16 , 2020 / 02:50 PM / by NOVA Merchant Bank Research / Header
Image Credit: NOVA Merchant Bank Research
The outbreak of Covid-19 has reshaped the outlook
across advanced, emerging and developing economies. Beyond any doubt, the
impact will reverberate across economies, irrespective of the level of fiscal
stimulus or monetary policy adopted to cushion the impact of the associated
slowdown in economic activities. Particularly in Nigeria, the countries fragile
fiscal and external positions have once again been exposed by the crash in
crude oil prices, with the impact on the real sector requiring a material
intervention which the fiscal and monetary authorities may struggle to provide.
The NOVA H2 2020 Economic Outlook communicates our
understanding of global and domestic developments. It also clearly delineates
our expectations of development in the Global Crude Oil Market, Domestic
Economic Growth, Balance of Payment, Currency and Foreign Exchange Flows,
Consumer Prices, Monetary Policy, Fiscal Policy and the Fixed Income Market.
See below summary of
- Global Economy: Notwithstanding recent slower rate of contraction in
manufacturing and services PMI, the shock occasioned by Covid-19 is expected to
depress economic activities for the rest of the year. GDP in Advanced economies
is projected to contract 8.0% YoY in 2020 from 1.7% growth in 2019. Compared to
the 2009 financial crisis wherein emerging and developing economies showed
resilience, the Covid-19 shock is expected to reverberate across most emerging
and developing markets. GDP in emerging and developing economies is expected to
contract 3.0% YoY from 3.7% growth in 2019.
- Crude Oil: While the global crude oil market is forecast to record
an average deficit of 3.3mbpd in H2 compared to average surplus of 6.7mbpd in
H1, the high inventory build-up occasioned by the cumulative market surplus of
40.2mbpd over H1 2020 will keep crude oil prices range bound over H2 at
$41.5/barrel compared to year to date average of $39.9/barrel and Q2 low of
- Nigerian Economy: We expect the Nigerian economy to contract by
2.9% YoY over 2020 compared to 2.1% YoY growth in 2019. We believe compliance
to the recent OPEC+ agreement has become necessary though not convenient.
Compared to the stipulated cut of 1.41mbpd, we estimate Nigeria average crude
oil production of 1.57mbpd which combined with condensates should average
1.85mbpd compared to Q1 20 average of 2.07mbpd. Even with our expectation of
the complete opening of the economy at the end of July with strict rules on
social distancing over the rest of the year, the return to full-fledged
economic activities might remain slow as complete containment without major
escalation of Covid-19 could extend until the end of Q3 2020.
- Balance of Payment: Over 2020, the depressed global crude oil
prices amidst pressured demand pose major risks for export and the trade
balance. Beyond CBN actions, the spread of Covid-19 across major economies will
have a major impact on travel and related services for the rest of the year.
Also, given the expected lower return on investment and feedthrough of the
global shock on individual income, we model lower income deficit and workers' remittances respectively. Overall, we forecast current account deficit of $16.6
billion on our base case. On the financial account, with the current risk-off
across emerging markets amidst depressed yields in local short-term debt
securities, we expect further exodus of FPI with a negative financing of $3.4
billion and overall balance of negative $19.9 billion compared to 2019 overall
negative balance of $5.5 billion.
- Currency and Foreign Exchange Flows: We believe there is a strong
risk of further haemorrhaging in the gross external reserves over H2 2020.
Assuming resumption of CBN intervention sales at the IEW starting August with
25% repatriation of backlog and maturing offshore holdings between August and
December, even with lower imports and services demand the gross reserve could
close the year at $31.8 billion on our best case scenario. Our base scenario
assumes that if 50% of the backlog and maturing offshore holdings are
repatriated between August and December, the gross external reserves could end
the year at $29.0 billion. With limited inflows and reduced avenues to control
outflows, recent unification of rates will have limited impact on the reserves.
We believe an outright floating of the exchange rate with intermittent
intervention to avoid unnecessary speculative attacks will have more meaningful
impact. Based on our purchasing power parity model (PPP), the fundamental value
of naira lies between N427/$ and $430/$ (~11% overvaluation from current NAFEX
rate of N387.2/$ and an undervaluation from current parallel market rate of
- Consumer Prices: The pressure on consumer prices over H2 will
largely reflect the impact of the breakup in supply chains and volatility
occasioned by the oscillating PMS price. While the impact of the border closure
is expected to largely fade off in August, recent events have overtaking its
impact. The combined effect of Naira depreciation and expected volatility
occasioned by the market reflective PMS price will further add to the pressure
on the core index over the rest of the year. Adjusting our model for the
above-mentioned pressures, we arrived at a base average inflation rate of 12.3%
in 2020, compared to average of 11.41% in 2019.
