The Debt Management Office (DMO) recently published data on Nigeria’s debt
profile as at Q3:2018 and this showed that total public debt was largely
unchanged at N22.4tn (US$73.2bn) from the previous quarter. This reflected
lower borrowings by both government and states in both the external and
domestic debt market. Interestingly, there was also the redemption of the
US$500.0m (N153.3bn) 5-year Eurobond which was issued in 2013. Hence, while
Federal Government’s (FG) domestic debt increased by N135.4bn to N12.3tn in
Q3:2018, its external debt holdings reduced by the value of the Eurobond
redemption to US$21.5bn (N6.6tn). For states, total domestic debt slightly
increased by N50.0bn to N3.5tn. While we note that the lack of data for some
states prevents gaining an accurate picture – data reported for thirty-one
states was as at H1:2018 while three states reported data as at FY:2017 –, the
external debt of states is already captured in FG’s external debt balance.
In view of the US$2.8bn (N858.0bn) Eurobond issued in Q4:2018 and additional
local bonds, which we estimate at N233.4bn, the total debt stock of the FG has
increased to N20.0tn as at FY:2018. This represents an 8.6% increase over its
total debt of N18.4tn as at year-end 2017.
Servicing Costs Still Elevated
In 2017, the FG started implementing its new debt strategy which was to
increase external debt holdings to 40.0% and increase the proportion of
long-term debt. This was part of the FG’s plan to reduce the cost of debt and
limit the crowding out of private sector borrowers. As at Q3:2018, the FG’s
debt profile reflected some of the progress made on these plans; the share of
external debt increased to 35.0% while the share of the long-term debt is now
77.1%. In Q4:2018, we estimate that the FG was closer to its target as external
debt was projected at 37.4% of total debt.
However, debt servicing costs have remained elevated, with debt service to
revenue worsening to 69.2% as at 9M:2018 (FY:2017- 61.6%). While this would
have been worse if the share of local debt had remained unchanged, we note that
the current strategy seems to be unfavourable over the long-term if the
persistent devaluation of the currency and higher interest rates on foreign
debts are taken into consideration. On a related note, the crowding out of the
corporates has persisted given currently high yields on the FG’s domestic debt.
Also, although the government has reduced its borrowings locally, the CBN’s
tightening activities through OMO issuances at high interest rates have crowded
out the private sector.
There Still Room for Aggressive Borrowing?
The FG’s debt sustainability indicators are not alarming on the surface,
especially considering debt to GDP at 16.2%, which is lower than the
recommended threshold of 56.0% by the IMF/World Bank. Also, the government is
still in a strong position to repay its external debt obligations as indicated
by a healthy but fast-growing external debt service to exports ratio of 46.5%
as at 9M:2018 (below IMF threshold of 100.0%). However, the major concern
remains the FG’s elevated debt servicing costs. Without an improvement in
revenues, if borrowing continues at the current pace, the government may be
using all of its revenues to meet debt obligations. This would reduce spending
on public goods and services, which the government is expected to provide. We
believe that there is still scope for improved revenues if petrol subsidies are
removed and the official exchange rate moves towards the NAFEX rate of
N360/US$. By our conservative estimates, the FG’s debt service to revenue could
moderate to 56.2% from 69.2% as at 9M:2018 if petrol subsidies are removed.
Also, the government can rein in its administrative costs to reduce spending,
and in turn borrowings. We are less optimistic about this and considering the
imminent minimum wage increase, we expect government finances to remain
Equities Market: Market in Suspense Ahead of President Trump’s Meeting with the
As the U.S. government shutdown approaches two weeks, President Donald Trump
and Congress leaders are set to meet this Friday in the hopes of breaking the
impasse around funding for the President Trump’s US-Mexico border wall as well
as other alternative security measures. With no decision reached at a prior meeting
on Wednesday, the 2nd of January 2019, there are expectations that a
deal could emerge this Friday, the 4th of January 2019 as the new
House Speaker, Nancy Pelosi, takes over. To prevent a total government
shutdown, we see that the US Congress has swung to action. Congress leaders
have passed two bills; one bill to fund eight closed U.S. departments through
September 30 and the other to reopen the Department of Homeland Security
through February 8.
As a result of concerns about the meeting, performances were largely bearish
across markets. In the US markets, the S&P 500 and the NASDAQ closed the
week lower, down 1.5% and 1.8% W-o-W respectively while UK FTSE gained, up 0.6%
W-o-W. Furthermore, France's CAC 40 (0.3% W-o- W) and Japan’s Nikkei 225 (2.3%
W-o-W) declined during the week. On the flip side, Germany's XETRA DAX and Hong
Kong’s Hang Seng rose 0.3% and 0.5% W-o-W respectively. We note that concerns
around a slowdown in global growth and interest rate tightening in advanced
economies have continued to underpin a bearish streak in markets.
Across BRICS countries, performance was mixed as 3 of 5 indices trended
northwards. Brazil’s Ibovespa recorded the largest gain, up 4.1% W-o-W,
followed by Russia’s RTS and China’s Shanghai Composite with a 3.5% and 0.8%
advancement W-o-W respectively. The upward trend in China’s Shanghai Composite
was due to optimism around easing trade tensions as the US and China hold
another trade meeting on Monday. On the flip side, the largest loss was
recorded by India's BSE Sens, down 1.1% W-o-W. Finally, South Africa’s FTSE/JSE
All Share closed the week with a loss of 0.9%.
In Africa, performance was mixed as 3 out of 6 markets under our coverage
recorded gains W-o-W. The Egypt’s EGX30 recorded the largest gain, up 3.3%
W-o-W, followed by Morocco’s Casablanca MASI (0.3% W-o-W) and Mauritius’ SEMDEX
index (0.3% W-o-W). On the flip side, the largest loss was recorded by
Nigeria’s All-Share Index, down 1.3% W-o-W, followed by Kenya’s NSE-20 (0.6%
W-o-W) and Ghana’s GSE Composite (0.2% W-o-W).
In Asia and the Middle East, there was a bearish performance as 4 of 5 markets
recorded losses W-o-W. Turkey's BIST 100 emerged as the lone gainer with a
return of 4.1% W-o-W. On the flip side, UAE's ADX General Index recorded the
worst return of 1.4% W-o-W to lead laggards, followed by Saudi Arabia's Tadawul
ASI (-1.0% W-o-W), Thailand’s SET index (-0.7% W-o-W) and Qatar's DSM 20 index
Equities Market: Bearish Performance Persists… ASI Down 1.3%W-o-W
The rout on the Nigerian equities market continued this week – the first week
of trading activities this year – as investors reduced and/or exited positions
in stocks ahead of the elections. As a result, most counters on the local
bourse remain undervalued, trading near 1-year lows. Persistent sell pressures
in market bellwethers - ACCESS (-14.7%), STANBIC (-12.7%)
and NIGERIAN BREWERIES (-3.0%) drove the All
Share Index (ASI) 1.3% lower W-o-W to 30,638.90 points, YTD return settled at
-2.5% while market capitalization decreased by N88.4bn to N11.4tn. Similarly,
activity level weakened, as average volume and value traded declined 50.0% and
47.0% to N411.6m units and N2.1bn respectively. The top traded stocks by volume
were DIAMOND (401.3m units) UNIONDAC (268.3m)
units and NEM (146.4m units) while ZENITH
(N2.0bn) GUARANTY (N1.0bn) and DIAMOND (N0.8bn)
led by value.
At the start of the week and close of 2018 (31/12/2018), the market gained
127bps after which it maintained a downtrend till Friday (4/01/2019). Sell
pressures on DANGCEM, NIGERIAN BREWERIES, GUARANTY and
drove the benchmark index 211bps lower on Wednesday and
Thursday, and by the close of the week, the cumulative loss extended to 254bps
on the back of price depreciation in FBNH, ZENITH and
Across sectors, performance was equally negative as 4 of 5 indices closed in
the red W-o-W. The Industrial Goods index was the biggest loser, down 3.9% due
to losses in WAPCO (-9.6%) and CCNN (-7.5%).
The Banking index trailed, falling 2.7% as ACCESS (-14.7%)
and ZENITH (-5.7%) witnessed price depreciation. In the
same vein, sell-offs in MANSARD (-3.7%), AIICO (-7.2%),
(-12.4%) and NIGERIAN BREWERIES (-3.0%)
dragged the Insurance and Consumer Goods indices 1.0% lower apiece. The Oil
& Gas index was the lone gainer for the week, up 2.9% following buy
interest in SEPLAT (+8.0%) and TOTAL (+3.6%).
Investor sentiment as measured by market breadth (advance/decline ratio)
softened to 0.4x from 2.8x recorded last Friday consequent on 19 stocks advancing
against 44 that declined. The best performers for the week were CUSTODIAN (+16.2%),
(+15.7%) and VITAFOAM (+16.2%) while FCMB
(-16.5%), GLAXOSMITH (-14.5%) and ACCESS
(-6.8%) led laggards. In the coming week, we anticipate a bearish performance
as sell pressures persist due to pre-election jitters.
Market: Uptick in Yields Continue as System Liquidity Wanes.
In addition to PMA re-issuances, the CBN sustained its OMO auctions this week
in order to control system liquidity and ultimately check speculative exchange
rate pressures. As a result, yields maintained an upward trend in the week,
reflecting soft sentiments and an overall bearish performance.
