April 30, 2020/Cordros Report

The domestic bourse maintained an uptrend this week, as gains in MTNN (+7.7%), NESTLE (+1.1%), and Tier 1 banks’ stocks boosted the market. Consequently, the All-Share index advanced by 1.9% w/w, to settle at 23,021.01 points.

Global Economy

This week in the U.S, GDP contracted by 1.2% y/y in Q1-20 following COVID-19 induced economic disruptions. When annualised, the number comes to 4.8% y/y, a notch below the consensus estimate of -4.0% y/y. For context, the outturn is the first economic contraction since Q1-14 (-1.1% y/y), and the steepest negative growth since Q4-08 (-8.4% y/y). The breakdown provided revealed that consumer spending, which constitutes more than 65% of the overall GDP, declined by 7.6% y/y. The weakness in the labour market, following job losses, comes to mind as the key driver of benign consumption. Beyond that, exports and imports fell sharply by 8.7% y/y and 15.3% y/y respectively. On a positive note, government expenditure rose slightly by 1.7% y/y, however, this was not enough to offset weaknesses in other key sectors. For us, the contraction in economic growth in Q1-20 is the first of many to come, given the sizeable impact on growth despite the great lockdown in the U.S only commencing at the tail end of March. In Q2-20, growth is expected to contract much deeper and lead to an economic recession in the U.S, which would be the first since the 2008 financial meltdown.

Chinese manufacturing activities succumbed to COVID-19 induced economic pressure, retracing to the contractionary territory in April. This is on account of slumping external demand. Specifically, manufacturing PMI dipped from the expansionary zone of 50.1 index points in March to 49.4 points in April. Although we had expected the gradual re-opening of the Chinese economy to keep manufacturing activities afloat in April, weaker export demand pressured activities. For evidence, China’s National Bureau of statistics acknowledged growing uncertainties across the export markets, with some factories reporting postponements or, in extreme cases, cancellations of orders. Already, China’s GDP has recorded negative growth of 6.8% y/y in Q1-20, the first economic contraction since 1990. We foresee further economic headwinds, largely on account of weakness in trade, following deteriorating demand for Chinese goods.

Global Markets

Global equities advanced amid (1) signs of positive developments in the fight against the coronavirus, (2) gradual reopening economic activities, from COVID-19 induced lockdown, and (3) optimism from resilient corporate earnings. Specifically, investors in the US (DJIA: +3.6%; S&P: +3.6%) shrugged off the disappointing GDP growth data, as the market notched gains, buoyed by strong financial results from technology companies and hints of policy easing from the Federal Reserve. Similarly, European (STOXX: +5.3%; FTSE 100: +5.7%) equities were also up as easing coronavirus worries and expectations of more European Central Bank (ECB) stimulus. It is noteworthy that the STOXX 600 is up more than 25% over the last six weeks. Also, general optimism from the progress of a COVID-19 trial drug and positive global sentiments drove Asian (SCI: +1.8%; Nikkei 225: +4.9%) equities higher.

Nigeria

Domestic Economy

This week, the IMF finally ratified Nigeria’s request for emergency financial assistance under the Rapid Financing Instrument (RFI) to the tune of SDR 2,454.50 million (USD3.40 billion), which translates to 100.0% of Nigeria’s quota. Given the decline in crude oil prices, together with the negative pass-through of COVID-19 on economic activities, Nigeria had requested for a USD3.4 billion RFI from the IMF in a bid to support both the fiscal and external imbalances. While the facility is a 5-year non-conditional loan, with a 3-year moratorium, the country is faced with a repayment plan of USD849.97 million in 2023, USD1.70 billion in 2024, and USD849.97 million in 2025. Accounting for the Eurobond maturity in 2025, Nigeria’s foreign debt obligation will amount to USD1.95 billion in 2025. On our previously estimated current account gap of USD8.90 billion for 2020 (3.8% of GDP), the facility is only expected to cover 38% of the external imbalance, leaving (1) FX reserves drawdown and/or (2) further currency re-pricing to plug the financing gap. We lean towards the latter. On the fiscal side, the RFI amounts to 20.0% of our estimated 2020 budget deficit of NGN6.0 trillion (USD16.67 billion). Thus, we still hold the view that domestic paper issuance will run ahead in a bid to plug the deficit gap.

