Culled—Proshare

January 7, 2020

By WSTC Securities

• The International Monetary Fund (IMF), in its most recent economic report, forecasted a 3.0% economic growth for the world in the year 2019, a downgrade from 3.2% in its previous report. The world economy is projected to grow at 3.4% in 2020. The world economy growth is based on an expected slowdown of the US and China trade dispute. Furthermore, an economy recovery in some emerging economies, specifically in Latin America, and Middle-East, is expected to drive world economic growth.

• Given the continued surge in non-OPEC output on the back of rising rig efficiency as well as well-level productivity, we expect OPEC’s role as a swing producer to be tested. Members’ compliance with production quota will test the cartel’s resolve to anchor crude prices in 2020. Nevertheless, we expect the Nigerian crude to command a premium on the back of the incoming  International Maritime Organisation (IMO) regulation 2020.

• We have a GDP forecast of 2.40% in FY 2020, premised on, early passage and implementation of the 2020 budget, stable crude oil production; and benign crude oil price relative to the 2020 budget benchmark of $57 per barrel.

• While we expect the stimulated lending to the real sector by the banks to drive an increase in output, proposed hike in VAT rate; Energy prices; and Continue delay in the implementation of wage will constrain domestic consumption.

• Although the FG approved an estimated revenue of N8.42trn, on the assumption of improved  earnings (mostly from efforts and policies of FG to drive revenue), we expect a 75% revenue performance in FY’20. In our view, we believe that the revenue estimates of the FG is too optimistic. Consequently, we expect to see increased levels of borrowing in the foreign and domestic markets (including monetary financing by the CBN).

• A critical economic challenge in 2020 would be how to address the declining foreign direct investments due to its impact on employment and output growth. A major way to improve the current FDI trend is to implement economic reforms such as the power sector reform, Petroleum Industry Governance Bill (PIGB), revenue reforms; and significant investment in infrastructure.

• Although we are not optimistic about the implementation of many of the reforms, we yet believe that a significant investment will be made in key infrastructure in 2020, on the back of improved revenue and improved overall budget implementation especially as the 2020 budget is expected to run a full 12-month fiscal period.

• Given the low yield environment, we expect:

1. Increased borrowing activities, particularly by the corporates.
2. Lower funding cost for banks and corporates, increased investment, and a boost to the bottom-line.

• But the big question for us in respect to the curve momentum is how sustainable and for how long?

• While we believe that a lower yield bodes well for business investment and the labour market, we are biased to fade optimism on the CBN heterodox policy on the following grounds;

1. Monetary policy rate at 13.50% amid the dovish bias of systematic banks speaks to system fragilities.
2. Faster-than-expected depletion of foreign reserves and current account deficit for three consecutive quarters in 2019; and
3. Higher inflation expectations in the coming months

• The equity market had experienced two consecutive decline of 17.81% and 14.60% in 2018 and 2019, respectively. We expect the trend to reverse in 2020 on the back of lower finance cost for companies, implementation of the minimum wage, and the quick passage and the implementation of the 2020 budget.

Click here to read PDF copy of report