Comercio Partners Nigeria Macroeconomic and Markets Report - January 2020


Tuesday, February 11, 2020   /11:08 AM  / By Comercio Partners Asset Mgt / Header Image Credit: The Csspoint


Report Summary


The Macroeconomy

  • Nigeria's crude oil output declined for the second month in a row
  • Headline inflation ticked higher although core inflation overtook food inflation
  • Capital importation was more modest in January
  • Growth rate in the PMI index declines


The Financial Markets

  • Fixed income markets maintain their bullish momentum
  • The Naira gains marginally for the second consecutive month
  • Equities market began to lose steam by month end


Our Expectation for the Coming Months

  • Oil prices to struggle to remain buoyant in the face of the Coronavirus threat and weakening demand
  • Headline inflation is expected to increase further as the underlying of core and food inflation face significant upward pressure
  • Foreign flows will remain positive due to attractive OMO yields
  • PMI could trend marginally lower as economic activity remains weak
  • The Naira is expected to remain stable, albeit with continued pressure.


Dramatic Drone Attack, Trade War Eases And Brexit Takes Effect


The first month of 2020 was filled with numerous stimuli - at times conflicting - that should spur most individuals, businesses and governments to review their plans/resolutions for the year and see how sustainable they are.


The first major catalyst for 2020 was the drone attack conducted by the Americans on Iraqi soil against Iranian General Qassem Soleimani. The dramatic overnight drone strike heightened tensions that were already razor-thin between the U.S. and Iran. Israel put its army on high alert; other European allies of the U.S. including Britain, France and Germany voiced concerns about an escalation in tensions; the U.S. Embassy in Baghdad urged all American citizens to leave Iraq immediately. Following this, oil prices jumped immediately, reaching a peak of $68/barrel over concerns of a disruption in Middle East supply. U.S. stocks fell by 1% the day after the attack occurred. Safe-haven assets the world over saw significant gains; Gold shot to 7-year high; the Swiss franc rose against the dollar and the Japanese yen surged to a 3-month high; the US treasury yield curve flattened. However, as the weeks passed, tensions seemed to ease.


The Iranians struck a U.S. base in Iraq in a move that seemed more calculated towards saving face than egging the Americans on. The American president, Donald Trump, appeared to walk back some of his more aggressive Twitter statements in his remarks to the press. It became apparent that both sides did not seem eager to escalate tensions further. Following these developments, we saw more risk assets claw back some of the gains they lost as a result of the skirmish.


The second major catalyst is the de-escalation of the trade war between the United States and China. After close to two years of cut-throat negotiations and counter-negotiations, both parties signed a “phase one” deal. The deal contains commitments from China to purchase $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion more in farm products, and $38 billion in services. However, it will leave in place 25% tariffs on a $250-billion array of Chinese industrial goods and components used by U.S. manufacturers, and China's retaliatory tariffs on over $100 billion in U.S. goods. The U.S. S&P 500 index gained 1.22% in the week it was signed while the Chinese Shanghai Stock Exchange Composite Index barely moved on the news. However, there are still fears surrounding how feasible this new agreement is. The biggest ever purchase of U.S. agricultural produce from China was $29 billion; this new agreement is almost double that figure.


The third major catalyst was in the crystallization of Brexit. While Brexit has been known since December 12, the actual fate of the U.K. still hangs in the balance. The U.K. is still to negotiate a brand-new trade deal with the bloc and sort out immigration issues. they would also have to re-evaluate their current standing with long term allies such as the United States and seek new trade partners.


The final catalyst is the near worldwide spread of the deadly coronavirus, which originated in city of Wuhan in the Hubei Province in China. As at 10th February, the virus had infected over 40,000 people and claimed almost 900 lives. The virus has also managed to impact the financial markets and the broader economy, particularly in China. The World Health Organization (WHO) declared the outbreak a global public health emergency.


Internally, there were some monetary policy changes, though things remained mostly the same. The Monetary Policy Committee (MPC) raised the cash reserve ratio (CRR) from 22.5% to 27.5%. The 5% increase in the CRR is expected to take out c.₦800 billion from the system. However, the Federal Government recorded a fiscal deficit of ₦4.62tn in its operations in the 2019 fiscal period and the Central Bank Governor, Emefiele, has maintained the same body language regarding his insistence on not devaluing the naira despite the dwindling reserves.


