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Saturday, May 23, 2020 08:00 AM / Proshare Content / Header Image Credit: EcoGraphics
Nigeria: Economic Dashboard @ 220520
Editor's Pick
Source: Cordros Weekly Economic and Market Report - May 22, 2020
Global Economy
Japan's
GDP growth recorded its second consecutive quarterly decline in Q1-20, as the
economy effectively nosedived into recession - the country's first recession
since 2015. Specifically, the preliminary data showed that Q1-20 growth
declined by 0.9% q/q (Q4-19: -1.9% q/q). When annualized, the figure comes to
-3.4% q/q, slightly above the consensus estimate of -4.6% q/q. As with other
advanced economies, we believe the negative impact of the COVID-19 pandemic on
economic activities and weaker external demand, weighed markedly on the
country's growth outturn. Analysing the breakdown, we noted that even as
government expenditure (+0.4% q/q) rose slightly, it was not enough to offset
declines across private consumption (-2.8% q/q), capital expenditure (-2.0% q/q),
and public investment (-1.6% q/q). While
the Japanese government's policy responses to COVID-19 have led to a clearer
sign of easing, we expect the Q1-20 contraction in growth to be the first of
many to come, as rising COVID-19 cases in countries that are major trading
partners continue to threaten the external sector. It is worth noting that in
Q1-20 alone, exports of goods and services shrank by 21.8% q/q, the steepest
move since Q2-11.
Elsewhere, In the United Kingdom, headline inflation grew at a slower pace to
0.8% y/y in April 2020, from 1.5% y/y in the prior month. The combination of
(1) the pass-through impact of lower crude oil prices to energy inflation and
(2) slower growth in apparel and clothing prices, supported a 70bps
deceleration in headline inflation, representing the sharpest decline in over
10 years. Beyond that, we recall that the BOE recently increased its
bond-buying programme by another GBP200 billion; a move we believe greatly
contributed to the depressed CPI movement in April. Going forward, we expect
consumer prices in the UK to remain largely suppressed. Our view is hinged on the expectation
that the BOE will sustain its dovish stance in a bid to limit the impact of the
COVID-19 pandemic on economic growth. The BOE stated that it expects headline
CPI to hit a 0.0% level in the next few months.
Global
markets rallied following early results for an experimental vaccine that raised
hopes of a faster economic recovery, as well as re-opening of some major
economies. Stocks in the US (DJIA: +3.3%; S&P: +3.0%) were supported by
this positive news early in the week, resulting in gains across some of the
country's major indices even as tensions between Washington and Beijing
continue to escalate. Asian equities (SSE: -1.9%; Nikkei 225: +1.8%) returned
mixed performances this week, as investors reacted to the early positive
results from Moderna's potential COVID-19 vaccine and the strained US-China
relations. European equities (STOXX: +3.2%; FTSE 100: +3.0%) were buoyed by
re-opening economies and optimism from fresh stimulus plans for the European
Union. Emerging markets (MSCI EM: +3.2%) and Frontier markets (MSCI FM: +3.8%)
also recorded gains, due to significant gains in Kuwait (+5.4%) and South Korea
(+3.8%).
Nigeria
This
week, the National Bureau of Statistics (NBS) released inflation data for April
2020, which showed that, for the eight consecutive months, headline CPI notched
another yearly increase - 8bps to 12.34% y/y. Relative to our forecast, the
outturn was 4bps higher, with the largest variance stemming from the core
basket. For us, aside from the Naira weaknesses which filtered to both the core
and food baskets, we believe that the impact of supply chain disruption,
occasioned by the COVID-19 outbreak, is now becoming a lot more evident on
Nigeria's consumer prices, especially the food basket. To ascertain the impact
of COVID-19 outbreak on April CPI, we note that m/m food inflation (1.18%) is
now at the highest level seen since November 2019 (1.25%), where the blend of
land border closure and festive induced demand, at the time, fanned higher food
prices.
The breakdown provided showed that the expansion in the food inflation was
driven by all the sub-categories, with the processed food basket (+82bps)
leading the pack, followed closely by farm produce (+21bps) and imported food
(+2bps) baskets. Meanwhile, core inflation grew at a faster pace by 14bps to
0.94% m/m - the steepest monthly expansion in 22 months. For May, while the troika impact of
planting and lean seasons in the North and South respectively, continued Naira
downslide, and rising incidences of COVID-19 cases should have ordinarily
pressure headline CPI in May, we believe that a favourable high base from the
corresponding period of last year will place a ceiling of CPI uptrend. Against
that backdrop, we now expect m/m headline CPI of 1.11%, cascading to a flat y/y
inflation at 12.34%.
