April 9, 2020/InvestmentOne Report

Please click to view the March 2020 Macro & Markets Update

·         In the outgone month, Brent oil price came under significant pressure from supply and demand sides of the market. While the supply side was driven by the price war between Russia and Saudi Arabia, the demand side was driven by low demand on the back of series of shutdowns in different parts of the world due to the spread of COVID-19. As such, Brent oil price lost 55% in the month of March to close at US$22.74 per barrel. 

·         On the back of recent outbreak of COVID-19 which has spread to the country, we expect the nation’s macroeconomic condition to remain weak. While there are indications that the price war between Russia and Saudi Arabia may come to an end in the foreseeable future as both parties mull a production cut, we believe the effects of COVID-19 on global economic activities may continue to limit oil demand and by extension keep oil price at low levels. Furthermore, we highlight that an OPEC+ cut may be more complicated to conclude with both Russia and Saudi wanting others to chip into the next cut to a significant extent. 

·         In the outgone month, the 2020 budget was hit significantly by current economic realities and pragmatic decision making by the Finance Ministry. Also, FAAC disbursement figures for the month of March came in lower than anticipated at N581.57billion, the lowest figure in 28 months. We also saw the nation’s major revenue source, crude oil, fall sharply in the outgone month to historic lows reflecting the effects of the coronavirus and the price war between leaders of the OPEC+. Lastly, S&P downgraded Nigeria to a junk rating. 

·         Given the impending effects of the coronavirus on Nigeria, we highlight the need for a fiscal stimulus package by the FG in the near term. With the likelihood of a recession increasing every day, the impact on unemployment rate and economic demand could be devastating taking into account the fragility of the economy post-2016 recession and the high poverty rate. However, given the country’s fiscal weakness i.e. tax to GDP ratio around 6-7%, overdependence on oil receipts and insufficient progress in driving up tax revenues, the FG’s ‘cash-strapped’ position might hinder it from rolling out necessary incentives.  

·         Following the outbreak of COVID-19 in China and the spread of the virus locally, the CBN introduced some policy directives during the month to stem the woes of the virus in Nigeria. In its first policy issuance, the CBN introduced six (6) policy directives including the reduction in interest rates on its intervention funds, extension of moratorium on CBN facilities, credit support for healthcare industry and creation of N50billion targeted credit facilities for SME’s among others. We believe the CBN’s response to the virus outbreak is commendable and should bode well for economic activities especially in situations where businesses require financial support to revive and maintain operations. 

·         Going forward, we see yields in the fixed income space remaining at this level with a possibility of a downward tilt in the bond space as local portfolio managers pick bonds at the current attractive yields levels caused by the recent FPI sell-offs. Although the hike in CRR may squeeze system liquidity to an extent causing some uptick in yields, we think it may not be sufficient to adequately stem the pressures from incoming OMO maturities for the rest of H1 2020 (N1.82trillion). 

·         On the back of weak macroeconomic conditions which have led to a significant pressure in the FX market as FPI made a flight to safety, the CBN adjusted the nation’s exchange rate during the month. As such, the official and IEFX rates were adjusted to N360/USD and N380/USD from N306/USD and N360/USD levels respectively. This may reduce dollar outflows as well as improve government revenue in naira term. 

·         While the recent slowdown in economic activities as well as travels should reduce demand for FX, we think FPI investment in the country may remain uninspiring as the country risk increases further on the back of weak dollar inflow from oil. On the back of the aforementioned, we think the nation’s FX market may remain under pressure in April. As such, we do not rule out the possibility of another devaluation in the near term if the risks associated with COVID-19 escalate further. 

·         The Nigerian bourse ended the month of March 2020 in the negative territory, extending the loss of 9.11% in February 2020 to 18.75% in March 2020; this translated to a Year-to Date loss of 20.65% as at March 31, 2020. Similarly, market cap deteriorated to N11.10trillion in March 2020 from N13.66trillion in the preceding month. 

·         Going into April, we opine that the bourse may continue its negative trend, as we expect the market to react to the lockdown in major cities in Nigeria, Covid-19 widespread, and  weakness in crude price in the absence of an OPEC+ deal and respite in global demand. Finally, we highlight that given the recent decline in share prices of bellwether names across the board, there appears to be a decent entry window for investors seeking bargain hunting opportunities for a medium to long term investment horizon.