Is the tide about to turn for Nigeria?
Welcome to the August edition of the Duplo Economic Digest. Get ready to be inspired! This edition is packed with exciting developments shaping the business landscape.
Nigerian Macroeconomic Recap
Good news left, right, center.
Nigeria’s Inflation Finally Takes a Breather After 19 Months: Nigeria’s inflation rate decreased to 33.4% in July, marking its first decline since December 2022, at 21.34%. This reduction from 34.19% in June represents a drop of 0.79 percentage points. However, the current rate is still significantly higher than the 24.08% recorded in July 2023, indicating a year-on-year increase of 9.32 percentage points.
The decline in inflation is a notable shift amidst persistent price increases over the past year, largely driven by high food inflation, which reached 39.53% in July 2024. Could this be a sign that the tide is starting to turn? Maybe. However, factors contributing to the inflationary pressures persist, such as the removal of fuel subsidies and the subsequent rise in food prices, which have exacerbated food insecurity nationwide.
Another good news; growth chooses resilience: Nigeria’s GDP was valued at approximately $252.7 billion in 2022, with projections indicating a growth rate of about 3.1% in 2024. This growth is expected to be supported by ongoing economic reforms initiated in 2023, which focus on stabilising the economy and enhancing productivity across various sectors. The financial and insurance sectors have shown notable performance, contributing significantly to the GDP growth in the first quarter of 2024, which recorded a growth of 2.98% compared to 2.31% in the same quarter of the previous year. While many Nigerians may argue that this growth doesn’t align with the harsh realities businesses face, the record-low financial performance of many companies supports their concerns; we choose cautious optimism that the tide is turning in Nigeria.
Finance Flashback
August was a month of open doors, some authorised, some unauthorised.
Want a slice? Ahead of the banking sector recapitalisation exercise, requiring banks to increase their capital base to ₦500 billion by March 2026, several Nigerian banks, including Access Bank, Zenith Bank, Fidelity Bank, and FCMB, employ traditional and unconventional strategies to raise. From international roadshows to attract foreign investors, leveraging supplier and contractor relationships by requiring their participation in share purchases, setting ambitious internal targets for employees to market shares, and engaging high-net-worth individuals and institutional investors. While these methods aim to strengthen the banks’ capital bases, their sustainability, and impact on stakeholder relationships remain scrutinised.
Investment Opportunities As of August 30, 2024, several banks are actively conducting share offerings:
Providus and Unity tie the knot: In line with the same recapitalisation target, Providus Bank and Unity Bank announced a merger approved by the Central Bank of Nigeria (CBN), marking a significant consolidation in the banking sector. The merger aims to stabilise the financial landscape, particularly addressing Unity Bank’s financial struggles. Providus Bank, with stronger financials, will lead the new entity, supported by a ₦700 billion CBN bailout. The merged bank, with 243 branches, will focus on SMEs and agribusiness, enhancing financial inclusion. The merger also requires raising an additional ₦151.8 billion to meet new capital requirements, ensuring long-term sustainability.
Data breaches brouhaha: Fidelity Bank, one of Nigeria’s leading financial institutions, faced the brunt of the regulatory crackdown. The Nigeria Data Protection Commission (NDPC) imposed a record-breaking fine of ₦555.8 million on Fidelity Bank for violating customer data privacy. This penalty, equivalent to 0.1% of the bank’s 2023 annual gross revenue, was the largest ever issued by the NDPC. The NDPC’s investigation revealed that Fidelity Bank had reportedly breached the Nigeria Data Protection Regulation (NDPR) of 2019 and the Nigeria Data Protection (NDP) Act of 2023. The penalty was exacerbated by Fidelity Bank’s reportedly uncooperative and dismissive stance during the investigation. The NDPC ordered the bank to settle the fine within 14 days of receiving the notice, reaffirming its commitment to upholding data protection laws and ensuring organizations prioritize customer data security. Guaranty Trust Bank (GTBank) also faced a cybersecurity scare when reports emerged that its website had been compromised, raising fears of customer data theft. The issue began shortly after the bank renewed its domain name, leading to widespread panic and disrupted online services. However, GTBank clarified that the problem was a domain issue, not a website hack, and assured customers that no sensitive data was at risk. While the incident highlighted the growing threat of cyberattacks on Nigerian banks, GTBank’s mobile banking services remained unaffected, emphasizing the need for robust cybersecurity and clear communication during crises.