- Monetary Policy: Beyond doubt, the LDR policy has proven to be
more potent in driving real sector lending and at the same time moderating the
cost of borrowing due to the increased competition for corporate names.
However, the distribution of loans continues to favor largely the prime sectors
and lenders with limited transmission to the CBN's preferred sectors. Going by
feedback across the banking system, banks are concerned about liquidity and
credit risk given current conditions. Due to the impact unusual debits have had
on system liquidity and overall interbank rates, we believe a gradual refund of
excess CRR will have a more positive impact on rates in the interim, but actual
lending by DMBs will require a fundamental change in the economic environment.
Over the second half of the year, we expect the CBN to focus on reflating the
banking system and to adopt more efficient measures around the LDR to further
support credit creation, especially to consumption stimulating sectors.
However, we see possible transmission of any further cut of the MPR to CBN
development programs and intervention initiatives.
- Fiscal Policy: Overlaying lower oil revenue (from lower prices and
compliance to OPEC cut), we estimate total 2020 FGN revenue of N3.2 trillion
(-22% YoY). We believe the implementation of the 2020 budget is largely
doubtful with the scapegoat being the capital expenditure. With our base case
scenario assuming budget implementation of 80% (5-year average: 84.4%), we
estimate budget deficit could range between N4.5 trillion and N5.5 trillion in
2020. While the IMF loan of $3.4 billion and the $150 million drawdown from NSIA
will unlock about N1.4 trillion for the federation, the 2020 budget will still
have a financing gap of N3.2 trillion. To fund the gap, our preferred scenario
assumes FG secures the remaining external funding of $2.1 billion and no
proceeds from privatization. It models financing half of the excess amount of
N2.4 trillion partly by CBN and domestic borrowings.
- Fixed Income and Strategy: With the paucity of dollars for
repatriation and limited avenue to attract FPI funds, the apex bank might not
be aggressive in raising OMO rates from current levels and could be more
inclined to lower it further. On the part of the FGN, to meet up with the
planned domestic borrowing, the FG will have to issue a total of N2.8 trillion
between July and December, which compared to maturing NTB of N1.6 trillion and
non-bank corporates estimated OMO maturity (between July and October) of N1.2
trillion suggest excess liquidity of N680 billion. With PFAs and individuals
largely dominating NTB and Bond auctions, we see the liquidity pressure further
gravitating NTB and Bond stop rates lower from current levels of 2.5% and 10.4%
on average respectively. In all, we expect CBN to continue to pressure banks to
drive OMO stop rates modestly lower, with 1-year stop rate likely to fall lower
within the range of 6.5% - 7.5%. Bond rates could fall at the next auction due
to demand pressure to 10% with a gradual convergence to OMO single digit rates.
NTB 1-year stop rate could gravitate between 2% - 3%.
Download Full PDF Report Here
- NSR H2 2020
(6) - Fiscal - New Budget, Same Old Problems
- NSR H2 2020
(5) - Currency - Calm Before a Storm?
- NSR H2 2020
(4) - Global Recession - The Pandemic Edition
- NSR H2 2020
(3) - MEA Region - A Period of Gloom and Doom
- NSR H2 2020
(2) - Balance of Payment - A Dire Outlook
- NSR H2 2020
(1) - Crude Oil - Cast in COVID-19 Shadows
Announces Completion of a Periodic Review of Ratings of Union Bank of
Announces Completion of a Periodic Review of Ratings of Sterling Bank Plc
Announces Completion of a Periodic Review of Ratings of Access Bank Plc
Announces Completion of a Periodic Review of Ratings of Fidelity Bank Plc
Announces Completion of a Periodic Review of Ratings of FCMB Limited
Announces Completion of a Periodic Review of Ratings of First Bank of
Announces Completion of a Periodic Review of Ratings of Zenith Bank Plc
Announces Completion of a Periodic Review of Ratings of Guaranty Trust
Announces Completion of a Periodic Review of Ratings of UBA Plc
Announces Completion of a Periodic Review of Ratings of Nigeria
- Nigeria H2
2020 Outlook: Up in the Air
Announces Completion of a Periodic Review of Ratings of Interswitch
Announces Completion of a Periodic Review of Ratings of Bank of Industry
- Nigeria H2
2020 Outlook - The Viral Shock