Global Economy

After a weekend-long and eventful negotiation, OPEC and its allies agreed to cut crude production by a historic 9.7mb/d. The agreement is expected to effectively take off on the 1st of May, 2020, and last till the end of June. Then, the cut will be reduced to 7.7mb/d between July and December 2020. Finally, from January 2021 to April 2022, the agreed cut is expected to further reduce to 5.8mb/d. Beyond the agreed production cut, heavyweight producers, Saudi Arabia, and other small producers such as Kuwait and the UAE, expressed plans to voluntarily cut an additional c.2.0mb/d. Outside of OPEC+, oil-producing countries of the G20 also agreed to cut output by 3.7mb/d. Despite the historic production cut agreement, we remain largely cautious on the trajectory of crude oil prices over the near term. For one, we like that the price war occasioned by the disagreement between Russia and Saudi Arabia in March is now effectively over. However, the rapid pace of deceleration in global crude demand remains a key concern. 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.

Elsewhere, in the U.S, headline inflation moderated by 0.4% m/m in March – the fastest monthly decline since January 2015. The moderation largely stemmed from declines in energy inflation and the price PMS of 5.8% m/m and 10.5% m/m, respectively. Excluding volatile items such as food and energy prices, core inflation only dipped by 0.1% m/m – the first monthly decline since January 2010. Meanwhile, food inflation rose, albeit at a slower pace, by 0.3% m/m, mostly on account of farm produce and other dairy-related products. Looking ahead, while the direction of food inflation is difficult to call, especially in the light of continued lockdown instituted by various state governments in the U.S, we expect the still depressed crude oil prices to continue to tether gasoline and energy prices over the next few months. 

Global Markets

Performances across global stocks were largely mixed, but with bullish bias, as the US and European countries laid out plans to gradually re-open their respective economies. Also, news of a clinical trial for a potential cure to the coronavirus which was showing promising early testing results stoked positivity. Performance in the US market (DJIA: -0.8%; S&P: +0.3%) was mixed, even as President Trump laid out plans to re-open the US economy. Similarly, European equities (STOXX: +0.8%; FTSE 100: -0.5%) were mixed, even as countries in the region revealed plans to ease lockdown measures. Asian markets were positive as Chinese (CSI 300: +0.8%) stocks closed in the green despite the announcement of an 18-year low GDP growth of -6.8% and expectations of further stimulus for the economy. Similarly, Japanese (Nikkei 225: +2.9%) stocks also recorded another weekly gain.

Nigeria

Domestic Economy

The Federal Government of Nigeria (FGN) submitted a revised budget of NGN10.27 trillion, against NGN10.60 trillion previously approved. In the new budget, the deficit level is at a historical high of NGN5.2 trillion (previously NGN2.18 trillion), due to the downward revision in revenue estimates. While revenue was previously estimated at NGN8.42 trillion, the revised estimate is now NGN5.08 trillion. Oil revenue projection was the largest revision, with the estimate reviewed downwards by NGN254.2 billion (NGN2.64 trillion previously). The revision to the oil revenue estimate follows the sharp decline in the price of Brent crude oil and lower production expectation given the OPEC agreement (Nigeria’s quota: 1.4mb/d vs. 1.75mb/d previously). The FGN is now expected to raise c.NGN4.43 trillion in borrowings as against NGN1.59 trillion previously approved. While OPEC+ has agreed to cut output by 9.7mb/d, the oil market appears to be unmoved since the cut isn’t significant enough relative to the decline in demand. In our view, the FGN’s oil production and price benchmarks of 1.80mb/d (including condensates) and USD30.00/bbl. respectively, might still be ambitious. We expect the budget deficit to touch NGN6.5 trillion if FGN were to implement c.90.0% of the budget.

The National Bureau of Statistics is expected to release data for Nigeria’s consumer price index for the month of March early next week and our view for March inflation trajectory hasn’t changed much since our last update. We recall that headline inflation rose by 7bps to 12.20% y/y (Cordros’ est.: 12.30% y/y) in February. We attribute the uptick to the unfavourable base from the corresponding period of last year. For the sake of clarity, lower energy prices, especially in H1-19, had driven focal temperance across both the food and core baskets. For March, softer price increase expectations from robust market supply underpin our slower food inflation forecast (-4bps to 0.83% m/m). Elsewhere, the recent naira weakness is not expected to impact either the core or food basket in the short term. Thus, core inflation is expected to print 0.71% m/m; 2bps lower than the previous month. Tying this all together, headline inflation is expected to print 1.79% m/m, which translates to 12.20% y/y. 

