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Nigeria H2-2020 Outlook: Up in the Air
3 www.unitedcapitalplcgroup.com
Executive Summary
Global Economy in 2020: Up in the Air
In January 2020, we estimated that better trade terms between the US and China,
improved clarity on the UK-EU economic ties, as well as an accommodative monetary
policy stance by central banks across the world would bolster global growth in 2020.
Against the run of play, the outbreak of the COVID-19 pandemic threw a curve ball at our
forecasts, as global attention was shifted to the public health crisis, at a huge economic
cost.
In H2-2020, global trade is unlikely to return to the pre-COVID-19 level, as economies
around the world continue to grapple with the impact of the pandemic on both global
demand and supply value chains. Clearly, the initial euphoria that greeted the last-
minute US-China Phase-1 trade deal signed in Dec-2019 has fizzled away. No thanks to
COVID-19 which added a new dimension to the brawl between both countries over
China’s transparency and information hoarding on the virus. Overall, we believe a
rebound in global trade volume is hinged on how soon normalcy will be restored and the
pace of economic recovery around the world.
Elsewhere, we expect economic policies to remain broadly expansionary to hasten
recovery. As such, liquidity in the global economy will be enormous, thereby
strengthening risk-on sentiment and the flow of capital in search of alpha. In the absence
of fresh surprises, oil prices are likely to hover from $35.0/b to $45.0/b for the rest of the
year. With no clear green light on a vaccine breakthrough before the end of 2020, we
are of the view that questioning a global recession in 2020 is pointless. The historic
lockdown experienced in H1-2020 has crippled demand and halted supply chains,
hence, the key question to ask is nature of recovery.
Sub-Saharan Africa: By far the most vulnerable
Though the last to be ensnared by the plague, authorities in Sub-Sahara Africa (SSA)
imposed one form of restrictions on the movements and economic activities or the other.
This worsened the already fragile social and economic conditions of most countries within
the region. The informal sector which accounts for over 80.0% of total employment
according to World Bank is clearly the worst hit. Again, while the health crisis exposes the
vulnerable countries with an ageing population and a large number of citizens with
underlying ailments, the economic cost will be felt the most by poor SSA countries which
are most vulnerable economically. As such, GDP growth in SSA is projected to contract by
3.2% in 2020, the lowest level in more than 20 years due to the collapse in commodity
prices.
Looking ahead, we believe the shape, duration, and size of recovery will vary from
country to country, depending heavily on the improvement in the external dynamics and
the timeframe required to bring economic activities back to pre-COVID-19 levels. We
note that recovery will be more strenuous in countries with little to no monetary or fiscal
Nigeria H2-2020 Outlook: Up in the Air
4 www.unitedcapitalplcgroup.com
headroom to provide large bailouts for economic recovery amid rising debt profiles.
However, the rapid financial support and debt forgiveness from the IMF other multilateral
agencies will go a long way to help.
Beyond 2020, we believe the effective implementation of the now postponed Africa
Continental Free Trade Agreement (AfCFTA) will be pivotal to building economic
resilience against future crises. The agreement will help strengthen regional value chains,
reduce vulnerability to external shocks, and advance the digital and technological
transformation required to accelerate development in the region.
Nigeria: Can stimulus packages prevent a recession?
What could have been a flourishing year for the Nigerian economy was caught in the
web of a global public health crisis which grounded domestic and external economic
activities. Already, domestic economic growth in Q1-2020 slowed to 1.87% and the figure
for Q2 2020 is set to come in negative, despite the series of stimulus packages announced
by the authorities aimed at easing the impact of the pandemic on businesses and
households.
Notably, given that the current crisis is supply-side heavy (restriction of movement and
business shutdown), it is clear that the demand-side responses by both the fiscal and
monetary authorities (liquidity injections) would not be enough to prevent an economic
contraction in the short term. However, the palliatives and reforms that are being
announced may reduce the probability of sliding into a deep recession or quicken
recovery once the incidence rate of the pandemic begins to drop and the economy is
fully re-opened.
Overall, the Nigerian economy may enter a technical recession by Q3-2020 (after two
consecutive quarters of contraction in Q2 and Q3-2020), with a chance of early recovery
by Q4-2020 or Q1-2021. Accordingly, we have lowered our real GDP growth forecast for
2020E from 2.3% to -2.69% in 2020. The biggest downside risk to the above projections
remains the possibility of a second round of lockdown, especially if the virus continues to
spread rapidly. Thus, this might delay the possibility of an early recovery or a V-shaped
recovery to a more strenuous U-shaped or W-shaped recovery. By implication, corporate
earnings will be pressured except for sectors such as healthcare, technology, and
household utilities.
Also, our outlook for the headline inflation rate remains biased upward in H2-2020 and we
expect the headline inflation rate to settle at 13.3% y/y in 2020 (Pre-COVID-19 expectation
– 11.9% y/y). On the exchange rate, we believe the odds are in favour of a further naira
adjustment which may take the official rate to N410/$ - N430/$ by year-end. However, we
believe the CBN will continue to defend the value of the local unit for as long as it can.
Thus, concerns around further adjustment are likely to discourage large-sized FPI and FDI
inflows for the rest of the year.
Nigeria H2-2020 Outlook: Up in the Air
5 www.unitedcapitalplcgroup.com
Naira Assets: …still a corporate issuers’ game
The spread of the COVID-19 disease across the world triggered unanticipated global
financial market volatility and Nigeria was not left out. FPIs and local investors flew to
safety amid the collapse in oil prices and currency adjustments. Investors repriced the risk
on naira assets, driving the average yield on OMO bills and domestic bonds from 13.1%
and 10.8% at the end of Dec-2019, to 15.1% and 11.9% respectively as at the end of Mar-
2020. Also, the stock market tumbled by more than 20.0% in Q1-2020.
However, in Q2-2020, the financial market rebounded sharply, as the yield curve
moderated amid optimism in the global and domestic market economy. Also, the equity
market almost recovered to its pre-selloff level largely driven by domestic investors who
took advantage of the market valuation amid a mild recovery in oil prices in the month of
May 2020.
In H2-2020, we maintain that the fixed income space will remain a corporate issuers’
game due to the sustained low yield environment. However, we expect a mild increase in
the yield curve, as the dynamics of demand and supply for debt instruments in H2-2020 is
anticipated to be driven by thinning system liquidity, FPI flows when intervention sales
resume, the CBN’s resolve to defend the naira using unconventional methods and
increased borrowing from the DMO.
Overall, we expect the yield curve to remain normalized, with a marginal upward shift, as
market forces move in favour of demand. For equities, the believe the path remains
gloomy, amid pressure on corporate earnings, concerns about the exchange rate and
the second wave of the pandemic. As a result, we expect the market to remain highly
volatile and ‘short-term gain’ driven.
uncoordinated policy outline. Notably, the recent amendment of the Deep Offshore and
Inland Basin Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews
of the Tax Acts via the finance bill, will support the implementation of the 2020 Budget
and beyond in the face of sharp rising debt profile. Again, the unprecedented early
passage of the 2020 budget by the senate in Dec-19, to return the economy to a January
to December budget cycle, effective 1st of Jan-20, is a positive development. Also, a
lower yield environment, triggered by the CBN’s recent mix of heterodox policy actions,
will not only ease the cost of rolling over government borrowings but also stimulate
domestic private sector investment.
