Nigeria: 2020 Mid-Year Outlook - Into the Night

Tuesday, July 21, 2020 / 11:34 AM / by CardinalStone Research / Header Image Credit: CardinalStone Research            

Executive Summary

The twin evils of COVID-19 and oil price shock are likely to cause a deterioration in the domestic economy in 2020, with a potential spillover into the first few quarters of 2021. The viral spread came at a time when budgetary space to absorb shocks is limited by weak oil prices. COVID-19 threatens to overwhelm domestic healthcare infrastructure, upend livelihoods, cripple social conditions, and distort business activities. So far, Nigeria's reaction has mostly been in sync with IMF's suggested response to the viral spread and its fallout even though the scale of the measures adopted appears insufficient to prevent significant distortions to domestic macro variables in the current year. 

Monetary policy bias could remain largely dovish, with administrative measures set to leave system liquidity at elevated levels and yields mostly lower in Q3'20. We expect yields to slowly reverse trajectory in Q4'20 due to a halt in OMO maturities that cannot be rolled-over as a fallout of CBN's OMO restrictions. Thus, investors are likely to stay short in the fixed income space. The government could also use some domestic borrowings to augment any budgetary shortfall that may arise after concessionary funding options have been exhausted. 

In the equities market, we expect investors to take advantage of bargain hunting opportunities in fundamentally strong names and hold for the long term. Investors could gravitate towards stocks with track records of high profitability, low financial leverage, and less margin volatility amidst the current macro vulnerabilities.

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