Crypto gets invited to the party: We’ve come a long way since February 2021, when crypto was ban in Nigeria. On 29 August, Nigeria’s Securities and Exchange Commission (SEC) announced that it granted two crypto exchanges, Quidax and Busha, approval in principle, legally recognising them as crypto trading platforms. These approvals are part of the SEC’s Accelerated Regulatory Incubation Program (ARIP). Additionally, four digital asset platforms—Trovotech Ltd, Wrapped CBDC Ltd, Dream City Capital, and HousingExhange.NG Ltd—were admitted to test their models under the Regulatory Incubation (RI) Program. The SEC emphasized that only approved entities can legally trade crypto in Nigeria, urging the public to avoid unauthorized platforms. The SEC’s move follows calls to regulate crypto trading in response to concerns over currency manipulation through peer-to-peer (P2P) trading.
NGX Performance
August was volatile for global markets, leading to unprecedented shocks. Despite the recovery, investors remain cautious.
The Nigerian Stock Exchange (NGX) experienced mixed performance amid economic and investor uncertainties. The All-Share Index (ASI) slightly declined from July’s 100,057.49 points due to external volatility and domestic challenges. Despite this, the NGX showed strong year-to-date growth with a 33.81% increase in the first half of 2024, driven by gains in the construction and energy sectors.
Best-Performing Stocks: Julius Berger and Seplat Energy reported impressive earnings and share price growth in the preceding months. Julius Berger saw its share price surge by 34.02% in the first half of the year, while Seplat benefited from rising oil prices. Banking Sector Challenges: The banking sector, however, faced challenges, with the NGX Banking Index declining by 7.47% in the first half of 2024, linked to rising interest rates and regulatory pressures, affecting investor confidence in banking stocks.
Global Stocks Stumble – Who Hit the Panic Button: August 2024 was marked by significant volatility in the global stock markets, triggered by a series of economic events that resonated across continents. The month began with a steep drop in Japan’s Nikkei 225 index, leading to its steepest decline since 1987, falling over 12% on 5th August. This dramatic fall was primarily due to the unwinding of the yen carry trade, a strategy where investors borrow yen at Japan’s low interest rates to invest in higher-yielding assets. The Bank of Japan’s unexpected interest rate hike strengthened the yen, making this strategy less profitable and causing a massive selloff in Japanese equities.
The turmoil in Japan quickly spread to the United States, with major indexes such as the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite suffering significant losses. The S&P 500 dropped over 3%, the Dow fell more than 1,000 points, and the Nasdaq entered correction territory. Additionally, disappointing U.S. labour market data exacerbated the situation, with only 114,000 jobs added in July and the unemployment rate rising to 4.3%.
The sell-off also impacted markets across Europe and Asia as investors grew increasingly concerned about the global economic outlook. High valuations, geopolitical tensions, and the upcoming U.S. elections heightened market volatility.
Despite the initial shocks, markets began showing signs of recovery within days. The CBOE Volatility Index spiked by 65% on August 5th but settled lower by the end of the week, indicating that while caution prevails, widespread panic has not set in. Looking ahead, there are reasons for cautious optimism. The recent rise in unemployment may be partly due to more people entering the labour force, which can signal confidence in the job market. The U.S. economy continues to display strengths, with consumer spending remaining strong and businesses still hiring, albeit at a slower pace. The Federal Reserve’s role will be pivotal in stabilising the markets. With inflation nearing the Fed’s target, there is speculation that interest rate cuts could come as early as September if market conditions worsen. Such a move would relieve borrowers and businesses, potentially calming the markets.
Nvidia’s Performance – not quite the showstopper expected: Nvidia’s recent earnings report has disappointed investors, as the tech giant failed to meet revenue expectations despite a strong demand for its GPUs driven by AI and gaming sectors. The company’s revenue fell short of analysts’ forecasts, leading to a decline in its stock price. The underperformance can be attributed to several factors, including supply chain challenges and increased competition in the semiconductor industry. Analysts are now reassessing their projections for Nvidia, considering the broader economic environment and the potential impact of rising interest rates on tech stocks.
