July 13, 2019/Cordros Report

Global economy
 
After a series of disappointing industrial and manufacturing output data, owing to the country’s underperforming automobile industry in 2018, the German economy is now partly showing signs of improvement. Evidently, Germany’s industrial production reading released by the Federal Statistics Office shows a 0.3% m/m expansion in May after a sharp decline of 2.0% m/m in April. The m/m growth largely stemmed from improvement in the production of capital (+2.0% m/m) and consumer goods (+1.1% m/m). In our view, the industrial sector is not out of the woods, as we highlight significant declines across intermediate goods (-0.5% m/m), energy (-2.2% m/m), and construction (-2.4% m/m). To further reinforce our position, industrial output declined significantly by 3.7% y/y. On balance, concerns hinged on stressed global demand still poses a downside risk to industrial production and exports.

According to the Chinese National Bureau of Statistics (NBS), consumer price inflation printed 2.7% y/y, unchanged from the prior month, and in line with the market consensus. The uptick was largely driven by an increase in the food prices (+8.3% y/y), following (1) a 14.4% y/y increase in pork prices – the impact of the breakout of African swine fever and (2) extreme weather conditions. On the flip side, the non-food inflation (-1.4%) tempered even as core inflation remains unchanged from a 3-year low of 1.6%. CPI is expected to remain relatively buoyant, supported by food prices. However, this should not result in strong inflationary pressure, with the core CPI likely to stay below 2.0% due to sluggish demand.
 
Global markets

Global equity markets across our coverage universe were broadly negative in the week – Euro Area (FTSE: -0.4%, Euro Stoxx: -0.8%); Asia (CSI 300: -2.2%, Nikkei: -0.3%) –, weighed on by concerns about trade tensions and a weak global economy. US markets (DJIA: +0.6%, S&P: +0.3%) were the outlier, as risk assets rallied after Federal Reserve Chairman Jerome Powell’s dovish comments towards the end of the week. Emerging (MSCI EM: -0.5%) and Frontier (MSCI FM: +1.3%) markets equity gauges moved in opposite directions, following mixed performances across China (-2.2%), South Korea (-1.1%), Kuwait (+3.6%) and Argentina  (+2.6%).

Nigeria
 
Economy
 
According to the press release by the DMO, Nigeria total debt as at Q1 2019 grew by 2.30% q/q to NGN24.95 trillion (Q4 2018: NGN24.39 trillion), taking the nation’s debt as a percentage GDP to 19.03%. The increase stemmed from both domestic and foreign debt which grew by 2.7% and 1.3% respectively, with the ratio of domestic to external debt settling at 68.49% to 31.51% at the end of the period. We continue to hold the view of widening debt profile amidst (1) government’s inability to effectively diversify and expand its revenue base, and (2) frail economic growth, raises concern over the fiscal sustainability. Speaking to the former, we expect the government to access the Eurobond market this year to bridge the budget deficit.
 
After the long wait, the President of Nigeria, Muhammadu Buhari, signed the African Continental Free Trade Area (AfCFTA), taking the total of countries which have assented to 54 of 55 member states. The aim of expanding intra-African trade through better harmonization and coordination of trade through the liberalization of tariffs (on an increasing scale to 90%) on all goods and services traded on the continental over 5-8 years period, in the first phase, with the overall aim to accelerate the establishment of a customs union for the continent. While we praise this giant first step, we, however, raise concerns regarding the low volume of intra-African trade prior to this agreement. While many believe that the low level of intra-Africa trade is due to high tariffs and other trade barriers, in our view it is due to lack of specialized exports, as most countries are exporters of natural resources. To further validate this point, by our estimates, only 15% of Nigeria’s total exports as at Q1 2019 were attributed to African countries. Overall, ‘Free Trade’ does not imply ‘Fair Trade’, and so for this agreement to be effective, there is the need for; (1) currency unification and (2) structural reforms to spur manufacturing activities. However, the former seems a lofty expectation.
 
