In line with our expectations, China’s factory and business activities contracted simultaneously for the first time since February 2020, when the COVID-19 pandemic dampened economic activities. According to the Chinese National Bureau of Statistics (NBS), China’s manufacturing PMI moderated to 49.5 points in March (February: 50.2 points), while the non-manufacturing PMI slowed by 3.2 points to 48.4 points (February: 51.6 points). The decline in the manufacturing and services sectors was due to the combined impact of (1) a surge in new daily COVID-19 infections and (2) mounting geopolitical uncertainties. Accordingly, the composite PMI (48.8 points vs February: 51.2 points) dropped to the lowest level since February 2020 (28.9 points), the peak of the initial COVID-19 outbreak. In the short term, we expect subdued activities in the manufacturing and services sectors, in line with the government’s strict preventive measures to control the recent resurgence of COVID-19 outbreaks.

According to the United States Department of Labor, the initial jobless claims in the U.S. increased modestly by 14,000 to 202,000 in the week ending 26th March – just after hitting a 53-year low in the week ending 19th March (188,000). Despite the increase, we highlight that employers are reluctant to reduce their workforce at a time when it is tough to find replacements. Notable increases on a non-seasonally adjusted basis were recorded across California (+3,893), Michigan (+3,553), Ohio (+3,518) and Texas (+2,106), while the most significant declines were recorded in Kentucky (-2,048) and Pennsylvania (-793). On a 4-week moving average, we highlight that the initial jobless claims declined by 3,500 to 208,500 (vs week ending 19th March: 212,000), reflecting an improved labour market amidst the economy’s continued recovery. Although the job market is poised to remain solid in the face of strong demand from companies, we think geopolitical risks emanating from Russia/Ukraine conflict and renewed surge in COVID-19 infections pose key downside risks to the labour market in the short term.

Global Markets

This week, global stocks posted mixed performances as sentiments were shaped by (1) concerns of an impending recession stemming from aggressive monetary policy tightening, (2) moderation in energy prices, and (3) anticipation of the outcome of the latest round of peace talks between Russia and Ukraine. Accordingly, US (DJIA: -0.5%; S&P 500: -0.3%) stocks were set to end the week with marginal losses as investors assessed President Biden’s plan to release massive crude from US reserves to combat inflation. European markets (STOXX Europe: +0.8%; and FTSE 100: +0.7%) were set for a weekly gain as hopes of a peace deal in the Ukraine crisis buoyed sentiments. Asian markets posted mixed performances, as the Japanese Nikkei 225: (-1.7%) closed lower taking a cue from the selloffs on Wallstreet. Elsewhere, the SSE: (+2.2%) posted a weekly gain as progress in talks between Russia and Ukraine boosted appetite for risk assets. Emerging markets (MSCI EM: +1.5%) and Frontier (MSCI FM: +0.6%) market stocks closed higher consequent upon bullish sentiments in China (+2.2%) and Kuwait (+1.5%), respectively.

Nigeria

Economy

Based on the recently released data by the National Bureau of Statistics (NBS), collections from Value-Added Tax (VAT) increased by 24.0% y/y to NGN563.72 billion in Q4-21 (Q3-21: +17.8% y/y to NGN500.49 billion). With the Q4-21 numbers, the total VAT collection settled at NGN2.07 trillion in 2021FY (+35.4% y/y vs 2020FY: NGN1.53 trillion). We attribute the increase to the combined impact of (1) a rebound in domestic consumption and (2) increased consumer prices compared to 2020FY levels. On a quarter-on-quarter basis, we highlight that the VAT collection increased by 12.6% in Q4-21 (vs Q3-21: -2.3% q/q to NGN500.49 billion), reflecting the knock-on effects of the festive-induced demand during the period. Accordingly, VAT collection increased across the local (+12.8% q/q to NGN333.29 billion), foreign (+27.4% q/q to NGN103.52 billion) and Nigerian Customs Service import (+2.5% q/q to NGN126.90 billion) VAT. Barring any major shock to the economy, we expect the VAT collections to continue to improve in the short term, albeit marginally. Our expectation of a moderate rise is in line with the normalisation of domestic activities after the initial post-COVID boost seen in 2021FY.

According to the Debt Management Office (DMO), Nigeria’s public debt stock increased by 4.1% q/q (equivalent to NGN1.56 trillion) to NGN39.56 trillion in Q4-21 (Q3-21: NGN38.01 trillion). We highlight that the public debt stock increased by 20.2% y/y in 2021FY (NGN39.56 trillion or 22.47% of GDP vs 2020FY: NGN32.92 trillion) in line with our estimates (NGN40.12 trillion). We believe the increased borrowing in 2021FY relative to the 2020FY level reflects the government’s expansionary stance in the face of persistent revenue underperformance. Accordingly, borrowings increased across the domestic (+17.3% y/y to NGN23.70 trillion) and external (+24.8% y/y to NGN15.86 trillion) funding sources. Without implementing fiscal consolidation measures, we do not see any respite to debt accumulation over the medium term, as increased borrowings will be required to plug the rising fiscal deficit. Barring the CBN’s Ways & Means securitisation, we estimate that the public debt stock would settle at NGN46.96 trillion (or 25.47% of GDP) in 2022FY.

