Three months after Moody’s and Fitch downgraded Nigeria’s sovereign ratings outlook to negative, S&P Global finally took the same action this week but also affirmed the ‘B/B’ long- and short-term sovereign credit ratings on Nigeria. The rating agency cited risks from further foreign exchange (FX) pressures amid declining FX reserves, weak economic growth and rising government debt.
The ratings downgrade is unsurprising given the material deterioration in Nigeria’s external position throughout 2019. This is expected to worsen in 2020, in part due to slowing global demand for commodities in the wake of the outbreak of ‘Coronavirus’ (COVID-19). External reserves at $36.2bn only provides 7.8 months of goods import cover from 8.8 months a year ago while Brent crude price has sharply moderated to $49.9/bbl., the lowest since 2017. Weaker oil prices and the flight of foreign capital to safer havens means there is poor prospect for reserves accretion.
The fiscal position of the FG is also expected to worsen, considering a budget benchmark of $57.0/bbl. The implication of lower oil prices would be an expansion in fiscal deficit beyond our projected ₦4.0tn which is 1.8x the FG’s forecast of ₦2.2tn. In the face of these challenges, the minister of finance, Zainab Ahmed, has hinted at a mid-term review of the budget. We suspect that the proposal would include an expansion in the FG’s borrowing given that the non-discretionary portion of the budget is high at 76.7%. Our usual concern about the high cost of debt service has eased due to the low-interest rate environment. However, the FG’s plan to borrow $22.8bn to finance infrastructure, which was approved by the National Assembly this week, poses grave risk to debt sustainability. While the debt would be granted by multilateral partners cheaply, there is outsized exposure to People’s Bank of China (PBOC) which lends without seeking complementary reforms. The aggressive nature of this borrowing is also concerning, given low revenues and high cost of debt service which already put debt sustainability at risk. While there is no clarity on the timeline of the borrowing, there is also little evidence that the debt binge would result in a significant boost to growth. We believe the FG is better placed collaborating with the private sector to bridge Nigeria’s infrastructure deficit. With weak revenues and unsustainable debt levels, the FG’s focus on transforming Nigeria’s infrastructure alone would leave the economy uncompetitive over the long-term due to the slow pace of progress.
Global Equities Market: Monetary Stimulus Supports Partial Recovery
The unrelenting spread of Coronavirus continued to rattle global markets this week, with the number of reported cases increasing 15.8% to 95,333 (as at Thursday) across 87 countries and territories from 47 last week (WHO Situation Report). In response to the growing risk to global economies, the Federal Reserve cut interest rate by 50bps to a range of 1% – 1.25%, the deepest cut since 2008. Performance across the developed market was mixed albeit negatively skewed. In the US, the S&P 500 and NASDAQ rose 2.4% and 2.0% w/w respectively. Likewise, Hong Kong’s Hang Seng index climbed 0.1% higher. Meanwhile, the UK’s FTSE All Share index dipped 1.8% w/w as the number of coronavirus cases increased to 115 and the first death was recorded. Similarly, Germany’s XETRA DAX and France’s CAC 40 indices declined 3.1% and 3.0% w/w respectively as the number of coronavirus victims rose while Japan’s Nikkei 225 closed 1.9% lower.
In the BRICS market, there was a mixed performance as 3 of 5 indices under our coverage trended southwards. Brazil’s Ibovespa index led laggards, down 6.2% while Russia’s RTS and India’s BSE Sens indices also lost 3.3% and 1.9% w/w respectively. On the flip side, China’s Shanghai Composite gained 5.4% w/w, supported by government’s stimulus and strategies to curtail the epidemic. In South-Africa, FTSE/JSE All Share rose 1.7% w/w despite the recession recorded in Q4:2019.
