May 31, 2019/Cordros Report

Global economy

The U.S. President, Donald Trump, vowed to impose, from June 10, a 5% tariff on all goods coming from Mexico. The President stated that the tariff would slowly rise until illegal immigration across the southern border is stopped – brandishing a weapon used against a widening group of countries and jeopardizing the new North American trade agreement; United States–Mexico–Canada Agreement (USMCA). Mexico’s exports to the U.S. account for about four-fifths of the country’s total overseas shipments, or about 28% of its gross domestic product. For the U.S. economy, 5% tariffs on USD346 billion of Mexican imports means a price tag of about $17 billion, which rises to USD87 billion if the taxes increase to 25%. Consequently, U.S. consumers will bear increasing costs from tariff hikes, as the coverage spreads to consumer goods. This move will further upend supply chains and stifle trade diplomacy, and diminishes the likelihood of a near-term breakthrough with China, which has already threatened retaliation through restriction on the exportation of rare earth metals to the U.S.

Data released by the National Bureau of Statistics showed that China’s manufacturing purchasing managers’ index (PMI) dropped to 49.4, worse than the 49.9 forecast in a Bloomberg survey of economists. Factory output expanded at a slower pace as new orders – a gauge of domestic and foreign demand – fell for the first time in four months. Export orders also declined for the twelfth straight month, with the sub-index falling significantly to 46.5 from April’s 49.2. The PMI data suggests a weaker growth outlook and that the slowdown precipitated by the on-going trade war are exerting pressure on the manufacturing sector. Given the higher level of uncertainty in foreign demand for production which is likely to continue in June, we expect the country to maintain its loose monetary policy, and extend recent stimulus initiatives.

Global markets

This week, the Sino-US trade war, benign global growth momentum – worsened by weak macroeconomic data –, and political uncertainty in the United Kingdom dominated headlines and impacted global risk appetite. Consequently, investors dumped risky assets across our coverage universe, with the U.S (DJIA: -1.6%, S&P: -1.3%) and Euro Area (FTSE: -1.8%, Euro Stoxx: -2.3%), closing the week negative. Meanwhile, the Asian market (CSI300: +1.0%, Nikkei: -2.4%) was mixed. Elsewhere, the emerging market (MSCI EM: +0.8%) and frontier market (MSCI FM: +1.8%) closed in the green, driven by the positive performance across Kuwait (+3.6%), Romania (+3.5%), Brazil (+4.5%).

Nigeria

Economy

Earlier this week, President Buhari signed the 2019 appropriation bill into law. In the approved budget, the total expenditure is expected to decline by 2.2% y/y to NGN8.92 trillion on account of cut backs in statutory transfer (-5.3% y/y) and capital expenditure (-0.3% y/y), both of which masked higher recurrent non-debt expenditure (+34.8% y/y). Meanwhile, retained revenue is expected to decline by 2.3% y/y to NGN7.0 trillion, translating to a deficit of NGN1.92 trillion (-1.8% y/y). According to breakdown, oil revenue is projected at NGN3.69 billion (23.0% y/y) on assumption of 2.3mb/d oil production and USD60/barrel oil price. On the other hand, non-oil revenue is expected to jump 2% to NGN4.23 billion, largely driven by higher revenues from GOEs (NGN955 billion). On oil revenues, amid the over-ambitious production assumption and so expect the non-oil revenue to remain under pressure as in the prior year. For non-oil, while we remain fairly optimistic on projected VAT and CIT, we believe the projected numbers are excessive especially in the light of GOEs revenue. Thus, we see wider fiscal deficit on the horizon.

According to National Bureau of Statistics (NBS), VAT for Q1-19 grew by 7.13% y/y to 289 billion but declined by 3.01% q/q. Dissecting the components, we saw improved performance across all segments with local non-import VAT (+12.91% y/y) leading packs, followed closely by import VAT (+6.02% y/y), and foreign non-import VAT (+0.58% y/y), respectively. Meanwhile, we highlight that the improved VAT was supported by the combination of (1) improved collection pattern and (2) low based from the corresponding period of last year. For the rest of the years, we see higher VAT revenues improved consumer spending which is hinged on the implementation of the new minimum wage. To add, we also see FGN’s proposition to raise VAT by 50% as a major tailwind.

