June 26, 2020/Cordros Report

Global economy

According to the Bureau of Economic Analysis, the US economy shrank by an annualized 5% in the first quarter of 2020, in line with the previous estimate and ending the most prolonged period of expansion in the country’s history. It marked the largest drop in GDP since the last quarter of 2008 as the COVID-19 pandemic forced several states to impose lockdown measures in mid-March, throwing millions of people out of work. With the third estimate, an upward revision to non-residential fixed investment was offset by downward revisions to private inventory investment, personal consumption expenditures (PCE), and exports. The US economy is expected to bottom out in Q2, contracting by 16.3%, according to the NY Fed. Growth will likely remain subdued for several quarters after that until the outbreak is controlled, the secondary impact is over, and the global economy begins to improve. 

The International Monetary Fund (IMF) slashed its economic forecasts once again. The IMF now estimates a contraction of 4.9% (previously 3.0%) in global growth in 2020, due to social distancing measures likely remaining in place during H2-20, with productivity and supply chains being hit. The fund also downgraded its GDP forecast for 2021 to 5.4% (previously 5.8%). We are most concerned about debt sustainability for emerging markets. As governments attempt to combat the fallout from the coronavirus crisis, fiscal balance sheets are seeing a meaningful deterioration in 2020 due to the weak growth outlook (2020F: -3.0%; 2021F: +5.9%) and larger fiscal deficits. Unlike many advanced economies, EMs do not benefit from reserve currency status and ultra-low interest rates, and, thus, are using limited fiscal resources compared to DMs in the fight against COVID-19.

Global markets

Global equities were mixed as markets struggled to gain traction against a backdrop of rising coronavirus cases in the US. Consequently, US (DJIA: -2.5%; S&P: -1.9%) and European (STOXX Europe: -1.5%; FTSE 100: -1.7%) stocks looked set to end the week in the red. On the flip side, Asian (Nikkei 225: +0.1%; SSE: +0.4%) shares crept higher as (1) investors remained stubbornly upbeat on the outlook for a reopening of the global economy and (2) an easing of restrictions on US banks and expectations for more stimulus amid rising coronavirus infections lifted investor sentiment. Emerging (MSCI EM: +0.3%) and frontier (MSCI FM: +1.0%) markets stocks were also on track to close higher following gains in China (+0.4%) and Kuwait (+3.9%).

Nigeria

Economy

From a record USD6.95 billion deficit reported in Q4-19, Nigeria’s Current Account (CA) deficit shrank by 29.8% q/q to USD4.88 billion over Q1-20. When viewed as a percentage of GDP, this translates to -1.3%. The blend of a marked reduction across Trade (-70.6% q/q), Service (-16.0% q/q), and Income (-11.62% q/q) net debit positions supported the slight recovery in Nigeria’s external sector. This performance is amid a 12.0% q/q decline in the current transfer. Although exports fell by 14.9% q/q, driven by lower crude oil earnings (-17.4% q/q), a steeper decline in imports (-19.8% q/q) was enough to lift the trade balance in the period. We believe that the institution of lockdowns by the FGN, especially at the twilight of the quarter, discouraged both goods and service imports, which was positive for the overall CA picture.

Elsewhere, Nigeria’s net financial account position printed net debit of USD6.3 billion, the first negative outturn since Q2-19. The outturn was on account of the combination of a faster pace of net portfolio outflows (+38.0% q/q) and the reported net debit position in the other investment liabilities line (USD1.2 billion). While the CBN recorded a net error and omission of USD11.18 billion, we believe the bank must have partly plugged the balance of payment gap with (1) the re-alignment of the naira (-17.7%) and (2) FX reserves drawdown (c. USD3.27 billion). For the rest of the year, we expect the CA deficit to settle at USD10.68 billion (2019: USD17.02), translating to -3.0% of GDP (nominal). In our opinion, the blend of a deteriorating CA picture, currency mispricing, and the growing premium between official and parallel rates connote that the odds are stacked against the naira.

Capital markets

Equities

Sentiment in the domestic bourse remained weak, as investors took profits on large-cap stocks. However, significant interest in AIRTELAFRICA (+10.0%) and NESTLE (+9.6%) in the last trading session of the week led the market to marginal gain for the week. Precisely, the All-Share Index advanced by 0.01%, WTD, to settle at 24,829.02 points. Thus, Month-to-Date and Year-to-Date losses printed -1.7% and -7.5%, respectively. Sectoral performance reflected the overall market sentiment, as all sector indices declined – Oil & Gas (-4.8%), Industrial Goods (-2.0%), Insurance (-1.6%), Banking (-0.5%) and Consumer Goods (-0.01%).

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.

Money market and Fixed Income

Money market

The overnight (OVN) rate ended the week 57bps lower, w/w, but remained elevated at 16.1% as the absence of any significant inflows led to thin system liquidity.

Next week, we expect the OVN to trend southwards, as system liquidity is improved by inflows from OMO maturities (NGN157.23 billion).

Treasury bills

Trading in the Treasury bills secondary market was sluggish this week as strained system liquidity conditions and unattractive yields hampered demand for instruments in the space. Thus, the average yield across all instruments expanded by 17bps to 4.2%. Across the segments, yields widened at both the OMO and NTB markets, by 18bps and 7bps to 5.0% and 2.2%, respectively.

With liquidity conditions expected to improve next week, we should see a pick-up in demand for instruments in this space. At the NTB segment, we expect most of the activity at the primary market, as the CBN will roll over instruments worth NGN88.86 billion via auction.

Bonds

Trading in the Treasury bonds secondary market was bullish, as the average yield across instruments contracted by 56bps to 8.8%. This week, there was increased participation in the market following anticipated scarcity of instruments, as the DMO confirmed it is close to fulfilling its borrowing plans for the year. Across the curve, yields contracted at the short (-83bps), mid (-41bps) and long (-63bps) segments due to demand for the MAR-2024 (-151bps), MAR-2027 (-119bps) and MAR-2050 (-72bps) bonds, respectively.

We expect the Treasury bonds secondary market to remain bullish due to relatively more attractive yields in the space.

Foreign exchange

For the fourth successive week, the CBN recorded another reserve drawdown as FX outflows outpaced inflows. The foreign reserves dipped by USD80.98 million w/w to USD36.22 billion. Consequently, the naira strengthened against the US dollar by 0.04% WTD to NGN386.33/USD at the I&E window, while it weakened by 1.09% to NGN460.00/USD at the parallel market. In the forwards market, the naira depreciated against the US dollar in the 1-month (-0.11% to NGN387.95/USD), 3-month (-0.31% to NGN391.74/USD), 6-month (-0.65% to NGN396.60/USD) and 1-year (-1.38% to NGN414.02/USD) contracts.

For us, the widening current account (CA) position suggests that odds are stacked against the naira. Beyond that, as the economy gradually reopens, the resumption of FX sales to the BDC segment of the market will place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.

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