Impact of Power Supply on Nigeria’s GDP

MARKET INDICATOR 

By Obinna Chima

The attainment of improved power supply to both households and firms in the country can add at least two per cent to the growth of Nigeria’s annual Gross Domestic Product (GDP), a report by Lagos-based FBNQuest has stated.

The investment bank noted that the shortage of power supply in the country had continued to make efficient business operations in the country extremely difficult, thereby stifling economic growth.

Although power generation capacity from the grid has peaked at about 7,000 megawatts (MW), distribution capacity is still at about 5,000MW.

The FGN currently estimates national energy demand at 22,230 MW.

 Based on industry sources, the federal government has secured a US$486 million from the World Bank as funding for the expansion of the Transmission Company of Nigeria (TCN).

Initially, the TCN had secured US$1.55billion in funding from multilateral donor agencies for the same purpose. But analysts at FBNQuest stated that it wasstill unclear if the recently secured US$486 million was part of the previous funding received from donor agencies or an additional credit line.

“If the latter is the case, we see it as a positive, given that the FGN targets a wheeling capacity of 20,000MW from the transmission grid over the next four years,” they added.

According to the most recent data from the federal ministry of power, works and housing, peak generation was 4,780MWlast Monday. Its lowest generation on the same day was 3,945MW.

“We understand that at least 40 per centof most business operating costs is allocated to self-generation of energy. A survey carried out by the Manufacturers Association of Nigeria revealed that N130billion was spent on self-generated energy in 2016.

“There is growing interest around off-grid solutions. Official thinking on power now includes developing alternative energy sources. The 700MW Zungeru hydro power plant project in Niger state is now 45 per cent complete.

“Besides increased energy generation, the completion of this project will boost economic activity via job creation for the host communities.

“Based on our estimates, if ‘full power’ is attained and made routinely available to businesses and households, it could add at least two percentage points to annual GDP growth,” they added.

Forex Market

Meanwhile, in line with trend, the CBN continued its weekly interventions last week as it pumped in a total of $549.89 million into the market during the week.

A breakdown of this showed that while the banking sector regulator earlier in the week, injected US$210 million viaits wholesale special interventionsauctions with the aim of maintaining stability across the different segments of the market, it sold another $339.89 million in the Retail Secondary Market Intervention Sales (SMIS).

 Against this backdrop, rates traded flattish within tight bands all week. The CBN spot rate opened the week at N305.70/US$1 and remained unchanged throughout the week.

At the parallel market, the naira appreciated N1 at the start of the week to close at N362/US$1 and traded at similar level all week.

At the Investors’ and Exporters’ (I & E) window, the NAFEX rate opened at preceding Friday’s close (N360.16/US$1) and traded flat till mid-week before appreciating to N360/US$1 on Friday. Activity level in the I & E window stood at $835.97 million as of Friday.

In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures strengthened by US$198.9 million, indicative of a 2.8 per cent week-on-week expansion to US$3.6 billion. The most subscribed was the APR-2018 instrument with total market value of US$659.9m (contract price: N360.59) while the JAN-2019 instrument was the least subscribed with a total market value of US$47.5 million (contract price: N361.94).

MAR-2018 instrument will be maturing next week and in line with the trend, we expect the instrument to be replaced with a new contract.

The acting Director in charge of Corporate Communications, CBN, Mr. Isaac Okorafor  stated that feedback from the wholesale and retail segments of the forex market showed that customers were satisfied with their level of access to forex.

He also assured Nigerians that the recent confirmation of Deputy Governors and Monetary Policy Committee (MPC) nominees by the Senate will further spur the Bank towards taking sound decisions needed for economic development.

Meanwhile, the naira exchanged at N362/$1 in the BDC segment of the market yesterday.

Nigeria’s external reserves recently hit a five-year high of $46 billion, representing an increase of 18 per cent or $7 billion over the country’s reserves figure of $38.912 billion as of January 2, 2018. It has also significantly surpassed the $40 billion target for 2018 announced by the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, last November, and is expected to inch up to $50 billion in the next few months.

Okorafor said the accretion of the country’s reserves was a result of the central bank’s continuous effort at vigorously discouraging unnecessary imports and reducing the nation’s import bill, inflows from oil and non-oil exports, as well as the huge inflows through the investors’ and exporters’ window of the foreign exchange market, which, he said, had attracted over $33 billion since April 2017, when it was created.

