Global economy

Weighed down by the novel coronavirus pandemic, Japan’s current account (CA) surplus for August fell from a year earlier for the sixth consecutive month, albeit at a slower pace as global economic activities gradually resume. According to the Ministry of Finance, the current account surplus stood at JPY2.10 trillion (Aug 2019: JPY2.14 trillion) compared to market expectations of JPY1.98trillion. Among key components, the goods account posted a JPY413.20 billion surplus, from a JPY30.40 billion surplus last year, as imports (-22.0% y/y) contracted faster than exports (-15.5% y/y). Imports fell mainly due to lower energy prices while exports fell on lower car exports.  Elsewhere, the services deficit widened to JPY316.60 billion (Aug 2019: JPY1.50 billion). For 2020FY, exports are expected to contract more than import as overseas demand for Japanese goods falls due to the global recession. As such, we expect the trade balance as a % of GDP to plunge into deficit in 2020 compared to a surplus of 0.1% in 2019. This, in conjunction with the contraction in services, investments and primary income balance due to the COVID-19 pandemic is expected to significantly narrow the current account surplus.

Retail sales in the Euro Area grew by 3.7% y/y in August (July: -0.1% y/y) according to the Eurostat- the highest growth since November 2017. This was attributable to increased spending due to pent-up demand and higher savings as countries across the region relaxed COVID-19 containment measures. There was a surge in mail orders and internet (+23.8% y/y) as well as electrical goods and furniture (+6.3% y/y). Food, drinks and tobacco which account for c. 39% of the total retail sales, also grew by 3.2% y/y (July: +1.1% y/y) while pharmaceutical and medical goods increased by 2.1% y/y (July: -1.8% y/y). Month-on-Month, the volume of retail trade increased by 4.4% (July: -1.8% m/m). With unemployment trending northwards and consumer confidence at historic lows, current levels of spending are not likely to be sustained beyond a few months, especially if the furlough and short-time work schemes fade.

Global markets

Global equity markets were set to close higher on hopes of more federal fiscal aid and growing expectations of a Democratic victory in next month’s presidential election, and as a string of mergers and acquisitions as well as a recovery in beaten-down sectors like banks and energy lifted stocks. Consequently, US (DJIA: +2.7%; S&P: +2.9%), European (STOXX Europe: +1.9%; FTSE 100: +1.8%), and Asian (Nikkei 225: +2.6%; SSE: 1.7%) shares were up in the week. Elsewhere, the Emerging markets (MSCI EM: +3.3%) index was up following a rise in China (+ 1.7%) while the frontier markets (MSCI FM: +2.8%) stocks were on track to end the week higher as Kuwaiti stocks surged 5.8% w/w.

Nigeria

Economy

Nigeria’s Current Account (CA) recorded its eighth consecutive quarterly deficit in Q2-20 at USD3.23 billion. The deficit was largely underpinned by a 36.4% q/q decline in current transfers (USD3.91 billion) and a much larger trade deficit (+181.4% q/q to USD3.74 billion) which offset the decline in services (-67.6% q/q) and income payments (-66.9% q/q). Current transfers, which historically have helped cushion the deterioration in the country’s CA, was the lowest since at least 2008 as the COVID-19 pandemic led to a reduction in wages and employment of Nigerians abroad, thus, limiting their ability to remit money home. Looking ahead, we expect further deterioration in the CA, hinged on the trade balance remaining in deficit and slow recovery in remittances. 

The COVID-19 containment measures had its attendant effect on Government finances following the decline in economic activities in Q2-20. According to the National Bureau of Statistics (NBS), States Internally Generated Revenue (IGR) declined by 26.5% q/q to NGN259.7 billion in Q2-20, following a decline in all the IGR components save for Other Taxes (+3.8% q/q). MDAs revenue (-42.0% q/q) declined the most followed by Direct Assessment taxes (-41.8% q/q), Road taxes (-38.0% q/q) and PAYE (-27.0% q/q). The decline was expected as the lockdown led to reduced staff salaries and diminished corporate profits. As such, the ability of states to generate revenue during the period was limited. On a y/y basis, IGR declined by 11.7% y/y to NGN612.87 billion in H1-20. The ability to generate more taxes is limited given the gloomy growth and employment outlook. Therefore, we expect FY-20 IGR to print below the FY-19 level (NGN1.33 trillion), resulting in state governments relying more on Federal allocations.

Capital markets

Equities

Despite some profit-taking towards the end of the week, record gains at the start of the week drove the equities market beyond the 28,000-point mark and to its largest weekly gain since May. Notably, investors’ interest in MTNN (+8.1%), AIRTELAFRI (+7.8%), and DANGCEM (+4.2%) drove the benchmark index 5.3% higher, w/w, to 28,415.31 points. The MTD and YTD return for the index grew to 5.9%. The Banking (+7.8%) index topped the sectoral charts, following gains in ZENITHBANK (+10.8%) and GUARANTY (+4.8%), followed by the Industrial Goods (+2.7%), Consumer Goods (+2.0%), Oil & Gas (+2.0%), and Insurance (+2.0%) indices.

We expect the market might continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 330bps w/w, to 4.9%. This was as funding pressures for FX retail and OMO auctions, and CRR debits at the latter part of the week, outweighed inflows from OMO maturities (NGN567.69 billion) and FX retail refunds (NGN320.00 billion).

We expect the OVN to contract in the coming week, as OMO maturities worth NGN370.00 billion boost system liquidity.

Treasury bills

Activity in the Treasury bills secondary market reversed, as bullish trading returned to the market. The performance was supported by increased participation by retail investors and the improved system liquidity. Thus, the average yield across all instruments contracted by 50bps to 1.4%. Across the segments, average yield contracted by 53bps and 45bps to 1.4% and 1.4%, at the OMO and NTB secondary markets, respectively.

Considering the abysmal level of yields at the T-bills market, we expect lethargic demand for instruments in this space. At the NTB segment, we expect market participants to shift their focus to the primary market, where the CBN will be rolling over NGN104.88 billion worth of maturities.

Bonds

Trading in the Treasury bonds secondary market remained bullish, as investors re-invested the excess liquidity in the system. Consequently, the average yield across instruments contracted by 58bps to 6.3%. Across the benchmark curve, the short (-32bps), mid (-96bps) and long (-55bps) segments all recorded significant demand, as investors bought up the JAN-2026 (-127bps), FEB-2028 (-149bps) and JUL-2034 (-77bps) bonds, respectively.

With system liquidity expected to improve next week, we expect sustained demand for bonds, as investors seek relatively favourable investible instruments.

Foreign exchange

Nigeria’s FX reserves declined by USD16.75 million w/w to USD35.73 billion, as FX outflows outpaced inflows. Across the FX windows, the naira traded flat at NGN385.83/USD against the US dollar at the I&E window, while it strengthened by 1.8% to NGN457.00/USD in the parallel market. In the Forwards market, the naira strengthened across the 3-month (+0.1% to NGN387.65/USD), 6-month (+0.2% to NGN389.90/USD) and 1-year (+0.6% to NGN397.39/USD) contracts, while the 1-month (NGN386.39/USD) was flat.

Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further in the medium-to-long term, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves.