What To Expect From The Markets This Week - 160919

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Saturday, September 14, 2019 08:00 AM / Proshare Content


Nigeria: Economic Dashboard @ 130919  

 

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Editor's Pick 

Source: Afrinvest Weekly Update-September 13, 2019

 

The Approved 7.2% VAT Rate Will Not Be a Silver Bullet

The Federal Executive Council (FEC) recently approved an increase in the Value Added Tax (VAT) rate to 7.2% from the initial 5.0% established since January 1, 1994. The increase is primarily to support the finances of states as the new minimum wage of N30,000/month becomes effective. The timeline for the implementation of the new rate is unclear, but the minister of Finance, Budget and National Planning hinted at 2020. As there are plans for wide consultation and amendment to the existing VAT Act, implementation may take longer than expected. The increase in VAT rate is unsurprising as governments have been keen but civil protests have led to reluctance despite Nigeria's low VAT rate relative to peer economies. Nigeria's VAT rate at 5.0% is the lowest among African peers such as Kenya (16.0%), South Africa (15.0%), Egypt (14.0%) and Ghana (12.5%). Similarly, VAT receipts to GDP is only 0.9% of GDP compared with 3.0% in Ecowas and Commonwealth countries according to PwC. We note that Nigeria's effective VAT rate is believed to be significantly higher than the current 5.0% due to the difficulty in claiming refunds, the high cost of compliance and non-allowable expenses for input VAT purposes.

We expect the increase in VAT to generate additional N479.7bn in revenues based on the N1.1tn collected in 2018. Based on the sharing formula, we expect the FG to receive additional N72.0bn (15.0%), states to receive N239.8bn (50.0%) and local governments to get N167.9bn (35.0%) upon implementation. While the states would receive a significant boost, the increase is unlikely to make a dent on FG's fiscal deficit which we estimate at N3.4tn in 2019. We believe the FG requires a significant revenue boost, which would come elsewhere. Our analysis shows that removing petrol subsidies and adopting a market reflective exchange rate of N360/US$1.0 for the computation of oil receipts would increase FG's revenue by N880.0bn.

While we align with the age-long call to boost non-oil revenue, we believe the FG has chosen an easy but less impactful route with the proposed increment in VAT. The increase should be part of a comprehensive fiscal reform package that would seek to boost collection efficiency, rein in recurrent spending, remove subsidies and widen the tax net. According to the former minister of finance, Kemi Adeosun, Lagos and Abuja account for 55.0% and 20.0% of VAT revenues respectively, meaning more pressure on consumers in both cities. We suspect that this is due to the large size of the informal economy which governments have been unable to integrate with the formal economy due to issues such as multiplicity of taxes. In the broader economy, we expect the adjustment to VAT to lead to higher consumer prices and in turn inflation. The attendant weakness to consumer spending would also impact growth negatively.

Q2:2019 Trade Report: Rising Imports Weigh on Trade Surplus
The Q2:2019 merchandise trade report released by the National Bureau of Statistics (NBS) shows that Nigeria's trade surplus declined to N588.8bn from N831.6bn in Q1:2019 as imports continued to expand faster than exports. Imports sustained the upward trajectory since Q3:2018, rising 8.2% and 65.2% (vs 25.8% and 3.4% in Q1;2019) on Y-o-Y and Q-o-Q basis respectively. This was mainly driven by a sharp rise across the board, but the importation of fuel and lubricant saw a steeper rise at 22.1% and 168.5% to N886.0bn on Y-o-Y and Q-o-Q basis respectively. Similarly, the importation of transport equipment and parts rose strongly by 342.3% and 28.7% to N635.0bn on Y-o-Y and Q-o-Q basis respectively. The importation of food & beverage, capital goods and consumer goods followed a similar growth trend, with the exception of industrial supplies which contracted 36.8% Q-o-Q to N791.4bn but rose 27.8% Y-o-Y. 

Exports expanded but at a slower pace of 2.1% Y-o-Y to N4.6tn in Q2:2019 (vs N4.5tn in Q1:2019) as a result of the increase in crude oil exports to N3.9tn. The rise in exports resulted from a 7.6% Y-o-Y increase in oil production to 1.98mbpd in Q2:2019 despite lower oil prices at US$68.5/bbl (vs US$74.9bbl in Q2:2018). However, on a Q-o-Q basis, exports rose much slower at 1.3%, due to a slight moderation in oil production even as average oil prices were higher in the quarter. Non-oil export growth rose by 4.1% Y-o-Y to N227.6bn while declining 62.3% Q-o-Q. 

