| Nigeria Economy |    1346 VIEWS  |
| Nigeria Economy | |
| 1346 VIEWS | |
 |
Monday, August 10, 2020 / 02:49 PM / By Comercio Partners
Asset Mgt / Header Image Credit: The Mirror
Report Summary
The Financial Markets
Our Expectation for the Coming Months
Equities, Oil, And U.S.-China Relations Make
A Comeback
There are now over 3 million known
coronavirus cases in the U.S. as more states reported record number of new
infections. Certain states are considering reintroducing some form of lockdown
after massive 24-hour spikes. Consequently, in a move that was largely
expected, the U.S. Federal Reserve held interest rates steady, a decision that
was based on the lukewarm outlook on the coronavirus ravaged economy. Besides
leaving rates unchanged, the Federal Open Market Committee (FOMC) expressed its
commitment to maintain its bond purchases and array of lending and liquidity
programs associated with the virus response which include dollar liquidity
swaps and temporary repo operations through March 2021. The swap lines were
established as a response to the pandemic to keep U.S. dollars flowing to
entities including global central banks in need of the currency. While the FOMC
did not indicate under what conditions it would take to change the rates, most
market participants are of the opinion that there would be no rate increases
until at least 2024 given the tepid outlook of the economy and the prospects of
ultra-low inflation (U.S. inflation is currently at 0.5%, a far cry from the 2%
Fed target). U.S. stocks rose after the Fed signaled it would continue to
provide stimulus amid the pandemic. Fed Chairman, Jay Powell, has continued to
rule out negative rates for the time being in favor of more aggressive forward
guidance. Some Fed officials have suggested that a forward guidance tactic
could be a pledge to not tighten policy until the 2% inflation target is
reached.
In the wake of the coronavirus pandemic, a
new crisis appears to be developing, one of a financial nature. In the first 7
months of 2020, corporate debt has grown by $1 trillion. This represents a 12%
increase, up from 82 last year, bringing global corporate debt to $9.3
trillion. In the years prior to the pandemic, corporate debt was mainly fueled
by mergers and acquisitions, share buybacks and dividends. This year however,
the increase in corporate debt was largely driven by the effects of the
coronavirus pandemic. As at July 13", based on a survey of 900 global
corporations, U.S. companies led the world in corporate debt coming in at $3.9
trillion; Germany came in a distant second at $762 billion. While lending
markets were virtually closed in March as the virus ravaged society, the
intervention of the Fed in the corporate debt market helped fuel the market,
including high yield debt issues from firms with lower credit ratings.
The relationship between China and the United
States continues to deteriorate. President Trump ended Hong Kong's special
status in a bid to punish the Chinese government. He also ordered the closure
of the Chinese consulate in the city of Houston amid accusations of spying. In
retaliation, the Chinese government ordered the shutdown of the American
Consulate in the city of Chengdu. The abrupt order given by the American
government was called an "unprecedented escalation". U.S.- China ties have
worsened sharply this year over issues ranging from the coronavirus and
telecoms- gear maker Huawei to China's territorial claims in the South China
Sea and clampdown on Hong Kong.
On the home-front, at the Monetary Policy
Committee meeting, the Apex Bank maintained the status quo keeping the Monetary
Policy Rate at 12.50%, the Cash Reserve Ratio at 27.5%, the liquidity ratio at
30% and the asymmetric corridor at +200/-500 bps. The Apex Bank Governor,
Godwin Emefiele, explained that the CBN maintained the status quo to evaluate
the effectiveness of the 100bps cut that occurred in May.
Additionally, the Federal Government has
lifted the ban on interstate travel and local flights have resumed. In
addition, arrangements would be made for graduating students in Primary 6, JS3
and SS3 to resume and prepare for examinations with the rest of the student
body joining them in the coming month while observing all safety protocols.
The Macro Economy
GDP Growth & Oil Production
GDP Growth & Oil Production According to
data from OPEC's direct sources, Nigeria's oil production for the month of June
stood at 1.41 mbpd, a 1.7% decline over the 1.44 mbpd recorded in the month of
May. On a quarter on quarter basis, Nigeria's average oil production declined
by 13.9% to 1.52 mbpd. Recall that Nigeria was among the countries that
produced beyond their agreed quota in the 9.7 mbpd cut instituted by the OPEC+
in May. Nigeria was only able to achieve a 19% compliance rate. However, at the
last OPEC+ meeting, Nigeria and other over-producing countries were compelled
to cut production by 400,000 barrels.
