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The Recent Trend of Moderation in Inflation is Expected to Persist

Wednesday, December 15, 2021 / 06:04 PM / By
Comercio Partners Asset Mgt / Header Image Credit: 
Comercio Partners 

Report Summary

The Macroeconomy

  • Real GDP growth printed at 4.03% in Q3 2021.
  • Headline inflation maintained its declining trend in November 2021.
  • The Naira appreciated against the U.S. Dollar on the I&E FX


Financial Markets

  • Equity market sustained uptrend in November.
  • Local bond market was mixed in the review period.
  • The Eurobond market sustained its bearish bias.


Expectation for the Coming

  • Real GDP growth should
    decelerate further.
  • The recent trend of moderation
    in inflation is expected to persist.
  • Corporate disclosures should
    drive most equity market activity.

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Variant Of Covid-19 Rattles Global Market

Just as the world subtly basked in the
euphoria of the waning of uncertainties around the delta variant of the
Covid-19 virus, we have suddenly been confronted with the omicron variant of
the deadly virus that has now been reported in at least 23 countries including
the U.S., South Africa, and Nigeria. At the tail end of November, the World
Health Organization (WHO) designated Omicron (variant B.1.1.529) a variant of
concern, on the advice of WHO’s Technical Advisory Group on Virus Evolution
(TAG-VE). The decision was based on the evidence presented to the TAG-VE that
Omicron has several mutations that may have an impact on how it behaves, for
example, on how easily it spreads or the severity of illness it causes. Policymakers and markets around the world continue to oscillate as the world race to
ascertain the extent to which the virus can compromise progress recorded so far
in the battle against Covid-19.


Elsewhere, the appointment of Jerome
Powell as the Federal Reserve Chairman for another four-year term beginning
February 2022 ended weeks of speculation over U.S. apex bank’s policy
trajectory. Whilst the appointment of Powell has essentially entrenched an era
of a Hawkish Fed who just recently changed its erstwhile position that
inflationary pressures were transitory, the appointment of his closest
contender, Lael Brainard (who has now been promoted to vice-chairman) would
have seen the emergence of a U.S. Fed that is more dovish in its policy
posture. Consequently, the Feds have commenced tapering its asset-purchase
program starting with $15 billion, split across $10 billion treasury purchases
and $5 billion mortgage-backed securities. Although the Fed has noted plans to
close out the asset purchase program by midyear 2022, there are credible talks
around closing out the pandemic support program even faster, as inflation which
hit 6.8% (year on year) in December remains a major cause for concern. However,
we are cognizance of how much unfolding insights into Omicron can influence
decisions going forward.


On the local front, the fuss on
whether to withdraw subsidy payments on petroleum motor spirit (PMS) remains
present. The Federal Government of Nigeria currently expends roughly
billion monthly on subsidizing PMS consumption in the country, a number that
keeps increasing. However, due to slackly constituted structure of
institutions, the masses do not get the full benefit of this humongous monthly
expenditure. With the World Bank and indeed the international financing
community almost daily sounding the gong in support of subsidy removal to the
Nigeria authorities, it remains unclear if the government will muster the
courage and political will to finally end the perceived treacherous era of
subsidy payment and allow a sternly market-driven industry, geared at creating
value for the Nigerian people.


The Macro Economy


Growth & Oil Production

Nigeria sustained the growth
trajectory seen in the last three quarters, as the economy recorded a real
growth rate of 4.03% y/y in Q3 2021. The Q3 2021 growth rate represents a
decline of 0.98% when compared to the preceding quarter (5.01%) but reflects a
sharp uptick of 7.65% relative to the growth rate recorded in Q3 2020 which
stood at -3.62%.


The oil sector sustained its
downtrend, as it recorded a real growth rate of -10.73% y/y in the third
quarter of 2021. The oil sector marked its sixth consecutive period of
contraction, despite the sustained bullish trend in the international oil
market. Oil sector performance was dampened by the local production level, as
it declined in the review period. Local oil production stood at 1.57mbpd,
reflecting a decline of 0.10mbpd when compared to the production level in Q3
2020 (1.67mbpd). Elsewhere, the non-oil sector recorded a real growth rate of
5.44% y/y in the review period, up by 7.95% and down by 1.30% relative to the
rates recorded in Q3 2020 (- 2.51%) and Q2 2021 (6.74%), respectively.


Of the three major activity sectors,
service retained the largest quotient in terms of GDP contribution, at 49.65%.
Hence, agriculture and industries contributed 29.94% and 20.41%, respectively,
to the GDP in Q3 2021. This explains the improvement seen in real GDP growth,
as the service sector, which accounts for the lion’s share of the GDP, grew by
8.41% in the review period. Agriculture also grew by 1.22%, while industries
remained in the contractionary region at -1.63%.


In other news, OPEC, in its monthly
oil market report for November revealed that Nigeria’s oil production dipped
monthly by 1.52% to 1.23mbpd in October 2021, as structural problems in the
sector continues to weigh on output. This decline was recorded despite the
400,000bpd monthly output increase by OPEC+. In addition, OPEC estimated a
demand growth of 5.7mbpd for 2021, 0.16mbpd lower than the preceding month’s
estimate, putting the total demand for the year at 96.4mbpd. On the supply
side, OPEC forecast a non-member supply growth of 0.7mbpd to average 63.6mbpd,
leaving their projection unchanged from the preceding month’s estimate.


Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd. 


Inflation sustained its path of moderation in October 2021. The headline
index grew by 15.99% YoY in October 2021, 0.64% lower than 16.63% recorded in
September 2021. Likewise, the food and core inflation metrics respectively
inched up by 18.34% and 13.24% YoY in October 2021, 1.23% and 0.50% lower than
19.57% and 13.74% recorded in September 2021. The drop in yearly headline
inflation marks the seventh consecutive decline, following a 19-month uptrend
that lasted from September 2019 till March 2021. The moderation in the headline
index was largely driven by the sustained decline in the food subindex, as well
as the reversal of the core segment uptrend. In October 2021, headline
inflation rose by 0.98% MoM, representing a 0.17% decline from the rate of
1.15% that was recorded in the previous month. The yearly average rate rose to
16.96%, 0.13% greater than 16.83% recorded in the previous month. The
decelerated rate of…

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