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Global stocks tumble on “Corona” sell off

Major stock indexes around the globe posted significant declines due to sell-off by investors as a result of angst over the spread of the coronavirus.

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Global stocks tumble on "corona" sell off, BLOODY WEEKS: Coronavirus cost investors N1 trillion, triggers devaluation fears, Global Market Summary on Tuesday, Analysis: The economy is crashing, avoid falling knives,, Debt crisis looms in emerging markets,Debt crisis looms in emerging markets

The rout across global markets deepened on Friday, as major stock indexes around the globe posted significant declines due to sell-off by investors as a result of angst over the spread of the coronavirus. Notably, the spread of the virus appeared to have gained momentum recently, following the reports of confirmed new cases in the U.S, Germany, South Korea, Italy, Iran.

In Sub-Sahara Africa, Nigeria, the largest country in the continent, also confirmed its first case on Friday. In North Africa, Egypt and Algeria also reported new cases. According to Bloomberg, the global death toll from the coronavirus outbreak has surged past 3,000.

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We think the rapid increase in the number of new cases across the globe stoked fears of an impending global recession that made investors liquidate their investment in risky assets in search of less risky investments and safe-haven assets such as gold and the Japanese yen.

Accordingly, global stocks fell by levels last seen in the global financial crisis. On the other hand, US treasury yields fell to its lowest level since the global financial crisis. Stoking further concerns, the CBOE volatility index jumped 129.3% w/w to 39.16 on Friday.

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[READ MORE: Health: Nigeria records first case of coronavirus)

In the United States, the S&P 500 and DJIA fell by 11.5% w/w and 12.4% w/w, posting its worst week since the 2008 crisis. Stock markets in Europe, Japan, China also followed suit, with the Europe Stoxx 600 shedding 12.2% w/w, German DAX losing 12.4% w/w, French CAC down 11.9% w/w, the Chinese Shangai composite index down 5.2% w/w while the Nikkei 225 and Hang Seng index lost 9.6% w/w and 4.5% w/w respectively.

Coming back home, the local bourse also recorded its biggest daily loss in 2020, as the ASI declined by 2.2% resulting in a week to date loss of 4.3%. Meanwhile, Brent oil prices also plunged 10.8% w/w to a 31-month low of US$52.18/bbl on the back of rising concerns about global demand.

Since the outbreak of the virus in China, economic activities have been hampered while global supply chains have been disrupted, as several countries imposed travel restrictions on immigrants, airlines suspended operations to certain destinations while industries and factories have shut down. A notable development has been the rise in share price of “stay in” stocks such as online streaming platforms, home fitness and video conferencing stocks while “go out” stocks have been on the receiving end of severe selling pressures.

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Heading into the new week, we expect the somewhat positive developments over the weekend ranging from President Donald Trump meeting with pharmaceutical industry executives, G7 Finance Ministers meeting to coordinate virus response, and the U.S Federal Reserve re-opening the door for a possible rate cut on “evolving risks” to bring some calmness across the global markets.

Notwithstanding, we do not envisage a broad-based recovery across global markets as we expect investors risk appetite to remain soft given the recent spate of reported cases across the globe. Hence, we think investors who would still prefer safer investment havens such as treasuries, government bonds and gold at least in the short term.

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A summer of higher food prices, limited room for monetary policy

Nigeria is facing a more fundamental supply shock, which alongside the rising transport costs is likely to drive higher food prices.

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Despite billions on agriculture, food inflation up by 108% since 2015.

Headline Inflation has assumed a new pattern over the last three months, primarily driven by pressures in the food basket, reflecting a shock to crop cultivation from covid-19 restrictions and border closures.

In addition, more recent developments in currency markets, where the Naira has weakened, as well as the increases in petrol prices following the removal of blanket subsidies have underpinned inflationary expectations.

