December 14, 2020/Coronation Research

Last week the price of oil, Brent crude, edged up over US$50.00/bbl, the first time we had seen this level since March. This raises hopes of much stronger public finances in 2021 than we have seen in 2020, if the rally is sustained into 2021. However, a return to normal, in terms of policies, seems unlikely.

FX

Last week the exchange rate in the NAFEX market (also known as the I&E Window and the interbank market) weakened by 0.01% to N391.53/US$1. In the parallel, or street market, the Naira closed the week steady at N475.00/US$1. The N391.53/US$1 NAFEX rate represents a mere 7.5% depreciation during the year to date, the only problem being that liquidity in this market fell very sharply after March. Although a proportion of demand for US dollars then shifted to the parallel market, it is notable that, for most of the time, the parallel rate has been within 20% of the NAFEX rate (the gap is 21.3% now). This is a much better situation than, for example, in late 2016 and early 2017 when the differences were much larger than this. Our sense is that pressure on the parallel market rate will not let up over the weeks ahead.

Bonds & T-bills

Last week, the secondary market yield for an FGN Naira bond with 10 years to maturity rose by 36 basis points (bps) to 5.32% and at 7 years rose by 44bps to 4.34% while at 3 years the yield rose by 12bps to 1.94%. The annualized yield on 321-day T-bill rose by 36 bps to 0.51%, while the yield on a 319-day OMO bill rose to 0.52%. The most significant event of the week was the Central Bank of Nigeria’s (CBN) issue of N4.1 trillion (US$10.5bn) of so-called Special Bills to banks in respect of sums of excess Cash Reserve Ratio (i.e.amounts of CRR held by the CBN in excess of the official 27.5% percentage applied to customer deposits). The 81-day bills carry a yield of 0.5%. It was not clear –it is still not clear –how these yields might leak into the T-bill market. But they appear to have affected market sentiment, with many participants reasoning that this marks the end of the downward march of T-bill rates over the past year. On the other hand, liquidity in the market remains high. So, the next move in short term rates at auction might be downwards, but market sentiment could be proven correct over the coming months.

Oil

The price of Brent crude rose by 1.46% last week to US$49.97/bbl. The average price, year-to-date, is US$42.80/bbl, 33.21% lower than the average of US$64.08 /bbl in 2019. Brent hit US$50.25 /bbl last Thursday, for the first time since March, edging higher on optimism surrounding vaccinations, the OPEC+ deal and increased demand in Asia. However, the Energy Information Administration (EIA) also reported a surge in crude inventories for last week, up 15.2 million barrels. Although things aren’t fully normal yet, the positive signals are strong.Equities Last week, the Nigerian Stock Exchange All-Share Index (NSE-ASI) fell by 2.52% with a gain of 27.60% year-to-date to close at 34,250.74. Okomu Oil Palm (+10.00%), PZ Cussons (+4.17%) and Oando (+2.50%) closed positive while Lafarge Africa (-10.65%), Ardova OIl (-9.69%) and Dangote Cement (-8.04%) closed negative.

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