The
Nigerian equities market rallied this week, on the back of significant
interests in banking stocks and market heavyweights BUACEMENT (+23.4%), MTNN
(+5.0%) and DANGCEM (+4.5%). Thus, the All-Share Index advanced by 5.6% w/w, to
settle at 25,204.75 points. Thus, the MTD return increased to 9.5%, as the YTD
loss moderated to -6.1%. Performance across all sectors were positive,
reflecting the positive performance in the market. The Industrial Goods
(+15.5%) index led the return chart, followed by the Banking (+7.2%), Oil and
Gas (+4.9%), Insurance (+2.0%), and Consumer Goods (+0.9%) indices.
In our opinion, risks
remain on the horizon due to a combination of the increasing number of COVID-19
cases in Nigeria and weak economic conditions. Thus, we continue to advise
investors to trade cautiously and seek trading opportunities in only
fundamentally justified stocks.
The
overnight (OVN) rate expanded by 13.63ppts, w/w, to 15.6%. The OVN steadied at
c.2.0% levels for most of the week, as system liquidity was supported by
inflows from FAAC allocation (c. NGN300.00 billion) and FGN bond coupon
payments (NGN17.87 billion). However, debits for Wednesday's FGN bond PMA
(NGN295.37 billion) and CRR debits caused the eventual expansion in the OVN
rate to its current level.
We expect the OVN rate to
trend southwards next week, as inflows from OMO maturities (NGN319.72 billion)
and FGN bond coupon payments (NGN5.63 billion) come into the system.
Trading
in the Treasury bills secondary market was bullish, as the average yield across
all instruments contracted by 177bps to 4.9%. The contraction was majorly
influenced by trading activity at the OMO segment (average yield: -242bps to
6.0%) as market participants demanded mid and long tenor instruments due to no
sales at the last auction. At the NTB segment, the average yield contracted by
11bps to 2.2% due to piqued investors' interest following improved rates in the
space.
In the coming week, we
expect healthy demand for T-bills, as system liquidity improves with expected
inflows in the week. In the NTB segment, we expect the focus to be shifted to
next week's PMA. While there is no indication of the amount to be offered, we
expect a similar result from the last NTB PMA.
Trading
in the FGN bonds secondary market was bullish, as investors covered for lost
bids at the PMA. Consequently, the average yield across instruments contracted
by 15bps to close at 10.4%. At the auction, instruments worth NGN60.00 billion
were offered to investors through re-openings - 12.75% APR 2023 (Bid-to-offer:
4.09x; Stop rate: 9.2%), 12.50% MAR 2035 (Bid-to-offer: 7.71x; Stop rate:
11.7%), and 12.98% MAR 2050 (Bid-to-offer: 9.46x; Stop rate: 12.6%). Despite
subscriptions across instruments settling at NGN425.18 billion, the DMO
eventually allotted instruments worth NGN152.11 billion, resulting in a
bid-cover ratio of 7.09x.
We expect improved demand
for instruments next week in the Treasury bonds secondary market, following
lost bids at the auction, and as investors seek investible securities for OMO
maturities coming in.
For
the third straight week, the CBN recorded another FX reserves buildup, with the
country's external balance growing by USD514.92 million WTD to USD35.67
billion. We attribute the driver of the reserve accretion to the inflow of RFI
facility by the IMF, which continues to outweigh FX outflows. Consequently, the
Naira gained some ground against the USD by 0.20% w/w to NGN385.94/USD at the
I&E window but slid by 2.17% w/w to NGN460.00/USD in the parallel market. In
the Forwards market, the naira appreciated against the USD across all
contracts, save for the 1-month (-0.02% to NGN388.21/USD). Notably, the 3-month
(+0.2% to NGN391.62/USD), 6-month (+0.5% to NGN396.74/USD), and 1-year (+1.0%
to NGN414.48/USD), contracts all recorded stronger naira values against the
greenback.
We still hold the view
that the RFI inflow will continue to provide short-term support for the FX
reserves. Nonetheless, we expect the currency market to remain largely
volatile, especially in the parallel as the CBN's suspension of FX sales to
BDCs continues to create a backlog of unmet FX demand.
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