The moderation in growth surplus continues to affect Nigeria's external balance, with external reserves declining US$1.1bn to US$43.4bn between Q1:2019 and Q2:2019. We expect trade surplus to remain weak in subsequent quarters mainly due to weak oil & gas exports and sustained growth in imports, particularly as we approach the festive season. However, we suspect that the partial closure of the Nigeria-Benin border may weigh on merchandise trade.

Global Equities Market: Sentiment Strengthens as Delay in Additional Tariffs Eases Tensions 
Optimism about calming trade tensions between the US and China strengthened this week as China exempted some U.S. goods from the 25.0% extra tariffs enacted in 2018, providing a reprieve of one year from September 17, 2019. The US reciprocated the gesture by suspending the proposed additional 5.0% tariff on Chinese goods worth US$250bn by two weeks from October 1, 2019 to allow for negotiations. The de-escalation of tensions between both countries is positive but not unusual, the lack of flexibility and speed during negotiations has been the drawback to a trade deal. In Europe, the European Central Bank cut rate by 10bps to -0.5% and resumes quantitative easing program from November, 2019 through monthly asset purchases of Euro 20.0bn until when unnecessary. In the UK, Prime Minister Boris Johnson suspended parliament for a month, raising the risk of a "no-deal Brexit" as Brexit deadline is on October 30, 2019.

The bullish run in the developed markets continued this week as all indices under our coverage ended in the green. In the US, S&P 500 and NASDAQ indices gained 1.2% and 1.1% W-o-W respectively on softening trade tensions. The France's CAC 40 and Germany's XETRA DAX indices were up 1.0% and 2.2% W-o-W respectively following ECB's rate cut while the UK’s FTSE All Share rose 1.1% W-o-W despite increasing uncertainty around Brexit. Likewise, Hong Kong’s Hang Seng index advanced 2.5% while Japan’s Nikkei 225 rose 3.7% W-o-W.

The bullish streak extended to the BRICS market as all indices under our coverage advanced W-o-W. South Africa's FTSE/JSE index led the gainers, advancing 2.8% W-o-W while Russia's RTS and Brazil's Ibovespa indices trailed closely following a 1.6% and 1.5% W-o-W gain respectively. Similarly, China's Shanghai Composite index rose 1.1% W-o-W as trade tensions partially de-escalated and the India's BSE Sens index also appreciated 1.1% W-o-W due to renewed economic stimulus.

Performance was mixed for indices under our coverage in the African market. Egypt's EGX 30 index sustained gains as it inched higher by 1.2% W-o-W. Similarly, Nigeria's ASI and Kenya's NSE 20 indices advanced 2.3% and 0.9% W-o-W respectively. Conversely, Mauritius' SEMDEX index led the decliners, shedding 1.0% W-o-W. The Ghana's GSE Composite and Morocco’s Casablanca MASI indices also lost 0.2% and 0.3% respectively during the week. 

In the Asian and Middle East market, 3 of 5 indices under our coverage closed in the green territory. Qatar's DSM 220 index further dipped 2.0% W-o-W while Turkey's BIST 100 index also sustained its bearish performance as it waned 3.9% W-o-W. Saudi Arabia’s Tadawul ASI appreciated the most by 2.8% while Thailand's SET and UAE's ADX General indices were up 0.5% and 0.4% respectively W-o-W. 

Domestic Equities Market: Bearish Run Reversed… NSE ASI Up 2.3% W-o-W
Following buying interest in UAC-PROP (+51.5%), FBNH (+24.1%) and SEPLAT (+15.7%), the domestic bourse trended upward as the ASI rose 2.3% W-o-W to 27,779.00 points while YTD loss eased to -11.6%. Similarly, investors gained N316.2bn as market capitalisation strengthened to N13.5tn. However, activity level was mixed as average volume gained 4.2% to 229.4m units while value pared 17.6% to N2.8bn respectively. The top traded stocks by volume were GUARANTY (219.0m units), ACCESS (115.0m units) and FBNH (92.9m units) while GUARANTY (N5.8bn), ZENITH (N1.2bn) and ACCESS (N794.4m) led by value.

Gains were recorded on 3 of 5 trading days during the week. For the first two trading days of the week, the market recorded 0.2% loss apiece due to price depreciation in NESTLESTANBICCCNN and DANGCEM. Meanwhile, gains in NESTLESEPLAT and GUARANTY buoyed the market on Wednesday and Thursday while gains in AIRTELAFRI and ETI moved the market higher on Friday. 
 