On the back of the above, GDP growth is expected to sustain a gradual uptick in 2020,
anticipated to expand above 2.3%, faster than 2019 but below 3.0%. Also, inflationary
pressure will persist due to supply shortages and the shutdown of the border, given the
direct impact on food prices. Again, increased money supply by the CBN may keep the
core inflation sub-index elevated due to pressure on FX. In all, we expect the headline
inflation rate to average 11.9% in 2020, higher than 11.4% in 2019, in the absence of further
structural changes that may trigger a fresh uptick in m/m inflation. While the benchmark
Nigeria H2-2020 Outlook: Up in the Air
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Analysts
Wale Olusi
Yinka Ademuwagun
Oluwabusola Jeje
Oluwashina Akinremi
Ayobami Omole
Team
+234-1-631-7898
United Capital Plc
Asset Management:
+234-1-631-7876
Investment Banking
+234-1-631-7883
Securities Trading:
+234-1-631-7891
Trusteeship:
+234-1-631-7877
Nigeria H2-2020 Outlook: Up in the Air
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Table of Content
Global Economy ······································································································· 8
The extra-ordinary 2020 ·················································································································· 9
Coronavirus outbreak: Is the threat still real? ··················································································· 11
Monetary and Fiscal Policies: ‘Helicopter money’ on a rescue mission ·············································· 13
Developed Markets: A cocktail of Healthcare, Economics and Politics ··········································· 15
Emerging Markets: A threat to years of strong growth ····································································· 17
Financial Markets: Taking a V shaped recovery ·············································································· 18
Oil Prices: Is the worst behind us? ·································································································· 19
Sub-Saharan Africa ································································································· 22
Macro Overview: Surviving the virus? ····························································································· 23
Fiscal Policy Response and Debt Sustainability: Striking the right balance··········································· 24
Macro Outlook: A synchronized slowdown and contraction····························································· 27
Eurobond Market: Monetary stimulus spurs market recovery ····························································· 29
Foreign Exchange: A broad base weakness ··················································································· 30
Equity Market: Wheezing from the impact of COVID-19 ··································································· 32
Domestic Macro and Policies ··················································································· 35
Domestic Macroeconomic Overview: Will Nigeria let a good crisis go to waste again? ······················· 36
Fiscal policy: Fiscal Policy Response to COVID-19 ············································································ 36
Monetary Policy: CBN’s Policy Response to COVID-19 ····································································· 42
Domestic Output: Can stimulus packages prevent a recession? ······················································· 47
Inflation rate: COVID-19 outbreak and lockdown, any impact on price? ··········································· 50
Foreign Exchange Rate and Reserves: Any possibility for further naira adjustment? ····························· 52
Funds flow: Q1-2020 is as good as it gets for 2020 ············································································ 54
Financial Markets ··································································································· 57
Fixed Income: The COVID-19 pandemic sparks a reassessment of risk ··············································· 58
Equities: On a slow path to total recovery? ····················································································· 66
Sectors ··················································································································· 74
Agricultural Sector ······················································································································· 75
Banking Sector ··························································································································· 77
Cement Sector ··························································································································· 79
Consumer Goods Sector ············································································································· 81
Oil & Gas Sector ························································································································· 83
Disclosure Appendix ································································································ 86
Global
Economy
Nigeria H2-2020 Outlook: Up in the Air
9 www.unitedcapitalplcgroup.com
Global Economy
The extra-ordinary 2020
As the year 2020 came around the corner, our baseline expectation was that of an
unsynchronized rebound in growth, driven by easy monetary policy, improved trade
relations, supportive fiscal policy, and a recovery in EM economies. However, the year
2020 has proven to be extra-ordinary in every sense. H1-2020 would be recorded in history
as catastrophic, with the unexpected outbreak of the COVID-19 disease. With the degree
of interconnectivity of the global economy, and the inability of healthcare systems to
adequately contain the virus, the global economy was forced into a ‘Great Lockdown’
as described by the IMF. Global economic activity, which has been intricately linked via
trade, travels, tourism, capital flows and human mobility, was almost grounded to a stand
-still amid panic, caution and extreme measures to flatten the curve of virus spread while
avoiding overwhelming the already overstretched healthcare system. As at mid-June
2020, the virus had spread across 213 countries, with 8.1mn confirmed cases, 4.2mn
recoveries and 438k deaths.
The extreme measures implemented by authorities all over the world which disrupted
global supply chains, brought business activities to a halt, resulting in a catastrophic
demand and supply shock! Global equities indexes plunged as investors scampered to
safety. Commodity prices also collapsed; oil prices tumbled to levels last seen in 2002.
Expectedly, Q1-2020 GDP growth numbers across the world printed negative or slower
growth, with global economy heavy weights such as China (-6.8% y/y), USA (-5.0% y/y),
Germany (-1.9%y/y), United Kingdom (-2.0% y/y), and Canada (-0.9% y/y) reporting
negative GDP growth for the period.
The Cost of the Lockdown: A necessary Evil?
With over 80 countries in the world placed under either a lockdown, travel ban, curfew, or
other types of physical distancing measures for at least 6 weeks, the economic cost of the
extreme measures taken to contain the virus outbreak were clearly expected to be
devastating. Notably, the global PMI collapsed to 26.2 pts in April 2020, severely below
...H1-2020 would be
recorded in history as
catastrophic, with the
unexpected outbreak
of the COVID-19
disease
Global Economy
Sources: Worldometer, John Hopkins Hospital, United Capital Research
Figure 1
The economic cost of
the extreme measures
taken to contain the
virus outbreak were
clearly expected to be
devastating
Nigeria H2-2020 Outlook: Up in the Air
10 www.unitedcapitalplcgroup.com
the 50pts threshold. In the US, as in many countries around the world, jobless claims
reached an all-time high of 6.6 million people in April. In terms of sector performance,
Aviation, Tourism, Oil & Gas, Hospitality, and Manufacturing, were the hardest hit.
As H2-2020 sets its course, authorities have begun rolling out plans to reopen economic
activities. Many countries have already eased the lockdown measures. However,
reopening is broadly expected to be gradual and phased. As a result, the IMF forecasts
that the global economy will contract by 4.9% in 2020. In our view, the key themes that
are critical to understanding the trajectory of global growth in H2-2020 include: the
dynamics of the COVID-19 outbreak, Trade relations and Monetary and Fiscal policy
responses.
...the IMF forecasts that
the global economy
will contract by 3.0% in
2020.
Global Economy
Sources: Bloomberg, United Capital Research
10
20
30
40
50
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20
COVID-19 ravages business
performance Trend of Markit Composite PMI
U.S. Germany U.K.EM Eurozone GlobalTurning point
Figure 2
0.7
1.2
1.7
2.2
2.7
3.2
3.7
4.2
4.7
0.95
1.05
1.15
1.25
1.35
1.45
1.55
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20
Unemployment soars as COVID-19
impacts businessRelative movement of Unemployment
across notable regions
Japan Eurozone Hong KongGermany Sweden ChinaUS
Figure 3
Sources: IMF, United Capital Research
The IMF’s 2020 revised Global Growth forecast by Regions Figure 4
Nigeria H2-2020 Outlook: Up in the Air
11 www.unitedcapitalplcgroup.com
Coronavirus outbreak
Is the threat still real?
Since COVID-19 became a pandemic, the focus of governments, the World Health
Organization, and multilateral agencies, has been the need to “flatten the curve”. With
top pharmaceutical research houses racing to get a vaccine, the only known or proven
public health measures to achieve any meaningful control of the virus remains social and
physical distancing, in a bid to slow the contagion. Looking at the numbers, while
confirmed cases appears to be slowing in Europe and parts of Asia, confirmed cases
continue to rise in the rest of the world especially the Latin America and Africa. What is
clear is the fact that whether the cases are on the rise or slowing, the threat of a second
wave remains real in the absence of a vaccine. Again, the resurgence of the virus
observed in Singapore and Hong Kong lends credence to this view. Unfortunately, the
recent outburst and protest across the developed world, following the death of George
Floyd in the district of Minneapolis in US, resulting in widespread gathering of people,
increases the stake of the second wave. As a result, the trajectory of cases in the next half
of the year is difficult to estimate.
With the benefit of hindsight, we know that the window of social distancing is incredibly
short. Hence, if the world goes through a second wave, this means that some form of
lockdown or curfew will remain in place in many countries, especially the western
economies, for longer, taking more toll on economic activities. The above
notwithstanding, more countries are getting ready to reopen the economy, introduce
international flights, ease restrictions on public gathering and kickstart business operations,
albeit gradually.
Any Vaccine in sight?
In analysing the dynamics of the COVID-19 pandemic, another focal point is the prospect
and early development of a vaccine. Notably, according to widespread medical
opinions, the development of a vaccine is a long and complex process that takes
between 10-15 years. Given the dire situation of the world, researchers and
...whether the cases
are on the rise or
slowing, the threat of a
second wave remains
real in the absence of
a vaccine
Global Economy
(30,000)
-
30,000
60,000
90,000
120,000
150,000
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5-F
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12-F
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Is the threat still real?Global daily new cases of COVID-19
Daily new cases
Figure 5
Sources: Humanitarian Data Exchange, United Capital Research
Despite the COVID-19
outbreak, more
countries are getting
ready to reopen the
economy
Nigeria H2-2020 Outlook: Up in the Air
12 www.unitedcapitalplcgroup.com
pharmaceutical companies are racing to develop a vaccine as soon as possible. Reports
have it that medical researchers have been able to cut the time between exploratory
stage and clinical stage significantly and 123 different possible vaccines are in pre-clinical
stage while 10 are in Clinical stage.
