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Nigeria’s 2023 financial market outlook 09 Jan 2023

Nigeria’s equity market experienced sharp volatility in 2022. After rising by 21.3 percent from the beginning of the year to May 19th, the NGX All Share Index had fallen by 1.98 percent – year-to-date – on November 8th, before closing the year at 11.5 percent growth. The stock market began a precipitated fall after the Central Bank of Nigeria (CBN) raised its anchor interest rate by 150 basis points at its May 2022 Monetary Policy Committee meeting. A bearish grip on the market was sustained as CBN continued to raise the Monetary Policy Rate (MPR) during subsequent bi-monthly MPC meetings for the rest of the year. In the seven-month period, the MPR was increased by 5 percent, from 11.5 percent to 16.5 percent.

Debt financing for the 2022 budget deficit, excessive naira liquidity in the system, and the interest rate hikes by the CBN appeared to conspire to buoy the fixed income financial market segment, where the FGN Bonds are considered as risk-free investments. Thus, investors staked N4.66 trillion on the FGN Bonds during the year, as high yields on the bonds versus high perception of risk in the equity market drove portfolio exits at the Nigerian Exchange Group (NGX). Nevertheless, yields generally trailed inflation rate which rose for 10 consecutive months to 21.47 percent in November 2022.

Do these trends indicate what will happen in 2023? The high probability is yes. According to the concluding statement of IMF’s mission to Nigeria in November, the overall monetary conditions in the country remain “accommodative”, given that the MPR is still below inflation rate. In December, President Muhammadu Buhari sought and obtained approval for a 2022 supplementary budget of N819.5 billion to stymie the impacts of the widespread floods earlier in the year on food security and infrastructure. The additional deficit financing to be carried over into the new year adds to the projected N10.78 trillion deficit in the 2023 budget. CBN’s development financing schemes are also projected to continue to drive strong monetary expansion. IMF also believes that the banking sector remains liquid – and profitable.

The projection is that the CBN will continue to provide Ways and Means Advances to the federal government, despite the use of the instrument beyond its legal limit and given the record-level 2023 budget deficit. Therefore, both the government and the CBN are poised to leave the liquidity floodgate open, and consequently continue to drive inflationary pressure. Further tightening of the MPR could then be expected, as the CBN tries to put out the fire it helps to start.

According to the CBN’s shifting diagnoses, excess naira liquidity, especially outside the banking system, had become a tool for speculation on the currency’s exchange rate. New naira notes were therefore slated to be introduced on 15 December 2022, and the existing ones they are to replace would cease to be legal tenders on 31 January 2023. But a significant rollout of the new notes has yet to begin at the end of the year, while the Nigerian Senate has called for an extension of the deadline for phasing out the old notes to the end of June. Such an extension will compromise the collateral effect – or the unofficial reason – for the timing and haste in the proposed implementation of the new naira policy: limiting spending for the February 2023 general election.

Thus, as the CBN continues to maintain its multi-window official exchange rate, the downward pressures on the value of the naira will likely continue in 2023, perhaps until a new administration mandates changes to the existing policies. Despite heightened risk perception associated with the country’s general elections, the prospect of a new administration that may want to try new policy options and bring more effectiveness to the implementation of the current ones that it may retain is the hope for having new market trends later in the year.

The local impact of global market development may also characterise Nigeria’s financial market in 2023. The impact of the U.S. monetary policy on the global financial cycle was at play in 2022. Hikes in the Federal Reserve interest rate – in attempts to rein in inflation – saw portfolio outflows from emerging and frontier markets and interest rate increases by other central banks around the world. In 2023, increases in US interest rate is expected to taper and start to reverse towards the end of the year. Nigerian equity prices may benefit from a risk-on stance by global investors. This prospect would be enhanced if the CBN finally accedes to the call for a unified and market-clearing exchange rate and its possible success in reversing the ascent in the general price level.

The performance of the Nigerian financial market in 2023 will be amenable to macroeconomic, geopolitical, governance, and policy variables, each of which has an uncertain outlook. Nevertheless, this is a market for high returns, as Nigeria’s economic and market potentials have been underinvested in for a long time. Given the lull, much effort is needed to attract the attention and interest of international investors back to the country. The work must be done.

I wish you a happy and prosperous New Year!