According to him, the CBN’s interventions in the forex window also helped to moderate the pressure on the forex reserves by sustaining liquidity in the market and boosting production and trade.

Okorafor also noted that the CBN policy restricting access to forex from Nigeria’s forex market to importers of some 41 items had made a huge impact on the status of Nigeria’s reserves and boosted the supply of local substitutes for imported goods, created jobs at home, and enhanced the incomes of farmers and local manufacturers.

Also, analysts at Afrinvest Securities Limited stated: “In the near term, we expect rates to continue trading within tight bands as we remain confident of the central bank’s ability to sustainforex interventions, considering sustained increase in external reserves and strong autonomous capital inflows.”

 

Interbank Rate

However, in the money market lastweek, the open buy back (OBB) andovernight (OVN) rates fell week-on-week as system liquidity improved towards the end of the week followingopen market operations (OMO)treasury bills maturities which hit the system.

At the start of the week, OBB and OVN rates rose 10.7 percentage points and 12.1 percentage points to settle at 22.5 per cent and 25 per centrespectively (from 11.8 per cent and 12.9 per cent recorded the prior week) as the impact of CBN OMO auction and weekly foreign exchange (forex)intervention offset N87 billion bond coupon payment.

According to a report by Afrinvest Securities Limited, at the OMO auction, the CBN issued 101-day and 227-day instruments at 12.6 per centand 14.4 per cent respectively.

But on Tuesday, the OBB and OVN rates increased 7.5 percentage pointsand 7.3 percentage points to 30 per cent and 32.3 per cent respectively, attributable to a further squeeze in system liquidity which opened at N45.1 billion.
The trend reversed mid-week as the OBB and OVN rates moderated 10percentage points and 10.2percentage points to close at 20 per cent and 22.1 per cent.

 This was sustained till Thursday as rates further eased to at 6.8 per cent (OBB) and 8.1 per cent (OVN), attributable to improvement in system liquidity due to N151.1 billion OMO auction and N107.9 billion treasurybills maturities which hit the system.

OBB and OVN rates closed the week at 6.8 per cent and 8.1 per cent, five per cent and 4.8 per cent lower week-on-week respectively.
However, performance in the treasury bills market was largely bullish as average rate across tenors traded lower on three of the five trading days.

The week started on a relatively flat note although average rate across benchmark tenors declined two basis points to 13.9 per cent.

Rates remained flat midweek even as the CBN carried out a Primary Market Auction (PMA) during the week. The 182-day instrument was the only undersubscribed and under allotted instrument in the auction. Average T-bills rate closed the week at 13.6 per cent, down one basis point week-on-week.

“In the coming week, N140 billion of OMO bills will be maturing. Our short-term outlook for T-bills remains bullish against the backdrop of relatively lower federal government domestic borrowings and CBN policy easing bias,” they predicted.

 

Bond Market Review

 

The performance of the domestic bond market was largely flattish lastweek as average yield across tenors closed at a similar level to prior week. Yields fell by a marginal two basis points week-on-week to close at 13.5per cent.

On Wednesday, the DMO held its monthly Bond Primary Market Auction (PMA).

At the auction, the 5-year 14.5% JUL 2021 and 10-year 13.98% FEB 2028 bonds were reopened while a near 10-year 13.53% MAR 2025 bond was offered.
In line with expectation, demand for the longer dated 10-year instrument was stronger in anticipation of further moderation in the interest rate environment.

The 10-year 13.98% FEB 2028 instrument received the highest subscription, 3.3 times the amount offered (amount offered: N30 billion, subscription: N98.8 billion, allotment: N10 billion and marginal rate: 13.6%).

Investor sentiment towards the 5-year 14.5% JUL 2021 instrument was also positive with a subscription of 1.9x (amount offered: N10 billion, subscription: N18.9 billion, allotment: N10.1 billion and marginal rate: 13.4%).

However, the 7-year new issue which was allotted at a marginal rate of 13.5% was undersubscribed as the total subscription of N25.2billion was below N30 billion offered.

Marginal rates of the 5-Year and 10-Year bonds were 30 basis points and 38 basis points lower than February auction.