Global Economy

This week, the U.K’s monetary policy committee unanimously elected to keep the policy rate unchanged at 0.1%, amid the COVID-19 induced economic disruption. However, in recognition of the slack that is building in the economy as activities stall, the committee expressed its readiness to cut the benchmark rate into the negative territory, if needed.  Beyond the foregoing, the BoE also voted to continue with its additional GBP200 billion quantitative easing programme. That together with its previous Q.E. programme, will bring its total bond-buying programme to c.GBP645.00 billion. In its assessment of economic growth outlook, the Bank expects GPD to contract by 14.0% y/y over 2020E, mostly due to the negative impact of COVID-19 on activities. The U.K. is one of the worst impacted countries in the COVID-19 epidemic, with over 30,000 coronavirus related deaths. Assuming the pandemic phases out in H2-20, U.K.’s economy is expected to rebound strongly in 2021, largely benefitting from a favourably low base in 2020. 

In a surprise outturn, China’s external sector rebounded strongly in April 2020, with trade surplus printing USD45.3 billion (March: USD19.9 billion) – the largest surplus since December 2019. The strong growth was supported by a recovery in exports (+3.5% m/m vs. -6.6% m/m in March), relative to a slide in imports (-14. 2% m/m vs. -0.9% m/m in March), which set the stage for a 127.6% expansion in the trade balance. On exports, China’s National Bureau of Statistics reported significant shipments of medical and anti-virus supplies in April, following rising coronavirus incidences across the world. Meanwhile, imports continue to falter as the Chinese economy is yet to fully recover post-lockdown. For the next few months, the need to flatten the COVID-19 case curve will continue to support the demand for medical supplies, which we believe is to China’s benefit. Thus, we see further legroom for China’s trade surplus to expand further.

Global Markets

Global equities sentiments were positive, as economies around the world move to ease respective lockdowns, alongside mixed economic and earnings data. Stocks in the US (DJIA: +0.6%; S&P: +1.8%) ticked higher as the US and China pledged to meet their trade deal obligations. Similarly, European equities (STOXX: +0.9%; FTSE 100: +3.0%) reacted positively to news of improving US-China relations. Investors in Europe are also expecting a recovery in global growth as economies around the world tout lockdown easing measures. Asian equities (SSE: +1.2%; Nikkei 225: +2.9%) were also buoyed by optimism surrounding improving Sino-US relations. On the other hand, the MSCI EM index was negative (-2.2%), following declines in South Korean (-0.1%), Taiwanese (-0.8%) and Indian (-6.2%) equities markets.

Nigeria

Domestic Economy

In the recent citizens’ dialogue session on “government fiscal policy decisions in response to the fall in oil prices and the COVID-19 pandemic, the minister for finance, budget, and national planning, Mrs Zainab Ahamed, acknowledged that Nigeria will nosedive into economic recession in 2020. The government expects GDP growth to contract by 3.5% y/y vs IMF’s estimate of -3.0% y/y (Cordros estimate: -2.07% y/y), mostly driven by contraction across both the oil and the non-oil sectors. This is expected, given the damage done thus far by the COVID-19 pandemic, which led to the institution of the great lockdown in Nigeria at the twilight of March. Meanwhile, relative to the previous year, oil receipts are expected to fall by as much as 90.0%, following the COVID-19 induced decline in crude oil prices. The FGN said it expects oil production to settle at 1.70mbd (Cordros’ estimate: 1.79mbd), while the price of crude oil is expected to average USD20.00/bbl. (Cordros’ estimate: USD30.00/bbl.)

Meanwhile, in recognition of the slack that is building across various economies as activities stall, we like that Nigerian economic managers have responded swiftly, adopting a more expansionary monetary policy while also implementing discretionary fiscal policy in a bid to limit the impact of the mounting risks. We understand that the government has launched a COVID-19 intervention fund up to the tune of c.NGN500.00 billion. Beyond that, the newly approved IMF RFI loan is expected to partly plug the expanded 2020 budget funding gap. Yet, as with the FGN, we also believe that the stimulus packages will not prevent an economic contraction this year. However, it will help with the recovery process post-pandemic.

Capital Markets

Equities

The Nigerian equities market sustained its upward trajectory, as the All-Share Index advanced by 4.4% w/w, to settle at 24,045.40 points. We highlight cheap assets prices, gradual lockdown easing, and inflows of budget facilities from the IMF, as the key drivers of risk assets accumulation over the week. Accordingly, the YTD loss moderated to -10.4%. Sectoral performances this week were positive, as gains bellwether stocks spurred gains all sector indices this week. The Consumer Goods index (+8.5%) led the gains, followed by the Banking (+4.0%), Oil & Gas (+2.8%), Insurance (+2.8%), and Industrial Goods (+2.2%) indices.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Fixed income and money market

Money market

In line with our expectations, the overnight (OVN) rate expanded by 5.58 ppts, w/w, to 8.3%. During the week, outflows from the prior week’s OMO auction (NGN100.00 billion) and Monday’s FX auctions outweighed this week’s inflows from OMO maturities (NGN18.50 billion) and retail SMIS refunds, causing the OVN rate to expand to its current level.

In the coming week, we expect the OVN to contract, as inflow from OMO maturities (NGN296.95 billion) enter the system.  

Treasury bills

Trading in the Treasury bills secondary market was bearish, as the average yield across all instruments expanded by 9bps to 7.9%. This was driven by the reduced demand for instruments at the OMO segment (average yield: +21bps w/w to 10.1%) and tempered trading activities in the NTB segment (average yield: -4bps w/w to 2.7%). 

In the coming week, we expect improved demand for T-bills, as system liquidity is boosted by expected maturities. In the NTB segment, we expect the focus to be shifted to next week’s PMA, where the CBN will be rolling over NGN33.84 billion worth of maturities. 

Bonds

The Treasury bonds secondary market was quiet through the week, as investors in the space hold off till the next primary auction, following the senate’s approval of the FGN’s request to source its foreign borrowings (NGN850.00 billion) locally. Thus, trading was mixed, with a bearish bias, as the average yield across instruments expanded by 3bps to close at 10.2%. Across the curve, yields expanded at the short (+6bps) and long (+15bps) ends following sell-offs of the JAN-2026 (+101bps) and APR-2037 (+25bps) bonds, respectively, and contracted at the mid (-18bps) segment, following demand for the APR-2029 (-45bps) bond.

We expect the current trend in the Treasury bonds secondary market to persist until the next PMA.

Foreign Exchange

Last week, we had stated that inflows from the IMF’s RFI loan will provide the needed breather for Nigeria’s FX reserves and also serve as a short-term currency defence ammunition to the CBN. As expected, Nigeria recorded an FX reserve buildup, growing by USD564.33 million WTD to USD34.09 billion (8th of May 2020). This is the first reserve accretion since the start of the year. Against that backdrop, the Naira appreciated against the USD by 0.01% w/w to NGN387.25/USD at the I&E window, and by as much as 4.12% w/w to NGN437.00/USD in the parallel market. As with the spot market, the naira gained ground against the USD across all contracts in the Forward market. Precisely, the 1-month (+0.4% to NGN388.77/USD), 3-month (+0.7% to NGN394.23/USD), 6-month (+1.2% to NGN402.07/USD), and 1-year (+2.1% to NGN421.52/USD) contracts declined in value. 

While we still hold the view that the RFI inflow will continue to provide short-term support for the FX reserves, we expect the currency market to remain largely volatile, especially as the CBN has announced the resumption of FX sales to SMEs and for the payment of school fees, in anticipation of the gradual re-opening of the economy.