May 29, 2020/Coronation Report

On Monday we learned about Q1 2020 GDP, up by1.87% year-on-year (Q4 2019: +2.27% y/y) with Non-oil growth at just 1.55% y/y. The Non-oil growth drivers were Agriculture and Telecoms, but both showing slightly weaker growth than before.

Going forward, we expect the large Trade sector to continue with negative growth (-2.82% in Q1), Manufacturing to turn from 0.4% y/y to recession in Q2, and the volatile Oil & Gas sector to turn to negative growth when forward sales at old oil prices run out. The IMF’s forecasts a 3.4% recession for 2020 is realistic.

Neutral implications for equities. The stock market is undergoing a bull run, which is consistent with seeing this as a V-shaped recession with a clear exit early next year. Although this is plausible if Brent crude prices recover to US$50.00/bbl (currently US$34.79/bbl), it is less plausible if oil prices falter. The telecoms sector continues to grow with data partly replacing lost voice revenues, and both subscribers and internet subscribers sharply up in Q1.

 Negative for inflation. The slowdown in Trade is associated with a steep fall in foreign exchange volumes and a rise in the parallel market exchange rate, meaning an increase in input costs. Agricultural production may not be growing as fast as population growth. April’s 12.34% y/y inflation (March: 12.26% y/y) could rise further.

Lower-for-longer implications for interest rates. The Monetary Policy Council of the Central Bank of Nigeria cut its headline rate from 13.50% to 12.50% yesterday, a clear signal that it is happy with low market interest rates. Liquidity at Nigerian investing institutions is high and T-bill rates at around the 3.0%pa-mark are useful for government as it finances its expanded N5.3tn (US$13.6bn) deficit.

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