Afrinvest Monthly Update | Bigger Budget, FX Exposure Prudential Measures... Is 2024 off to a Good Start?
An Extraction of the Afrinvest Monthly Economic & Market Report for January, 2024
Photo Credit: Google
The global and domestic macroeconomic landscape went through a lot of bumpy phases in 2023 – U.S. banking sector tremor, China’s real estate crises, aggressive policy tightening by systemic central banks, deepening de-globalization (championed by the BRICS), a resurgence of tension in the Middle East, multiple debt defaults in SSA, and Nigeria’s currency scarcity episode, political transition, and roll-out of policy reforms by the new government – many of which the effects would fully crystalise in 2024. Picking up from where we left off in 2023, we present a snapshot analysis of key macroeconomic events in Nigeria in the month of January and expected impacts in the months ahead.
To begin with, President Bola Ahmed Tinubu on January 1st assented to the 2024 fiscal appropriation plan which had earlier been revised upward to ₦28.8tn (previously: ₦27.5tn) by the National Assembly (NASS). For context, the appropriation plan comprised of a ₦10.0tn CAPEX provision, ₦8.8tn recurrent obligations, ₦8.3tn for debt servicing, and ₦1.7tn for statutory transfers. On the revenue leg, although the new revised target as well as compositions has not been formally communicated by the budget office (pre-NASS approval target: ₦18.3tn), the upward review of a key driver assumption – the exchange rate (to ₦800.00/$ from ₦750.00/$) – suggests that the revised revenue projection should be in the range of ₦19.1tn to ₦19.6tn.
While we applaud the recalibration of the expenditure plan mix due to favourable CAPEX provision (with a potential for a positive multiplier effect on the economy), we maintain our 2024 macroeconomic prognosis that the revenue projection, especially the crude oil component with expected inflows of c.₦7.7tn or 43.0% is overly bullish. Also, our model suggests that the actual budget deficit should exceed ₦13.0tn (provisioned: ₦10.5tn), while annual GDP growth should print at about 3.0% in a base case as against FG's 3.9% projection. We opine that cost-cutting initiatives, full implementation of CAPEX, and fiscal discipline to rein-in on rising debt are sustainable ways to enhance the impact of budget on economic growth.
In other development, headline inflation rate climbed to 28.9% y/y in December from 28.2% previously, bringing the annual average headline rate for 2023 to 24.5% (2022: 18.8%) – a far cry from the 17.2% target set in the year's budget. The record-high price level was due in part to continued pressure on the food inflation sub-basket amidst lingering insecurity crises, weak mechanisation, and perennial logistic challenges due to infrastructure gaps. Similarly, the halt to PMS subsidy payment (which drove average PMS price up 225.8% y/y to ₦671.86 in December) and currency depreciation (down 49.1% y/y to ₦907.11/$) contributed to upticks in price level. On the other hand, the core inflation sub-component also rose 68bps to 23.1% y/y in December, pulling the annual average rate up to 20.7% from 13.7% in 2022 – reflecting the pass-through effect of the sticky-high global inflation and energy prices, and the knock-on from Naira depreciation.
In view of the lingering upsets to price level, we expect inflation to remain elevated through 2024 though at a slower pace. In a blue-sky scenario, we estimate that the average headline inflation rate would decline to 22.1%. This is hinged on the expected impact of the high base year effect, a muted increase in energy prices (as current prices suggest modest under-recovery payment), reduced FX volatility relative to 2023, and positive spillovers from the decelerating global inflation trend. Particularly in January, we estimate y/y headline inflation to edge lower by 40bps to 28.5% on the back of a muted increase in the m/m food and core indices and a high base year effect.
Switching gears to monetary policy matters, the CBN in a letter to banks dated 31st January 2024 issued new prudential requirements on foreign currency exposures of banks. The CBN’s move was hinged on the need to avert a potential foreign currency and other related risks in the banking sector as the absence of prudential guidelines has incentivised banks to hold excess long foreign currency positions (more FX-denominated assets than liabilities) through their Net Open Position (NOP).
The new FX exposure prudential guidelines provide that (i) the NOP of the overall FX assets and liabilities (both on and off-balance sheet) of banks should not exceed “20.0% short or 0.0% long of shareholders’ funds unimpaired by losses” using Gross Aggregate Method, (ii) banks with NOP outside the stipulated cap should regularise it not later than 1st February 2024, (iii) banks should adopt CBN’s new reporting template for foreign exchange exposure to foster daily and monthly NOP and foreign currency trading position (FCTP), and (iv) banks should increase high-quality foreign assets (cash and government securities) to cover maturing FX obligations and have FX contingency funding arrangement with other financial institutions.
In addition, (i) all new borrowing by/lending to banks should be in the same currency, (ii) the basis of interest rate for borrowing should be the same as that of lending, (iii) any clause of early redemption of Eurobonds should be at the instance of the issuer and approved by the CBN, and (iv) all banks are required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposure and ensure accurate reporting on a timely basis.
In our view, the new guidelines on FX exposure of banks should deliver a short-term relief to the currently unsettled FX market. Precisely, we hold that the policy action should drive reduced FX holdings by banks and boost FX supplies in the official channel given that an NOP condition of 20.0% short would compel banks with net FX assets above 20.0% of shareholders’ funds to either dispose of the holdings or take more FX liabilities to balance out their positions. Conversely, a NOP condition of 0.0% long implies that no new FX assets would be acquired by banks unless current holdings are below 20.0% of shareholders' funds unimpaired by losses. Also, we believe the measures should temper the misalignment between lending and borrowing rates to/from banks, especially on FX-tied transactions.
Nonetheless, we reiterate that the move is not a silver bullet to the ongoing FX challenges. Hence, we advise that measures that would enhance organic FX inflow channels – crude oil production and sales, diaspora remittance, and FPIs & FDIs – be enhanced, while other FX leakage channels in the public sectors are completely blocked. In addition, we are of the opinion that the 24-hour implementation timeframe given by the CBN for banks to realign their NOP position appears hasty and may lead to weak compliance or unconventional adjustments with potential non-satisfactory outcomes in the near term.
Chart 1: 2024 Budget of “Renewed Hope”
Source: NASS, FMFBNP, Afrinvest Research
Chart 2: Macroeconomic Dashboard