The question remains how soon can we get a vaccine? No doubt, regulators are ready to
speed up the process of a vaccine approval. However, ample time must be given in
conducting clinical tests and human trials to ensure that harmful drugs are not released to
the public. Bearing the above in mind, the most optimistic case is that a vaccine will be
available by June 2021. Notably, Janssen Pharmaceutical Companies, a subsidiary of
Johnson & Johnson, anticipates that the first batches of a COVID-19 vaccine could be
available for emergency use authorization in early 2021.
The Hazy outlook for H2-2020
The realities of 2020 are clearly an unmapped territory, not only in the field of public
health, but also in modern economic policy management. What lies ahead is beyond a
contraction in output level, as noted above, the threat of another wave remains real and
the experience and impact will be different for each economy. Thus, many forecasts will
be anything but accurate. With so many uncertainties about the future, Philipp Carlsson-
Szlezak et al, in an article titled “ Understanding the Economic Shock of Coronavirus”
published in Harvard Business Review, noted that “predicting the path ahead has
become nearly impossible, as multiple dimensions of the crisis are unprecedented and
unknowable.” The article went on to identify the following aspects of uncertainties that
makes the future blurry:
• The virus’ properties are not fully understood and could change.
• The role of asymptomatic patients is still imperfectly understood.
• The true rates of infection and immunity are therefore uncertain, especially where
testing is limited.
• Policy responses will be uneven, often delayed, and there will be missteps.
• The reactions of firms and households are uncertain.
The most optimistic
case is that a
vaccine will be
available by June
2021
Global Economy
Sources: World Health Organization , United Capital Research
A Vaccine on the Horizon? Figure 6
...the threat of
another wave
remains real and the
experience and
impact will be
different for each
economy.
Nigeria H2-2020 Outlook: Up in the Air
13 www.unitedcapitalplcgroup.com
Beyond the above, the question of the time path of economic shock created by the virus
and the ensuing recovery, if recovery will rebound to pre-shock level and the clear
picture of the structural changes that will follow the pandemic, are all still quite blurry.
Trade
U.S-China Phase one deal on a ‘Ventilator’
Compared to 2019, the year 2020 started with fresh optimism from the last-minute US-
China phase-one trade deal that was signed in Dec-2019. However, the signed deal
which once brought clarity to the global trade environment, seems to be on ‘life support’.
First, the COVID-19 outbreak added a new dimension to the brawl between U.S. and
China, over China’s transparency and information hoarding concerning the pandemic. In
addition to that, swords remain drawn between the two power houses over the new
national security law passed in Hong Kong, which sees an increase in China’s economic
and political influence and a possible end to the special status issued by the U.S. to Hong
Kong.
To further aggravate the current tensions, China advised state owned firms to suspend
large-scale purchases of major U.S. farm products, over the Hong Kong dispute. Apart
from the recent halt in imports, another bone of contention is that the Asian giant has not
been meeting its obligations under the phase one deal, and has been sourcing cheap
agricultural and energy imports from Brazil, despite its pledge to significantly rack up
purchases from the U.S. No doubt, the prospect of kickstarting a phase two trade deal in
H2-2020 is weak, with a growing possibility that the phase one deal will be halted.
Elsewhere, as the U.K. heads to the end of the BREXIT transition period, the country has
been making notable strides in securing free trade agreements with its largest trade
partners. Notably, the U.K. published its negotiating objectives for a free trade agreement
with Japan worth £15.0bn, with Australia and New Zealand also in the works.
Apart from trade tensions and talks, countries are also suffering from twin shocks
emanating from the impact of the pandemic on global demand and supply value
chains. According to the World Trade Organization (WTO), all regions will suffer double
digit decline in merchandise export and import. In an optimistic scenario, merchandise
trade volume is expected to decline by 12.9% while a decline of 31.9% in expected in a
pessimistic scenario. Although unquantifiable, services trade is expected to be the most
impacted, due to travel restrictions that have obstructed services such as tourism,
hospitality, education, and other professional services. In all, global trade is looking
melancholic in H2-2020, and is hinged on the pace of economic recovery around the
world.
Monetary and Fiscal Policy
‘Helicopter money’ on a rescue mission
In 2019, monetary policy authorities gradually took a dovish stance, due to the fragility of
The signed U.S/China
Phase one trade deal
which once brought
clarity to the global
trade environment,
seems to be on ‘life
support’
Global Economy
As the end of the
BREXIT transition period
looms, UK goes
shopping for beneficial
free trade agreements
In all, global trade is
looking melancholic in
H2-2020, and is hinged
on the pace of
economic recovery
around the world
Nigeria H2-2020 Outlook: Up in the Air
14 www.unitedcapitalplcgroup.com
global growth and the dilemma with low inflation rates. In 2020, the outbreak of COVID-19
sent global central banks on a tsunami of expansionary monetary policies, ranging from
huge rate cuts to quantitative easing, and less conventional tools like helicopter money.
Notably, the US Federal Reserve (Fed) led the way as it delivered a surprise rate cut of
50bps after an emergency meeting and a subsequent 100bps cut which settled the
Federal Funds rate at 0-0.25% band. Similarly, the Bank of England (BoE) dropped policy
rates to 0.1% vs 0.75% at the beginning of the year. However, with policy rates already in
the negative region, the European Central Bank (ECB) took a more cautious approach,
expanding its asset purchase program by €750.0bn. Also, the Peoples Bank of China (PBC)
injected liquidity amounting to about RMB3.8tn into the banking system and cut interest
rates on reverse repos, medium-term lending facilities and excess reserves. Finally, the size
of liquidity injection was robust, with the Fed pumping $2.3tn, and the EU finance ministers
approving a €500.0bn rescue package.
Also, fiscal authorities employed several measures to curb the spread of the virus by
providing health care services to the affected and deploying funds. In the US, a stimulus
package of $2.0tn was disbursed under the Coronavirus Aid Relief and Economy Security
Act. Also, the Trump administration maxed out the $350.0bn fund available through the
Small Business Administration's Rescue Loan program. Elsewhere, Japan‘s cabinet
approved a new $1.1tn stimulus package, that includes significant direct spending, to
stop the pandemic from pushing the economy deeper into recession. The European
Union was not left out, deploying a $826.0bn stimulus package. In China, an estimated
total of RMB 3.6tn has been announced, while in Canada, $205.0bn CAD (an equivalent
of 9.8% of GDP) has been disbursed through various channels.
Going into H2-2020, we expect the sheer size of the monetary stimulus to support the
global economy, or at least ease the pain. By implication, global monetary policy
authorities will continue to use all possible tools to ensure a speedy economic recovery.
Also, fiscal policies are likely to remain expansionary. However, fiscal authorities will remain
wary of overaccumulation of debt and surging inflation. Overall, while this may not
immediately stall a global economic recession, it means that liquidity in the global
economy will be enormous, thereby strengthening risk-on sentiment and the flow of
capital towards assets with attractive yields.
Global Economy
The outbreak of
COVID-19 sent global
central banks on a
tsunami of
expansionary
monetary policies
Sources: Bloomberg , United Capital Research
-1.0
0.0
1.0
2.0
3.0
May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20
Growth Dillema: Inflation head for sub-zero levelsTrend of CPI y/y in Major Economies
U.S. U.K. E.U Japan Canada Inflation Target
Figure 7
...liquidity in the global
economy will be
enormous, thereby
strengthening risk-on
sentiment and the
flow of capital towards
assets with attractive
yields
Fiscal policy rolled out
massive stimulus
packages, as
governments raced to
savage their
economies
Nigeria H2-2020 Outlook: Up in the Air
15 www.unitedcapitalplcgroup.com
Global Outlook
USA: A cocktail of Healthcare, Economics and Politics
The US is the hardest hit country in terms of the number of confirmed infections,
accounting for about 27% of global confirmed cases as at mid June. The economic
impact has also been monumental, as the country recorded a 4.8% q/q annualized
decline in GDP in Q1-2020, after experiencing the longest growth streak in history.
In addition, unemployment rates surged from an historic low of 3.5% in Sep-2019, to an
historic high of 14.7% in Apr-2020. Clearly disturbed by the rapid decline in growth, the U.S.
government has launched fiscal responses, cumulating to an equivalent of 13.0% of GDP.