Looking ahead, sizable increases in electricity tariffs which came into effect in September as well as continuing fuel price pressures could see inflation head towards 14% levels in Q4 2020. Given the supply-side driven nature of the inflationary bout as well as the recent pivot to unorthodox monetary policies (which include liquidity tightening measures via CRR debits), it is likely that the CBN will ignore these numbers and persist with its current stance.

Nigeria’s inflation surged in August with the CPI rising 13.22% y/y (July: 12.8% y/y), the highest level since April 2018, largely driven by pressures in the food basket, where prices climbed 16% y/y (July: 15.48% y/y) while the core index (which includes energy prices) decelerated to 10.5% (July: 10.1% y/y). On a monthly basis, the inflation climbed by 1.34% over August (July: 1.25%) — the highest monthly number since June 2017.

Pressures in Food, Utilities and Transport are driving the rising inflation numbers

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Disaggregating the inflation numbers, three segments stand out (Food, utilities aka Housing, Water, Electricity and Gas and Other Fuels, HWEGF and Transportation) as central to the pick-up in inflation, as they accounted for ~80% of the variation in the monthly CPI print.

Food was central and I shall set out my thoughts on the drivers later in this report, but on the latter two, pressures are linked to pick-up in fuel prices following the removal of subsidies in March which has seen fuel prices rise by 15% over the last two months.

Figure 1: Component analysis of monthly inflation

Aug2020CPISource: NBS, Authors Calculation

A combination of weaker farming activity, Naira weakness and covid-19 lockdowns are behind the uptrend in food inflation

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Looking at food inflation, the big pressures came from the farm produce component which accounts for over 90% of food inflation. August usually marks the start of the main crop harvest season in Nigeria which peaks in September-October and as such in normal years, monthly inflation peaks in July and decelerates thereafter.

However, in 2020, monthly farm produce and food inflation readings over the last three months are at levels not seen since 2017 which would suggest factors hurting the supply side. Indeed, most grain and tuber crop prices are moving towards five-year trend levels.

Figure 2: Component Analysis of Monthly Food Inflation

MonthlyFoodAug2020Source: NBS, Authors Calculation

In 2017, my thesis then was that a sharp Naira depreciation drove heightened exports of Nigerian farm produce into the wider sub-region, forcing an upward adjustment in domestic prices.

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In 2020, in addition to the sharp shift in the FX rate as well, the sense from reading on-ground sources like FEWSNET is that Covid-19 movement restrictions hurt the flow of labourers from neighbouring countries during planting season.

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Accordingly, field surveys are indicating that the area under cultivation for most grain and tuber crops is lower than levels in prior years which is pointing towards a subpar crop harvest for 2020. As such, Nigeria is facing a more fundamental supply shock, which alongside the rising transport costs is likely to drive higher food prices.

The price pressures are likely to be steep in urban centres as is evident in the spreads between rural and urban inflation which have widened since the border closures. Thus, in a departure from prior years, when regional supplies from neighbouring countries moved through the border to temper these pressures, existing blockades imply that limited relief is forthcoming.

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Solving the price runaway for food items clearly involves a combination of allowing targeted food imports or at least re-opening the borders to allow regional food trade flows to resume. However, Nigeria’s economic managers appear to be on the other side of this fence.

Figure 3: Rural and Urban Inflation

UrbRurCPIAug2020Source: NBS, Authors Calculation

But money supply growth has been restrained by CRR debits in the banking sector

The textbook monetary policy response to accelerating inflation is to raise interest rates to induce a shift away from consumption towards savings in a bid to force inflation to within a target level. This pre-supposed inflation was driven by an expansion in money supply often through credit growth. A look at developments on this front would rule this out.

As at the end of July 2020, annualized growth in monetary aggregates was mixed with strong growth in M1 (+33%) and M2 (+27%) relative to M3 (+10%)[1]. The muted growth in M3 relative to the narrower measurers of M1 and M2 reflect declines in OMO bills (- 72%) after the CBN elected to proscribe non-bank domestic investors from its sterilization securities sales.

