In our Weekly Economic Commentary (15 January 2021), our prognosis was that China’s inflation would slip back into negative territory due to the high base effect in 2020. True to our expectation, China’s headline inflation retraced to -0.3% y/y in January (December 2020: +0.2% y/y), according to data published by the National Bureau of Statistics (NBS). Asides the high base effect, we highlight that the decline was also due to weak demand for services following the re-introduction of COVID-19 containment measures in some cities. Meanwhile, food prices rose by 1.6% y/y (December 2020: 1.2% y/y) due to (1) bad weather conditions and (2) travel restrictions that impacted the transportation of vegetables and meat – thereby helping to prevent a larger deflation impulse. Over the rest of Q1-21, we expect the relatively high base in 2020 to keep inflationary pressures muted albeit the lunar New Year holiday demand is likely to keep prices higher in February.

According to the U.S. Bureau of Labour Statistics, the U.S. consumer price index rose slowly by 0.3% m/m in January (vs. December 2020: 0.4% m/m), as the increase in gasoline prices (7.4% m/m vs. December 2020: 5.2% m/m) was responsible for most of the seasonally adjusted increase in the CPI. Similarly, food prices (0.1% m/m vs. December 2020: 0.3% m/m) rose slightly in January due to the increase in food away from home (0.3% m/m vs. December 2020: 0.4% m/m) which more than offset the decline in the index for food at home (-0.1% m/m vs. December 2020: 0.3% m/m). On a year-on-year basis, consumer prices rose by 1.4% y/y, same as in December 2020. Given (1) the expectation for additional stimulus, (2) the relatively low base in 2020, and (3) anticipated pent-up demand as more citizens are vaccinated, we expect headline inflation to march on above the Fed’s 2.0% target in the medium term.

Global markets

Global stocks edged higher for the second consecutive week as continued progress in vaccine distribution and prospects of additional fiscal stimulus from Biden administration strengthened optimism about sustained recovery in economies activities. U.S (DJIA: +0.9%; S&P: +0.6%) stocks posted gains on the back of announcement of deals for an additional 100 million vaccine doses amidst positive corporate earnings announcements.  In Europe, the STOXX Europe (+0.4%) and FTSE 100 (+0.6%) were on track for their second consecutive weekly gains, as vaccine-induced optimism was complemented by positive corporate results. In Asia, the Nikkei 225: (+2.6%) and SSE: (+4.5%) were on course for another week of gains, reflecting optimism that Biden’s coronavirus relief package will get congressional approval. Emerging markets (MSCI EM: +0.0%) stocks were broadly flat despite robust gains in India (+1.9%) and China (+4.5%) while Frontier (MSCI FM: -1.0%) market stocks halted their five-week gaining streak, following losses in Nigeria (-3.0%) which masked gains in Kenya (+3.4%).  

Nigeria

Economy

In line with current realities and projected economic trends, the Federal Economic Council (FEC) approved a new Medium-Term Debt Management Strategy (MTDS) for Nigeria, for the period 2020-2023. The targets of the MTDS include (1) 40% maximum total public debt as a percentage of GDP (Previously: 25%), (2) a debt portfolio mix skewed towards domestic debt than external debt in the ratio 70:30 (Previously: 60:40), and (3) sustenance of the issuance of longer-tenor instruments with tenors of 10 years and above, with a ratio of 75:25 for long-term to short-term domestic debt. We like that the new MTDS takes the Ways and Means Advance at the CBN into account in justifying the revised 40% target of public debt as a percentage of GDP. This is because it takes the burden off the CBN while making the FGN accountable for the borrowings. Although Nigeria’s revised debt-to-GDP ratio target is still low when compared to IMF’s threshold (55%) for its peers, we remain concerned about the sustainability of its debt stock given elevated debt servicing costs in the face of weak revenue generating capacity of the government. 

According to the November 2020 economic report of the Central Bank of Nigeria (CBN), the retained revenue of the FGN declined by 36.3% y/y to NGN247.76 billion in November, predicated on a 39.8% y/y decline in FG’s share from the Federation Account. We however note that aggregate expenditure grew by 25.5% y/y to NGN905.26 billion during the same period owing to a 36.7% y/y increase in recurrent expenditure. We believe the substantial increase in aggregate expenditure relative to the decline in total revenue was due to the FGN’s quest to stimulate aggregate demand to mitigate the lingering effect of the COVID-19 pandemic on the economy. This however resulted in a wider fiscal deficit of NGN620.49 billion In November compared to NGN421.35 billion recorded in October. With economic activities yet to recover fully to pre-pandemic levels amid compliance with OPEC production cuts, we expect revenue from both non-oil and oil sources to remain pressured. As the government sustains its expansionary fiscal stance, the resultant effect would be widening in fiscal deficits which will require increased level of borrowings.