For the U.S. economy, going into H2-2020, there are three cogent aspects to keep an eye
on. These include the COVID-19 containment, economic recovery, and the upcoming
presidential elections. According to Bloomberg economists’ consensus, the US economy is
expected to contract by 33.0% q/q annualized in Q2-2020, while a growth of 15.0% q/q
annualized is expected in Q3-2020, summing up to about an 8.0% decline in FY-2020
(according to IMF). The economic progress that the current administration has driven in
the past four years, through huge fiscal stimulus in form of tax cuts, has almost been wiped
out. Elsewhere, the Nov-2020 elections are fast approaching, with current signals not in
totally in favour of a re-election of the Trump Administration. No doubt, there has been
outrage regarding the current administration’s response to the COVID-19 pandemic as
well as its body language towards the protests on racism. However, we expect the
current administration to make a case for re-election by fast tracking economic recovery
through an aggressive expansionary fiscal policy.
For monetary policy, at the early stage of the economic meltdown, the Fed cut rate to 0-
0.25% band. Moving into the next half of the year, we expect the FOMC to continue to
act as appropriate in reviving the economy, in addition to making information-driven
decisions. However, a full recovery is hinged on further fiscal policy and the planned
reopening of the economy. Give or take, the IMF sees the US economy tumbling 5.9% in
2020.
Global Economy
We expect the FOMC
to continue to act as
appropriate in reviving
the economy
Sources: Centre for strategic and International Studies , United Capital Research
Credit
Enhancement ,
$554
Government
Spending , $1,851
Tax Relief , $502
USA government has spent about $2.9tn (13.6% of GDP) as
COVID-19 fiscal response USA government fiscal response ($'bn)
Figure 8
The U.S. economy
recorded a 4.8% q/q
annualized decline in
GDP in Q1-2020, after
experiencing the
longest growth streak in
history
Three cogent aspects
to keep an eye on in
H2-2020: the COVID-19
containment,
economic recovery,
and the upcoming
presidential elections
Nigeria H2-2020 Outlook: Up in the Air
16 www.unitedcapitalplcgroup.com
Euro Area: Entering a period of depressed growth
Hammered by the coronavirus shock, the Eurozone suffered a 3.8% q/q GDP decline in
Q1-2020, which was the sharpest drop in GDP in over a decade. In addition, one of the
regional growth engines, France, entered a technical recession in Q1-2020. In terms of
monetary policy, a conventional rate cut was not used by the ECB since rates are already
in the negative region. Instead, there has been a series of asset repurchase programs,
restriction against payment of dividend by banks and permission for companies to
operate below required capital adequacy.
Going forward, we expect the ECB to double down on efforts to ensure quick economic
recovery. Elsewhere, the European Union finance ministers came together to strike a deal
for a €500bn stimulus plan to be used as a business liquidity fund, bailout fund and stability
mechanism. For the rest of the year, the economic bloc is expected to continue to count
the cost of the health crisis and the lockdown on major sectors such as automotive,
aerospace, aviation and tourism which have been heavily hammered by the restriction
of movement, and city lockdowns globally. In all, the IMF projects the Euro Area GDP to
plunge by 8.0% in 2020.
United Kingdom: Marred by twin worries
The United Kingdom’s initial attempt at herd immunity as a response to the coronavirus
outbreak and its reluctance to impose a lockdown came at a considerable cost. The
country recorded the highest death toll in Europe, as at mid-June at 41.7k deaths.
Although the government has planned an economic reopening, level of activity is
expected to recover very slowly given the high number of cases in the UK and especially
as infection curve does not seem to be at its peak.
Elsewhere, after officially leaving the EU on Jan 31, the UK now has approximately six
months for negotiation, for a UK-EU trade agreement, before concluding the transition
period on Dec 31. Notably, the outcome of recent negotiations has been somewhat
negative, as the U.K. is striving for a free trade agreement with the EU. However, for a free
trade agreement to be in place, the EU is proposing that the UK must continue to follow its
single market rules.
In terms of monetary policy, the Bank of England is deploying quantitative easing tools
and was quick to cut interest rates to 0.1%. Also, the outlook for a negative interest rate
environment in the U.K now looks more possible, following the issuance of a negative
yield bond by the UK DMO in Q2-2020. Overall, the economic activities in the UK will be
marred by the twin concern around a poorly managed public health crisis and the
fragility of the EU-UK trade agreement in H2-2020.
Global Economy
The economic bloc is
expected to continue
to count the cost of the
health crisis and the
lockdown on major
sectors
...the outlook for a
negative interest rate
environment in the U.K
now looks more
possible
UK now has
approximately six
months for negotiation,
for a UK-EU trade
agreement, before
concluding the
transition period on
Dec 31
Nigeria H2-2020 Outlook: Up in the Air
17 www.unitedcapitalplcgroup.com
Emerging Markets: A threat to years of strong growth
Judging by historical trends, we expected global monetary policy easing around the
world would set a precedent for positive fund flows into EM assets in 2020. However,
dwindling exports, capital flow reversals, thinning remittance, lower commodity prices,
collapse in energy demand and currency market crises pushed many emerging and
frontier market economies to the edge in H1-2020. Notably, the IMF sees emerging
markets and developing economies shrinking by 3.0% in 2020 before rebounding by 5.9%
in 2021.
Looking at the constituent economies in the BRICS classification, Brazil comes in second,
on the list of countries with the highest COVID-19 cases at 874.0k people. Based on the
expected economic damage from the pandemic and its related quarantine measures,
the Brazilian government lowered its 2020 economic outlook, forecasting a 9.1%
contraction in GDP for 2020. The Russian economy is also heavily impacted by the
pandemic (third country based on highest confirmed cases), as well as suffering from the
oil demand destruction and declines in exports. However, broad-based expectations are
pointing towards an increased stimulus from the Russian government, given the modest
stimulus package deployed so far, estimated at 2.8% of GDP. Elsewhere, India which was
once the fastest-growing economy among the G-20 countries, experienced a downward
spiral, with growth in Q1-2020 falling to 3.1% y/y vs 5.8% y/y in Q1-2019. Going into H2-2020,
the Asian economy would be challenged with implementing policies that mitigate the
risks of sustained lower growth, amid the continued increase in the government’s fiscal
deficit.
China seems to be ahead of the pack despite being the initial epicenter of the
coronavirus outbreak. Leading indicators such as the PMI and industrial output readings
are flashing positive signs, with the country’s demand for crude oil reported to be back to
pre-pandemic levels, However, the growth outlook remains bleak compared to 2019, as
the country remains exposed to the weaker trade and disruptions in global supply chains.
Therefore, the IMF predicts that the Chinese economy will grow by 1.0% in 2020 compared
to the 6.0%-7.0% historical growth range. In sum, while fiscal and monetary policy
Global Economy
..the IMF sees emerging
markets and
developing economies
shrinking by 1.0% in
2020
Sources: Institute of International finance, Bloomberg, United Capital Research
-60
-10
40
Oc
t-19
No
v-1
9
De
c-1
9
Ja
n-2
0
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Emerging markets experienced huge
outflows in March Non resident portfolio flows to EMs
Equity Flows ($bn) Debt Flows ($bn)
Net capital flows ($bn)
Figure 9
-30.0% -20.0% -10.0% 0.0%
Brazilian real
South African Rand
Mexican Peso
Russian Rouble
Indian Rupees
Kazakhstan Tenge
Chinese Yuan (Onshore)
Chinese Yuan (offshore )
Capital flow reversals weaken
currencies across emerging markets YTD Performance of BRICS currency
Figure 10
China’s leading
economic indicators
such as the PMI and
industrial output
readings are flashing
positive signs
Nigeria H2-2020 Outlook: Up in the Air
18 www.unitedcapitalplcgroup.com
responses are important for the recovery, the trajectory of EM markets lies in the recovery
of other developed economies, given the dependence of emerging economies in terms
of foreign fund flows and trade.
Financial Markets
Taking a V shaped recovery
At the height of the pandemic in Mar-2020, stock markets crashed to the levels not seen
since the Global financial Crisis 2008/9, with bond yields crashing, as investors took flight to
relatively safer US treasuries or maintained cash positions. Interestingly, while the
performance of gold has been deemed to be positive in times of economic downturn,
2020 was different, as gold prices dropped significantly to a year low of $1,477.9/ozt in
Mar-2020.
However, we saw a quick rebound through Apr-2020 and May-2020, as investors took
advantage of the cheap valuation and became optimistic of a gradual economic
recovery, especially as monetary and fiscal authorities rolled out expansionary policy
tools. Notably, the MSCI equity world index has recovered partially, with YTD loss at -8.0%
as at Jun 15, vs -32.1% in the heat of Mar-2020. In addition, the yields on U.S. treasuries are
steadily on the rise, as investors’ appetite for riskier assets is becoming stronger.