Across sectors, 5 indices under our coverage gained W-o-W. Price appreciation in SEPLAT (+15.7%), FORTE (+14.1%), FBNH (+24.1%) and ETI (+11.9%) moved the Oil & Gas and Banking indices up 7.2% and 5.1% W-o-W respectively. Also, the AFR-ICT and Consumer Goods indices gained 3.7% and 0.6% W-o-W respectively following buying interest in MTNN (+0.7%) and DANGSUGAR (+9.7%). The Industrial Goods index advanced 0.5% due to gains in WAPCO (+1.4%). Conversely, the Insurance index was down 1.5% W-o-W on the back of sell-offs in CONTINSURE (-8.0%) and MBENEFIT (-4.8%).
 
Investor sentiment strengthened as market breadth (advance/decline ratio) inched higher to 2.0x as 38 tickers advanced against 19 that declined. UAC-PROP (+51.5%), FBNH (+24.1%) and SEPLAT (+15.7%) led the advancers while THOMASWY (-9.5%), CONTINSURE (-8.0%) and OANDO (-7.3%) led losers. We expect bearish sentiment to resume next week, although there is room for gains in fundamentally sound stocks through bargain hunting.

Foreign Exchange Market: Naira Relatively Stable Amid Declining Oil Prices 
In a bid to ensure stability in the foreign exchange market, the CBN injected US$210.0m into the interbank segment following sales concluded on Tuesday. Recall that the sum of US$321.1m and CNY33.3m was injected into the Retail Secondary Market Intervention Sales (SMIS) segment on Friday last week. Of the US$210.0m sold this week, US$100.0m was offered to the wholesale segment while the Small and Medium Enterprises (SMEs) and invisibles segments received US$55.0m each. However, the external reserves further declined, down 0.7% (US$283.2m) to US$42.9bn from US$43.2bn last week. The prospect for accretion in reserves remains weak as oil prices struggle to keep up with the US$60.00/bbl. benchmark of the 2019 Budget. 

The CBN spot rate opened the week at N306.90/US$1.00 but closed the week at N306.85/US$1.00, appreciating 5kobo W-o-W from N306.90/US$1.00 last week Friday. At the parallel market, the exchange rate traded flat all week to close at N360.00/US$1.00. At the Investors' & Exporters' (I&E) FX Window, the NAFEX rate opened the week at N361.88/US$1.00 and closed at N361.95/US$1.00 on Friday, appreciating 13kobo W-o-W from N362.08/US$1.00. Activity level in the I&E Window fell 1.8% to US$1.07bn from US$1.08bn recorded in the previous week. 
 
At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts of the Naira settled at US$11.2bn, up US$106.6m (1.0%) from US$11.1bn in the prior week. The SEP 2020 instrument (contract price: N365.47) received the most buying interest in the week with additional subscription of US$70.0m which took total value to US$84.2m. On the other hand, the MAY 2020 instrument (contract price: N364.87) was the least subscribed, with an additional subscription of US$5.0m for a total value of US$1.1bn. In the coming week, we expect rates to trade within similar levels across the various FX segments as the CBN continues to sustain its weekly intervention. 

Money Market: Bullish Sentiment in the Secondary Treasury Bills Market
OBB and OVN opened the week at 7.1% and 8.3% respectively, higher than the previous week's close of 3.2% and 3.9% as system liquidity remained robust at N354.8bn. Despite OMO maturities worth N347.7bn, which boosted system liquidity to N694.1bn on Thursday, the rates inched higher to 11.4% and 12.3% in that order. By the close of the week, OBB and OVN settled at 22.4% and 24.7% respectively.

In line with its schedule, the CBN held a Primary Market Auction on Wednesday to rollover instruments worth N158.7bn in maturing treasury bills. Unlike previous auctions, oversubscription was recorded across the board as the 91-day, 182-day and 364-day bills were oversubscribed by 2.2x, 1.7x and 2.1x respectively. Marginal rates remained the same as the previous auction for the shorter-dated instruments at 11.1% while marginal rates for the medium and longer-dated instruments inched higher to 11.8% and 13.3% respectively (previous auction:11.6% and 12.9%).

The CBN also held an OMO auction this week, offering a total of N300.0bn across three instruments to keep system liquidity in check given huge inflows from maturities. Only the medium-term instrument recorded undersubscription of 0.3x while the short-and long-term instruments were oversubscribed by 2.8x and 1.9x respectively.  Sales exceeded offer as instruments worth N344.4bn were issued at stop rates similar to previous auction of 11.6%, 11.8% and 13.5% for the 91-day, 182-day and 364-day instruments. 

