Global economy

The trading activities in the U.S declined significantly in February, as the country’s trade deficit shrank to the lowest in more than three years, due to the coronavirus pandemic which continued to take a toll on global commerce. The trade deficit declined by 12.2% m/m, as imports (-2.5% m/m) declined faster than exports (-0.4% m/m). Also, the goods-trade deficit with China shrank to the narrowest level since 2009, as China was locked down due to the virus battle. The U.S economy is expected to weaken in the first quarter of 2020, as strict measures by the government to control the spread of the coronavirus has brought the country to a sudden halt, triggering a wave of layoffs across industries.
 
Global markets   
 
Global equities markets were bearish this week as the impact of the spread of the coronavirus weighed on economies, and by extension performances across markets. Specifically, in the US (DJIA: -2.0%, S&P: -1.1%), equities pared on the back of weaker than expected jobs report, which showed a decline of 701,000 jobs in March. Elsewhere, both European (STOXX: -0.4%; FTSE 100: -1.7%) and Asian (Nikkei 225: -2.1% and CSI: -0.3%) markets were set to close in red as market sentiment remain weak, as the economic impact of shutdowns deepened further. For evidence, Eurozone PMI crashed to its lowest level in history 29.7 points in March, down from 51.6 points in the previous month.
 
Nigeria
 
Economy
 
Nigeria’s current account (CA) position recorded its sixth consecutive quarter of deficit in Q4-19, expanding by 157% q/q. We highlight that the absolute CA deficit of USD6.97 billion translates to 5.3% of GDP – representing the highest in history. Analysing the breakdown, we note that the negative outturn was largely occasioned by trade deficit (USD1.5 billion), the first deficit since Q3-16, following a 17.0% q/q expansion in imports, which ran ahead of exports (-11.0% q/q). The deterioration in the trade balance, together with higher services (+9.2% q/q) and income (+0.8% q/q) payments, were enough to offset the improvement in remittances (+16.9% q/q). Looking ahead, we see sizeable legroom for further deterioration in CA as COVID-19 continues to wreak havoc on economic activities. Over 2020E, weaker oil prices and Nigeria’s inability to sell its Bonny Light cargoes, together with COVID-19 induced decline in capital importation imply further depletion of the country’s FX reserves. 

According to the December 2019 Monthly Financial and Operations Report by the NNPC, Nigeria’s crude production (oil and condensates) declined by 3.5% m/m to 1.98 mb/d in November 2019 – 13.8% lower than the 2019 budget estimate of 2.30mb/d. The production decline was attributed to shutdowns of the Forcados terminal (for repairs) and Bonny NCTL (shut down due to leaks). Meanwhile, petrol subsidy expenses (under-recovery) settled at NGN551.22 billion over 2019FY – 15.9% below the total amount expended in 2018FY (NGN648.27 billion). The recent crash in oil price, occasioned by the rising cases of coronavirus, is negative for Nigeria’s public finances as more than 85% of FX earnings are from crude oil sales. However, the oil price-induced reduction in subsidy payments should slightly help limit the impact.
 
Capital markets
 
Equities
 
This week, amid the rising cases of coronavirus in Nigeria, the domestic bourse recorded another bearish outing, as the NSE All-share Index plummeted by 3.5% w/w to 21,094.62 points. Consequently, the YTD return of the market settled at -21.4%. Analysing by sectors, significant losses in the Banking (-5.3%) and Consumer Goods (-3.9%) sectors, were the primary drivers of the weak market performance. Also, marginally losses were recorded in the Industrial Goods (-1.7%) and Insurance (-0.3%) indices. On the other hand, the Oil and Gas (+2.3%)  sector was the sole gainer, however, given the magnitude of losses recorded in other sectors, it was not enough to turn the tide.

In our view, the trend witnessed this week is likely to persist, as weakened market sentiments are expected to pressure market returns. Nonetheless, we advise investors to take a position in fundamentally justified stocks.
 
Money market and fixed income
 
Money market

The overnight (OVN) rate contracted by 14.50ppts, w/w, to 3.1%. The rate depressed from the start to the end of the week, as the system became awash with liquidity following inflows from CRR refunds (c. NGN310 billion) to some banks and OMO maturities (NGN288.54). The outflow from this week’s OMO auction (NGN4.00 billion) was not significant enough to significantly depress system liquidity. 

In the coming week, inflows from OMO maturities worth NGN130.93 billion are expected to hit the system. Nonetheless, we expect the OVN rate to expand from current levels as the CBN will likely mop-up excess liquidity.
 
Treasury bills
 
In line with our expectations, bullish sentiments persisted in the Treasury bills secondary market as excess liquidity drove demand for OMO instruments, while market players covering up for lost bids at this week’s NTB PMA drove demand in that segment of the market. Thus, the average yield across instruments contracted by 126bps to 10.5%, with the average yield across instruments at the OMO and NTB spaces contracting by 171bps and 49bps to 13.8% and 3.2%, respectively.  At this week’s OMO auction, the CBN offered instruments worth NGN110.00 billion, however, only NGN4.00 billion worth at the long end was sold at a stop rate of 12.8% (previously 13.0%).

We expect the demand for OMO bills to continue to drive down the average yields across both segments of the Treasury bills secondary market. However, we expect quiet trading activity at the NTB segment of the market.  
 
Bond

The Treasury bonds secondary market became bullish this week, as market players demanded for mid and long tenored instruments. Consequently, the average yield contracted by 25bps to 11.8%. Across the curve, yields contracted at the short (-3bps), mid (-31bps) and long (-18bps) segments following demand for the JUL-2021 (-11bps), JUL-2030 (-39bps) and JUL-2034 (-51bps) bonds, respectively.

We expect bullish activity in the Treasury bond secondary market as crude oil prices rise, and as investors (local corporates) look to reinvest maturities.
 
Foreign exchange

This week, Nigeria’s FX reserves remained under pressure, declining by USD351.04 million WTD to USD35.16 billion (2nd Apr 2020), as offshore outflows intensify and inflows remain benign.  Consequently, the naira remained under pressure, weakening by 0.4% w/w to NGN383.00/USD at the I&E window, and by 3.6% to NGN415.00/USD in the parallel market. In the Forwards market, the exchange rate increased on the 1-month contract (-0.2% to NGN386.76/USD), but declined across the 3-month (+0.1% to NGN394.79/USD), 6-month (+0.9% to NGN408.15/USD) and 1-year (-1.8% to NGN441.01/USD) contracts. Also, the CBN recently suspended the sale of FX to BDCs, arguing that the decline in demand for service related payments due to the closures of borders across the globe necessitated the action.

While we acknowledge that the currency remains under pressure, we believe the CBN’s FX rate alignment and convergence is a laudable move, which should ease pressures on the balance of payment and curtail speculative attacks on the naira. Notwithstanding, the size of the recent adjustment might not be substantial enough to buy the CBN enough time before an official devaluation.