ACCORDING TO NWIZU, SUBSIDY ELIMINATION AND A SMOOTH TRANSITION WILL HELP WITH FOREX INFLOW

In this interview, Nnamdi Nwizu, Co-Managing Partner/Founder of investment banking firm Comercio Partners Limited, explains how the removal of fuel subsidies, which take place on May 29, 2023, will improve foreign exchange input into the economy, leading to naira appreciation.

What do you think of the stock market's performance in comparison to the NGX's over 8% YTD return, given what the economy faced in Q1 of 23？

Election concerns, inflationary pressures, and a 50-basis point increase in the central bank's monetary policy rate from 17.5% to 18% all contributed to a difficult macroeconomic, NGX miraculously produced an annual return of over 8%.

Given the stated 25% reduction in sales by manufacturers, this is even more impressive. The NGX proved its resiliency in first quarter on a high note, as shown by the strong performance of key market indices.

The market capitalisation climbed from N28.11 trillion at the beginning of the quarter to N29.65 trillion at the quarter's close, reflecting investor optimism. The Benchmark All-Share index increased by 6.33%, completing the quarter at 54,861.87 points. The volume traded climbed by 66.04% despite the value traded declining by 22.04%. Notably, the consumer goods index, which gained 19.32%, led the sector performance. It was followed in performance by the oil and gas index, which gained 10.45%, and the banking index, which gained 8.50% despite being vulnerable to Ghana's debt restructuring. It top gainers in Q1 were shares of Tripple Gee and Company Plc, International Energy Insurance, John Holt, and Geregu Power.

In Q1 of 23 the FX market saw External reserves decreased 4.1% to $35.57 billion; turnover in the I&E window decreased by 45% year over year to $6.5 billion; and the Naira appreciated by 50 kobo to N461.5/$ in the I&E window and by N19 to N755/$ in the parallel market. What were the causes of these unfavorable events, and when will they start to turn around？

The Naira's value against the dollar weakened in Q1 2023 despite the CBN's best efforts to stabilize its several interventions through the RT 200 policies and its naira4dollar program. Given the political and macroeconomic environment that was present during the quarter.

The local currency's value fell as a result of election spending related to the presidential and gubernatorial elections held in Q'1 2023. There is a lot of money flowing around during elections. In addition to the money spent on campaigns, the Independent National Electoral Commission (INEC) received about N300 billion to finance the general elections. However, the CBN Naira redesign strategy postponed the effect of this anticipated cash flow, causing a cash constraint because of the new note's restricted quantity.

The value of the Naira fell as a result of rising prices as well. The CBN increased its monetary policy rate by 150 basis points to 18% in an attempt to reduce inflation, but the Nigeria headline CPI index nevertheless increased to 21.91% in February 2023 from 21.34% in December 2022. Consumers' purchasing power is reduced by inflation, which also depreciates the value of money. The US Federal Reserve increased its benchmark interest rate by 25 basis points during the first quarter, sharply strengthening the dollar on a global scale. The quarter-long decrease in the value of the Naira against the dollar can be attributed to other macroeconomic basic problems, such as low crude oil production and low CBN auction sales.

Total foreign reserves fell to their lowest level since September 2021 at the same time. According to information that is publicly available on the CBN website, on March 24, 2023, Nigeria's foreign reserves fell to $35.74 billion. The CBN's efforts to preserve exchange rate stability by selling the dollar at FX auctions could be largely responsible for this. The country's foreign reserves' sale of the USD at the auctions presented a substantial challenge to the top bank.

These unfavorable trends could be temporarily reversed by two significant occurrences. The first is a seamless handover of authority to the following government. We think that the new administration will lead to a more stable political environment, which will assist to lessen the current wave of risk aversion among existing and potential investors.

The second is that successfully eliminating gasoline subsidies will save the country more than $6 billion, some of which can be put toward increasing the country's reserve.

Given the aforementioned, as well as predictions of a likely change in monetary policy and the collapse of the multiple foreign exchange rate system, we anticipate some reversal to start as early as the start of Q3 2023.

With two more increases to the Monetary Policy Rate in January and March, the CBN tightened the financial system even more. What effects did these increases have on the dynamics of interest rates and the performance of fixed-income investments throughout the quarter？

However, despite our optimism for the non-oil sector, we are aware of enduring problems like instability, unregulated disruptions to local food production, inadequate road networks and infrastructure, the ongoing FX crisis, and its knock-on effects on the cost of production.

Additionally, we anticipate that the increase in oil output will maintain its favorable trend and outperform 2016 levels. We anticipate that these improved activities will cause the GDP to rise by more than 3.2%, which would be an improvement above the GDP growth of 3.1% in 2022.