In the just concluded week, one of the leading providers of credit ratings, Fitch Ratings, revised outlook on Nigeria’s long-term foreign-currency issuer default rating (IDR) to “Stable” from “Negative” and affirmed the IDR at “B”.
According to the credit rating agency, the revision of the Outlook reflects a decrease in the level of uncertainty surrounding the impact of the global pandemic shock on the Nigerian economy. Basically, Fitch revealed that crude oil prices have stabilised at the international market, global funding conditions have eased and domestic restrictions on movement have largely been relaxed.
Notably, it stated that Nigeria has navigated external liquidity pressures from the COVID-19 shock through partial exchange rate adjustment combined with de facto capital flow management measures and foreign-currency (FC) restrictions. Fitch opined that the oil-rich African country supported the level of its external reserves with disbursed external official loans – lately, Nigeria got USD3.36 billion worth of loan from the International Monetary Fund (IMF) to further boost infrastructural development.
On the flip side, the credit agency’s report revealed that unfulfilled FC demand could constitute a drain on reserves once FC supply is further relaxed by CBN. Reportedly, the stock of outstanding non-resident holdings of CBN open-market operation (OMO) bills was around USD10 billion in August 2020, equivalent to 27.99% of external reserves (USD35.73 billion) in September 2020.
In Fitch’s view, further tightening of FC supply for trade and financial transactions could harm output growth and exacerbate inflationary pressures. Meanwhile, September 2020 Purchasing Managers’ Index (PMI) survey report by CBN showed that manufacturing and non-manufacturing activities declined faster amid weakened new orders.
Specifically, the manufacturing composite PMI printed faster contraction to 46.9 points in Sept. (from 48.5 points in Aug.) – the fifth consecutive contraction – as new orders index fell to 46.4 in Sept. 2020 (from 49.2 in Aug. 2020). This resulted in lower production as the production index dropped to 47.3 (from 49.2).
Producers’ costs of production rose (input prices index increased to 69.8 from 66.8) but did not really translate to the higher selling price (output prices index barely rose to 58.8 from 58.4) due to weaker purchasing power. Despite the faster supplies of raw materials – supplier delivery time index rose to 53.5 in Sept. (from 53.0 in Aug.), raw materials/work-in-progress index fell, to 43.0 from 46.1 amid higher input costs.
The stock of finished goods rose as new orders slowed – its index rose to 45.8 in Sept. from 45.6 in Aug. Employment index fell, in tandem with slower activity, to 44.1 points (from 44.6 points).
Also, the non-manufacturing sector recorded faster contraction as its composite PMI fell to 41.9 points in Sept. (from 44.7 points in Aug.) as business activity and incoming business slowed – their indices fell to 43.7 (from 47.4) and 39.5 (from 44.0) respectively. Hence, the employment index point decreased, to 41.6 (from 44.3).
Elsewhere, WTI crude price tanked week-on-week (w-o-w) by 3.94% to USD38.72 a barrel despite a 2.24% w-o-w rise in US crude oil input to refineries to 13.67 mb/d as at September 25, 2020 (it also fell by 14.67% from 16.02 mb/d printed on September 27, 2019).
Also, Brent price fell by 3.60% to USD40.93 a barrel while Bonny Light declined 4.51% to USD38.94 a barrel as at Thursday, October 1, 2020. We saw U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fall further w-o-w by 0.42% to 492.43 million barrels (but rose by 16.51% from 422.64 million barrels as at September 27, 2019).
On the balance, we feel the declining PMIs would be short-lived amid ease in restrictions and the usual improved activity in the last quarter of the year; against our expectation for the higher inflation rate in the coming months.