The Macro Economy


GDP Growth & Oil Production

Nigeria's crude oil production slowed to 1.67 mbpd, representing a whopping 5% decline from the previous month according to data provided by OPEC. While the exact country production quota of the December 6 OPEC+ cuts is not public knowledge yet, the deep production cuts signals intent to keep within the prescribed quota.


Meanwhile, OPEC+ is calling for a further meeting. The purpose would be to either extend the current March 31 deadline for the agreement or deepen the cuts - a proposal not many states in the alliance will find attractive. This is in response to the havoc wreaked in the oil markets by the deadly coronavirus. 

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Headline inflation inched up 13 bps in December 2019 as the yuletide season kicked in. The Consumer Price Index (CPI) which measures inflation rose by 11.98% YoY in December, the 4th consecutive rise since the border closure in August 2019. However, on a month-on-month basis, the Headline index increased by 0.85% in December 2019, 0.17% lower than November's rate of 1.02%.

It is pertinent to note that core inflation grew at a faster pace than food inflation YoY at 9.33%, 34 bps higher than 8.99% in the previous month. Food inflation on the other hand, grew by 14.67% YoY, a 19 bps increase from 14.48% in November 2019. The border closure remains the key driver behind the high inflation rate recorded in the months of September through December (harvest period). However, Nigerian millers and poultry sellers report an invasion of smuggled rice and poultry towards the end of December. This could account for the slow pace at which food inflation rose seeing as on month-on-month basis, it increased by 0.97%, 28 bps less than the 1.25% recorded in November 2019.


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Capital Importation and Foreign Exchange Reserves

Inflow in the I&E FX Window started the year on a subdued note as total inflows into the Nigerian economy declined by 7.7% from $2.96 billion in the month of December 2019 to $3.19 billion in the month January 2020 despite the surge in inflows from FPIs. Foreign Portfolio Investment inflows grew by 213% from $651 million in December 2019 to $2.04 billion in January as yields remained attractive on the OMO papers. The decline in I&E FX Window was on the back of the significant drop in the intervention from the CBN (63.5% decline), and a 48.3% decrease in inflows from other local sources apart from the CBN in the month of January. The 30-day moving average of the external reserves continued its steady decline for the 8th consecutive month, shedding 1.5% from $38.60 billion in December 2019 to $38.01 in January 2020.


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Purchasing Managers' Indices

The PMI indices grew at a slower rate in January 2020 when compared to December 2019, though they still indicated an expansion in the economy. The Manufacturing PMI was down 1.60 points to settle at 59.2 index points which speaks to an expansion in the manufacturing sector for the 34th consecutive month. 11 subsectors out of 14 subsectors reported growth in the review period with 5 subsectors (Production level, new orders, supplier delivery time, employment level and raw materials inventories) growing at a slower rate.


The Non-Manufacturing PMI was equally down by 2.50 points to 59.6 index points. All the 17 surveyed subsectors for the index recorded growth with 4 subsectors (Business activity, new orders, employment level and inventories) growing at a slower rate.


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Financial Markets


Fixed Income Market

The fixed income market maintained its bullish trend in the new year as yields moved further south due to the paucity of investable securities. Average monthly yield on the 5-year sovereign bond declined the most, shedding 2.44 bps from 12.28% to 9.84%. In addition, average yield for the 3-year sovereign bond declined by 175 bps from 10.30% to 8.55%; average yield for the 10-year bond declined by 57 bps from 11.78% to 11.21%, while average yield for the 20-year bond declined by 55 bps from 12.03% to 11.48%.


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The Bond auction held on the 22nd of January 2020 closing relatively strong with a bid to cover of 4.03x and stop rates printing as follows; 5 year, 10 year and 30 year at 9.85%, 11.125% and 12.56% respectively, significantly lower than their levels in the previous auction.