FX Performance
In August 2024, Nigeria’s foreign exchange market experienced significant turbulence, reflecting the broader challenges facing the naira. The month began with the naira showing mixed signals against the dollar, appreciating N1,543/$1 in the official market. The Central Bank of Nigeria (CBN) attempted stabilising the naira by selling $876.26 million at N1,495/$1 to qualified banks. However, despite these efforts, the naira’s value remained strained due to reduced FX liquidity, underinvestment, and tepid oil production. By the end of the month, the naira had depreciated to N1,596.6/$1, its lowest since March, following a drop in FX liquidity and speculation about U.S. Federal Reserve interest rate cuts.
The parallel market also saw fluctuations, with the naira trading at N1,610/$1, showing mild strength despite overall volatility. The CBN’s interventions, including a significant Retail Dutch Auction, were met with limited success, as the naira remained vulnerable to market fluctuations. The ongoing challenges in the FX market have led to concerns about the naira’s ability to maintain its value, with projections ranging from further depreciation to a potential stabilization at lower levels.
Company Focus – VERITAS CAPITAL
Veritas Kapital Assurance Plc is a prominent insurance company in Nigeria, primarily providing a wide range of non-life insurance products and services. Formerly known as Unity Kapital Assurance Plc, the company was incorporated in 1973 and has since established itself as a reliable player in the Nigerian insurance market. Its offerings include auto, home, aviation, marine, engineering, oil and gas, and agricultural insurance. Additionally, Veritas Kapital provides medical insurance and pension fund administration services through its subsidiaries.
Veritas Kapital Assurance Plc reported a remarkable 630% increase in profit after tax for the first half of 2024, rising from ₦672.4 million in H1 2023 to ₦4.908 billion. This significant growth is driven by a 425% increase in net insurance and investment results, which reached ₦6.523 billion, and a 350% rise in insurance revenue to ₦9.908 billion. Gross Written Premium (GWP) also improved by 330%, reaching ₦12.574 billion. The company’s total assets grew by 41% to ₦34.828 billion, while shareholders’ funds increased by 32% to ₦21.553 billion. Managing Director/CEO Dr. Adaobi Nwakuche attributed the success to the company’s strategic vision and operational efficiency. Veritas Kapital Assurance continues strengthening its position in the Nigerian insurance sector, demonstrating resilience and a commitment to excellence.
Africa Focus
Ghana wants to get more from gold: Ghana has inaugurated its first gold refinery, the Royal Ghana Gold Refinery, to enhance the value of its gold resources. The refinery, which will process 400 kilograms of gold daily, will source most of its material from artisanal and small-scale mines, contributing one-third of Ghana’s annual gold output. Bank of Ghana Governor Ernest Addison highlighted that the refinery will help reduce gold smuggling by providing a legitimate market for smaller miners, thus promoting transparency. Finance Minister Mohammed Amin Adam emphasized the need for value addition in Ghana’s gold sector to fully capitalise on its status as a top gold producer. The refinery is primarily owned by India’s Rosy Royal Minerals Ltd. (80%) and the Bank of Ghana (20%). This initiative is part of Ghana’s broader strategy to formalize its artisanal mining sector and boost foreign exchange reserves. Other African nations are considering similar approaches to increase local value from natural resources.
Ethiopian lenders – time for a haircut?: Ethiopia caught its bondholders off-guard with a proposal to introduce a 20% haircut in the nation’s debt-restructuring process, setting the scene for tense negotiations. The government’s suggestion to reduce the value of $1 billion Eurobonds due in December contrasts with proposals creditors exchanged with Ethiopia last year, which would have seen them receive the principal in full, but over a longer period and at lower interest rates. This move by Ethiopia has unsettled bondholders, who were expecting to recoup the full principal amount. The proposed 20% haircut would significantly impact the returns bondholders anticipated from their investments in Ethiopian debt.
The debt-restructuring process is crucial for Ethiopia as it seeks to alleviate its debt burden and stabilize its economy. However, the unexpected proposal for a haircut has introduced uncertainty and may lead to prolonged negotiations between the government and its creditors. Bondholders are likely to push back against the haircut proposal as it deviates from the initial terms they agreed upon. The outcome of these negotiations will have significant implications for Ethiopia’s access to future financing and its relationship with the international investment community.
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Developer at ING
3moGreat idea, love this.