FX Market Liquidity Challenge to Remain a Drag on Capital Market Performance

The Nigerian Stock Exchange (NSE) held its annual Market Recap and Outlook briefing earlier this week on Thursday, 12th January. The presentation delivered by the CEO of the Exchange, Oscar Onyema, at the session offered investors an opportunity to gauge regulators perspectives of the sentiment drivers in 2016 and projections for performance, regulation and products in 2017. Expectedly, the Exchange attributed the weak sentiment in 2016 - which resulted in a third consecutive annual loss of the All Share Index (ASI) – to low FX liquidity and FX rate divergence which stifled capital inflows and weakened participation of Foreign Portfolio Investors (FPIs).

According to data from the NSE, total amount of transactions by FPIs in the equity market from Jan - Nov 2016 totaled N473.5bn, down 51.4% from N973.7bn within the same period in 2015. This disinterest by foreign investors in keying into opportunities in the Nigerian market is also evident in the performance of the Futures market which was introduced by the CBN in H2:2016 as a medium by which foreign investors can hedge against currency risks. Despite the attractive prices of the contracts on offer, percentage of total subscription stood at 31.9% as at Jan 12th 2016 whilst none of the contracts on the calendar have been fully subscribed as Investors remain wary of an overhanging liquidity risk at time of exit.

The currency controls which led to the protracted crunch in the Nigerian Foreign Exchange (FX) market throughout 2016 continues to prevail in the current operations of the FX market.  Thus, the persistent confidence deficit amongst foreign investors in returning to the Nigerian market due to currency, liquidity and reinvestment risks will remain a drag on capital inflows, performance of Corporates and capital market performance.

December 2016 Inflation Ahead of Consensus Estimates, Rises to 18.6%
The National Bureau of Statistics earlier today released December 2016 Consumer Price Index report. The report showed a further rise in Y-o-Y Headline Inflation (by 7bps) to 18.55% in Dec-2016, above consensus analysts’ estimate of 18.4%. On a M-o-M basis, the CPI rose 1.1% in December relative to 0.8% in November. Although Core Inflation dropped 10bps to 18.2%, the Utility division (Housing, Water, Electricity, Gas and Other Fuels sub-index) remained pressured, rising 27.3% Y-o-Y in the month and the major driver of the Core index. The Food Index rose by 17.4% Y-o-Y, up by 0.2% from 17.2% recorded in November with most Food sub-indices under pressure. We expect energy prices and FX rate movement pass-through on imported Food items to remain a driver of inflation in 2017. Nonetheless, we forecast Headline Inflation to drop by minimum 3 percentage points by year end 2017 due to high-base factor