Looking ahead, we believe that the renewed interests in equities and fixed income might
be sustained to pre-COVID levels. The expansionary monetary policy, low rates in
developed economies and recovery in commodity prices will see funds flow back into
emerging economies as we approach the end of the year. However, the downside risk to
our expectation includes a possible second wave of infection as economies begin to
open, liquidity crunches, insolvency, and subdued demand, as unemployment levels take
time to be restored to pre-COVID-19 levels. Therefore, the key indicators to watch before
making investment decisions include the trajectory of infections across the world,
headways made in finding a vaccine for the virus, unemployment rates and policy
actions.
Global Economy
...while performance of
gold has been deemed
to be positive in times
of economic downturn,
2020 was different
Sources: Bloomberg, United Capital Research
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20
Stock Markets crashed in March Relative movement of key Global stock indices
world index SSE Index S&P 500 FTSE 100 Nasdaq
Covid 19
Escalates in China
Risk off sentiments decipates,
markets rebound
Economic lockdown at high
intensity around the world
Figure 11
A major downside risk
to global financial
markets is the
possibility of a second
wave
Nigeria H2-2020 Outlook: Up in the Air
19 www.unitedcapitalplcgroup.com
Oil prices
Is the worst behind us?
In H1-2020, the impact of COVID-19, the resultant lockdown, coincidentally, the expiration
of the previous OPEC+ agreement and the breakdown of agreement between Saudi
Arabia, and Russia, fueled a supply glut and plunged oil prices to a record low. As a
result, inventory build-ups and heavy loads of unsold cargoes began to surface, leading
to an extreme drop in Brent oil price, from $66/b in Dec-2019 to $19.3/b in Apr-2020, the
lowest in about 20 years. Also, for the first time in history, the price of WTI crude May
futures dropped into the negative region, as over-utilization of storage units led oil traders
to pay oil buyers to take physical delivery of crude.
However, judging by recent events, the tides have changed in the oil market. First, the
resolution of the oil price war, which gave birth to a historic 9.7mbpd initial supply cut by
OPEC+, and additional cuts by non-OPEC+ members, partially mopped up supply. Also,
the demand prospects improved, with China’s oil consumption (approx. 13.0% of world oil
demand) reported to be back at pre-pandemic levels, and the gradual reopening of
world economies, especially in high-demanding regions like the U.S. and Europe (approx.
20.9% and 14.0% of world oil demand respectively). Bearing all the above in mind, Brent
oil price and WTI recovered from $25.3/b and $18.8/b at the end of Apr-2020 to $39.7/b
and $37.1/b by mid-June 2020, respectively.
As H2-2020 begins to unravel, we believe the world is on a better balance of supply and
demand, which will determine the trajectory of oil prices. On the supply side, OPEC+
decided to extend the 9.7mb/d cuts by one month into July (now 9.6mb/d with exclusion
of Mexico’s 100kb/d), before entering the next phase of production cuts, in which output
will be reduced by 7.7 mb/d. This is as Saudi Arabia announced to cut its production by
an additional 1mb/d in June-2020.
On the other hand, the dynamics on the demand side are dependent on the progression
of the COVID-19 disease and how soon activities can return to normal. With a number of
economies gradually easing process restrictions, as well as stimulus measures by
Global Economy
Brent oil price dropped
from $66.0/b in Dec-
2019 to $19.3/b in Apr-
2020, the lowest in
about 20 years
Sources: Bloomberg, United Capital Research
-50
-30
-10
10
30
50
70
90
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
Shut down of activities across economies caused oil demand to slump Brent and WTI price trend ($/b)
Coronavirus goes out
of control in China
Storage spaces maxed
out as the May WTI Futures
expire
Saudi Arabia
initiate oil price war
with Russia, U.S.
OPEC+
extends
9.7mbpd cut
US airstrike kills top Iranian
military commander
Figure 12
As H2-2020 begins to
unravel, we believe the
world is on a better
balance of supply and
demand, which will
determine the
trajectory of oil price
Nigeria H2-2020 Outlook: Up in the Air
20 www.unitedcapitalplcgroup.com
governments to spur business and industrial activities, demand is likely to trickle higher.
However, given the absence of a vaccine, the level of activities is expected to remain
low throughout 2020 compared to 2019. Notably, the OPEC projects that oil demand will
rebound to about 92.3mbpd in Q3-2020 from 81.3mbpd in Q2-2020, bringing average
demand in 2020 to 90.6mbpd, 10.0% lower than 99.7mbpd from 2019. In all, putting the
two market forces together, we believe that oil prices will hover around $40.0/b to $45.0/
b, as a full recovery in demand remains hinged on the development of a vaccine, and
the non-materialization of a second wave of the pandemic.
Global Economy
Putting the two market
forces together, we
believe that oil prices
will hover around
$40.0/b to $45.0/b
60
70
80
90
100
110
2018 2019 Q1-2020 Q2-2020 Q3-2020 F Q4-2020 F 2020 F
Oil market has gone through the worst time yet World oil demand (Mbpd)
Sources: OPEC MOMR, United Capital Research
Figure 13
Sub-Saharan
Africa
Nigeria H2-2020 Outlook: Up in the Air
23 www.unitedcapitalplcgroup.com
Sub-Saharan Africa
Macro Overview: Surviving the virus?
In Jan-2020, when we published our outlook report for FY-2020 titled “A different playing
field’, we had expected economic activities to pick up in Sub-Saharan Africa (SSA) on the
back of our outlook for strong growth among non resource-intensive countries which we
estimated would bolster the modest expansion among the resource-intensive countries.
However, the global outbreak of the novel Coronavirus in early 2020 precipitated an
economic crisis in the region as the prices of key export commodities (especially crude
oil) of most countries within the region slumped, prompting a panic exit by foreign
portfolio investors and creating a huge external deficit.
Notably, Africa was the last frontier to be hammered by the pandemic partly due to its
relatively lower trade traffic with the rest of the world and the inadequate testing
capacities in most of the countries. However, like most advanced economies, the
incidence of COVID-19 was followed by stringent measures across the region. Notably, all
SSA countries imposed some form of restrictions on the movements of people and
economic activities. These restrictions and lockdowns worsened the already fragile social
and economic conditions of most countries within the region, with the large informal
sector (over 80.0% of total employment according to World Bank) being the worst hit.
We had expected
economic activities to
pick up in SSA, on the
back of our outlook for
strong growth among
non resource-intensive
countries
Sub-Saharan Africa
4% 2%
0%-6% -10% -10% -13% -16% -17% -21%
-26%
-66%
12% 12%
-10% -10% -10%
-28%
-14%-13% -13%
-9%-15%
-40%
Go
ld
P.
me
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Wh
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t
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min
um
Zin
c
Co
pp
er
Co
tto
n
Bre
nt
Except for precious metals, prices of SSA's key export items are
down in 2020
YTD Commodity Return in March viz. June
YTD return as at the end of March
Sources: Bloomberg, United Capital Research
Figure 14
Sources: Africa CDC, United Capital Research
Figure 15
...like most advanced
economies, the
incidence of COVID-19
was followed by
stringent measures
across the SSA region
Nigeria H2-2020 Outlook: Up in the Air
24 www.unitedcapitalplcgroup.com
Despite the late arrival of the virus and the prompt implementation of social distancing
measures, the virus has spread rapidly across the region. As at the time of writing this
report (16th of June 2020), all 54 African countries have recorded a case of the virus, with
over 251,800 total confirmed cases, more than 114,300 recoveries and more than 6,700
deaths. A country by country analysis showed that the regional giants – South Africa (with
73,553 case), Egypt (with 46,289 cases) and Nigeria (with 16,658 cases) – led the pack on
the highest number of cases within the region. However, the lack of testing capacity in
many countries suggests that these figures most likely understate the true number of
infections.
These developments have prompted both the fiscal and monetary authorities within the
region to unveil large-size stimulus packages to correct the imbalance and reduce the
burden on people and businesses.
Fiscal Policy Response and Debt Sustainability: Striking the right balance
Although the outbreak of COVID-19 left a negative imprint on the revenue profile of most
countries within the region (especially for the crude oil and tourism dependent
economies), the need to cushion the impact of the restrictions implemented to curb the
spread of the virus have spurred government spending across the region. Notably, this
fiscal imbalance has widened the need for governments to borrow in 2020, though not all
the countries within the region have the sustainable fiscal space to do so.