In the secondary treasury bills market, performance was bullish as average rate fell 21bps W-o-W to 12.5%. Rates fell across tenors with the long-term instruments recording the steepest buying interest as rates pared 36bps to close at 13.3% while rates on the short and medium-term instruments also fell by 12bps and 14bps respectively to 11.9% and 12.1%. Given large inflows worth N356.5bn from OMO maturities expected next week, we believe the CBN will continue to keep rates in check through regular auctions.

Bonds Market: Bearish Momentum Sustained in the Domestic Market
This week, the domestic bonds market sustained its bearish performance as average yield rose 5bps W-o-W to settle at 14.2%. The market recorded a bullish performance only on Monday (-5bps) and a bearish outing on Tuesday (+1bps), Wednesday (+3bps), Thursday (+3bps) and Friday (-3bps). While the short-term bonds enjoyed buying interest as yields fell 11bps, yields on the medium and long-term instruments rose by 6bps and 7bps respectively.

In the SSA Eurobonds market, the narrative remains unchanged as the bullish trend persisted across all the instruments we track, except the Zambian 2027 instrument that posted a 2bps rise in yields. As observed in past weeks, the Zambian 2022 and 2024 instruments enjoyed the most buying interest with yields shedding 189bps and 179bps respectively. The Ghanaian and Nigerian 2049 instruments continue to trail with 88bps and 82bps drop in yields respectively.

In the corporate Eurobonds segment, the bullish momentum was sustained as all instruments gained W-o-W. The MAURITIUS BAYPORT MANAGEMENT 2022 instrument led the pack as yields pared 91bps and the NIGERIAN SEPLAT 2023 trailed with a 72bps decline in yields. Going forward, we expect investors to remain attracted to emerging market instruments in the quest for higher yields. 

 

 

 

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Sunday, September 15, 2019

Data Science Nigeria will on this day hold the AI Bootcamp, while the National Bureau of Statistics will on the same day release the  2018/19 Transport and Storage Sector Survey Report AUTOMOTIVE GAS OIL (DIESEL) PRICE WATCH; CPI and Inflation Report, Liquefied Petroleum Gas(Cooking Gas) Price Watch, NATIONAL HOUSEHOLD KEROSENE PRICE WATCH, PREMIUM MOTOR SPIRIT (PETROL) PRICE WATCH, SELECTED FOOD PRICES and Transport Fare Watch for August 2019.

 

 

Monday, September 16, 2019

The Nigeria America Chamber of Commerce will on this day hold the Intellectual Property Symposium with the theme: The Bane of Counterfeit Pharmaceuticals & Piracy at Eko Hotel & Suites, Victoria Island Lagos, while the Lagos Court Arbitration Alternative Dispute Resolution Summit will hold on the same day with the theme: Alternative Dispute Resolution in Action: Balancing the Scales.

 

Tripple Gee & Company Plc will on this day hold its Annual General Meeting at Muson Centre, 8/9, Marina Road, Onikan, Lagos, while the Nigerian Economic Society will on the same day hold its 60th Annual Conference with the theme: Economic Policies and Quality of Life in Africa at NAF Conference Centre & Suites, Kado, Abuja.

 

The Journalism Clinic 1st Media Leaders’ Summit will hold on this day at TCC Resort and Conference KM 67, Lagos-Ibadan Expressway, Ogere-Remo, Ogun State.

 

 

Tuesday, September 17, 2019

The Africa Finance Corporation will on this day pay a courtesy visit to the Nigerian Stock Exchange, while Propak West Africa 2019 will hold on the same day at the Landmark Event Center, Victoria Island.

 

The 11th Edition of 2019 PSRG-RICHARDSON HSSE FORUM will hold on this day at the Eko Hotels & Suites, Victoria Island Lagos

 

 

Wednesday, September 18, 2019

The Nigerian Conservation Foundation will on this day hold its Annual General Meeting at Rotunda, Lekki Conservation Centre, Lagos.

 

Friday, September 19, 2019

The Financial Reporting Council of Nigeria will on this day hold the Corporate Governance Masterclass with the theme: Enthroning Good Corporate Governance-A Code of Best Practice at Fraser Suites, Abuja, while the Franco-Nigerian Chamber of Commerce and Industry will on the same day hold the Business Breakfast Meeting, with the theme: Executive Health and Attaining Universal Healthcare Coverage in Nigeria at Apa/Mazonia Hall, Eko Hotel & Suites Victoria Island Lagos.

 

The Africa Legal & Tech Network Summit 2019 will hold on this day with the theme: Addressing Technology Disruption in Law & Business at Commerce House, 1 Idowu Taylor Street Victoria Island Lagos, while the National Bureau of Statistics will on the same day release the Nigerian Domestic and Foregin Debt (JUNE 2019)

 



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