Capital markets
 
Equities
 
Bearish sentiments persisted in the local bourse for the third consecutive week as profit-taking activities dominated market performance with the benchmark index recording losses in three of the five trading sessions. Precisely, the All-Share Index ended the week 0.3% lower to close at 46,842.86 points. Notably, selloffs of TOTALENERGIES (-10.0%), NB (-9.1%), INTBREW (-8.1%), GTCO (-7.1%) and ZENITHBANK (-7.1%) drove the weekly loss. Based on the preceding, the MTD and YTD return printed -0.3% and +9.7%, respectively. Activity levels were mixed, as trading volumes increased by 9.6% w/w while trading value declined by 18.4% w/w. Performance across sectors was largely bearish, following losses in the Banking (-7.1%), Oil and Gas (-3.4%), Consumer Goods (-1.8%),  Insurance (-0.3%), and Industrial Goods (-0.1%) indices.

We expect the weak sentiments that dominated the local bourse this week to persist in the week ahead, as investors continue to scale down exposure to equities following the mark down of share prices for 2021FY dividends amidst expectations of uptick in FI yields. 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 marketThe The overnight (OVN) rate expanded by 450bps, w/w, to 10.7%. During the week, the OVN remained depressed as system liquidity remained healthy against the backdrop of the FAAC disbursement (c. NGN350.00 billion) from the prior week and inflows this week from FX retail refunds, OMO maturities (NGN10.00 billion) and FGN bond coupon payments (NGN40.77 billion). However, the rate expanded at the end of the week following debits for CRR and the weekly OMO (NGN50.00 billion) and FX auctions.

In the absence of any significant inflows expected to hit the financial system next week, we expect system liquidity to be pressured. Thus, we envisage an expansion in the OVN rate from current levels.

Treasury bills

Proceedings in the Treasury bills secondary market closed the week on a bearish note following a dearth in demand and as the secondary market rates adjusted to the increased NTB PMA rates. Thus, the average yield across all instruments inched higher by 3bps to 3.3%. Across the market segments, the average yield expanded by 15bps and 2bps to 3.8% and 3.2% at the OMO and NTB segments, respectively. At this week’s OMO auction, the CBN sold NGN50.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions. At the NTB auction, the CBN offered NGN143.29 billion – NGN2.49 billion of the 91-day, NGN2.09 billion of the 182-day, and NGN138.71 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN174.19 billion – NGN13.88 billion of the 91-day, NGN20.35 billion of the 182-day and NGN139.96 billion of the 364-day bills – at respective stop rates of 1.75% (previously 1.74%), 3.00% (unchanged), and 4.45% (previously 4.00%).

With system liquidity expected to tighten in the coming week, we anticipate a further increase in the average yields on T-bills.

Bonds

Elsewhere, the Treasury bonds secondary market traded with mixed sentiments, albeit with a bullish tilt, as market reaction to the higher NTB stop rates midweek dampened the buying interests witnessed in the early part of the week. Consequently, the average yield declined slightly by 1bp to 10.7%. Across the benchmark curve, average yield expanded at the short (+1bp) end as investors took profits off the APR-2023 (+60bps) bond, but contracted at the long (-4bps) following demand for the MAR-2036 (-19bps) bond. Meanwhile the average yield was flat at the mid segment.

We maintain our view of an uptick in bond yields in the medium term, especially as we start a liquidity stiffened Q2-22, with the FGN’s borrowing plan (NGN2.57 trillion) for 2022FY pointing to elevated supply.

Foreign Exchange

Nigeria’s FX reserve recorded its first accretion in four weeks as it increased by USD21.11 million w/w to USD39.55 billion (29th March 2022). Meanwhile, the naira depreciated by 0.1% to NGN416.63/USD at the I&E window (IEW), but was flat at NGN588.00/USD at the parallel market. At the IEW, total turnover (as of 31st March 2022) increased by 21.9% WTD to USD752.97 million, with trades consummated within the NGN410.00 – NGN453.25/USD band. In the Forwards market, the naira was flat at the 1-month (NGN418.13USD), 3-months (NGN424.08/USD) and 6-months (NGN433.42/USD) contracts, but appreciated at the 1year (+1.1% to NGN448.18/USD) contract.

In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond (USD1.2 billion) and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.

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