Sub-Saharan Africa
Regional giants – South
Africa, Egypt and
Nigeria – led the pack
in the highest number
of cases within the
region
…this fiscal imbalance
has widened the need
for governments to
borrow in 2020
Sources: Africa CDC, United Capital Research
Figure 16
Sources: World Bank, United Capital Research
-16.0%
-12.0%
-8.0%
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Se
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lles
Except for Eritera all SSA countries have announced some form of fiscal
stimulus to combat COVID-19Fiscal Balance (% of GDP), 2020
Figure 17
Nigeria H2-2020 Outlook: Up in the Air
25 www.unitedcapitalplcgroup.com
As of 2019 (Prior to the outbreak of COVID-19), 19 SSA countries were reported to have
exceeded the 60.0% debt-to-GDP threshold set by the African Monetary Co-operation
Program (AMCP) and IMF for developing economies. Surpassing this threshold means that
these countries are highly vulnerable to economic changes and their governments have
little headroom to provide support to the economy in the event of a recession. Also, debt
sustainability analysis by the IMF in Nov-2019 showed that almost half of all SSA borrowers
were either at risk of, or already in debt distress.
Accordingly, to create more fiscal room for governments across the region to spend on
the critical infrastructures needed to curb the spread of the virus, the World Bank Group
and the IMF have called for debt relief, as well as debt servicing and repayment
suspension, while also unveiling various support packages to assist the region in the fight
against COVID-19. In response to the COVID-19 "call to action" from the World Bank and
the IMF, the G20 and Paris Club announced a debt service suspension initiative on 15
April, supporting an NPV-neutral (to ensure creditors face no losses on the value of the
delayed payments), time-bound suspension of principal and interest payments for the
eligible 73 countries that make a formal request for debt relief from their official bilateral
creditors, and encouraging private creditors to participate on comparable terms.
However, private creditors (Eurobonds, Commercial Banks and others) which account for
the largest portion of SSA’s debt are yet to lend a voice of support to the either of the two
options.
Sub-Saharan Africa
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
Erite
ra
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lia
As of 2019, 19 SSA countries had surpassed IMF's threshold for prudent debt levelsDebt to GDP ratio viz. IMF' 60.0% prudent threshold
Debt to GDP ratio, 2019 IMF's prudent threshold
Figure 18
Sources: IMF, United Capital Research
Debt sustainability
analysis by the IMF
showed that almost half
of all SSA borrowers
were either at risk of, or
already in debt distress
Multilateral Agencies
band together to
provide debt relief and
suspension for SSA
economies
59 63 67 74 79 82 88 104 11049 54 53 61 68 73 87
97 10078 86 98111 117 117
123131 138
4354
7376
85 9296
122135
45
78
11 1212
1110
2010 2011 2012 2013 2014 2015 2016 2017 2018
A large portion of SSA' long term external debt is owed to to
private creditorsSSA External Debt Mix
Official Multilateral Official Bilateral Commercial Banks Bonds Other Private Creditors
Figure 19
Sources: IMF, United Capital Research
Nigeria H2-2020 Outlook: Up in the Air
26 www.unitedcapitalplcgroup.com
We note that while many SSA countries were quick to tap the IMF (up to 40 SSA countries
requested for support and 27 have been approved) and World Bank (more than 40
countries have received support) support facilities, many were initially reluctant to seek
debt suspension under the G20 initiatives (less than 10 SSA countries applied and 5 were
approved). This was due to fears of credit-rating downgrades amid concerns that the
debt suspension could include private creditors and limit countries' access to international
capital markets during the debt suspension period. However, more countries (up to 22 in
SSA have applied while 8 have received) are starting to tap the initiative amid the
request by G20 to ratings companies to avoid any action against countries participating
in the initiative.
Clearly, 2020 is the year for concessional borrowings by SSA countries. However, as
economies begin to re-open and external dynamics continue to improve, we might see
some more private commercial borrowing in H2-2020 – a window most countries are
leaving open by not tapping the G-20 debt suspension initiatives.
Monetary Policy Response: At the expense of price stability?
Like their fiscal counterparts, monetary authorities across SSA have announced series of
expansionary policies to cushion the impact of the pandemic on their various economies
and the livelihood of their citizens. These monetary policies include but are not limited to:
rate cuts, targeted liquidity support, loan restructuring, and asset purchase programs.
However, unlike the fiscal side, there seems to be more room in many SSA economies for
monetary authorities to conduct countercyclical policy responses. Notably, only 7 of 46
SSA countries have an above single-digit inflation rate.
While we expect the monetary authorities across the region to maintain their
expansionary policy stance through H2-2020, we note that the impacts are only likely to
be felt when those economies start to reopen. Also, it is important that these policies are
eased as external conditions start to improve, to prevent blowing over the region’s
currently low level of inflation.
Sub-Saharan Africa
-20.0%
0.0%
20.0%
Lib
eria
An
go
la
Eth
iop
ia
S/L
eo
ne
Nig
eria
Gu
ine
a
Ma
law
i
Za
mb
ia
Gh
an
a
Sa
o T
om
e…
Ga
mb
ia
Ma
da
ga
sca
r
Ke
nya
Leso
tho
Co
ng
o D
.R
So
uth
Afr
ica
Na
mib
ia
Tan
zan
ia
Rw
an
da
Ug
an
da
Mo
zam
biq
ue
Bo
tsw
an
a
Esw
atin
i
C.A
.R
Ga
bo
n
Ca
me
roo
n
Ma
urita
nia
Co
ng
o,
Re
p.
Se
yc
he
lles
Se
ne
ga
l
Co
mo
ros
E/G
uin
ea
Ca
bo
Ve
rde
Tog
o
Ma
uritiu
s
Gu
ine
a-B
issa
u
Bu
run
di
Co
te d
'Ivo
ire
Be
nin
Ch
ad
Ma
li
Nig
er
Bu
rkin
a F
aso
Eritr
ea
SSA economies have room for monetary stimulusInflation Rate viz Global and SSA Average
Inflation Rate Global Average SSA Average
Sources: World Bank, United Capital Research NB: South Sudan and Zimbabwe, with triple digit inflation have been removed from the chart
Figure 11
2020 is clearly the year
for concessional
borrowings by SSA
countries
Figure 20
Nigeria H2-2020 Outlook: Up in the Air
27 www.unitedcapitalplcgroup.com
Macro Outlook: A synchronized slowdown and contraction
The outbreak of COVID-19 compounded by other existing crises in many countries
(including the desert locust emergency, drought, climate change, conflict, and violence)
have changed the overall economic outlook for the SSA region from that of expansion
(earlier expected at the beginning of the year) to a broad-based contraction/slowdown.
Notably, recent PMI figures as well as Q1-2020 GDP report from the region already
confirms the negative impact the pandemic is having on SSA economies.
Again, the World Bank has estimated that the deadly COVID-19 pandemic could cost the
region between $37.0 bn - $79.0 bn in terms of output losses caused by trade disruption.
However, with the expansionary policies rolled out by both fiscal and monetary authorities
across the region estimated at under $20.0bn, we assume that these policies can only at
best minimize the depth of contraction/slowdown.
Sub-Saharan Africa
Sources: IMF, United Capital Research
30
40
50
60
Ja
n-1
9
Feb
-19
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-19
Au
g-1
9
Se
p-1
9
Oc
t-19
No
v-1
9
De
c-1
9
Ja
n-2
0
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
SSA economies already contracted in Q2-2020 and are on the
path of recoveryComposite PMI
Nigeria South Africa Kenya Ghana Threshold
Figure 22
Sources: Bloomberg, United Capital Research
...recent PMI figures as
well as Q1-2020 GDP
report from the region
already confirms the
negative impact the
pandemic is having
While we expect SSA
monetary authorities to
maintain their
expansionary policy
stance through H2-2020,
the impact remains
hinged on economies
reopening
Country Rate cut Liquidity support Loan restructuring Assets purchase
Nigeria YES YES YES NO
Angola YES YES YES YES
Kenya YES NO YES NO
Gambia YES YES NO NO
Ghana YES NO NO NO
South Africa YES YES YES YES
Rwanda YES YES YES YES
Senegal NO YES YES NO
Monetary Actions taken by AuthoritiesFigure 21
Nigeria H2-2020 Outlook: Up in the Air
28 www.unitedcapitalplcgroup.com
Notably, we expect economies dependent on crude oil (Nigeria, Angola, Congo, and
Chad) and tourism to be the hardest hit, followed by those with little or no fiscal or
monetary policy space to respond to the outbreak. Also, we expect an underwhelming
economic outcome by East African countries (Ethiopia, Kenya, Djibouti, and Uganda)
battling with the combined negative impact of COVID-19 outbreak, global supply chain
disruption, and locust invasion which has severely disrupted their agricultural production.