This resulted in a drop in OMO bills from NGN8trillion at its peak in November 2019 to NGN3.5trillion in July 2020. As these monies flowed unhindered into the banking system, they spurred an expansion in Demand Deposits (+42% and Quasi-Money (+24%). Although these should ordinarily stoke concerns, a look at the monetary base (M0)[2] throws up evidence of how the CBN has still managed to sterilize liquidity: via the cash reserve requirements.

Specifically, bank reserves have expanded at an annualized pace of 132% to NGN11trillion at the end of July or by some NGN4.8trillion – which is more than double the quantum of growth in Naira terms in M3 (NGN2trillion). Effectively, as many have argued, the entire move to outlaw access for non-bank (and tacitly banks) was essentially targeted at zero cost liquidity sterilization. Thus, while there has been growth in money supply from maturing OMO bills, the concurrent expansion in monetary base via CRR debits has effectively drained the financial system of excess liquidity.

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From a more structural perspective, money supply growth is often driven by two sub-parts: net domestic assets (NDA) and net foreign assets (NFA). The CBN’s use of CRR debits has ensured that NDA growth over the first seven months of 2020 has been subdued (+1.3% annualized) relative to a faster expansion in net foreign assets (+54%) following the surge in FX borrowings with the IMF loan. In simple terms, the liquidity deluge from OMO bill maturities have been managed away.

Figure 4: Growth in Money Supply

MoneySSJuly2020Source: CBN

So what gives?

In the near term, my suspicions are that the CBN is set to follow the global trend of ignoring the inflation numbers, which suits its ‘home-grown’ philosophy, that has underpinned a spate of interventions across a host of sectors.

These interventions have resulted in the CBN directing credit towards certain sectors (manufacturing, renewable energy, gas-to-power, housing, agriculture etc) at single-digit interest rates in a bid to stimulate activity. In combination with the Loan-Deposit Ratio (LDR) policy as well as the arbitrary nature of the CRR debits, which are well above the 27.5% target number, the CBN has been able to force banks to boost loan volumes as a coping mechanism in the face of collapse in net interest margins from lower rates on government securities.

Though sceptics remain over the efficacy of supply-side policies on stimulating production among other unorthodox policies such as offering better rates for offshore investors relative to onshore investors, the CBN’s recent policy of lowering minimum savings rate has provided a strong signal of its direction: there will be no reward for risk-free anymore.

Will this work or not? We will have to wait to find out. But interest rates are likely to remain lower for sometime.

And 3 more things…

  • Changing the definition of core inflation: Presently, Nigeria defines core inflation as headline inflation less farm produce, which reflected historic stability in fuel prices due to the existence of subsidized regime. With the removal of subsidies and 30-day averaging period, fuel prices now move from month-to-month implying higher volatility. Now is the time to change the definition of core inflation to exclude farm produce and fuel in line with the theoretical meaning. Looking back, the spread between headline and the true core definition which the NBS publishes suggests maybe we should not have tightened policy as aggressive as we did in 2016-17 by focusing communication on the true core number. Economic policies should focus on more lasting structural drivers than transient one-off shocks like fuel & electricity price hikes which tend to have disinflationary base effects afterwards.
  • Adopting a more meaningful inflation target: In Nigeria, that target level for inflation is defined as 6-9% for the headline number. Given the weight of food inflation (55%) in the CPI numbers as well as elements without recourse to monetary policy (like fuel and electricity prices), some (including myself) have argued that the 6-9% target for headline is meaningless. In countries which pursue inflation targeting, the target is more refined with preference for demand-side inflation metrics like core inflation, wage inflation or personal consumption expenditures. Nigeria needs to adopt something similar.
  • Explicitly incorporating FX into Nigeria’s monetary policy reaction function: In theory, the core mandate of central banks is price stability, but this does not preclude the pursuit of other objectives. In the US, the Fed has a dual mandate that explicitly includes unemployment. I believe a proper explicit mandate for the CBN is one that requires that it optimize a reaction function of price stability and an export competitive exchange rate. The price stability mandate should entail lowering some measure(s) of inflation (preferably ‘core’ demand side measures) towards a target band defined as conducive for consumption and welfare in Nigeria over a medium-term period set as 2-3 years. This allows to evaluate the efficacy of monetary policy and provides a good feedback loop. On the other factor, given the importance to policymakers we need to include that the CBN target a competitive exchange rate. The idea in mind is a variant of what obtains in Singapore, wherein the nominal exchange rate must coincide with a REER level that ensures that Nigeria’s non-oil manufacturing exports are competitive. This way, we resolve this obsession for nominal exchange rate stability. Balancing both items and ensuring better communication are the ultimate goals for monetary policy.