Capital Markets

Equities

Investors’ interest in bellwether stocks, DANGCEM (+16.2%), MTNN (+6.8%), NESTLE (+16.5%) among others, led the domestic bourse to post a whopping 7.2% w/w gain – the largest weekly return since the 10th January 2020 (+9.1%). Thus, the All-Share Index settled at 22,921.59 points. Accordingly, the MTD return increased to +8.6% and YTD loss moderated to -14.6%. Sectoral performance was positive this week, as all sector indices gained. The Consumer Goods (+15.6%) index led the gainers as NESTLE (+16.5%) and NB (+45.7%) recorded significant increases. The Industrial Goods (+5.2%), Banking (+4.7%), Oil & Gas (+1.5%) and Insurance (+0.8%) indices followed suit.

This week’s performance was surprising, given that risks remain on the horizon following the increasing number of COVID-19 cases in Nigeria. Nonetheless, we note that the market performance was buoyed by fundamentally justified stocks and therefore advise again, that investors trade cautiously.
 
Fixed income and money market

Money market

The overnight (OVN) rate contracted by 14.58 ppts, w/w, to 2.3%. The money market opened with the OVN depressed (hovering around 2.0%), following inflows from CRR refunds by the CBN to deposit money banks late last week, and this week’s OMO maturities (NGN135.86 billion). The outflow from Thursday’s OMO auction (NGN134 billion) was not significant enough to influence the movement of the rate. At the auction, the CBN fully allotted instruments worth NGN134.00 billion – NGN16.00 billion of the 82DTM, NGN18.00 billion of the 166DTM and NGN100.00 billion of 334DTM at respective stop rates of 11.5%, 11.5% and 12.8%.

In the coming week, inflows worth a combined NGN300.34 billion are expected in the system from OMO maturities (NGN267.67 billion) and FGN bond coupon payments (NGN32.67 billion). Nonetheless, we expect the OVN rate to expand as the CBN will likely mop up excess liquidity from the system.

Treasury bills

Activity in the Treasury bills market was quiet, as the extended lockdown in Lagos, FCT and Ogun limited participation of local players. Also, players in the NTB space shifted their attention towards the week’s PMA, further limiting participation. Nonetheless, the direction of trading remained bullish given the buoyant system liquidity, with the average yield across all instruments contracting by 81bps to 8.7%. The average yield contracted by 102bps to 11.3% at the OMO secondary market and expanded by 13bps to 3.4% at the NTB secondary market. At the NTB PMA, the CBN fully allotted instruments worth NGN58.49 billion – NGN5.85 billion of the 91-day, NGN3.50 billion of the 182-day and NGN49.14 billion of the 364-day – at respective stop rates of 1.93% (previously 2.20%), 2.74% (previously 3.20%), and 4.00% (previously 4.30%).

We expect mixed trading sentiments in the Treasury bills secondary market next week, as demand slows at the OMO segment, and as quiet trading continues at the NTB segment.

Bond

Trading in the Treasury bonds secondary market remained bullish this week even as investors’ demand shifted towards Dangote Cement’s corporate bond issuance (NGN100.00 billion). Thus, the average yield contracted by 30bps to 11.0%.  Across the benchmark curve, yields contracted at the short (-42bps), mid (-26bps) and long (-12bps) segments of the curve, following demand for the JAN-2026 (-89bps), MAR-2027 (-34bps) and MAR-2036 (-42bps) bonds, respectively.

The DMO will hold a PMA on the 22nd of April wherein NGN60.00 billion across three instruments will be offered to investors through re-openings – 12.75% APR-2023, 12.50% MAR-2035, and 12.98% APR-2050 bonds. We expect increased demand at the Treasury bond secondary market next week as investors bargain hunt, given the reduced supply at the bond auction to be conducted next week.

Foreign Exchange

This week, Nigeria’s FX reserves remained under pressure, sliding by another USD487.69 million WTD to USD33.91 billion (16th April 2020), as offshore outflows intensified in the face of weak inflows. Consequently, the Naira depreciated by 0.34% w/w to NGN386.13/USD at the I&E window, and by 0.24% w/w to NGN416.00/USD in the parallel market. As with the spot market, the exchange rate depreciated across all contracts in the Forward market. Precisely, the 1-month (-0.7% to NGN389.53/USD), 3-month (-1.5% to NGN396.08/USD), 6-month (-2.6% to NGN407.94/USD), and 1-year (-5.1% to NGN437.21/USD) contracts increases in naira value.

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.