Capital markets
 
Equities
 
Despite the listing of AIRTELAFRI at the start of the week, sentiments remained weak, as the ASI extended losses from the previous week, declining 2.4% w/w, to close at 28,566.79 points. Thus, the MtD and YtD losses worsened to 4.7% and 9.1% respectively. Analyzing by sectors, the Consumer Goods (-9.5%) bore the brunt of the losses, with NESTLE (-7.8%) declining to its lowest since October 2017. The Oil & Gas (-3.1%), Insurance (-2.4%), and Industrial Goods (-2.0%) indices followed suit. The Banking (+0.8%) index was the sole gainer, following bargain hunting on GUARANTY (+2.6%).  
 
Our outlook for equities in the short to medium term remains conservative, amidst the absence of any catalyst to drive positive market returns.

Money market and fixed income 

Money market

Given the substantial system liquidity for most of the week, the open buyback and overnight lending rates undulated during the week before settling lower week-on-week. Rates closed the first trading day down by 50bps apiece at 3.4% and 4.1% for the OBB and OVN respectively, before further declining by 7bps and 14bps to 3.3% and 3.9% on the 2nd trading day. Thereafter, rates spiked to 6.5% and 7.2% before declining to 3.0% and 3.6% on the penultimate trading day of the week. However, after the final day’s trading, the OBB and OVN settled at 2.2% and 2.9%; representing increases of 165bps and 164bps respectively.

In the coming week, given the long position of the market, as well as impending maturities in the coming week, we expect rates to decline at the start of the week, before trending upwards at the tail end as we expect the CBN to maintain tight system liquidity given impending OMO maturities on the 18th of July.

Treasury bills

Activities in the Treasury bills secondary market were seemingly bullish as yields declined precipitously in the week, as the average yield across instruments settled at 11.1%; representing an 82bps w/w decline. This was on the back of the new rule by CBN reducing the limit on interest-earning placements by DMBs at the Standing Deposit Facility (SDF) window from NGN7.50 billion to NGN2.00 billion. In addition, demand also largely reflected the significant long position of the market through the week as no OMOs or PMAs were held.

In the coming week, OMO maturities totaling NGN148.73 billion are expected to hit the system, while OMO repayments from the 11th of July (NGN184.82 billion) which enhanced liquidity levels at the tail end of the week. Consequently, we expect secondary market yields to remain tempered at the start of the week until the CBN commences mop-up activities.

Bond

Activities in the Treasury bonds market mirrored the T-bills market, as the average yield across instruments declined by 17bps to 13.7%. The 7.00 23-OCT-2019 bond recorded the largest decline in yield, paring by 98bps to settle at 11.5%, while the 14.50 15-JUL-2021bond recorded the largest increase in yield of 23bps to settle at 13.3%.

We expect to see increasing demand for Treasury bonds instruments, especially if yields on Treasury bills maintain this downward trend, as investors re-allocate higher-yielding assets. Consequently, we expect yields to trend downwards in the coming week, and over the short term.

Foreign Exchange

The naira depreciated marginally by 1bp to NGN360.79/USD at the I&E window but appreciated by 0.3% to NGN360.00/USD at the parallel market, even as the CBN once again chose not to intervene in the market this week. Also, according to data from the CBN, there was an accretion to the foreign reserves this week by USD11.89 million WtD to settle the level at USD45.13 billion on the 11th of July, while the total turnover at the I&E window decreased by 58.3% w/w to USD441.49 million. Finally, in the FX forwards market, rates declined across all contracts, with the 1-month (-0.1% to NGN363.26/USD), 3-month (-0.2% to NGN368.92/USD), 6-month (-0.5% to NGN378.85/USD) and 1-year (-0.1% to NGN402.90/USD) contracts all settling lower.

Looking ahead, we expect the naira to remain resilient over the short to medium term, as the still elevated crude oil price continues to underpin higher oil receipts, thereby supporting the reserves and potential interventions by the CBN.

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