In the first off-cycle monetary policy meeting since the global financial crisis of 2008, the Bank of England (BOE) followed the U.S. Fed’s recent action by unanimously electing to reduce its benchmark rate by 50bps to 0.25%, from 0.75%. The move was aimed at limiting the negative impact of the coronavirus on economic activities. Also, on the fiscal side, a GBP30 billion (USD39 billion) economic stimulus program was unveiled to boost banking loans and provide cheap consumer credit in a bid to reduce the hardship caused thus far. As at the time of writing, we understand that over 500 cases have been confirmed across the U.K, according to the European Centre for Disease Prevention and Control (ECDC). While we still see numerous risks to the economic growth outlook, we believe the combination of the preemptive fiscal and monetary intervention should provide a needed breather in the short-to-medium term.

Economic growth remained weak in the Euro area, as mixed economic performances across member states dampened overall output in Q4-19. Specifically, GDP growth moderated to 1.0% y/y (Q3-19: 1.3% y/y) – the weakest expansion since Q4-13, occasioned by slower growth in household consumption (-30bps to 1.2% y/y), government expenditure (-20bps to 1.8% y/y) and a negative contribution from external trade.  Across member states, economic activities were grounded in heavyweight countries, as Italy & France contracted, while Germany recorded no growth. For Q1-20, the uncertainty caused by the coronavirus outbreak has cast a shadow on the Euro area economy. Further out into the year, export dependent countries among member states are likely to contract, as the global trade outlook remains benign. 

Global markets

Global equities were set for their worst week since the 2008 financial crisis, with coronavirus panic-selling hitting nearly every asset class. US (DJIA: -18.0%; S&P: -16.5%) and European (STOXX Europe: -14.8%; FTSE 100: -13.9%) shares were on track to record their worst weeks on record, as investor fears heightened over just how much damage the fast-spreading COVID-19 virus will wreak on the global economy. In Asia, Japanese (Nikkei 225: -16.0%) stocks posted their second worst week ever after a 24% fall in early October 2008, while Chinese (Shanghai SE: -4.8%) suffered reduced losses as the spread of the coronavirus has slowed domestically and many factories have resumed work after lengthy virus-related stoppages. Emerging markets (MSCI EM: -12.7%) and Frontier markets (MSCI FM: -14.9%) were not immune to the global rout, with significant losses in South Korea (-13.2%) and Kuwait (-17.9%) weighing down the respective indices.

Nigeria

Economy

Against the unrelenting naira asset sell-offs by foreign investors, capital flows into Nigeria’s economy tempered in Q4-19 by 32.4% q/q to USD3.80 billion, on account of global growth concerns, volatile crude oil prices, and an unimpressive domestic macro landscape. Specifically, Foreign Portfolio Investment (FPI), which constituted 49.5% of the total inflow, plunged by 37.8% q/q, following disappointing outturns across the board. However, Foreign Direct Investment (+24.5% q/q) surprised positively, recording the first growth in four quarters, following higher inflows into the equities market. Over 2020, the bias is for capital inflows to remain tame, on account of (1) a benign global growth outlook as the coronavirus continues to spread, and (2) weaker domestic macros, as a decline in crude oil prices continue to spur fears of currency devaluation.  

According to the Q4-19 foreign trade statistics report, the trade balance recorded the first deficit since Q3-16 and the largest in history, as imports ran ahead of exports. Specifically, exports fell by 9.8% q/q, driven by a moderation across both non-oil exports (-43.9% q/q) and oil exports (-3.2% q/q). We highlight the border closure in August 2019 as the key driver for the former. On the other hand, the decline in oil exports was driven by lower crude oil production (-1.5% q/q) which masked the slight gain recorded in crude oil prices (+0.6% q/q). Elsewhere, higher increases recorded across non-oil (+57.9% q/q) and oil (+3.0% q/q) imports set the stage for a 49.3% q/q expansion in overall imports. Over 2020, we expect export earnings to moderate, as the risks to crude oil prices are firmly tilted to the downside. Elsewhere, given the recent devaluation fears, we believe the CBN will resume its FX management strategy by excluding more items from eligible non-oil imports, which portends a downside risk to overall imports.

Capital markets

Equities

It was a gloomy week for the domestic bourse as coronavirus fears and lower oil price panic-selling drove the market to its worst weekly loss on record. The ASI declined by 13.6% w/w, as investors sold off across board. Accordingly, the MTD and YTD losses increased to -11.9% and -15.3%, respectively. All sectoral indices closed negative – Banking (-26.8%), Consumer Goods (-14.9%), Oil & Gas (-7.1%), Industrial (-5.7%), and Insurance (-5.1%) indices.
 
Looking ahead, we still see sizeable legroom for further downslide in risk assets as investors continue to run towards safety in the face of the precipitous decline in oil price.

Fixed income and money market

Money market

The overnight (OVN) rate contracted by 278bps, w/w, to 10.1%. The rate begun the week elevated following outflows from the Wholesale FX auction. However, inflows from OMO maturities (NGN232.26 billion) and FX retail refunds (c. NGN200 billion) towards the end of the week were sufficient to saturate the market and cause the eventual contraction in the OVN this week.

Inflows worth a combined NGN395.72 billion – OMO maturities (NGN304.75 billion) and FGN bond coupon payments (NGN90.97 billion) – are expected to offer a boost to system liquidity next week. Thus, barring any significant liquidity mop-ups, we expect a contraction in the OVN.

Treasury bills

Activities in the treasury bills market were bearish as foreign investors sold off OMO bills on coronavirus fears and the crash in oil prices. Consequently, the average yield across instruments expanded by 242bps to 12.6%. The average yield in the OMO segment of the market expanded by 370bps to 16.6% while the average yield in the NTB secondary market contracted by 13bps to close at 3.9%. The week’s NTB primary auction, the CBN fully allotted NGN86.30 billion worth of bills – NGN1.80 billion of the 91-day, NGN14.00 billion of the 182-day and NGN70.50 billion of the 364-day – at lower stop rates of 2.49% (previously 3.00%), 3.78% (previously 4.00%), and 5.30% (previously 5.70%).

We expect foreign investor led-selloffs to persist in the OMO secondary market amidst continued Coronavirus worries and lower oil prices. At the NTB PMA next week, the CBN is expected to offer NGN47.56 billion worth of instruments to investors.

Bonds

The FGN bond secondary market was bearish as market players remained wary of the impact of lower oil prices on the country’s crude oil revenue. Consequently, average yields across instruments expanded by 140bps to 11.7%. Yields across the short (+125bps), mid (+181bps), and long (+101bps) segments of the curve expanded due to sell-offs of the JAN-2026 (+242bps), MAR-2027 (+345bps), and APR-2037 (+156bps) bonds.

We expect the Treasury bonds market to remain bearish as market players continue to react to global issues.

Foreign exchange 

As foreign outflows intensify, Nigeria’s FX reserves declined by USD156.08 million WTD to USD36.17 billion (10 Mar 2020), as the CBN maintained its support for the currency via its weekly FX interventions; USD210.00 million was sold across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Nonetheless, the naira remained under pressure, weakening by 0.6% w/w to NGN368.47/USD at the I&E window and by 5.3% to NGN380.00/USD in the parallel market. In the Forwards market, the naira depreciated across the 1-month (-2.1% to NGN377.49/USD), 3-month (-2.5% to NGN384.45/USD), 6-month (-2.9% to NGN396.67/USD) and 1-year (-3.8% to NGN427.08/USD) contracts. 

Looking ahead, we expect the foreign reserves to support the CBN’s currency defense over H1-20. Further out, the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira will force the CBN to throw in the towel in our opinion.