Culled—Proshare

September 7, 2020

by FBNQuest Research

Muted contraction, muted recovery  

Q2 2020 will surely prove the low point in the year although the scale of the GDP contraction in lockdown was not as bad as widely anticipated. The limits to its integration within the global village have given Nigeria some protection. However, for this same reason its recovery next year will underwhelm. Household consumption remains under acute pressure.

Some support from the global

US monetary policy and the oil market (since May) have been supportive global props. We have deliberately maintained conservative oil price forecasts. The oil price assumption in the 2020 budget will give the authorities a little headroom as global demand for crude, led by Asia, makes a decent recovery.

Non-oil revenue to underperform

This headroom will be welcome as fiscal projections for non-oil revenue collection again prove overambitious and the FGN surely posts another sizeable deficit. A return to the Eurobond market in early 2021 beckons.

Space to muddle through on Fx

Our message is unchanged. Any move by the CBN towards market-determined fx rates will be bumpy. Its preference, evident three times in the past quarter, is to deploy administrative measures when possible and make small fx adjustments in the absence of any alternative. The oil price recovery has given the CBN a little breathing space and external concessional loans will also help to shore up reserves as FPIs make and plan their exits.

Bond yields set to tread water

The record domestic funding target of N1.6trn set this year for the DMO would normally point to a widening of yields. However, the CBN’s management of liquidity and the lack of investment alternatives for domestic institutions indicate otherwise, and we see yields on mid-curve FGN bonds in a range of 8.00% to 9.00% over the next quarter.