OPEC and allies such as Russia agreed in a
meeting held in the month of July to ease record oil supply curbs from August.
OPEC+ has been cutting output since May by 9.7 million barrels per day, or 10%
of global supply, after the virus destroyed a third of global demand. From
August, cuts will officially taper to 7.7 million bpd until December. However,
fears of a second wave of coronavirus are weighing heavily on the market and
OPEC+ said that "a second strong wave" could deepen the hit to demand to 11
million bpd this year. On a week-on-week basis, Brent futures prices barely
moved as it gained 1% to $43.13/barrel, however on the day of the OPEC+
meeting, Brent futures jumped as high as $43.79.
Inflation
Nigerian headline inflation accelerated for
the 10th straight month in June 2020 as restrictions on access to foreign
exchange and continued border closures drove up prices - it was up by 16 bps.
The Consumer Price Index (CPI) which measures inflation maintained its uptick
as headline inflation rose to 12.56% YoY, from 12.40% in May. The uptick
largely reflects the increase in both the food and core components, which rose
to 15.18% and 10.13% in June 2020 from 15.04% and 10.12% in May 2020,
respectively. On a month-on-month basis, the Headline index was up by 1.21%, 4
bps higher than the 1.17% recorded in May.
The food index, which accounts for more than
half of the inflation basket and the main driver behind the surge in inflation,
rose 15.18%, the highest since March 2018, which represents a 14-bps increase
from 15.04% in May 2020.
The Central Bank of Nigeria extended foreign
exchange restriction to the importation of maize/corn, bringing the number of
items on the restricted list to 44. The Apex Bank explained that the forex
restriction on maize was aimed at increasing local production of the commodity
while stimulating economic recovery, safeguarding rural livelihoods and
increasing jobs.
Capital Importation and Foreign Exchange
Reserves
In the month of July, the total foreign
capital inflow into the Nigerian economy through the I&E FX Window improved
significantly by 50% to $575.4 million from $383 million driven by significant
increases in inflows from FPls (69%) and inflows from other local sources apart
from the CBN (61%) as inflow from the Apex bank remained meager. However, total
inflow through the window remained significantly depressed relative to the
average monthly inflow of $3.68 billion recorded in Q1 2020 before the effects
of the coronavirus pandemic weighed in. Foreign Portfolio Investments (FPls)
inflows rebounded after five consecutive months of decline as foreign investors
seemed to have regained slight confidence amid the coronavirus pandemic.
The 30-day moving average of Nigeria's
foreign exchange reserves declined for the second consecutive month in June
2020 as the external reserves declined by 0.9% to $35.88 billion from $36.20
billion.
Purchasing Managers' Indices
Purchasing Managers' Indices Expectedly, the Manufacturing
PMI in the month of July stood at 44.9 index points, indicating a contraction
in the manufacturing sector for the third consecutive month, although the
metric indicated an improvement relative to its level in the previous month. Of
the 14 surveyed subsectors, only the transportation equipment subsector
reported growth (above 50% threshold) in the review month, while non-metallic
mineral products sector reported no change. The remaining 12 subsectors
reported contraction.
The composite PMI for the non-manufacturing
sector stood at 43.3 points in July 2020 indicating a contraction for the
fourth consecutive month, but similar to the manufacturing PMI, an improvement
over the previous month. Specifically, a month-on-month analysis of the movement
in the sub-indices indicated that non-manufacturing economic activities
significantly improved in July 2020 as it rose from 35.7% in June 2020 to
43.3%in July 2020. Of the 17 surveyed subsectors, 2 subsectors - arts,
entertainment and recreation, and transportation and warehousing - reported
growth (above 50% threshold) in the review month while the other 15 subsectors
reported declines.
Financial Markets
Fixed Income Market
The bullish trend in the Fixed income market
strengthened further in the month of July with yields across all maturities
trading at historically low levels. Monthly yields for the benchmark securities
monitored declined across all maturities on a month-on-month basis, with
average yields on the sovereign bonds with 3- year, 5-year, 10-year and 20-year
maturities declining by 176 bps, 320 bps, 192 bps and 110 bps, respectively.
