SAT, MARCH 21 2020-theG&BJournal- In line with our expectations, headline inflation rose by 7bps to 12.20% y/y (Cordros’ est.: 12.30% y/y) in February. We attribute the uptick to the unfavourable base from the corresponding period of last year. We recall that lower energy prices, especially in H1-19, had driven focal temperance across both the food and the core basket. For March, softer price increase expectations from robust market supply underpin our slower food inflation forecast (-4bps to 0.83% m/m). Elsewhere, the recent naira weaknesses are not expected to bleed over to either the core or food basket in the short term as the CBN continues its aggressive supply of FX for eligible imports across the different FX windows. Thus, core inflation is expected to print 0.71% m/m, 2bps lower than the previous months. Tying it all together, headline inflation is expected to print 1.79% m/m, cascading to 12.20% y/y.
Last week, the Nigerian government announced plans to slash its 2020 budget by NGN1.5 trillion to NGN9.09 trillion (excluding GOEs: NGN8.21 trillion). This is due to the coronavirus outbreak and its negative impact on global economic activities, together with the recent decline in oil prices. We understand that the FGN intends to cut 20.0% and 25.0% of its recurrent and capital expenditures, respectively. From NGN7.00 trillion, the FGN is now looking to expend NGN5.24 trillion in recurrent (including debt servicing). On the other hand, a total of NGN2.34 trillion is now expected to be spent on CAPEX. Given the scale of things thus far, a NGN1.5 trillion cut is a drop in the ocean in our view. Assuming a 90% implementation rate, we expect the budget deficit to settle at NGN4.87trillion, on an optimistic NGN4.17 trillion retained revenue forecast. With the previously planned Eurobond suspended, the FGN’s domestic debt issuance is likely to run ahead if we are to see meaningful implementation.
Nigerian stocks suffered another week of losses as worries deepened about the impact of the novel coronavirus outbreak and as oil prices fell to 17-year lows during the week. The ASI declined by 2.4% w/w, led by selloffs in DANGCEM (-15.2%) and NESTLE (-7.1%). The decline pushed the index well into bear market territory, with the ASI falling over 25% from its recent peak to its Thursday low. Accordingly, the MTD and YTD losses increased to -15.3% and -17.3%, respectively. Sectoral performance was mixed as the Industrial Goods (-4.9%), and Consumer Goods (-3.2%) indices fell sharply, while the Insurance (+2.8%), Banking (+0.3%) and Oil & Gas (+0.2%) indices rebounded.
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 fast-spreading coronavirus pandemic and the rout across global markets.
Money market
The overnight (OVN) rate contracted by 478bps, w/w, to 5.3% as inflows from OMO maturities (NGN304.75 billion) and FGN bond coupon payments (NGN90.97 billion) outweighed outflows from the FX Wholesale auction.
In the coming week, we expect the OVN to trend southwards as inflows from FGN bond coupon payment (NGN18.12 billion) and OMO maturities (NGN76.22 billion) will offer a boost to system liquidity.
Treasury bills
Trading in the Treasury bills secondary market turned bullish following increased demand for instruments in the OMO segment of the market. Consequently, the average yield across instruments contracted by 17bps to 12.4%. In the OMO secondary market, average yield contracted by 26bps to 16.5%, while the average yield in the NTB market expanded by 14bps to 4.0%. Also, at this week’s NTB primary auction, the CBN fully allotted NGN47.57 billion worth of bills – NGN2.00 billion of the 91-day, NGN8.39 billion of the 182-day and NGN37.18 billion of the 364-day – at respective stop rates of 2.30% (previously 2.49%), 3.40% (previously 3.78%), and 4.60% (previously 5.30%).
We expect the market to remain relatively bearish as offshore investors maintain a risk-off stance from emerging markets while local players anticipate next week’s MPC meeting.
Bonds
The Treasury bonds secondary market was bearish this week, as weak global sentiments persisted. Consequently, the average yield across instruments expanded by 19bps to 11.7%. Yields across the short (+1bp), mid (+14bps), and long (+22bps) segments of the curve all expanded due to sell-offs of the APR-2023 (+136), JUL-2030 (+196bps) and APR-2037 (+97bps) bonds, respectively.
Interest is expected to return to the FGN bond market next week as investors bargain hunt, given the reduced supply at the bond auction to be conducted next week. The DMO will hold a PMA on the 25th of March wherein NGN50.00 billion across three instruments will be offered to investors – 12.75% APR-2023 (re-opening), MAR-2035 (new instrument), and APR-2050 bond (new instrument).
Foreign exchange
As with the prior week, Nigeria’s FX reserves dipped by USD193.83 million WTD to USD35.98 billion (20 Mar 2020), as the CBN sustained its support for the currency across the different strata of FX windows. Nonetheless, the naira remained under pressure, weakening by 0.95% w/w to NGN372.00/USD at the I&E window, but strengthened by 1.3% to NGN375.00/USD in the parallel market. In the Forwards market, the naira depreciated across the 1-month (-0.7% to NGN374.12/USD), 3-month (-0.6% to NGN380.62/USD), 6-month (-0.5% to NGN391.98/USD) and 1-year (-1.6% to NGN426.47/USD) contracts.
Looking ahead, we expect FX market volatility to persist in the short to medium term as lower oil earnings, together with the deceleration in FX reserves continue to induce speculative attacks on the naira. In the longer term, an extended lower oil price environment will eventually force the CBN to reprice the naira.- With Cordros Research
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