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Analysis

Analysts see sustained upward pressure for August inflation rate as Nigeria’s Net FX Inflow Spikes USD6.43 billion

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In the just concluded week, the Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS) showed that annual inflation rate maintained its upward trend as it rose further to 12.82% in the month of July (higher than 12.56% in June) in line with our expectations.

The higher inflation rate was
chiefly due to a spike in the food prices given the ongoing planting season and insecurity challenges in some part of the country.

Specifically, annual food inflation rose to 15.48% in July from 15.18% printed in June.

Also, monthly food inflation jumped to 1.52% in July (from 1.48% in June) as prices of bread, cereals, potatoes, yam and meats, amongst others, increased.

Similarly, we saw imported food index expand to 16.35% (higher than 16.31% in June) – as Naira further depreciated against the USD at the Interbank, Bureau de Change and the parallel markets.

Specifically, two months moving average foreign exchange rates rose y-o-y by 3.47%, 15.74% and 28.40% to N381/USD, N414.81/USD and N463.50/USD at the respective market segments in July 2020.

However, Core inflation rate moderated to 10.10% (from 10.13% in June) despite the increases recorded in clothing and foot wear (+0.90%), transportation costs (+0.37%) and housing and energy (+0.11%).

Also, on a monthly basis, core inflation slowed to 0.75% (from 0.86% in June).

Meanwhile, urban and rural inflation rates rose to 13.40% and 12.28% (higher than 13.18% and 11.99%) respectively.

In another development, the Central Bank of Nigeria (CBN) in its recently released monthly economic report for April 2020 showed that Nigeria’s foreign exchange (forex) inflow tanked by 25% to USD9.72 billion in April, from USD12.15 billion in March.

According to CBN, the sharp decline in forex inflow was due to the lower crude oil revenue as the price of crude per barrel plummeted to USD14.30 in April from USD32.30 in March given the weak global crude oil demand amid lockdown of most economies due to COVID-19 pandemic fears.

On the other hand, forex outflow from CBN fell by 55.1% to USD3.29 billion in April, from USD7.32 billion in March. CBN noted that the moderation was driven, chiefly, by the 69.3% decline in interbank utilisation.

Also, CBN stated that it substantially reduced funding at the I&E FX Window and withdrew intervention at the Bureau de Change (BDC) window in the month of April 2020.

Following the decline in interbank utilisation, the significant funding reduction at the I&E FX Window and the non-intervention in the BDC market, CBN printed a net inflow of USD6.43 billion in April, higher than the USD5.63 billion net forex inflow recorded in March 2020.

On the foreign scene, the US crude oil input to refineries moderated week-on-week by 1.16% to 14.49 mb/d as at August 14, 2020 (and lower by 18.14% to 17.70 mb/d printed in August 16, 2019).

However, as the U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell w-o-w by 0.32% to 512.45 million barrels (but higher by 17.05% from 437.78 million barrels as at August 16, 2019), WTI crude price rose w-o-w by 1.37% to USD42.82 a barrel.

Elsewhere, Europe’s Brent crude rose by 0.22% to USD45.06 a barrel; however, Nigeria’s Bonny Light crude moderated by 1.29% to USD44.05 a barrel as at Thursday, August 20, 2020.

We expect sustained upward pressure on the inflation rate in August as the ongoing planting season would have a northward effect on food prices going forward.

Meanwhile, we note that the increased net forex inflow into Nigerian economy in April 2020 may not be sustained going forward as the gradual reactivation of local economic activities, especially reopening of international flight, and possible reintroduction of the sale of foreign currency to BDC in order to supress further depreciation of the Naira against the USD would increase the need for forex.

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Analysis

Economist See Nigeria’s economy contracts in Q3 again after 6.1% y/y in Q2

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Nigeria’s economy contracted by 6.1% in the second quarter of 2020 from a year earlier, the statistics office said on Monday, as lockdowns in its two main cities and low oil prices took their toll.

Gross domestic product shrank 6.1% in the three months through June from a year earlier, compared with growth of 1.87% in the previous quarter, the Abuja-based National Bureau of Statistics said on its website on Monday. The median estimate of six economists in a Bloomberg survey was for a 4.05% drop in output. Quarter on quarter, real GDP decreased by 5.04%.

Oil production fell to 1.81 million barrels a day from 2.07 million barrels in the previous three months. That’s the lowest since the first quarter of 2017, which was the last time Africa’s largest economy contracted.

a screenshot of a cell phone: Nigeria’s economy contracted heavily in the second quarter
© Bloomberg Nigeria’s economy contracted heavily in the second quarter
Crude contributes less than 10% to Nigeria’s GDP, but it accounts for about 90% of foreign-exchange earnings and half of government’s revenue. That means the plunge in oil prices in the wake of the coronavirus pandemic, which hit as the economy’s recovery from a 2016 slump was still gaining traction, have emptied coffers

Still, the drop in output was wider than just crude. The oil sector contracted by 6.6% from year earlier and the non-oil sector shrank by 6.05%, the first decline in non-oil GDP since the third quarter of 2017.

Nationwide Shutdown
“The decline was largely attributable to significantly lower levels of both domestic and international economic activity during the quarter, which resulted from nationwide shutdown efforts aimed at containing the Covid-19 pandemic,” the statistics office said.

The outlook for the economy remains fragile. The International Monetary Fund sees Nigerian GDP shrinking 5.4% this year, its biggest contraction in nearly 40 years.

“Macro headwinds — depressed oil prices, a slow pickup in global trade, a strong dollar supported by the Fed — along with local structural inefficiencies, will continue to batter the Nigerian economy,” Ikemesit Effiong, head of research at Lagos-based SBM Intelligence, said before the release.

What Bloomberg’s Economist Says
“We expect the economy to contract again in 3Q, but at a slower rate than 2Q. The above target oil production in April-June, though, mean steeper production cuts will be required in August and September in order to reach full OPEC compliance. At the same time, a weaker naira and ongoing foreign-exchange restrictions will continue to weigh on growth in the non-oil sector.”

–Boingotlo Gasealahwe, Africa economist

The West African country, which has Africa’s largest economy and is the continent’s top oil producer, reported its first coronavirus case in late February. It imposed lockdowns lasting just over a month in commercial hub Lagos and the capital Abuja which ended in early May.

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