Figure 5: Trends in headline and core inflation

HeadCorspreadAug2020Source: NBS, Authors calculation

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Nigeria’s high recurrent costs, low revenue and escalating debt numbers

Nigeria continues to face issues of poor revenue generation and a lack of will to efficiently manage its expenditure.

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Debt, Fitch downgradesS&P downgrades Nigeria, Nigeria’s credit rating faces downgrade by Fitch, Oil price crash, Coronavirus: The trouble that lies ahead for Nigeria, Avoiding 2016: What Nigeria should do to fight the coming economic storm, Fitch downgrades, federal government (FG)

In the recently released Q3 2020 debt report by the National Bureau of Statistics, the total public debt was N32.22trn as of 30 September 2020, with local debt making up 62.18% of the total public debt in the period while external debt made up 37.82%.

This is similar to the country’s debt structure in the same period of 2019 when domestic debt made up 68.45% of total public debt and external debt made up 31.55%. Whilst debt to GDP ratio remains within the acceptable threshold, we are increasingly concerned about the nation’s ballooning debt service to revenue ratio.

READ: U.S. budget suffers a deficit of $3.1 trillion in 2020, as pandemic slams the economy

Recall that the Federal Government of Nigeria following a series of revisions to the 2020 appropriation bill arrived at a fiscal deficit of N4.98trn. Based on the finance ministry data, an aggregation of debt monetization (N2.86trn) and New borrowings (N3.28trn) was used to finance the deficit.

READ: Heads of defaulting revenue generating agencies will be severely sanctioned – Buhari

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The 2021 appropriation bill forecasts a budget deficit of N5.60tn which would be financed mainly by borrowings of N4.69tn, privatization proceeds of N205.15bn and project linked bilateral & multilateral loans of N709.69bn. The country’s financing structure is of concern when one considers that the budget is tilted more towards recurrent expenditure than capital expenditure and raises questions on the sustainability of the current fiscal practices.

READ: FG directs the suspension of NIMC staff involved in extortion of NIN applicants

The significantly higher recurrent component of the budget continues to drag the country’s economic growth, resulting in poor infrastructural development. Spending more on capital projects can promote industrialization, improve local purchasing power and help the federal government’s diversification drive.

READ: NEM Insurance CEO/MD purchases 4 million additional shares worth N9.2 million

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Nigeria continues to face issues of poor revenue generation and lack of will to efficiently manage its expenditure. No significant cuts have been made to its overheads and statutory spending has continued to rise. Nigeria’s growing debt stock with little to show for it in terms of capital expenditure remains a major concern.

READ: Nigeria’s total public debt stock increased by N2.381 trillion in 3 months


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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How Africa’s youth contribute to the African society

The growth of technology has created an opportunity for several African youths to come up with new innovations.

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Africa has been called a lot of names – dark continent, the savage, the continent of Safaris, third world, emerging market continent and more recently, Sh**hole, but it is hardly called the Continent of Youths.

It is not a secret that the youths are the future of the African continent. They are already emerging and will be the next thought leaders, creators and innovators that will help galvanize the African continent to greater heights.