Capital markets

Equities

Bearish sentiments persisted in local bourse for the second consecutive week, as investors became increasingly worried about the uptick in yields in the FI market. The result of the NTB auction wherein average stop rates rose by 105bps to 2.33% (from 1.28% at the last auction) lends credence to investors’ downbeat mood during the week. Accordingly, the All-Share Index shed 3.0% w/w to close at 40,439.85 points – the biggest weekly fall in eight years. Consequently, the YTD return moderated sharply to 0.4%. Activity levels were slightly weak, as trading volumes declined by 2.8% w/w while value fell by 20.3% w/w. Notably, sell offs in bellwether stocks; GUARANTY (-15.7%), BUACEMENT (-7.2%), DANGCEM (-4.4%) and ZENITH (-3.9%) drove the weekly loss. Sectoral performance was broadly negative as all sectors closed in the red. The Banking (-8.8%) index led the losers chart followed by Insurance (-6.5%), Industrial Goods (-5.7%), Oil and Gas (-1.0%) and Consumer Goods (-0.9%) indices.       

With the latest outcome of the NTB auction pointing towards yield elevation in the near term, we expect investors to trade cautiously while taking positions in stocks with attractive dividend yields. As a result, we expect the local bourse to exhibit a zig-zag pattern in the near term as the opposing forces of uptick in yields and FY 2020 corporate earnings releases dictate market performance. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate dipped by 13.25ppts w/w to 4.8%. This was due to improvement in system liquidity (weekly average: c. NGN353.97 billion vs. prior week average: c. NGN224.52 billion) following inflows from OMO (NGN200.76 billion) and net NTB (NGN38.91 billion) maturities which outweighed outflows for CBN’s weekly auctions – FX and OMO auction (NGN169.00 billion).

For next week, with OMO maturities of NGN260.21 billion expected to hit the system, we expect the OVN rate to remain in the single digit territory.

Treasury bills

The Treasury bills secondary market ended the week on a bearish note, as the average yield across all instruments expanded by 268bps to 4.2%. We attributable the market outcome to the upward repricing of OMO instruments especially on Monday, in reaction to the higher stop rates at last week’s OMO auction. Thus, average yield in the space jumped by 473bps to 6.7%. At this week’s OMO auction, the CBN sold NGN169.00 billion worth of bills across the three tenors, with stop rates unchanged from last week’s level. Elsewhere, trading activity in the NTB segment (average yield expanded by 45bps to 1.5%) was muted for a large part of the week, as market participants anticipated higher yields at the bi-weekly NTB PMA. At the PMA, the CBN struggled to keep the rates low as market participants made aggressive bids on the NGN169.78 billion worth of instruments on offer, in expectation of a replication of the higher rates at the OMO segment. In its resolve to keep rates tempered, the CBN eventually allotted NGN24.67 billion of the 91-day, NGN16.06 billion of the 182-day and NGN90.15 billion of the 364-day – at respective stop rates of 1.00% (previously 0.55%), 2.00% (previously 1.30%), and 4.00% (previously 2.00%).

In line with the recent developments in the market, we maintain our expectation of higher yields in the T-bills secondary market.

Bonds

In line with our expectation, proceedings in the Treasury bonds secondary market were bearish, as investors priced in the higher yields at the Treasury bills market, with the expectation of a similar outturn in the bonds market. Against the foregoing, average yield expanded by 104bps to 9.0%. Across the benchmark curve, average yield expanded at the short (+114bps), mid (+160bps) and long (+30bps) segments, as investors sold off the MAR-2025 (+179bps), NOV-2029 (+173bps) and MAR-2036 (+61bps) bonds, respectively.

In the coming week, we expect the outcome of the auction to influence the direction of yields in the bonds secondary market. At the auction, the DMO is set to offer instruments worth NGN150.00 billion through re-openings of the 16.2884% FGN MAR 2027, 12.50% FGN MAR 2035 and 9.80% FGN JUL 2045 bonds. We expect the auction to be oversubscribed, with market participants making aggressive bids in line with the higher stop rates at the most recent OMO and NTB auctions. In Q1-21, we note that there is a strong case for tempered yields in the bonds secondary market, given the limited supply amidst significant inflows from CBN special bill maturities (c. NGN4.00 trillion) and FGN bond coupon payments (c. NGN500.00 billion).

Foreign exchange

Nigeria’s FX reserves sustained its descent, as it dipped by USD153.60 million w/w to USD35.89 billion (9th February 2021). Across the FX windows, the naira weakened against the US dollar by 2.1% to NGN404.67/USD at the I&E window but appreciated by 1.5% to NGN473.00/USD in the parallel market. At the I&E window, total turnover (as at 11th February 2021) decreased by 20.4% WTD to USD236.66 million, with most trades consummated within the NGN380.35 – 422.59/USD band. In the Forwards market, the rate weakened in the 1-month (-0.6% to NGN407.85/USD) contract, but appreciated in the 3-month (+0.3% to NGN415.22/USD), 6-month (+0.5% to NGN425.19/USD) and 1-year (+0.8% to NGN441.93/USD) contracts.

Given the expected pressure on the external reserves amid weak portfolio inflows, we expect the naira to depreciate closer to its fair value implied by the long-run REER (NGN453.67) in the medium term. Our baseline expectation is that the CBN will depreciate the naira by 5.3% to NGN400/USD in the interbank market and 5.1% to NGN415/USD at the IEW.