SAT, MARCH 14 2020-theG&BJournal- Against the unrelenting naira asset sell-offs by foreign investors, capital flows into Nigeria’s economy tempered in Q4-19 by 32.4% q/q to USD3.80 billion, on account of global growth concerns, volatile crude oil prices, and an unimpressive domestic macro landscape. Specifically, Foreign Portfolio Investment (FPI), which constituted 49.5% of the total inflow, plunged by 37.8% q/q, following disappointing outturns across the board.
However, Foreign Direct Investment (+24.5% q/q) surprised positively, recording the first growth in four quarters, following higher inflows into the equities market. Over 2020, the bias is for capital inflows to remain tame, on account of (1) a benign global growth outlook as the coronavirus continues to spread, and (2) weaker domestic macros, as a decline in crude oil prices continue to spur fears of currency devaluation.
According to the Q4-19 foreign trade statistics report, the trade balance recorded the first deficit since Q3-16 and the largest in history, as imports ran ahead of exports. Specifically, exports fell by 9.8% q/q, driven by a moderation across both non-oil exports (-43.9% q/q) and oil exports (-3.2% q/q). We highlight the border closure in August 2019 as the key driver for the former. On the other hand, the decline in oil exports was driven by lower crude oil production (-1.5% q/q) which masked the slight gain recorded in crude oil prices (+0.6% q/q).
Elsewhere, higher increases recorded across non-oil (+57.9% q/q) and oil (+3.0% q/q) imports set the stage for a 49.3% q/q expansion in overall imports. Over 2020, we expect export earnings to moderate, as the risks to crude oil prices are firmly tilted to the downside. Gven the recent devaluation fears, we believe the CBN will resume its FX management strategy by excluding more items from eligible non-oil imports, which portends a downside risk to overall imports.
Capital markets
Equities
It was a gloomy week for the domestic bourse as coronavirus fears and lower oil price panic-selling drove the market to its worst weekly loss on record. The ASI declined by 13.6% w/w, as investors sold off across board. Accordingly, the MTD and YTD losses increased to -11.9% and -15.3%, respectively. All sectoral indices closed negative – Banking (-26.8%), Consumer Goods (-14.9%), Oil & Gas (-7.1%), Industrial (-5.7%), and Insurance (-5.1%) indices.
Looking ahead, we still see sizeable legroom for further downslide in risk assets as investors continue to run towards safety in the face of the precipitous decline in oil price.
Fixed income and money market
Money market
The overnight (OVN) rate contracted by 278bps, w/w, to 10.1%. The rate begun the week elevated following outflows from the Wholesale FX auction. However, inflows from OMO maturities (NGN232.26 billion) and FX retail refunds (c. NGN200 billion) towards the end of the week were sufficient to saturate the market and cause the eventual contraction in the OVN this week.
Inflows worth a combined NGN395.72 billion – OMO maturities (NGN304.75 billion) and FGN bond coupon payments (NGN90.97 billion) – are expected to offer a boost to system liquidity next week. Thus, barring any significant liquidity mop-ups, we expect a contraction in the OVN.
Treasury bills
Activities in the treasury bills market were bearish as foreign investors sold off OMO bills on coronavirus fears and the crash in oil prices. Consequently, the average yield across instruments expanded by 242bps to 12.6%. The average yield in the OMO segment of the market expanded by 370bps to 16.6% while the average yield in the NTB secondary market contracted by 13bps to close at 3.9%. The week’s NTB primary auction, the CBN fully allotted NGN86.30 billion worth of bills – NGN1.80 billion of the 91-day, NGN14.00 billion of the 182-day and NGN70.50 billion of the 364-day – at lower stop rates of 2.49% (previously 3.00%), 3.78% (previously 4.00%), and 5.30% (previously 5.70%).
We expect foreign investor led-selloffs to persist in the OMO secondary market amidst continued Coronavirus worries and lower oil prices. At the NTB PMA next week, the CBN is expected to offer NGN47.56 billion worth of instruments to investors.
Bonds
The FGN bond secondary market was bearish as market players remained wary of the impact of lower oil prices on the country’s crude oil revenue. Consequently, average yields across instruments expanded by 140bps to 11.7%. Yields across the short (+125bps), mid (+181bps), and long (+101bps) segments of the curve expanded due to sell-offs of the JAN-2026 (+242bps), MAR-2027 (+345bps), and APR-2037 (+156bps) bonds.
We expect the Treasury bonds market to remain bearish as market players continue to react to global issues.
Foreign exchange
As foreign outflows intensify, Nigeria’s FX reserves declined by USD156.08 million WTD to USD36.17 billion (10 Mar 2020), as the CBN maintained its support for the currency via its weekly FX interventions; USD210.00 million was sold across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Nonetheless, the naira remained under pressure, weakening by 0.6% w/w to NGN368.47/USD at the I&E window and by 5.3% to NGN380.00/USD in the parallel market. In the Forwards market, the naira depreciated across the 1-month (-2.1% to NGN377.49/USD), 3-month (-2.5% to NGN384.45/USD), 6-month (-2.9% to NGN396.67/USD) and 1-year (-3.8% to NGN427.08/USD) contracts.
Looking ahead, we expect the foreign reserves to support the CBN’s currency defense over H1-20. Further out, the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira will force the CBN to throw in the towel in our opinion.-With Cordros Research
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