The Bond market maintained its post auction
rally at the beginning of the month as demand was witnessed across board,
particularly on the long maturities albeit on a less aggressive note. However,
towards the end of the month, the bullish momentum picked up further as the
unmet bid at the auction filtered into the secondary market.
The Bond auction held on 22"° July 2020
closed relatively strong with a bid to cover of 2.6x and stop rates printing as
follows; 6-year, 15-year, 25-year, and 30-year at 6.00%, 9.50%, 9.80% and 9.95%
respectively.
The MPC meeting was also held on 22nd July
2020. The Central Bank of Nigeria left its benchmark interest rate unchanged at
12.5% as policymakers said that the previous rate cut was having a positive
impact as credit growth had increased significantly in the economy.
Foreign Exchange Market
For the month of July, the Naira depreciated
at the I&E FX Window as the average exchange rate of the currency to a unit
of the Dollar rose by 0.28% to 387.48 in July. Total I&E inflows for the
month stood at $575 million compared to $384 million recorded last month.
Inflows from FPls advanced by 69% month-on- month to $64 million in July from
$38 million. However, total monthly turnover slowed by 5.5% to $937 million.
Other local sources remain the biggest contributor to the I&E window,
accounting for 80% of total inflows through the window. The Apex bank has not
indicated any intention to intensify support at the window.
Equities Market
The first month in the 3'¢ quarter of the
year saw the equity market sustain the lull seen in the previous month. The
trickle of half year results did not do much to lift the sour mood in the local
bourse. Lafarge recorded a 2.25% gain in H1 2020 revenue compared to Hi 2019.
The company's Profit after tax was significantly up by 158.96% to N23 billion
as the ticker continues to enjoy the benefit of having deleveraged its balance
sheet. FBN Holdings, the parent company of First Bank, equally posted impressive
results, growing its topline by 5.82% while growing profit after tax by 56.33%
to N49 billion. The Oil & gas (-13.30% MoM) and consumer (-8.80% MoM)
sectors suffered huge declines as investors reacted to the non-impressive
results released. Tickers in these sectors continue to battle with challenges
instigated by the Covid-19 pandemic and low oil prices. Activity in the local
bourse remains subdued though there has been decent demand for tech and
industrial names.
FX repatriation remains an issue for foreign
portfolio managers who had to adopt unorthodox means to pull out funds. They
exit some positions by buying and selling fungible stocks though volumes and
value traded are not significant.
The NSE ASI ended the month of July on a
positive note, gaining 0.88% mom at 24,693.73 with a negative year-to-date
return of 8.00%.
Our Expectations for The Coming Months
The decision by OPEC+ to ease its production
cuts by 2 mbpd indicates that on the supply side, oil appears to be
stabilizing. However, the recent spike in coronavirus cases and likelihood of
more cities shutting down again could exert more downward pressure on the price
of oil. Inflation in Nigeria has been above the 9% upper limit of the central
bank's target band for five years and will likely continue to accelerate as
border closures, initially ordered in August 2019 to curb smuggling of rice and
other products, remain in place. The central bank's move to end official
foreign- exchange supply for corn imports to boost local production could boost
the inflation numbers.
The improvement seen in both the
Manufacturing and Non-manufacturing sectors, albeit at a slower rate can be
attributed to the continued recovery after the disruption caused by the
coronavirus pandemic. The growth cycle continues for the second straight month
after three prior months of COVID-19 disruptions. Demand and consumption
continue to drive expansion growth, with inputs remaining at parity with supply
and demand. We expect to see stifled growth within this space until the
domestic and global economy reopens fully.
We expect the bullish trend in the fixed
income market to ease this month on the back of the sharp decline in yields.
Nevertheless, we expect the paucity of instrument coupled with increased
liquidity to continues to provide support for yields in near term.
We expect foreign inflows to remain at
current levels whilst anticipating the World Bank's decision regarding its $1.5
billion loan that should have been decided late July. We expect foreign inflow
and Foreign Exchange Reserves to improve in this month on the back of the
anticipated World Bank $1.5 billion loan facility.
The coming months will be characterized by short periods of bargain hunting and profit taking in the equities market as the result season is almost over. Factors that could drive activity in the market include progress in tackling the coronavirus globally and FX repatriation.
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