The stock market is critical to Nigeria’s economic growth and development, especially going into an election year.
As such, the 2023 general elections and their outcomes would have a major impact on investors’ confidence, not least because of the elevated risk associated with elections in the country.
Speaking on the outlook of the market for the year 2023, Uche Uwaleke, a professor of Capital Market at the Nasarawa State University, Keffi, and president of the Capital Market Academics in Nigeria, noted that the current bullish trend in the market may not be sustained through the first quarter of 2023, when cautious trading and profit-taking are likely to take centre stage.
According to him, “History indicates that in an election year, a number of foreign investors do seek safety in other emerging markets, and may return sometime after the election, if it is largely judged to be credible by the international community.”
“Owing to this flight-to-safety inclination, government securities will most likely offer the most opportunities and become the toast of investors during the first half of 2023,” he said.
Speaking further, Uwaleke highlighted the monetary policy decisions of the Central Bank of Nigeria, and the implementation of the budget, among other policies that will also impact the elections.
CBN’s monetary policy
The capital market expert noted that given that the impact of monetary policy comes with a lag, it should be expected that the full effects of the pace and scale of policy rate hikes in 2022 would hit the economy in 2023.
“Tight monetary conditions will most likely weigh on near-term economic growth and dampen stock market performance, especially in the first half of 2023,” he said.
“It is most likely that the CBN, following the advice of the IMF in the Article IV consultation with Nigeria, will keep financial conditions tight to contain inflation which implies limited upsides for the equities market.
“Regrettably, political uncertainty and insecurity will not allow high-interest rates to support any meaningful flows from foreign investors in H1 2023.
“As a result, I expect economic activity to decelerate in Q1 and Q2 of 2023. Perhaps, nowhere will this be more apparent than in the manufacturing and agriculture sectors, where growth rates have already begun to tank, according to the National Bureau of Statistics’ GDP Q3 2022 report,” he said.
On the implications of such decisions, he expressed belief that “Against this backdrop, companies in the agriculture and consumer goods sectors may record depreciation in their share prices during these periods.”
“In general, CBN’s tightening stance in the first half of 2023 will largely contain stock market gains.
“It bears mentioning that the supply-side and cost-push factors driving inflationary pressure in Nigeria, including energy costs and insecurity, which are exogenous to the CBN, will likely deny the monetary authority victory over the war against inflation as the expected impact of the implementation of currency redesign and a cash withdrawal limit on inflation and exchange rates may not crystallise in the near-term.”
Implementation of the 2023 expansionary budget
From a theoretical perspective, the implementation of an expansionary budget ought to turbo-charge the stock market as output expands with a positive pass-through to the earnings of quoted companies.
However, the 2023 federal budget of about N21.8 trillion is weighted more on recurrent expenditure (N8.32 trillion) and debt service (N6.55 trillion).
This has grave implications for inflation and interest rates given that the huge budget deficit will be financed chiefly through borrowing. So, fiscal conditions may deteriorate, which will likely attract downgrades by rating agencies such as Moody’s, Standard & Poor’s, and Fitch, negatively impacting confidence and stock prices.
A related issue is the government’s plan to securitize over N23trn in government debt owed to the CBN. What all these portend is a high-interest rate environment in 2023, which will not augur well for the stock market.
On the deficit, he said the elephant in the room seemed to be the issue of fuel subsidy, which the 2023 budget has only accommodated up till June. How the new administration navigates the challenges that will come with its removal lie at the heart of macroeconomic stability in the second half of 2023.
“It goes without saying that negative investor sentiment on the part of both domestic and foreign investors will prevail if fuel subsidy removal is made possible.
“This is why the government should begin in earnest to engage relevant stakeholders; effectively communicate to the public as well as agree on compensation measures with organised labour with a view to ameliorating its direct impact and unintended consequences,” he added.
On the upside, the don noted that the implementation of the revised Capital Market Master Plan (2021-2025) expected to kick in from 2023, may buoy market performance, especially in the 2nd half of 2023.
“Given that the Federal Ministry of Finance, Budget and National Planning is the implementing ministry and has been charged with the responsibility for its successful execution, it is expected that, unlike what obtained in the past, the ministry will drive it as part of the national economic policy agenda.
If that is done, sectors like ICT (MTN, Airtel), Agriculture (Okomu, Presco), Industrial (Dangote Cement, BUA Cement), Oil and Gas (SEPLAT, MRS) and Financial Services (Zenith, GTCO) may benefit from increased investors participation in H2 2023 on the back of the revised plan which seeks to achieve significant participation of institutional (especially pension funds, insurance companies, mutual funds) as well as retail investors in the stock market,” he further explained.
On the global space, he asserted that a rise in US interest rates and bond yields will make it more expensive for the government to service the huge public debt now in excess of N42trn, especially the foreign debt, with a significant Eurobonds component.
“This development will worsen the current fiscal imbalance, jeopardise the 2023 budget as well as crowd out development funds.
“Having gone through this route before, both the fiscal and monetary authorities should anticipate the fallout of monetary policy tightening by central banks in developed economies and put in place measures to cushion the adverse impact on the Nigerian economy,” he said.
He further explained that the international crude oil price is likely to stay above the 2023 budget reference price of $75 per barrel on average.
“To be sure, the Energy Information Administration (EIA) forecast is to the effect that Brent crude oil prices will average USD95.33 per barrel in 2023, due in part to the OPEC+ output target and the EU ban on Russian crude imports as well as the G7 price cap which is aimed at reducing Russia’s ability to finance the war in Ukraine,” he added.