According to the January 2019 Monthly Financial and Operations Report by the NNPC, Nigeria’s crude production (oil and condensates) rose by 1.0% m/m to 1.96 mb/d in December 2019 – 14.8% 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 NGN43.31 billion in January 2019 – 62.6% higher than the total amount expended in December 2019 (NGN26.63 billion). Evidently, the recent crash in oil price, occasioned by the COVID-19 induced decline in oil demand, is negative for Nigeria’s public finances as more than 85% of FX earnings are from crude oil sales. Thus, the FGN has recently announced the suspension of the subsidy regime in Nigeria. The petrol pump price is now subject to a monthly review, solely based on the movements in global crude oil price and FX rate. The move is positive for FGN’s revenue, especially when crude prices recover.

Capital Markets

Equities

The domestic bourse maintained an uptrend this week, as gains in MTNN (+7.7%), NESTLE (+1.1%), and Tier 1 banks’ stocks boosted the market. Consequently, the All-Share index advanced by 1.9% w/w, to settle at 23,021.01 points. Accordingly, the MTD return increased to +8.1%, and YTD loss moderated to -14.2%. Sectoral performance this week was positive, as gains in the Banking (+3.8%), Oil & Gas (+1.7%) and Insurance (+1.3%) indices covered for the losses recorded in the Consumer Goods (-1.4%) and Industrial Goods (-0.5%) indices.

As risks remain on the horizon, following the increasing number of COVID-19 cases in Nigeria and as economic fundamentals remain weak, we continue to advise investors to trade cautiously and seek only fundamentally justified stocks.

Fixed income and money market

Money market

The overnight (OVN) rate contracted by 18.33ppts, w/w, to 2.8%, crashing from a 33-week high of 21.1%, as inflows from CRR refunds, OMO maturities (NGN30.66 billion), FGN bond coupon payments (NGN149.14 billion) and funding from CBN’s Standing Lending Facility to banks, improved system liquidity.

Barring any surprises from the CBN, we expect the OVN to expand from current levels in the coming week, as expected inflow from OMO maturities (NGN18.50 billion) is not significant enough to saturate liquidity.   

Treasury bills

Trading in the Treasury bills secondary market turned bearish this week, as a result of weak system liquidity, and market participants readying bids for the week’s NTB PMA. Consequently, the average yield across all instruments expanded by 6bps to 7.8% – average yield at the OMO and NTB segments contracted by 3bps and 1bp to 9.9% and 2.7% respectively. At this week’s NTB PMA, the CBN fully allotted NGN131.53 billion worth of bills – 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 1.85% (previously 1.93%), 2.50% (previously 2.74%), and 3.84% (previously 4.00%).

In the coming week, we expect demand for T-bills to improve, as system liquidity becomes more buoyant. 

Bonds

The Treasury bonds secondary market opened the week on a muted note as yields ticked higher given the tight system liquidity. Nonetheless, trading was somewhat bullish, as the average yield across instruments contracted by 30bps to 10.2%. Across the curve, yields contracted at the short (-14bps), mid (-17bps), and long (-43bps) segments following buying interests in the JAN-2022 (-60bps), MAR-2027 (-59bps) and MAR-2036 (-86bps) bonds.

We anticipate higher yields at the Treasury bonds secondary market from next week, following the Senate’s approval of the FGN’s request to source its foreign borrowings (NGN850 billion) locally.

Foreign Exchange

This week, Nigeria’s FX reserves remained under pressure, sliding by another USD99.64 million WTD to USD33.44 billion (30th April 2020). Consequently, the Naira depreciated by 1.11% w/w to NGN387.30/USD at the I&E window, and by 1.10% w/w to NGN455.00/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 (-1.0% to NGN389.26/USD), 3-month (-1.1% to NGN394.91/USD), 6-month (-1.5% to NGN404.43/USD), and 1-year (-1.9% to NGN427.43/USD) contracts declined in value. Against the gradual easing of lockdown, the CBN announced its intent to resume the provision of FX to all commercial banks for onward sales for school fees payments and SMEs wishing to make essential imports. Pointedly, the apex bank is expected to disburse USD100 million weekly for both segments going forward.

We understand that the IMF has committed to disbursing the recently approved RFI of USD3.4 billion by May. This is expected to provide short-term support for the rapidly dwindling FX reserves. Irrespective, we expect the currency market to remain largely volatile, especially as the CBN has announced the resumption of FX sales to SMEs and payment of school fees, in anticipation of the gradual re-opening of the economy.

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