Nigerian Macroeconomic and Market Report - February 2020


Wednesday, March 11, 2020  07:40 PM / Comercio Partners/ Header Image Credit:  Facebook


The Macroeconomy

  • The coronavirus appears to have gone viral
  • Global Central Banks returned to an accommodative mood to ease disruptions caused by the virus
  • Different sectors of the economy felt the effects of the virus
  • Oil prices fall dangerously low


The Financial Markets

  • Fixed income markets continued their bullish run in February, but yields increased after OPEC+ failed to renew and increase oil cuts
  • The Equities market reversed all gains made in the previous month
  • The rate of PMI expansion slowed


Our Expectation for the Coming Months

  • Growth prospects for the nation look weak in light of the pandemic
  • Headline inflation is expected to rise further particularly as unrest continues in the North East and land preparation begins
  • Capital importation is expected to remain pressured
  • PMI to continue its downward trend
  • Equities market is expected to remain bearish.


A Viral Outbreak And a Coordinated Response

The coronavirus was the theme that dominated headlines and market activities this month - globally and locally. The US Energy Information Administration (EIA) released a forecast which showed global oil demand fundamentals tightening this year primarily due to the impacts of the coronavirus outbreak. Crude oil prices declined 25% earlier in the month as several OPEC members leaned towards a bigger than previously expected oil output cut. Some members of the cartel were considering an output cut of up to 1 million bpd for the second quarter of 2020, more than the initially proposed 600,000 bpd. However, at the cartel's and its allies meeting of March 5-6 in Vienna, the unexpected happened with Russia unsupportive of further cuts. Oil prices declined significantly afterwards touching levels last seen in 2017.

Global Central Banks across the world acted in unison - cutting rates in order to stimulate their economies. The U.S. Federal Reserve cut rates by 50 bps to a range of 1% - 1.25% in response to the spread of the virus. The rate cut is the largest since the Great Recession in 2008. However, that is where the comparison ends. In 2008, the world virtually ran out of money and, as a result, drastic measures were required to inject liquidity into the economy in order for regular transactions to occur. In 2020, some have compared the recent rate cuts to arming shoppers with vouchers to a store that is out of merchandise. It is hard to see how monetary policy will solve this problem.

Transportation and Logistics also felt the pain from the global pandemic. The International Air Transport Association has projected a global revenue loss of $29 billion due to the virus. Global passenger growth for 2020 had previously been projected to increase by 4.1%. However, the industry is expected to shrink by 0.6% as travelers are not just delaying holidays but cancelling trips until the virus is contained.


On the local front, the country also faced its own challenges with respect to the virus; the first recorded case of the virus occurred this month although it was well contained. The revenue problem faced by the country was exacerbated due to the drastic drop in oil prices. The nation's foreign reserves continued its downward trend by shedding 4.5% to $36.30 billion. With the impact the coronavirus is having on the oil markets, it is hard to imagine a scenario that could reverse this trend given that the nation depends on crude oil for 60% of fiscal revenue and 90% of forex inflows according to statements made by the Central Bank Governor.


The Macro Economy

GDP Growth & Oil Production The country posted its highest annual GDP growth rate in 4 years as output expansion came in at 2.27% in the year 2019 versus 1.91% posted in 2018. This growth - although sluggish - projects some resilience in some sectors of the economy despite soft economic conditions. The Nigerian economy grew 2.55% Y-o-Y in the fourth quarter of 2019 from 2.38% in the fourth quarter of 2018. The Full Year 2019 number beat the IMF's GDP growth expectation of 2.10%. Growth in the economy was largely driven by the non-oil sector as it expanded by 2.36% in the fourth quarter of 2019, up by 0.44% from the fourth quarter of 2018. The oil sector increased its contribution to total GDP to 8.78% in 2019 from 7.06% in 2018.  The bulk of the growth in the economy was driven by the non-oil sector as it expanded by 2.36% in Q4'19, up by 0.44% from Q4'18.

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Headline inflation maintained its upward trend in January, inching up by 15 bps as the border remains closed. The Consumer Price Index (CPI) which measures inflation rose by 12.13% YoY, marking its  5th consecutive rise, further away from the CBN's goal of a single digit inflation number. On a month-on-month basis, the Headline index was up by 0.87%, 2 bps higher than December's rate of 0.85%.

 Core Inflation increased marginally at 9.35% YoY, 2 bps higher than 9.33%in Decemeber 2019. Food inflation, on the other hand, grew by 14.85% YoY, an 18 bps increase from 14.67% in December 2019. It appears that the border closure coupled with escalating conflicts in the North East and other areas will continue to drive headline inflation higher.

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Capital Importation and Foreign Exchange Reserves

In a negative turn of events, the CBN took back its position as the leading source of FX inflows on the I&E FX Window in the month of February 2020 as foreign portfolio inflows declined significantly. Total inflows into the I&E FX Window declined by 18.8% in February 2020 to $2.6 billion with CBN inflows accounting for 48.1% of the total from 12.1% in January. On the other hand, foreign portfolio inflow into the window accounted for 31.8% of total inflow in the month of February 2020 from 68.9% in the previous month. 


The resumed defense of the Naira on the I&E FX Window by the CBN further drained Nigeria's foreign exchange reserves by 4.5% to $36.30 billion by the end of February 2020. Increased concerns over the economic fallout from the spreading coronavirus spurred foreign exchange outflow on the I&E FX Window prompting the intervention of the CBN at the window in a bid to stabilize the Naira.

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Purchasing Managers' Indices

In the month of February, growth in the PMI indices slowed as they did in the previous month albeit at a lower rate. Regardless, the indices still indicated a general expansion in the economy. The Manufacturing PMI shed 0.90 points to 58.3 index points marking an expansion in the manufacturing sector for the 35th consecutive month. Overall, 12 subsectors out of 14 subsectors reported growth in the review period, leaving only 2 subsectors (Primary metals and Printing & Related Support Activities) that declined.


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The Non-Manufacturing PMI was down by 1.00 point to 58.6 index points, pulled back by slow growth in Business activity, new orders, employment level and inventories. Out of the 17 surveyed subsectors, 16 subsectors recorded growth with only 1 subsector declining.


Financial Markets

Fixed Income Market

The Fixed income market maintained its bullish momentum in February 2020. Average monthly yields for the benchmark securities monitored declined across all maturities on a month-on-month basis, with average yields of the sovereign bonds with 3year, 5-year, 10-year and 20-year maturities declining by 134 bps, 95 bps 56 bps and 45 bps, respectively.

 The Bond market started the month on a relatively quiet note, with minimal volumes traded as market participants traded with a cautious approach due to the continuous and anticipated CRR debit.

 The Bond auction - which held on the 19th of February 2020 - closed relatively strong with a bid-tocover ratio of 2.8x and stop rates for the 5-year, 10-year and 30-year printing at 8.75%, 10.70% and 12.15% respectively. These are significantly lower than those seen in the previous auctions. Activity in the Bond market improved significantly after the bond auction with demand seen across board as the unmet demand at the auction coupled with the liquidity improvement spurred a bullish bias in the market. However, after the fallout from the OPEC+ meeting, yields increased significantly as oil prices nose-dived.

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Foreign Exchange Market 

The Naira depreciated slightly in the month of February 2020 at the I&E FX Window as the average exchange rate of the Naira to a unit of the Dollar rose by 0.44% from N363.18 in January 2020 to N364.79. Total monthly turnover on the I&E FX Window also increased in the month of February 2020 as it grew by 24.5% from $6.544 billion in January 2020 to $8.150 billion. With the declining external reserves and the global risk off sentiment, the decline in the value of the Naira during the month and the increase in the turnover on the I&E FX Window were not surprising.

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Equities Market

February was quite an abysmal month for the local bourse as all the gains realized at the start of year were completely wiped out by the month's end. The year started with the Nigerian Stock Exchange poised to receive more traction as local demand continued its build-up, given the struggle to find alternative high yielding instruments to replace OMO bills. However, the Covid-19 epidemic which originated in China and quickly transformed into a pandemic, turned sentiments sour in global markets with no exception to Nigeria. Brent crude's depressing price coupled with the CBN's spontaneous cash reserve debits spooked market participants, creating an environment for more offshore selloffs. The local bourse, which initially started the year as the topmost performing exchange, lost its rank due to the global risk-off sentiments pervading the market.

 The release of 2019 audited full year results had little or no impact on the performance of the market as focus remained on the spread of Covid-19. The Morgan Stanley Capital International (MSCI) concluded its February 2020 index review, adding BUACEMENT to the MSCI Frontier Market index with no other changes. The 3rd largest cement maker in Nigeria enjoyed some buying sentiments on the back of this.


 The month ended with Nigeria announcing its first Coronavirus case in Lagos, which further fueled the already existing negative sentiment in the market as local investors also joined the bandwagon of aggressive sellers. The benchmark ASI was down 9.11% month-on-month, worst monthly decline in four years while year to date performance settled at negative 2.33%. Net foreign flow into the equities market for January 2019 printed negative at N22.68 billion, with foreign transactions only accounting for 20% of total transactions executed on the local bourse.

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Our Expectations For The Coming Months

With Covid-19 now a global pandemic, the global growth outlook does not look rosy. Nigeria, in particular, has not been able to grow at an appreciable pace, and the weakness in the global economy is sure to take a toll on 2020 growth projections. Key macroeconomic variables, such as the benchmark oil price, are already in jeopardy.


We expect food inflation to drive a higher inflation rate as the border closure continues to pressure the headline number. In addition, the country is currently in the land preparation season, with the harvest season expected in the second half of the year.


We expect capital importation to be pressured next month as concerns over the economic fallout from the spreading coronavirus continued to dampen foreign investors sentiment.


We maintain our view on the PMI indices to trend marginally lower in Q1 2020 as we are yet to see any significant improvement in economic activity.


We expect the bond market to reverse its bullish trend in March as participants trade on a cautious note on the back of concerns around the Coronavirus pandemic coupled with declining oil prices. 


We expect the performance of the equities market to continue to dwindle with the alarming spread of the Covid-19 virus.  However, we still anticipate bargain hunting to kick in occasionally.


We expect the naira to be pressure in coming months as the external reserves sustains its downward trajectory. Nevertheless, A possible issuance of Nigeria Eurobond could provide support to the naira in near term.

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  5. Weekly Economic and Financial Commentary - Week Ended Mar 06, 2020
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  7. FPI Repatriation Surged in February 2020 Amidst Decline in Foreign Inflows - NOVA
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  9. Weekly Economic and Financial Commentary - Week Ended Feb 28, 2020
  10. Another Underwhelming FAAC Distribution In February 2020
  11. Q4 Real GDP Expands at a Faster Pace of 2.55%; FY'19: 2.27%
  12. Nigeria's GDP Grew By 2.55% in Real Terms in Q4 2019 and 2.27% in Full Year 2019
  13. Weekly Economic and Financial Commentary - Week Ended Feb 21, 2020
  14. Headline Inflation Crosses The 12% Threshold
  15. Headline Inflation Increases By 12.13% YoY In January 2020; 0.15% Higher Than December 2019 Rate

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