In Africa, the bearish performance continued as 4 of 6 markets under our coverage recorded losses. Mauritius’ SEMDEX emerged the top laggard, down 5.9% w/w while Egypt’s EGX30 trailed, falling 5.1% w/w. Likewise, Morocco’s Casablanca MASI and Ghana’s GSE Composite indices fell 4.1% and 1.1% w/w respectively. On the flip side, Kenya’s NSE 20 and Nigeria’s All Share Index gained 2.7% and 0.2% respectively. In Asia and the Middle East, performance was mixed albeit negatively skewed as 3 of 5 indices closed in the red w/w. UAE’s ADX General Index led laggards, down 5.3%, followed by Qatar’s DSM 20 and Saudi Arabia’s Tadawul ASI which declined 2.5% and 2.1% w/w respectively. On the flip side, Turkey’s BIST 100 index advanced 3.4% due to a cease fire in Northern Syria as a deal was struck by the presidents of Russia and Turkey. Finally, Thailand’s SET Index closed the week 1.8% higher.
Domestic Equities Market: Gain Resurfaces in the Local Bourse… ASI up 24bps w/w
The equities market opened the week on a negative note. However, it rebounded on the following trading session before recording successive gains on Wednesday and Thursday. Nonetheless, the market shed some of its gains on Friday, but ended the week on a green note. Consequently, the All-Share index recorded a gain of 0.2% w-o-w to 26,279.61 points, following price appreciation in UAC-PROP (+22.9%), UACN (+18.9%) and LAWUNION (+16.7%). Also, YTD loss stood at -2.1% while investors gained ₦37.4bn as market capitalisation rose to ₦13.7tn. Activity level advanced as average volume and value traded rose 17.3% and 7.2% to 362.7m units and ₦5.2bn respectively. The most actively traded stocks by volume were GUARANTY (277.4m units), ZENITH (210.9m units) and UBA (131.5m units) while GUARANTY (₦6.6bn), NESTLE (₦5.1bn) and ZENITH (₦4.1bn) led by value.
Sector performance was bullish as 4 of 6 indices under our coverage gained. The Banking (+3.8%) and AFR-ICT (+1.8%) indices led gainers on the back of appreciation in FBNH (+13.8%), WEMABANK (+13.0%) and MTNN (+4.5%). Similarly, LAWUNION (+16.7%) and MOBIL (+10.0%) drove gains in the Insurance (+1.4%) and Oil & Gas (+0.8%) indices. Conversely, the Consumer and Industrial Goods indices dipped 5.9% and 4.3% w/w respectively, owing to losses in UNILEVER (-13.3%), NESTLE (-10.0%) and WAPCO (-11.9%). Investor sentiment as measured by market breadth (advance/decline ratio) strengthened to 1.4x from the 0.1x recorded last week as 33 stocks gained against the 24 that declined while 87 tickers closed flat. UAC-PROP (+22.9%), UACN (+18.9%) and LAWUNION (+16.7%) led the top gainers while UNILEVER (-13.3%), WAPCO (-11.9%) and NESTLE (-10.0%) led decliners. We anticipate a mixed performance in the coming week as we expect both profit taking activities and bargain hunting to dominate trade.
Foreign Exchange Market: OPEC+ Pulls the Plug on Further Production Cuts
OPEC+ met this week with plans to cut oil production by an additional 1.5mb/d to support prices due to the sharp fall in oil demand prompted by COVID-19. However, OPEC failed to reach a deal as Russia opposed further cuts at the end of the meeting on Friday. The immediate reaction to the outcome of the meeting was a moderation in Brent crude price to a 3-year low of $45.6/bbl. On the domestic front, the external reserves fell 0.2% w/w to $36.2bn (5/3/2020). With reports of unrestrained production starting on April 1, we expect Nigeria to be hit hard by the fall in oil prices.
