is planned for later today.

• Call it pollution instead of climate change – Arnold Schwarzenegger has advised climate change activist to call climate change what it really is – pollution, and deal with the communication problem the push has in public minds. He says, “pollution kills” and that is simple enough. Meanwhile, in measures towards limiting pollution, the French government has banned domestic flights for which there are alternative train services of less than 150 minutes, according to CNBC reports.

News Analysis – Unified Exchange Rates

President Tinubu promised on Monday a unified exchange rate and thereby remove distortions in the present dual exchange rate system. That is, he wants to deal with the gap in the graph below between the CBN managed I & E window and the street price exchange rates.

Nigeria’s Naira to the US $ at the I & E and Street Markets

As the graph above shows, the I & E rate at N460/ US $ and the parallel market rate at N750-770/ US $, reflecting a 65% gap. It is not entirely clear yet how it will be achieved, especially because it is generally agreed that the I & E window rate is not a true reflection of the deteriorating economic conditions in the economy in the last few years while the street rate may be too weak.

But ultimately, foreign exchange responds to changing and moving fundamentals, and perception. It is now up to the government, unlike the previous one, to ensure that on a constantly basis, it puts in place measures of macroeconomic stability. That is the most important.

Macroeconomic stability supports savings and investment decisions in the country, attracts foreign investments, and therefore, the demand for Naira. The opposite, as we have seen in the last 10 years, is a disincentive to savings and investment in the country and scares investments, both of foreigners and Nigerians – foreign education, foreign healthcare, “japa”, trading rather than long term investments etc.

Nigeria international payment for education and health in current US$’ billion 2014-2020

Finally, the perception is more critical now. Following the inaugural speech, the markets moved in the positive direction, signaling that the market thinks the right things will be done. So, even before tangible progress is made, there is an expectation. That expectation will need to be sustained by concrete, tangible and measurable progress on price stability. The investments, growth, and jobs will follow.

The Week Ahead

• OPEC+ will meet on Sunday June 4, 2023. At the last meeting April 3, 2023, it announced output cuts of 1.16 MBPD. Some OPEC+ members announced voluntary production cuts in April that would take effect in May, but oil prices have continued to decrease due to concerns about economic growth and interest rate hikes.

• The NBS is expected to release the Q1 2023 capital importation data today Wednesday 31st May 2023. The latest data shows that the capital importation has been declining since Q4 2021. Put in perspective, the capital importation declined by 20% to US$5.3billion in 2022 from US$6.7 billion in 2021.

• Also, the NBS is expected to release Q1 data on selected banking data today Wednesday 31^st May 2023. This data cut across credit, payment channel, staff strengths among others.

• On Wednesday 31^st May 2023, France, Italy, France, and Canada are expected to release their various reports on Inflation report for the Month of April.

• Friday June 2, 2023, the United State will release its monthly unemployment rate for the month of May.