According to the United Nations in 2015, Africa has 226 million youth aged 15-24 and one-fifth of the world’s youth population. This means that one out of every five youth on earth is from Africa. The African Youth population is forecasted to grow by 42% by 2030. There should be a new focus on the youth in Africa, as we examine how much they contribute currently to the continent.

One area where youth are thriving well in Africa is in the tech sector. The sector has become an interesting source of Foreign Direct Investments and in 2019 accounted for close to half a billion-dollar raked into the continent. In 2020, – the Paystack/Stripes deal brought in about 200 million dollars. The growth of technology has created an opportunity for several African youths to come up with new innovations, which are even more helpful in the current fledging economic and social climate affected by the pandemic.

There are several examples of many African youths using technology to start new ventures. Mike Endale, an Ethiopian American based in Washington, D.C, who is the principal at BLEN Corp, an information technology firm that leads the Ethiopia COVID-19 Emergency Tech Volunteer Task Team and assists Ethiopia’s Ministry of Health. During the pandemic, they have recruited over 1,700 software engineers and have even created an Africa COVID-19 response toolkit.

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Temie Giwa-Tubosun, the founder of LifeBank in Nigeria, is another African youth making strides in the tech scene. Since its establishment in 2016, it helps to deliver 22,830 units of blood, according to Next Billion, to hospitals in Nigeria, which help connect donors to blood banks. Next Billion also stated that LifeBank conducts drive through COVID-19 testing and supply oxygen to health centers. The Lifebank recently expanded in East Africa. In December 20280, the US- Africa Business Center of the US Chamber in conjunction with the American Business Council Nigeria in recognition of the great impact of start-ups in the wake of the Pandemic, inaugurated a digital entrepreneurship competition.

African youths are also thriving in the entertainment sector, particularly in the music business.  The Afrobeats genre continues to rule the music world and the likes of Burna Boy, Davido, Mr. Eazi and Omah Lay, who are still in their 20’s, spearhead and remain the face of the genre. The international recognition of Afrobeats has given artists more visibility on the global forefront. This was the case for Davido, Mr. Eazi and Tiwa Savage, who were featured on the cover of the Billboard magazine. Music remains of significant importance and the youths are a big factor to the success of the industry.

In Nigeria, the music revenue grew from $26 million in 2014 to $34 million dollars in 2018, according to Statista. The music revenue in Nigeria is expected to increase to $44 million by 2023 as reported by Statista.

Africa’s youth are also flying high in the area of sports, particularly in soccer. Wilfred Ndidi and Kelechi Ihenacho of Nigeria (both players at Leicester City in the English Premier League) come to mind. Also, Percy Tau, a South African soccer player, who was with R.S.C Anderlecht in Belgium, will now be returning to his parent club, Brighton & Hove Albion in the premier league. Tau plays in a forward position and he is expected to make his debut for the seagulls (Brighton & Hove Albion) in the 2020-21 season of the premier league.

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Lastly, youths in Africa have also been influential on the activism forefront, especially in the last couple of years. This was evident in October of 2020, when several Nigerian youths took to the streets to fight against police brutality in the End SARS protests. In Uganda, Musicians like Bobi Wine’s foray into Politics first as a parliamentarian and presidential candidate is attracting more youth to get into politics.

Other youths like Christelle Kwizera, founder of Water Access Rwanda, have been involved in helping communities with access to water. According to Global Citizen, Kwizera’s plan is to eradicate water scarcity and to provide clean water for people in local communities. Currently, her organization has supplied 70,000 people in Rwanda with clean water. Kwizera’s efforts earned her the Cisco Youth Leadership Award at the 2020 Global Citizen Prize.

African youths definitely have a lot to offer in several sectors and this would be vital to the growth of the continent. African governments need to understand this and invest meaningfully and in a sustainable way on the youth population to reduce the migration drain.

The enthusiasm, the work rate, and efforts are why the current children of Africa have an opportunity to be wonderful leaders of tomorrow. With the right nurturing environment in place, Africa’s future is in safe hands.

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Written by Paul Olele

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