ThinkBusiness Today - May 4th

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Buy now, pay later. I’m sure you are very familiar with the term, especially with shopping abroad. In Nigeria, there is rarely buy now, pay later except you are President Muhammadu Buhari. Yesterday, the Senate approved the President’s controversial request of N23 trillion ways and means (cash from printing machine!) as debt. As expected, the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC) found the approval disgusting, as reported in Vanguard. Let’s understand what this means:

• This was extra budgetary spending by the government. It is like your spouse hiding credit card transactions until they mature – 8 years in this case.

• There was no approval for the expenditure by the Senate and the House of Assembly.

• This is a massive scale of “inflation tax” on Nigerian citizens and businesses. Still wondering the source of Nigeria’s inflation?

• The government contravened the Central Bank of Nigeria (CBN) Act, 2007 that stipulated that “ways and means” should not exceed 5% of the previous year revenue.

• We have been lied to for eight years. Data on budget and deficits have been manipulated for eight years.

If we are going to be serious about institutional building, I expect a serious Assembly, hopefully the next one, to investigate how a government makes a whopping N23 trillion extra budgetary spending or should we expect this Idi Amin’s type of governance to continue?

Markets

• The benchmark NGX All-Share Index (ASI) passed 88.71 (-0.17%) points to close at 52,207.77, representing a 1-week gain of 1.17%, a 4-week loss of 2.6%, but an overall year-to-date gain of 1.87%. The decline is attributable to sell off in Transcorp (-9.4%), MTNN (-0.65%) and other cap stocks.

• On Wednesday, Oil prices extended losses on Wednesday after plunging 3.9% to $72.35, as investors fret about the outlook of the U.S. economy ahead of an expected Federal Reserve interest rate hike later in the day. The Fed raised interest rate by 0.25% to 5% - 5.25% range.

• The Naira depreciated marginally by 0.55% at the parallel market to close at N737/$ and declined by 0.03% at the I & E window, closing at N462.33/$.

• Natural gas extended its decline by 4.2% to close at US $2.1, trading at a 21-month low amid record LNG sales and rising stockpiles.

• Zenith Bank Plc has said it will pay its shareholders N100.47 bn dividend for the 2022 financial period, bringing total dividends for the 2022 financial year to N3.20 per share.

• Guaranty Trust Holding Company Plc (GTCO) has recorded a Profit before Tax (PBT) of N74.1 billion for the three-month period ended March 31, an increase of 36.5 per cent over N54.3 billion recorded in the corresponding period last year. It added that the group’s loan book (net) dipped by 1.5 per cent from N1.88 trillion recorded as at Dec. 2022 to N1.86 trillion in March 2023.

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National Headlines

• The Nigerian Senate has gazette the “ways and means” of N23 trillion Naira, equivalent of US $51 billion into the official debt management office stock. (See introduction).

• The Federal Government deducted over N78bn from allocations made to the states for external debt servicing, according to data from the Federation Account Allocation Committee Disbursement reports published by the National Bureau of Statistics. The most hit state by the deductions was Lagos, with about N23.61bn deducted in 2022 for external debt servicing. It was followed by Kaduna with N10.25bn deducted, and Cross River with N7.56bn deducted. The sum of N4.27bn, N2.74bn, N2.62bn and N2.15bn were deducted from Oyo, Rivers, Ogun and Edo respectively.

• The Manufacturers Association of Nigeria (MAN) has warned that the newly released 2023 fiscal policy measures (FPM) will lead to industry recession, capacity underutilization, and layoffs of workers. Some cases were up to 50 per cent on ad valorem and 75 per cent on specific duty rates, were over and above the already approved high increases of up to 50 per cent and 45 per cent respectively majorly on beer, wines and spirits, tobacco.

Global Headlines

• The Federal Reserve on Wednesday approved its 10th interest rate increase in just a little over a year and dropped a tentative hint that it will wait for data and foecast to determine the future of interest rates. The increase takes the Fed funds rate to a target range of 5%-5.25%, the highest since August 2007 (See Graph below). This decision comes amid U.S. economic fragility and shocks to the banking system.

• According to FT reports, Iranian forces seized a Panama-flagged oil tanker on Wednesday in the Strait of Hormuz, the second time in less than a week that Iran has captured a commercial ship in the region. About 20% of the world's crude oil and oil products passes through the Strait of Hormuz, a narrow choke point between Iran and Oman. However, oil price declined (See markets above).

• The Africa Union has appealed to both sides of the fight (see Monday 1^st May edition) for a ceasefire. The appeal is landing in deaf ears as fighting continues. Sudan is currently suspended from participating in the Africa Union activities since 2019. The Africa Union Peace and Security (PSC) council had suspended the country from participation in all AU activities until the effective establishment of a civilian led transition authority.

News Analysis - Where are we in the economic cycle

As expected, the Fed raised its rate for the 10^th time in just a little over a year to 5% - 5.25% range. The rate rise comes amidst the ongoing mid-sized banking crisis in the US, and fragile outlook for the US economy. The federal reserve Chairman, Jeremy Powell, said after the rate increase that “a decision on a pause was not made”. They board will look at the data again in June, depending on the accumulative tightening effects of already rate increases, lags in economic conditions following the rate increases and the effects on the banking sector in the country.

As mentioned yesterday, the conversation around the rate rise is in two fold – what it means for growth (will there be a recession?), and what it means for the shock permeating US banking sector. Today, I thought to check what history says, and consider where we are in the economic cycle, for which the US still provides considerable leadership.

Tiffany Wilding and Andrew Balls, both of PIMCO, one of US largest investment management firms with assets under management of about US $2 trillion, noted the following, “historically, recession and unemployment increases have tended to begin around 2 – 2.5 years after the start of a hiking cycle. That is, concrete and real economic effects begin to happen after 2 years of the start of a raise in interest rate cycle.

Taking this thought, see below two graphs showing two recent and different seasons in the history of Fed rate changes in the US. The first graph shows that the Fed started to raise rates in April 2022. Recall that for over a decade before then, the rate was literally flat and nil to boost economic growth between 2010 and 2021.

US Fed Rates (March 2022 – May 2023)

US Fed Rates (January 2004 – November 2007)

Comparing the two cycle of rate rises, it took 18 months for the rates to reach 5%, from 1% between January 2004 and November 2007, while it took 14 months for the Fed to raise rates from 0.4% to 5% in the last year. In the context of this narrative, the next six months is critical – how the banking shocks pan out and what happens to economic conditions. But as I also noted yesterday, no two economic shocks are completely alike. It is widely agreed the economic conditions are different today than they were in the period leading to the 2008 financial crisis. For us here in Nigeria, the major transitory channel is through oil prices. Although, there is also the self-inflected output dimensions. Finally, I will keep tracking these developments and sharing them with you here.