All members of the monetary policy committee voted to maintain the MPR at 13.5%, while 9 out of 11 members voted to raise cash reserve ratio by 500bps from 22.5% to 27.5%. The liquidity ratio was maintained at 30%. The MPC stated that while LDR and OMO restriction pushed liquidity higher and the border closure boosted inflation, the increase in CRR should help curb the robust liquidity coming through from OMO maturities; the bulk of which cannot be reinvested in OMO bills due to restrictions placed on certain investors.


Foreign Exchange Market

The Naira appreciated slightly for the second consecutive month at the I&E FX Window with the average exchange rate of the Naira to a unit of the US Dollar declining by 0.11% from N363.57 in December 2019 to N363.18 in january 2020. Total monthly turnover on the I&E FX Window also increased in the month of December 2019 as it grew by 7.2% from $6.10 billion in December 2019 to $6.54 billion in january 2020.


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Equities Market

The local bourse started off the new year with the Santa rally filtering into the month of January. Local demand coupled with the influx of OMO maturities in the month drove momentum for the first few weeks in the Nigerian Equities market. This was mainly because local market participants struggled to find other high yielding instruments in a dwindling yield environment. The local bourse became the top performing exchange globally for the first few weeks in January with year to date returns hovering around 7% to 10%. The bullish run was however halted in the last week of January after a series of events; the Monetary Policy Committee concluded its first meeting in the year, deciding to raise the cash reserve ratio to 27.5% (from previous rate of 22.5%) while holding other policy parameters constant. Also, the global risk-off sentiment surrounding the Coronavirus epidemic in China finally caught up with the local bourse. These two events provided a catalyst for the selling pressure observed all through the last week in January. The banking tickers were the first to feel the brunt of the negative sentiment in the market as offshore investors aggressively sold down their positions. Amid the sell-off, local participants were also taking profit, pushing the local bourse further into the red.


NSE All Share Index

On the last day of the month, the benchmark ASI was at a 3-week low, with month-on-month and year to date performance at 7.46%. Net foreign flow into the equities market for December 2019 printed negative at N19.76 billion, slightly similar to November’s figure of N19.58billion.


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Our Expectations For The Coming Months

With the weak global demand forecast for oil in 2020, oil prices would struggle to remain buoyant during the year. However, with the outbreak of the new global pandemic - the coronavirus - the slope of the downward trajectory appears to have steepened. Certain industrial cities of the world’s largest and most important purchaser of oil - China - have been quarantined. With no known remedies to the virus available; weak global growth; significantly depressed demand and a bountiful supply—it may be a while before we see oil prices rebound.


Core inflation seems to have picked the baton from food inflation, increasing at a higher pace and approaching the double-digit region. The pick-up in Core inflation can be attributed to increased spending on clothing, transport and hairdressing which is typical in the yuletide season. Food inflation will remain pressured by the continued closure of the land borders, of which no date has been set for its reopening. The Nigerian Government insists that it will only reopen land borders when Niger and the Benin Republic have complied with the ECOWAS trade agreements.

We expect inflows from the foreign FPI to remain elevated as they remain drawn to attractive rates at the OMO market. however, we expect the external reserves to continue its downward trend on the back of declining crude oil prices.


We expect the PMI indices to trend marginally lower in Q1 2020 because even as the border closure continues to give it a boost, lack of significant improvement in economic activity might nullify this development.


We expect the yields in the Bond market to maintain its downward trajectory in February on the back anticipated liquidity inflows from the N606 billion bond maturity and N2.4 trillion OMO maturities.

Despite the decline the external reserves, the naira has remianed relatively stable due to the increased inflow from the foreign FPI taking advantage of the attractive OMO rates. We expect the CBN to continue to support the naira at current levels, by selling OMO bills to FPIs (Foreign Portfolio Investors).


We expect the equities market to bounce back from its downward trend as some anticipated audited full-year results filter into the market next month. The SEC changed the dynamics of reporting full-year results, giving listed companies the first 30 days in the year to post unaudited results with 90 days allowance to post the audited version. Companies that don’t release unaudited results have the first 60 days in the year to release their audited results. We also expect liquidity from upcoming OMO maturities to filter into the equities market.


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