The twin effects of soaring inflation and burgeoning unemployment are rapidly grooming a band of distressed consumers whose purchasing power has fallen to record lows.
Propelled by cost shocks, inflation in Africa’s largest economy climbed to a near six-year high of 15.6 percent in May, sending Consumer Confidence Index (CCI) scores to a record low, last seen in the first quarter of 2014, according to data collated by research firm, Nielsen.
“The CC report is not surprising at all. It encapsulates the general macroeconomic environment within which the consumers operate,” said Olusegun Omisakin, a senior economist at the Lagos Chamber of Commerce and Industry (LCCI) in response to questions.
“As long as macroeconomic fundamentals remain weak, the inflation outlook, and by implication, consumers’ confidence, will be up trending,” Omisakin said.
Despite being the highest ranked in sub-Saharan Africa, Nigeria saw Consumer Confidence Index (CCI) scores slump 7 points, to 120 (quarter-on-quarter) in the first three months of 2016, the Nielsen report released last week showed.
Analysts indicate that scores may be lower for longer, given the turbulent economic landscape.
“Consumers simply do not have the wherewithal to spend. Some have not been paid wages, and some are even without jobs. If the major drivers of inflation persist, purchasing power will wane and by implication, confidence will thin out,” Muda Yusuf, director-general of LCCI said.
Higher inflation and slowing growth means Nigeria’s economy will probably contract this year, according to the International Monetary Fund (IMF).
“I think there is a high likelihood that the year 2016 as a whole will be a contractionary year,” Gene Leon, the fund’s resident representative in Nigeria, said in an interview. “While the economy should look better in the second half of the year, growth will probably not be sufficiently fast, sufficiently rapid to be able to negate the outcome of the first and second quarters,” he said.
Nigeria’s economy contracted in the first quarter of 2016, and most analysts forecast the economy will enter a recession by the time second quarter GDP numbers are released.
The economy has been hit by the effects of the hard naira dollar peg at N199/$ which was only recently broken by the Central Bank, which unveiled a new foreign exchange policy some two weeks ago.
The positive impact of the policy change may be too little to make an impact for now, as energy shortages and the delayed budget weigh on output, said some analysts.
“For banks their Q2 results will probably be lower than last year. For the industrial sector it will probably be the same,” Tajudeen Ibrahim, head of research at Chapel Hill Denham said.
Nigeria’s second largest cement producer, Lafarge Africa, issued a profit warning last week, saying the impact of naira devaluation is expected to be a N28 billion unrealised exchange loss arising from dollar borrowings.
The World Bank lowered Nigeria’s growth forecast to 0.8 percent last month, citing weakness from oil-output disruptions and low prices.
Nigeria’s May inflation was the highest rate in more than six years. June’s inflation report is scheduled for publication on July 16, according to the calendar of the National Bureau of Statistics (NBS). Electricity, fuel and food costs were “key drivers” of inflation in May.
Inflation will probably continue its upward trend through the end of this year, though unlikely to exceed 20 percent, IMFs Leon said.
Rising inflation would make investors demand higher yields to buy government bonds analysts said.
The Debt Management Office (DMO) plans to raise N120 billion ($424.78 million) in local currency denominated bonds with maturities ranging between 5-year and 20-year tomorrow.
Analysts said thinning system liquidity and outlook in anticipation of a relatively higher June inflation rate further enhances the selling pressure of mostly mid and longer tenors.
“The market may be predominantly bearish this week, as system liquidity declines ,whilst dealers take positions ahead of the auction”, said research analysts at Lagos-based Dunn Loren Merrifield.
The DMO had issued its provisional issuance calendar for third-quarter (Q3) 2016. It looks to issue between N305 billion ($1.08bn) and N405 billion (US$1.43bn) over the quarter.
This marks a pick-up from Q2 when it raised N265 billion. However, it also has to repay N560 billion to bondholders on the maturity of the Aug ‘16s and meet the N940 billion net domestic borrowing requirements in the 2016 budget, which requires fine-tuning as a result of the naira devaluation on 20 June.
“This increase in supply, together with rising inflation, point to yield widening,” research analysts at FBNQuest said.
“We would expect the Pension Fund Administrators (PFAs) again to be prominent buyers at the auctions. Data from PenCom for March show their holdings of FGN bonds at N3.24trillion ($11.45bn), equivalent to 59.3% of their Asset under Management (AUM). Additionally, they held N450bn in Nigerian Treasury Bills (NTBs) and N150bn in state government bonds. As for offshore buyers, we could see some interest from investors with risk appetite who convert funds in the lengthy repatriation process into buying orders. The same process has reportedly been seen with equities,” FBNQuest analysts added.
Vetiva Capital analysts said with the June inflation figures due for release this week (which is expected to inch moderately higher) amidst tight system liquidity, “we expect bearish sentiment to persist in the coming sessions.”
IHEANYI NWACHUKWU, PATRICK ATUANYA, LOLADE AKINMURELE