Liquidity levels this week were bolstered by a N690.0bn inflow from OMO
repayments (N424.5bn) and Net PMA repayments of N265.5bn. However, this was
short lived as system liquidity declined following Wednesday’s PMA which was
oversubscribed. The attractive stop rates drove investor appetite as
subscription levels rose across all tenors issued, with the 91-day (stop rate -
10.899%), 182-day (stop rate – 13.100%) and 364-day (stop rate - 14.500%) with
instruments oversubscribed by 2.0x, 1.2x and 1.6x respectively. Thereafter, on
Thursday, the CBN held an OMO auction which was undersubscribed given the
diminished level of system liquidity despite higher rates offered on the
instruments (91-day: 11.9%, 182-day: 13.5% and 364-day: 15.0%). Bid-to-offer
levels on the 91-day, 182-day and 364-day instruments were recorded at 0.6x,
0.4x, and 0.6x respectively on offers of N50.0bn, N100.0bn and N300.0bn
Based on this, money market rates: Open Buy Back (OBB) and Overnight (OVN)
rates closed the week higher at 20.0% and 23.8% respectively compared to 17.2%
and 18.4% at the close of the prior week. Furthermore, buying activities in the
secondary market drove average T-bills rate 2bps lower to close the week at
14.07% against 14.09% the prior week.
Next week, we expect money market rates to slightly moderate as OMO maturities
worth N375.4bn hit the system. Nevertheless, we believe the CBN will continue
with its weekly OMO mop ups to keep liquidity levels in check.
Exchange Market: Naira Appreciates
The foreign reserves contracted this week as the balance decreased by 0.2% to
US$43.1bn (as at 2nd January) from US$43.2bn last week. In its intervention in
the forex market this week, the CBN injected a total of US$210.0m across
various market segments – US$100.0m in the Wholesale and US$55.0m each in the
SME and Invisibles (tuition fees, medical payments and BTA) segments.
In the parallel market, naira appreciated 0.5% from N364.00/US$1.00 to close
the week at N362.00/US$1.00 due to CBN’s market support in the wholesale
segment of the market. Similarly, the CBN spot rate appreciated by 5kobo from
N307.00/US$1.00 to close N306.95/US$1.00; while in the Investors’ &
Exporters’ (I&E) FX Window, the naira opened the week at N364.35/US$1.00
but depreciated 95kobo to close the week at N365.30/US$1.00.
Likewise, activity level in the I&E FX window fell by 22.5% W-o-W to
US$549.9m from US$709.5m in the prior week. In the FMDQ OTC open futures
contract market, total subscriptions rose 2.9% W-o-W to US$4.8bn from US$4.7bn
last week, with prominent buying interest observed in the December 2019 contract.
In the coming week, we expect activity level to improve as Christmas
festivities wrap up; and further anticipate that the central bank will continue
in its pursuit to stabilize the value of the Naira should any market volatility
occur, possibly owing to pre-election uncertainties.
Market: Market Settled into Pattern of Weak Activity
The average Ask-yield on Treasury bonds increased in the week, advancing 20bps
to settle at 15.4%. There were increases in yields recorded across most of
bonds, save for on five instruments – 16.00 29-JUN-2019, 7.00 23-OCT-2019,
13.53 23-MAR-2025, 12.50 22-JAN-2026, 16.2499 18-APR-2037 – which recorded
yield increases of 2bps, 15bps, 4bps, 8bps and 30bps respectively. Also,
activity levels remained weak, with the total volume traded on the FMDQ OTC
declining by 69.2% toN 30.0bn in the four-day trading week from N94.2bn in the
prior week, which was a three-day trading week.
The direction of yields remains in line with our general expectations given the
structure of market yields at the present time. We expect upward pressure to be
exerted through Q1:2019 as participation in the bonds market is expected to
remain weak in the face of attractive yields on short-term instruments.
The buying activities in the SSA sovereign Eurobonds market picked up in the
week, as the average yield on the instruments pared by 2bps to bring the
average yield to 7.9%. The largest increases in yields were recorded on the
Zambia Eurobonds, which recorded an average Ask-yield increase of 16bps to
15.4%. Dissimilarly, the yields on the Nigeria Sovereign Eurobonds declined,
paring by 6bps to settle at an average yield of 7.9%. We expect continued
interest in the country’s debt, driven by local demand over the coming weeks,
as investors take position in safe foreign currency assets given heightened
In the corporate Eurobonds market, yields across instruments declined by 12bps
to settle at 9.0%. There were yields declines across all bonds save for the
ACCESS 2021, EBN FINANCE CO BV, FBNH 2021 and UBA 2022 bonds, which recorded
yields increases of 8bps, 3bps, 3bps and 11bps respectively. We expect the
yields on corporate Eurobonds to pare in the coming weeks as flight to safety
imperative becomes stronger in the face of the impending elections.