Broadly, a combination of low commodity prices, capital outflows (mainly portfolio
investment), reduced tourism activity, and slowdowns in the economies of key trading
partners are expected to weigh heavily on SSA economic activity in 2020.
However, the shape, duration, and size of recovery will vary from country to country,
depending heavily on the improvement in the external dynamics (global supply chain,
commodity prices as well as capital flows) and the length of time required to bring
economic activities back to near pre-COVID-19 levels. We note that recovery will be
more strenuous in countries with little to no monetary or fiscal space to provide large-size
bailouts for economic recovery. The downside risk to our overall outlook remains that the
decline in growth could be deeper and more widespread as outbreaks intensify and
spread more widely across the region.
Beyond 2020, we believe the effective implementation of the now postponed Africa
Continental Free Trade Agreement (AfCFTA) will be pivotal to building economic
Sub-Saharan Africa
Sources: Bloomberg, United Capital Research
3.6%
2.4%3.4% 3.2%
3.9%
-1.6%-2.1%
-0.8%
1.8%
-0.7%
-3.2%-5.1%
-1.1%-2.6% -2.8%
IMF World Bank AU UNECA AfDB
An historic broad-based contraction is now expected2020 GDP growth forecasts
Pre-COVID-19 COVID-19 Base Case COVID-19 Worst Case
Figure 23
We note that recovery
will be more strenuous
in countries with little to
no monetary or fiscal
space to provide large-
size bailouts for
economic recovery
73.2%
54.1% 50.4% 48.3% 46.5%38.9% 35.4%
29.4% 25.8%20.9% 20.2%
Sa
o T
om
e a
nd
Prin
cip
e
Ca
bo
Ve
rde
Co
mo
ros
Ga
mb
ia, Th
e
Eth
iop
ia
Ma
uritiu
s
Se
yc
he
lles
Tan
zan
ia
Rw
an
da
Su
da
n
Ma
da
ga
sca
rCountries dependent on tourism to be badly hit in 2020
SSA Countries International tourism, receipts (% of total exports), 2018
Sources: World Bank, United Capital Research
Figure 24
A combination of low
commodity prices,
capital outflows,
reduced tourism
activity, and economic
slowdowns in key
trading partners will
weigh heavily on SSA
economic activity in
2020
Nigeria H2-2020 Outlook: Up in the Air
29 www.unitedcapitalplcgroup.com
resilience against future crises as it will help to strengthen regional value chains, reduce
vulnerability to external shocks, and advance the digital transition needed for the region’s
developments.
Eurobond Market: Monetary stimulus spurs market recovery
Early in the year, activities at the primary Eurobond market were business as usual for SSA
countries. Gabon opened the year with a $1.0bn issuance in Jan-2020, followed by
Ghana with a $3.0bn issuance in Feb-2020. Both auctions were widely oversubscribed with
subscription rates of 3.5x and 4.7x respectively. Obviously, foreign investors took
advantage of the relatively high yield on offer at both auctions. However, with the
outbreak of COVID-19 and its attendant negative impact on SSA economies, Nigeria,
South Africa, Benin, Ivory Coast and Kenya, all halted plans of re-visiting the Eurobond
market in H1-2020.
At the secondary market, yields on all the outstanding and new SSA notes re-priced
higher in Q1-2020, owing to the synchronized risk-off sentiments fueled by the COVID-19
pandemic and the uncertainties involving the impact that it will have on the economy.
Notably, Zambia (+24.4%) and Angola (+20.2%) recorded the highest increases in
average Eurobond yields amid concerns of a widening fiscal deficit and deteriorating
credit worthiness on the back of high debt levels. However, the large-sized stimulus
package unveiled across the developed market and recent recovery in economic
activities, had since refueled risk-on sentiments by foreign investors, with SSA Eurobond
yields declining from their March-2020 highs.
SSA Eurobond yields
benefit from large-sized
stimulus packages in
developed economies
Sub-Saharan Africa
Sources: Bloomberg, United Capital Research
0.20.8
2.11.6
7.2
5.3
1.9
6.7
5.85.0
3.72.9
5.8
2.4
1.0 1.30.8 1.0 1.0
3.0
4.4
6.0
1.0 0.8
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
202
9
203
0
203
1
203
2
203
3
203
5
203
8
204
1
204
4
204
6
204
7
204
8
204
9
205
1
206
1
Ghana is the only country with Eurobond maturity in 2020SSA Eurobond Maturity Profile ($'bn)
Figure 25
COVID-19 halted plans
for a number of SSA
economies to return to
the Eurobond market
Nigeria H2-2020 Outlook: Up in the Air
30 www.unitedcapitalplcgroup.com
Looking ahead, we believe there is still room for new Eurobond issuances in H2-2020.
Although this will depend on the level of improvement seen in both the external and
domestic space, our optimism is buttressed by the recent recovery in foreign investors’
appetite for SSA Eurobond at the secondary market. Also, the need for most of the SSA
economies to plug sizable budget deficit as well as refinance existing private debt
obligations further adds to our optimism.
For example, Kenya has refused to tap the G20/G7 debt relief initiative owing to the
initiative’s stringent requirement that may constrain the country from tapping the
Eurobond market during the relief period (April-Dec 2020). Effectively, Kenya is leaving the
door open for a return to the international debt market in 2020. Also, the fact that Egypt
was able to raise a $5.0bn (its largest ever issuance) with a subscription rate of 4.4x and at
a weighted average rate of 7.66% in May-2020, indicates the availability of demand for
Africa’s Eurobond, which some countries would be looking to tap in H2-2020.
At the secondary market, we expect interest to be dictated by the level of recoveries in
the key export items of each countries. Also, our outlook for sustained expansionary
monetary policy conditions in advanced economies (especially in U.S and Europe) should
create a bullish bias for investing in SSA Eurobonds in H2-2020.
Foreign Exchange: A broad-based weakness
Analysis of SSA foreign exchange condition in H1-2020 showed a broad-based weakness
against the US dollar, as the outbreak of COVID-19 triggered sharp capital outflows
(portfolio investments), exposed the fragilities in each country’s external account and
negatively impacted economic activities across the region.
Emerging and Frontier
Market equities to
thrive well come 2020
Sub-Saharan Africa
We believe there is still
room for new Eurobond
issuances in H2-2020
At the secondary
market, we expect
interest to be dictated
by the level of
recoveries in the key
export items of each
country
Sources: Bloomberg, United Capital Research
2.0%
12.0%
22.0%
32.0%
42.0%
S/A
fric
a
Ivo
ry C
oa
st
Se
ne
ga
l
Eth
iop
ia
Be
nin
Ke
nya
Nig
eria
Gh
an
a
Rw
an
da
Co
ng
o
Mo
zam
biq
u
e An
go
la
Za
mb
ia
SSA yields spike in March-2020 as COVID-19 fuels risk-off
sentimentAverage mid-yield to maturity of outstanding SSA countries Eurobond
31/12/2019 31/3/2020 5/15/2020
Figure 26
Nigeria H2-2020 Outlook: Up in the Air
31 www.unitedcapitalplcgroup.com
Notably, the Zambian kwacha and Angolan kwanza were the region’s worst performing
currencies, as foreign confidence in both economies sharply dropped amid steep
declines in the price of key export commodities - copper and crude oil, in both countries,
respectively. Also, the inability of both countries to access external support from the IMF or
World Bank (amid their already high debt levels) added to investors’ concern. Similarly,
regional giants - Nigeria and South Africa saw their respective local currencies, naira, and
rand, weaken against the US dollar. In Nigeria, the central bank adjusted its official and
I&E exchange rate from N306/$ and N360/$ to N360/$ and N385/$ respectively as the
outbreak of COVID-19 revealed the fragilities in the country’s external account.
Meanwhile, the South African rand weakened amid COVID-19-induced capital reversals.
Elsewhere, the CFA franc was the lone gainer against the dollar in H1-2020, supported by
its link to the euro. Meanwhile, a critical milestone was achieved in the transformation of
the West African CFA franc to eco, in H1-2020. This was as the French Council of Ministers
adopted a bill ratifying the end of the CFA franc in the eight francophone countries that
form the West African Economic and Monetary Union (UEMOA). However, no further
progress was made on the implementation of the new currency amid the COVID-19
pandemic.