Capital markets

Equities

The Nigerian equities market recorded a positive performance this week as the benchmark index appreciated by 0.61% w/w to settle at 31,069.37. Thus, the MtD gain increased to 6.55% while YtD loss moderated to 1.15%. Analysing by sectors, all sectors indices – Banking (+3.94%), Insurance (+3.28%), Oil & Gas (+2.14%), Consumer Goods (+1.31%) and Industrial (+1.30%) – closed positive, further signifying the positive sentiment in the week.

We reiterate our view that the blend of a compelling valuation story, together with positive macroeconomic picture leaves scope for market recovery in the medium term. However, we guide investors to tread the cautious trading path in the short term.

Fixed income and money market

Money market

In line with our outlook, the overnight lending rate crashed to 4.93% – a 707 bps w/w contraction – as the CBN refrained from liquidity mopping activities. As a result, inflows from matured OMO bills (NGN154.45 billion) and bond coupon payments (NGN5.62 billion) boosted system liquidity, leading to a decline in money market rate.

Next week, inflows from maturing OMO bills (NGN177.05 billion) and FAAC disbursements to states and local governments will offer support to system liquidity. However, liquidity mop-up and forex intervention by the CBN are likely to exert upward pressure on the overnight lending rate.

Treasury bills

Activities in the treasury bills market were mixed, albeit with a bearish bias, as average yield rose by 3 bps w/w, to close at 12.17%. Sell pressure was concentrated at the long (+8 bps) end of the curve, with yield on the 335DTM (+47 bps) bill recording the most significant expansion. Conversely, demand for the 13DTM (-156 bps) and 181DTM (-35 bps) bills led to yield contraction across the short (-12 bps) and mid (-2 bps) segments, respectively. At this week’s primary auction, the CBN fully allotted NGN67.37 billion – NGN24.37 billion of the 91DTM, NGN23.16 billion of the 182DTM, and NGN19.84 billion of the 364DTM – worth of bills at respective stop rates of 10.00% (same as previous auction), 11.95% (previously 12.30%), and 12.20% (previously 12.49%). Stop rates declined by an average of 21 bps amidst relatively strong demand, with the auction recording an oversubscription of NGN128.16 billion.

Yields are expected to be pressured next week, as the CBN is expected to resume its liquidity mop-ups.

Bond Trading in the bond market was also mixed, with a bullish tilt, as demand at the end of the week, spurred by the lack of OMO activity, offset profit taking activity in the earlier part of the week, following three consecutive weeks of declining bond yields. As a result, average yield moderated by 4 bps, w/w, to close at 13.77%. Investor interest was focused at the short (-14 bps) end of the curve, with yield on the JUL-2021 (-53 bps) bond widening. On the flip side, selloffs of the JAN-2026 (+13 bps) and JUL-2030 (+7 bps) bond led to yield expansion at the mid (+6 bps) and long (+3 bps) segments respectively.

Our theme for the bond market favours moderately higher yields in the medium term on expectations of a ramp up in government borrowing to (1) fund the 2019 budget, and (2) refinance upcoming bond maturities (NGN585.20 billion).

Foreign exchange

The naira depreciated by 0.10% to NGN360.74 at the I&E window as total turnover decreased by 56.22% to USD279.39 million. However, the naira traded flat at NGN361 at the parallel market, as the CBN sustained its interventions in the week – Wholesale segment (USD100m); SME segment (USD55mn); Invisibles segment (USD50mn). Meanwhile, the foreign reserves, according to data by CBN, rose by USD18.7 million to USD45.09 billion. In the FX forwards market, there was a decline in contracts purchases across the market, save for the 3-month (+0.01% to 374.54), with subscriptions for the 1-month (-0.13% to NGN367.84), 6-month (-0.14% to NGN384.44%) and 1-year (-0.44% to 413.18) bills all declining relative to the prior week.

Looking ahead, we expect the naira to remain resilient in the short to medium term, as the still elevated crude price continues to underpin higher oil receipts, thereby supporting the CBN’s continued intervention.

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