Wednesday, February 20 2019 09:22 AM / Coronation Research
Last Saturday’s Presidential and National Assembly elections were postponed, a few hours before they were to start. Elections in 2011 and 2015 were also postponed (though not at such short notice) so the popular reaction has been muted. Here, we discuss the relationship between Nigeria’s general elections, stock market rallies and interest rates.
Last week, the NIFEX rate remained stable at NGN358.79/US$1. The NAFEX rate also closed stable at NGN361.54/US$1. The US dollar in the NAFEX market trades at a 0.77% premium to the NIFEX rate. We expect this nearly-unified exchange rate regime to further improve liquidity in the NAFEX market, which provides the FX quote featured on Bloomberg.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 9bps to 14.64%, and at 3 years fell by 49bps to 14.53%. The yield on a 364-day T-bill fell by 19bps to 17.34%. The yield on a T-bill with 3 months to maturity decreased by 7bps to 12.22%.
In the bond market yields contracted across all maturities, except at the 7-yr duration. It was also noticeable that the inflation print for January, at 11.37% y/y (December 11.44% y/y), did not show a spike from pre-election spending as some had feared. Yield compression at the longer end of the bond curve suggests that investors are pricing in a decline in short-term rates soon.
The price of Brent rose by 6.68% last week to US$66.25/bbl. The average price, year-to-date, is US$61.13/bbl, 14.73% lower than the average of US$71.69/bbl in 2018, but 11.66% higher than the US$54.75/bbl average seen in 2017.
The oil market was bullish last week, pushing Brent to the highest level since the start of the year. OPEC cuts have been deeper than expected. OPEC production fell to 30.8 million barrels per day (mbpd) in January from 31.6 mbpd in December 2018. Although these are early days, the oil price story is a little better than our forecast of an average US$58/bbl for the year. See Coronation Research: Year Ahead 2019, A tale of two halves, 15 January.
The Nigerian Stock Exchange (NSE) All-Share Index recorded a gain of 3.76% last week, taking the year-to-date return to 4.09%. Last week Oando (+20.00%), Unilever Nigeria (+17.57%) and Cadbury Nigeria (+15.00%) closed positive, while MRS (-9.94%) and Sterling Bank (-6.00%) fell.
We expect a quiet tone in the start of this week’s trading session as investors take a cautious stance following the postponement of general elections.
Many Nigerians woke up on Saturday 16 February, to the news of the rescheduling of the 2019 General Elections by the Independent National Electoral Commission (INEC), previously scheduled for that day.
Nigeria’s Presidential and National Assembly elections are now scheduled for 23 February 2019, while the Governorship, State House of Assembly, and Federal Capital Territory (FCT) Area Council elections have been moved from 2 March to 9 March.
It will not be the first time that elections have been postponed in Nigeria, however, this decision by the electoral body, INEC, came as a surprise because the announcement to reschedule the elections was made a few hours before polling was due to start.
As we argue in Coronation Research: Year Ahead 2019, A tale of two halves, 15 January, recent history suggests that equity investors are cautious in the few months leading up to the elections, though with excitement shown during the month directly ahead of election day.
In 2011, the Nigerian Stock Exchange All-Share Index (NSE-ASI) shed 9.8% from the end of January, 2011 to election day in April.
As in 2011, the NSE-ASI also recorded losses in the months leading up to 2015’s elections (-27.3% in the six months to election day). On both occasions, there was no rally in the stock market after elections.
Election reschedule might halt the bulls
Equity investors’ caution was reflected in the money markets as the yield on a 364-day Treasury Bill inched up 235bps two days before the election was held in 2011, while a sharp increase was also experienced in 2015. On both occasions, however, yields declined steadily after the elections.
So far, February has been a good month for equities (NSE-ASI up 6.21% month-to-date as at Friday, 15 February), driven largely by demand on banking stocks by foreign investors. Some of the positive sentiment may be attributed to the US Fed’s decision to hold rates in its January 2019 Federal Open Market Committee (FOMC) meeting, and a slightly more positive outlook for oil prices recently.
However, it is possible that foreign investors will react negatively to recent political developments.
Economic Impact of the postponed elections
The rescheduling of the general elections will likely disrupt economic activities in various sectors, it is difficult to quantify the overall impact on economic output.
Considering the major contributors to GDP; Agriculture (25.83%), Trade (16.29%), Telecoms (9.73%), Manufacturing (8.75%), and Oil & Gas (8.50%), we argue that the recent postponement will likely have a small negative impact on Manufacturing, Trade, and Oil & Gas, while we do not think there will be a negative impact on Agriculture and Telecoms.
By our estimates, Manufacturing, Trade, Oil & Gas, and Transport, potentially the most negatively affected sectors, could lose approximately N129bn (US$359m) in output, assuming a complete shutdown in these sectors for a day. However, given the possible positive impact on sectors such as Hospitality, and Telecoms, we believe overall effect on GDP is negligible.