Deregulation With Price Controls. Precursor to Devaluation?

LAGOS, Nigeria, Capital Markets in Africa: Last week, the Federal Government finally took a step to pseudo-deregulate the downstream sector (the FGN refused to use the word deregulation). This initiative was expected due to the introduction of the price modulation template by the NNPC in January 2016 and also the 2016 budget had no provisions for petrol subsidy payments. Under the new framework, market players are now permitted to source FX independently of the CBN to import and sell petrol within a price band of N135-N145. Reactions to the new pricing framework has been mixed, given the history of corruption, significant government spend ($35 billion between 2011 and 2014), and prolonged fuel scarcity associated with the petrol subsidies. The attempt by the prior administration to completely remove the subsidy (pump price +117% to N141), was met with mass protests and work stoppage across the country. We note that the major labor union intends to stage a work stoppage protest against the new price framework to force the government to revert back to the original price of N86.50.

Underpinning the new pricing template is the price of crude oil and availability of FX. The recent rally in crude oil prices (up 31% ytd) brought back subsidy and given the decline in government revenue, funding subsidy is untenable. Furthermore, scarcity of foreign exchange and difficulty to open letters of credit impacted marketers ability to import products. Under the new regime, importers can access “autonomous” sources (interbank, upstream O&G majors, parallel market) for their FX needs. It should be noted that PPPRA assumed an exchange rate of N285/$ (interbank N197/$, parallel N357/$) to arrive at the pump price band. Which begs the question – what is the true value of the Naira? Since the rationing of FX began, CBN allocated about 40% of FX to fuel importation. With the new framework, importers are expected to source outside the CBN window which will further exacerbate demand pressures on the autonomous sources and further widen the band between the official and parallel rates.

The widening effects of the importers FX demand and the use of N285/$ conversion rate by the PPRA (instead of N197/$) suggests an official devaluation imminent. Further supporting our belief was the recent statement from the Vice President (Osinbajo) indicating that devaluation is in the cards in the near future. This represents a deviation from the President’s staunch stance against devaluation and the first time a public official will publically offer a difference in opinion on devaluation.

Source: Primera Africa Investment Research (Weekly Note)