October 2019 Macroeconomic Update - Comercio Partners


November 09, 2019 02:00PM / Comercio Partners / Header Content Image: The Csspoint


Report Summary


The Macroeconomy

  • Nigeria's crude oil production increased further in September 2019 as OPEC increased the country's oil cut quota
  • Inflation rose in September after 3-months of consecutive declines
  • Total capital inflow through the I&E FX Window declined significantly for the 3rd consecutive month
  • After a slight decrease last month, the PMI resumed its ascent.


The Financial Markets

  • Fixed income yields declined significantly in October
  • The Naira depreciated slightly
  • Equities declined further by the end of the month.


Our Expectation for the Coming Months

  • Continued border closure is expected to exert an upward pressure on inflation, though the effect on the PMI is expected to be positive
  • The relatively illiquidity of the fixed income market could force yields lower given increased flows. 
  • We could see improved flows into equities on the back of the recent OMO policy from the apex bank. 


An Extended Brexit, Cooler Us-Sino Trade Tensions, The Exit Of Another Opec Member, & Real Sector Focused Policies At Home


Keeping with the theme of this year, the month of October was activity-filled as the Brexit saga raged on, some headway was made on the US-Sino trade front, there were some supply side shocks in the crude oil markets, and Nigeria's apex bank announced some interesting policy changes.


Against his will, the British Prime Minister was forced to ask the EU for another extension for Britain's divorce from the union after being compelled by Parliament which had refused to give its assent to the 11th hour divorce deal negotiated by the Prime Minister. With the impasse imposed on him, the Prime Minister is banking on the British electorate to give him the majority he needs in parliament to push through a Brexit deal, and has called for a general election in that regard, which will hold on the 12th of December.


In its present form, the 11th hour deal reached by the Prime Minister on the 17th of October required Northern Ireland to be part of Britain's custom's territory, while also adhering to a number of EU rules and regulations. While it might be termed an election, the British electorate would, in fact, be deciding on Brexit itself when it votes on the 12th of December. Will they empower the Conservatives, thus giving a go-ahead to the Prime Minister's Brexit push, or will they seize power from the party and possibly put the Brexit deal to another public vote as promised by the Labour Party?


After a series of mis-starts and misfires, the U.S. and China have announced that they are close to signing what has been termed a "Phase 1" deal. As part of the terms of the deal, both countries are expected to cancel some of the planned and existing tariffs on each other's goods. In China, GDP growth slowed to a 30-year low of 6%, year-on-year, as a result of the continued trade tensions.


The slowdown in GDP has given the Chinese government enough reasons to chase more aggressive stimulus policies. In the US, homebuilding tumbled from a 12-year high despite lower mortgage rates. Manufacturing also fell, an ironic outcome as the trade war was started in a bid to protect US manufacturing. The US Federal Reserve also cut rates for the third time this year by 25 bps to a range of 1.5% to 1.75%, though it indicated that it would pause rate cuts henceforth. There are still dark clouds over this new deal as the Chinese government has expressed its reservation over the likelihood of a long-term deal given the unpredictable nature of the US President.


In the crude oil space, Ecuador, a member of the OPEC, announced its intention to leave the cartel on 1st January 2020 as a result of the fiscal crisis the country is currently facing. However, as the nation contributes barely 2% to OPEC's overall output, the departure would hardly be noticed. Iraq, a more significant player in OPEC was rocked by violent protests as a result of the populace's grievances with the ruling government. Iraq is OPEC's second largest producer and contributes 12% to OPEC's daily output. While the oilfields had generally been left alone, the possibility of a hit on the country's production remains. In addition to the crisis in Iraq, the continued civil war in Libya adds to the heightened geopolitical tensions.


Back home, the Central Bank of Nigeria (CBN) upwardly revised the Loan to Deposit (LDR) of banks to 65% from 60%. This circular was given in line with the bank's drive to stimulate lending to the real sector. Following this, the CBN released another circular banning the participation of local firms and individuals in both primary and secondary Open Market Operations (OMO), all in a bid to spur lending to the real sector. Consequently, activities in the treasury bills space have declined significantly as liquidity squeeze forced market participants to the long end of the yield curve on government securities. 


The President also presented a N10.72 trillion budget to the National Assembly for approval for the 2020 fiscal year. The budget is based on an oil price benchmark of $57/barrel; daily oil production estimate of 2.18 mbpd; GDP growth of 2.93%; exchange rate of N305/$1; and government revenue of N8.155 trillion. The estimated government revenue comprises of N2.64 trillion of oil revenue, N1.81 trillion of non-oil revenue and N3.7 trillion of other revenues. On the expense side, statutory transfers was projected to be N556 billion (5%); non-debt recurrent expenditure, N4.88 trillion (47%); capital expenditure, N2.14 trillion (21%); debt service, N2.45 trillion (24%), with a sinking fund provision of N296 billion (3%). This gave rise to a projected deficit of N2.18 trillion.


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Our Expectations for the Coming Months

As we await Nigeria's Q3 2019 GDP report, we expect the combined effects of increasing crude oil production and improving purchasing managers indices to push up Q3 2019 GDP growth rate slightly higher than the level recorded in Q2 2019. Inflationary pressures resulting from higher commodity prices which began in August, the middle of the 3rd quarter, due to the border closure could dampen Q3 2019 GDP growth. However, we expect the recent extension of the border closure beyond Q4 2019 coupled with the effect of increased yuletide purchases to push up inflation significantly, as already seen in September 2019.


Despite the negative effects of the border closure on prices and inflation, the PMI indices are expected to increase at a faster pace in the coming months as demand for locally produced goods and services increases and prices equally increase driven by supply side challenges as local production struggles to meet demand. 


In the fixed income space, we expect the bullish trend in the bond market to persist in the coming months as investors seek higher yielding instruments as they are now ineligible to participate at OMO auctions. Given the significant impact of this policy on the fixed income market, we would not be surprised if the policy directive is tweaked to ensure better liquidity in the treasury bills market.


We expect the Naira to maintain its value relative to the US Dollar in the near to medium term as the CBN remains keen on maintaining the naira at current levels. While the continuous decline of the foreign exchange reserves remains an issue, it stays at the upper band of the $35 to $40 billion range which we consider sustainable. At the lower end of this range, we expect panic to set in.


We anticipate that the recent policies of the CBN may result in increased flows into equities by local Pension Fund Administrators and asset management companies in the near to medium term as they struggle to find alternative investment outlets to deploy their investible funds. However, we expect this to be done over time and not aggressively. In addition to that, we might see some positive sentiments filter in as more Q3 2019 earnings reports are released. The MSCI (Morgan Stanley Capital International) semi-annual review which should be out anytime now could equally shape the actions of offshore index trackers in the coming months.



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