ThinkBusiness Today - May 3rd

E kaaro o, Ututu Oma, Barka da Safiya – Good morning, and welcome to ThinkBusiness Nigeria.

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• It is the season of double C – confidence and contagion. Confidence is the greatest currency of any banking system, and it now appears that confidence in mid-sized banks in the US is ebbing away fast. And as its ebbing away, contagion follows closely. The ink has not dried on the deal that sold First Republic to JP Morgan when shares of PacWest and Western Alliance both declined 28% and 15%, respectively on Tuesday’s trading.

• Nearer home, President Buhari’s government is falling over itself to run our lives after May 29^th . In the last week, attempts at removal of subsidy and census around the time of the administration’s handover has collapsed. I expect that the latest changes to the government’s fiscal policy measures will collapse too when a new government comes in.

Markets

• The benchmark NGX All-Share Index (ASI) lost 107.03 (-0.2%) points to end the day at 52,296.48, a 1-week gain of 1.83%, a 4-week loss of 1.56%, but an overall year-to-date gain of 2.04%. Although the oil and gas index increased by 1.05% and the banking index increased by 2.84%, the industrial goods index fell by 0.2%, due to sell pressures in Wapco (-1.66 per cent) which weighed down the market.

• Wema Bank Plc earned N39.35 billion in gross profits in Q1 2023, 35% over the N29.14 billion reported in the same period last year. Interest income increased by 32% y/y to reach N33.63 billion, up from N25.53 billion in Q1 2022. Non-interest income increased by 1.96 percent year on year to N5.72 billion, up from N5.61 billion in Q1 2022.The bank declared a profit before tax (PBT) of N6.21 billion, an increase of 88.18 percent y/y from the N3.30 billion reported in Q1 2022.

• Crude oil prices fell 5.13% to settle at US$75.24 yesterday, owing to a surprising fall in industrial activity in China, as well as the prospect of another rate hike from the US Fed, raising concerns about oil demand. Natural Gas price also declined by 4.14% on Tuesday on rising output and a decline in the amount of gas flowing to U.S. liquefied natural gas (LNG) export plants in recent days.

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National Headlines

• The Edo State Governor, Mr. Godwin Obaseki said the Federal Government might not be able to pay workers’ salaries beyond June 2023 without resorting to massively printing money or removing fuel subsidy. In anticipation of the huge holes in government finances after the collapse of the plan to remove fuel subsidy in June, the federal government raised the excise duties on tobacco and alcoholic beverages in its latest fiscal policy measure (FPM), further than it planned in previous FPMs. The fiscal measures have been roundly criticized – see clips of Taiwo Oyebode, PwC’s Fiscal Policy Partner and West Africa Tax Leader with CNBC Africa and News Central. The government has realized it will not be able to remove subsidy, so it’s gone for the “easiest” (“sin tax”) increases to plug the catastrophic holes in its finances.

• The International Monetary Fund has said Nigeria could lose an estimated $10bn of foreign direct investment and official development assistance inflows to geo-political tensions. The IMF, in its country focus on Sub-Saharan Africa said the figure is about a half per cent of the nation’s annual Gross Domestic Product. The losses could be compounded if capital flows between trade blocs were cut-off because of geo-political tensions.

• The production output of Nigeria’s Manufacturers fell by 9.7 percent to N6.67 trillion in 2022 from N7.39 trillion in 2021 on account of forex scarcity, high inflation, high cost of energy and limited household purchases.

Global Headlines

• Brazil is the latest country to propose legislation that would shift the burden of reporting illegal content to technological companies. It proposes a legislation that will fine technologically companies for carrying fake news and other illegal materials on their site. It follows the UK two weeks ago that is strengthening its measures through its competition and market authority (CMA). The measures will become law next year. Last year, the EU passed similar law – Digital Services Act (DSA) that will come into effect, also in 2024. The common themes in all these are antitrust and protection of consumers online experience. But big technological companies argue that it may lead to restrictions in freedom of speech.

• Major U.S. stock indexes fell more than 1% each on Tuesday as regional bank shares tumbled on renewed fears over the financial system and as investors tried to gauge how much longer the Federal Reserve may need to hike interest rates. As I said in the introduction, the ink had faintly dried on the deal that sold First Republic to JP Morgan when shares of PacWest and Western Alliance both declined 28% and 15%, respectively on Tuesday’s trading.

• U.S. job openings fell for a third straight month in March and layoffs increased to the highest level in more than two years, suggesting some softening in the labor market that could aid the Federal Reserve's fight against inflation. Still, the labor market remains tight, with the monthly Job Openings and Labor Turnover Survey, or JOLTS report, from the Labor Department on Tuesday showing 1.6 vacancies for every unemployed person in March. That was the lowest reading since October 2021 and compared to 1.7 in February.

News Analysis

Godwin Obaseki, Edo State’s governor, in his usual candor, on Monday, said the Federal Government might not be able to pay workers’ salaries beyond June 2023 without removing fuel subsidy. (Source https://tribuneonlineng.com/salary-payment-will-be-impossible-unless-subsidy-removed-obaseki/)

Mr. Godwin Obaseki might be right based on the following reasons:

First, the contradiction in the retention of the policy on subsidy is underscored by the dire revenue situation of the government at the state level, with most of them facing the burden of salary arrears on account of the depletion in revenue accrued to the Federation Account. As the NNPC continues with deductions from oil and gas earnings to fund the corruption-prone fuel subsidy policy. In 2022, FAAC lost about N4.3trillion and this led to the inability of most states to pay salaries and fulfill their social contract to citizens. For instance, in August 2022, Eight state governments failed to pay some of their workers for at least six months, a new report says. The states are Taraba, Nasarawa, Edo, Ebonyi, Ondo, Plateau, Imo, Abia. They owe active workers as well as retirees.

Second, given the international market condition, the largest source of revenue, oil revenue, may continue to drop. In its short-term energy outlook issued on April 11, the US Energy Information Administration (EIA) predicted that the price will average $85.01 in 2023, down from $100.1 in 2022, and then decline to $81.21 in 2024. With diminishing earnings in 2023, removing the subsidy will further exacerbate the issue.

The Week Ahead

• The NBS is expected to release the State Disaggregated Mining and Quarrying Data (2022) on Friday.

• This weekend, the coronation of their Majesties King Charles III and Queen Camilla will take place Saturday 6 May in London. King Charles, formerly known as the Prince of Wales, became king on the death of his mother Queen Elizabeth II on 8 September. Nigeria, as part of the commonwealth family, is still connected to the throne. Lightheartedly, Tiwa Savage, one of Nigeria’s truly global music global stars, will perform at one of the concerts celebrating the coronation on Sunday 7 May.