At the time of writing on Thursday, OPEC and its allies looked set to orchestrate the largest oil production cut in history. Given the collapse in oil prices and plummeting demand, OPEC+ entered into a negotiation, with the market forecasting up to 10mbpd additional production cut. To underscore the scale of things, the EIA recently forecasted an oil supply glut of 11.4mb/d by Q2-19, which is also estimated would result in an average price of c.USD23.00bbl. While a favourable resolution between the cartel and its allies would be positive, a production cut of c.10mbpd might not be substantial enough to cause a resurgence in oil prices. In our view, if the COVID-19 pandemic lasts for an extended period and continues to weigh on global demand, then prices will remain depressed. We forecast the price of Brent crude oil to an average of between USD30-35bbl. over 2020.

In the U.K, manufacturing activities dropped to a contractionary level in March 2020, signaling rising headwinds from the COVID-19 pandemic. Specifically, manufacturing activities retraced from 51.7 index points in February to 47.8 points in March. Save for the food and pharmaceutical sectors, significant declines were witnessed across sectors. To limit the impact of the COVID-19 outbreak on economic growth, the British government had announced various stimulus packages. For us, the stimulus packages may not prevent the economy from sliding into recession, however, it will allow a smoother and sharper recovery as the pandemic ends. 

Global Markets

Global equities markets were bullish this week, as optimism that the curve of new cases of coronavirus may be flattening. Beyond that, expectations that the Saudi-Russia price war could end soon also supported sentiments. Specifically, in the US (DJIA: +11.3%, S&P: +10.5%), hopes that the country may gain the upper hand in the battle against coronavirus as early as next week and the prospect of higher oil prices, prompted traders to bet on risk assets. The European (STOXX: +5.9%; FTSE 100: +5.6%) markets were up as death tolls reduced in key coronavirus epicenters – France, Spain, and Italy. Also, Asian (Nikkei 225: +8.4% and SSE: 2.2%) markets reacted similarly as the Japanese Prime Minister announced a JPY39.00 trillion (USD357.55 billion) stimulus package, and the Chinese central bank announced another round of stimulus.

Nigeria

Domestic Economy

Against the COVID-19 induced collapse in crude oil prices, Nigeria’s monthly FAAC disbursements to the FGN and its federating units have consistently declined since Jan-20. Precisely, the total FAAC disbursement fell by NGN64.40 billion to NGN582.00 billion in March (February disbursements). Compared to the monthly FAAC projections at the start of the year (NGN888.5 billion), the amount shared was 40.2% lower. To put in proper context, FAAC disbursements must average, at least, NGN650.00 billion for both the federal and states governments to meet their obligations. With c.NGN400.00 billion projected for the next few months, we foresee another round of FGN and/or CBN bailouts to states to lessen the burden of fiscal shortfalls. Already, the FGN has approved the withdrawal of USD150.00 million from the Sovereign Wealth Fund to support the June FAAC disbursement. Beyond that, the CBN is now mandated to give interest payment moratorium for government-funded loans to the states, to further enable the states to meet recurrent expenditures.

Nigeria’s total debt stock rose by another 4.5% q/q to NGN27.40 trillion. The increase stemmed from both the domestic (+2.4% q/q) and external (+9.1% q/q) debt portions. In terms of debt composition, domestic to foreign debt ratio stood at 68:32, above the 60:40 ratio targeted by the DMO. Meanwhile, compared to the prior quarter, external debt service moderated significantly by 47.2% q/q, supported by multilateral (-63.1% q/q), bilateral (-70.4% q/q), and commercial (-40.3%) debt services. Similarly, domestic debt service moderated by 58.1% q/q, driven by bonds (-67.0% q/q) and NTBs (-22.4% q/q). With the FGN planning to borrow another round of external debt of USD6.90 billion to support public finances in a period of lower FAAC disbursements, national debt stock is expected to rise further if the plan materializes. 

Capital Markets

Equities

Bargain hunting across MTNN (+3.3%), WAPCO (+41.3%) and Tier 1 banking tickers drove the market to its first weekly gain for four weeks. The All-Share Index gained 1.4% w/w, to settle at 21,384.03 points. Thus, the MTD return turned positive to +1.34%, while the YTD loss moderated to -20.3%. Analysing performances by sectors, the Banking (+12.4%), Consumer Goods (+6.5%) and Insurance (+0.2%) indices gained, while the Industrial Goods (-6.6%) and Oil & Gas (-4.8%) indices closed in the red.

Despite the market closing positive this week, risks remain on the horizon, given the rising cases of COVID-19 in Nigeria. More so, our base case is for the FGN to extend the presently instituted lockdown in Lagos, Abuja, and Ogun, by another one week. Thus, we advise investors to trade cautiously, taking positions in fundamentally justified stocks. 

Fixed income and money market

Money market

In line with our expectations, the overnight (OVN) rate expanded by 14.23 ppts, w/w, to 16.8%. During the week, outflows from CBN’s weekly FX auctions and LDR debits outweighed this week’s sole inflow from OMO maturities (NGN106.75 billion), causing the OVN rate to spike to its current level. However, system liquidity was healthy throughout the week.

We expect the OVN rate to contract in the coming week, as inflows from OMO maturities (NGN194.95 billion) come into the system.

Treasury bills

Trading in the Treasury bills secondary market continued bullish, as the average yield across all instruments contracted by 100bps to 9.5%. The OMO segment buoyed the market, as excess liquidity influenced the increased demand for OMO bills, causing the average yield to contract by 150bps to 12.3%. On the other hand, the average yield expanded by 9bps to 3.3%, as the demand witnessed was not significant enough to influence yield in the segment. At this week’s OMO auction, the CBN offered instruments worth NGN50.00 billion, however, only NGN39.35 billion worth of instruments on the long-dated maturity (341-days) was sold, at a stop rate of 12.8% (previously 12.8%).

In the coming week, we still expect the OMO segment to continue influencing the Treasury bills secondary market, as local participants continue to be active in this space. In the NTB segment, we expect the focus to be shifted to this week’s PMA, where the CBN will be rolling over NGN58.49 billion worth of maturities.

Bond

Trading in the Treasury bonds secondary market remained bullish this week, as investors cherry-picked short and mid tenured instruments, on the back of the improving global outlook, and the FG’s plan to increase the size of domestic borrowings to fund its budget. Thus, the average yield contracted by 71bps to 11.3%. Across the curve, yields contracted at the short (-80bps), mid (-69bps) and long (-59bps) segments following demand for the MAR-2024 (-176bps), JUL-2030 (-76bps) and JUL-2034 (-93bps) bonds, respectively.

We expect the Treasury bond secondary market to remain bullish in the coming week, as investors continue to seek to re-invest maturities.

Foreign Exchange

This week, Nigeria’s FX reserves remained under pressure, declining by USD578.06 million WTD to USD34.59 billion (8th April 2020), as offshore outflows intensify in the face of weak inflows. Consequently, the naira remained under pressure, weakening by 0.5% w/w to NGN384.83/USD at the I&E window, but closed flat in the parallel market. In the Forwards market, the exchange rate declined from prior levels across all contracts, save for the 1-year (+0.2% to NGN434.41/USD) contract. Specifically, the 1-month (-0.5% to NGN388.25/USD), 3-month (-0.5% to NGN395.05/USD), 6-month (-0.1% to NGN406.29/USD), and 1-year (-1.8% to NGN441.01/USD) contracts appreciated.

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.