The CBN spot rate closed the week at ₦307/$1.00, depreciating 5kobo w/w from ₦306.95/$1.00 in the prior week. At the parallel market, naira traded flat at ₦360.0/$1.00. At the Investors’ & Exporters’ (I&E) Window, the NAFEX rate depreciated ₦1.0 to settle at ₦366.25/ $1.00. Activity level in I&E Window rose 14.4% to $3.0bn from $2.6bn recorded in the previous week.
The total value of open contracts of the naira at the FMDQ Securities Exchange (SE) FX Futures Contract Market advanced 2.2% ($235.2m) to $11.1bn. The FEB 2021 instrument (contract price: ₦367.00) received the highest subscription of $133.4m, taking total value to $968.8m as foreign investors maintained preference for the 1-year OMO instrument. On the other hand, the MAR 2020 instrument (contract price: ₦364.33) recorded sell-offs which reduced subscription by $4.8m to $1.2bn. We believe oil prices will remain pressured by waning demand as the virus continue to spread. We expect exchange rates to remain range-bound across different segments of the market in the meantime on the back of the apex bank’s intervention.
Money Market: Sustained Bearish Sentiment in the T-Bills Market
As system liquidity printed at ₦266.2bn at the start of the week, the OBB and OVN rates opened at 14.8% and 15.6% respectively, lower than last week’s close of 15.5% and 16.4%. By the close of the week, the OBB and OVN rates printed at 11.7% and 12.9% respectively as system liquidity settled at ₦406.1bn. The CBN conducted OMO auction worth ₦100.0bn on Thursday, below same day’s maturity. There was no demand for the short and medium term instruments, while the 362-day (Offer: ₦80.0bn; Subscription: ₦112.1bn; Sales: ₦110.5bn) instrument was oversubscribed with a bid-to-cover ratio of 1.4x at a marginal rate of 12.99% (down 1bps from last auction). There were sell-offs in the T-bills segment, resulting in a bearish performance in the secondary market as average rate advanced 40bps w/w to 4.2%. The 364-day instruments saw the most sell pressure with yields climbing 80bps. Similarly, rates on the 182- day instrument rose 40bps while the 91-day instrument closed flat. In the coming week, we expect maturities worth ₦1.0bn and ₦86.3m from OMO and T-bills markets to hit the system. As such, we see rates trending lower in the week ahead. Also, we expect the CBN to continue its liquidity mop-up via OMO sales.
Bonds Market: Sell Pressures Dominates Activity as COVID-19 Fears Mount
The domestic bonds market posted a negative performance this week as average yield across tenors advanced 100bps w/w to 10.2%. As expected, the market reacted negatively to the spread of the COVID-19 into Nigeria and weaker oil prices. Consequently, average yield appreciated on all trading days with the highest sell-offs recorded on Friday (+52bps). At the mid-end, bonds witnessed the most sell-offs, rising 126bps w-o-w in yields while the short-end bonds trailed closely, appreciating 104bps on average. Lastly, there were sell-offs on the long-end notes as yields advanced 52bps w/w. In the SSA Eurobonds segment, we saw a bearish performance across board with average yield climbing 23bps w/w. The SOUTH AFRICA 2022 instrument saw the most increase in yields (+415 bps w/w) as it approaches maturity (09/03/2020). All ZAMBIAN instruments (2022, 2024 and 2027) recorded sell-offs as their respective yields advanced 65bps, 38bps and 24bps w/w. Conversely, the KENYA 2030 and IVORY COAST 2022 led gainers, as yields declined 18bps w/w apiece.
For the African Corporate Eurobonds that we track, performance was positive as average yields declined 17bps w/w. The SIBANYE GOLD 2023 and ESKOM HOLDINGS 2021 instruments led the pack with yields declining 324bps and 59bps w/w respectively. On the other hand, the BAYPORT MGT 2022 and ACCESS BANK 2021 led the laggards with yields up 60bps and 26bps w/w respectively. We expect developments from OPEC+ meeting and monetary easing by central banks in advanced economies to shape the sentiment towards these asset over the coming weeks.
Afrinvest