Emerging and Frontier
Market equities to
thrive well come 2020
Sub-Saharan Africa
0.5% 0.0%
-0.1% -0.7% -1.0% -1.6% -2.0% -2.2%-5.2% -6.4% -7.4% -8.4% -9.4% -10.4%-11.8%
-18.5%-19.6%-22.1%
CFA
Fra
nc
S/L
eo
ne
(SLL
)
Ma
law
i (M
WK
)
Tan
zan
ia (
TZS)
Gu
ine
a (
GN
F)
Ug
an
da
(U
GX
)
Rw
an
da
(R
WF)
Gh
an
a (
GH
S)
Ke
nya
(K
ES)
Nig
eria
(N
GN
)
Eth
iop
ia (
ETB
)
Ma
uritiu
s (M
UR
)
Bo
tsw
an
a (
BW
P)
Co
ng
o (
CD
F)
Mo
zam
biq
ue
(M
ZN
)
S/A
fric
an
(ZA
R)
An
go
la (
AO
A)
Za
mb
ia (
ZM
W)
SSA currencies weakened against the dollar amid BoP shocksYTD Performance against the US$
Declines in the price of
key export
commodities exposed
fragility in SSA
currencies
...no further progress
was made on the
implementation of the
new currency amid
COVID-19 pandemic
Sources: Bloomberg, United Capital Research
Figure 27
Sources: Bloomberg, United Capital Research
9.0
6.85.8 5.6 5.4 5.3 5.1 4.9 4.8 4.4 4.1 4.1 3.9 3.6 3.6 3.5 3.4 3.3 3.3 3.2 2.9 2.7 2.6 2.4 2.0 1.8 1.3 0.9 0.4
Bo
tsw
an
a
Co
mo
ros
Nig
eria
Tan
zan
ia
An
go
la
Ma
uritiu
s
Ca
bo
Ve
rde
Lib
eria
S/A
fric
a
Ca
me
roo
n
Ug
an
da
Rw
an
da
Ma
da
ga
sca
r
Ga
mb
ia
Na
mib
ia
Mo
zam
biq
ue
Leso
tho
Ma
urita
nia
Gu
ine
a
Se
yc
he
lles
Ma
law
i
Gh
an
a
Sa
o T
om
e…
Eth
iop
ia
Esw
atin
i
Za
mb
ia
Djib
ou
ti
Bu
run
di
D.R
.C
Most SSA economies have more than the recommended 3-
months import coverFX reserves import cover viz. 3-month threshold (months)
Total reserves in months of imports, 2018 Recommended Threshold
Figure 28
Nigeria H2-2020 Outlook: Up in the Air
32 www.unitedcapitalplcgroup.com
Looking ahead, we expect currencies within the region to strengthen against the USD in
H2-2020, as external (commodity demand and price recovery) and domestic (easing
economic restrictions) dynamics begin to improve and portfolio investments recover.
Also, concessional loans from IMF and World Bank should further support local foreign
exchange conditions, adding to respective countries’ external reserves and making them
more resilient to speculative attacks. However, with lingering uncertainties around the
outlook for COVID-19, we do not expect most of the currencies to recover to pre-COVID-
19 levels. Lastly, we expect the conversation around implementation of the eco to pick-
up in H2-2020 as countries within the region start to re-open for business.
Equity Market: Wheezing from the impact of COVID-19
The performance of equity markets across the world was a tale of two quarters in H1-2020.
This was as the outbreak of the COVID-19 pandemic in Q1-2020 spurred a broad-based
risk-off sentiment while the synchronized injections of fiscal and monetary stimulus spurred
a risk-on sentiment later in Q2-2020. Despite the recovery in Q2-2020, major equity indices
in the global, emerging and frontier markets remain below the water, still wheezing from
the negative impact of COVID-19-induced sell-offs. Notably, all the six bourses under our
coverage in SSA ended H1-2020 in the negative territories.
Looking ahead, we expect the overall interest in SSA equities to strengthen as more
countries begin to ease lockdown policies and businesses begin to re-open. Also, the low
interest rate environment in the developed market, the continued rollout of monetary
and fiscal monetary stimulus and our expectation for currencies within the region to
strengthen as external as well as domestic conditions improve, should spur a renewed
foreign interest in the region.
Emerging and Frontier
Market equities to
thrive well come 2020
Sub-Saharan Africa
Concessional loans
from IMF and World
Bank should further
support local foreign
exchange conditions,
adding to respective
countries’ external
reserves
...we expect the overall
interest in SSA equities
to strengthen as more
countries begin to ease
lockdown policies and
businesses begin to re-
open
Sources: Bloomberg, United Capital Research
0%
-21% -21% -22% -24%-21%
-4%
-16%
-28% -28%
-3%-7% -8% -8%
-13% -14% -15% -15%-20%
-24%
Bo
tsw
an
a
Nig
eria
Glo
ba
l Mkt
S/A
fric
a
Em
erg
ing
Mkt
Ke
nya
Gh
an
a
BR
VM
Fro
ntie
r M
kt
Ma
uritiu
s
Equities remain under the water despite recoveries in Q2-2020Equity Market Performance
March- YTD June- YTD
Figure 29
Despite the recovery in
Q2-2020, major equity
indices in the global,
emerging and frontier
markets remain below
the water
Nigeria H2-2020 Outlook: Up in the Air
33 www.unitedcapitalplcgroup.com
Sources: Bloomberg, United Capital Research
Px_Last CHG_PCT_1DCHG_PCT_WTDCHG_PCT_YTDPE_RatioBEST_DIV_YLDPx_to_book_ratio
Macroeconomics | Equities | Fixed Income | Currencies | CommoditiesPx_Last CHG_PCT_1D CHG_PCT_WTDCHG_PCT_YTD PE_Ratio EQY_DVD_YLD_12MPx_to_book_ratio
Equities Level Mcap ($'bn) WTD (local) YTD (local) P/E P/B Div. Yield
BGSMDC IndexBotswana 7,243.2 3.2 -0.4% -3.6% 9.2 1.3 6.3%
ICXCOMP IndexBRVM 135.9 7.1 -2.1% -15.1% 6.7 1.1 8.1%
EGX30 IndexEgypt na - na -21.9% 9.6 1.5 3.2%
GGSECI IndexGhana 1,928.7 7.6 -1.2% -14.8% na 1.6 nm
NSEASI IndexKenya 143.3 20.5 1.8% -13.0% 8.6 1.5 6.2%
SEMDEX IndexMauritius 1,670.5 4.9 -0.6% -23.5% 32.8 0.8 5.4%
MOSENEW IndexMorocco 10,020.3 53.9 -1.3% -14.2% 19.4 2.3 4.2%
NGSEINDX IndexNigeria 24,956.0 33.6 -1.2% -7.4% 8.3 1.2 7.2%
JALSH IndexSouth Africa 52,270.2 794.4 -4.4% -5.6% 16.5 1.7 3.9%
TUSISE IndexTunisia 6,701.0 6.7 1.1% -5.6% 17.8 2.2 1.8%
MXWO IndexGlobal Market 2,171.4 80,192.3 -5.1% -5.9% 21.5 2.5 2.3%
MXFM IndexFrontier Market 471.2 -- -3.0% -18.2% 11.1 1.5 4.3%
MXEF IndexEmerging Market 966.3 -- -4.1% -11.2% 16.2 1.6 2.7%
Dollar Eurobonds Amt Out ($'bn) Average YTM WTD YTD
Angola 8.0 14.1% -0.28% 7.0%
Egypt 30.2 6.8% 0.31% 1.3%
Ghana 11.0 8.0% 0.09% 1.1%
Iv ory Coast 4.6 6.0% -0.04% 0.7%
Kenya 6.1 7.4% 0.03% 1.2%
Morocco 2.3 2.8% 0.02% -0.3%
Nigeria 11.2 7.3% 0.03% 1.1%
Senegal 2.9 6.1% -0.14% 1.6%
GHS BGN CurncySouth Africa 20.0 5.2% 0.20% 0.4%
Zambia 3.0 36.9% 2.60% 18.0%
Currencies (vs. USD) Spot Rate WTD MTD YTD 6M Forward 12M Forward
AOA BGN CurncyAngola AOA: Kwanza 599.2 -1.6% -1.4% -18.8% na na
EGP CurncyEgypt EGP:Pound na -- -2.1% -0.9% 17.0 17.9
GHS BGN CurncyGhana GHS:Cedi 5.8 0.0% 0.0% -1.2% 6.2 6.7
KES BGN CurncyKenya KES: Shilling 106.6 -0.3% 0.5% -4.7% na na
MUR BGN CurncyMauritius MUR: Rupee 40.0 0.2% 0.5% -9.2% na na
MAD BGN CurncyMorocco MAD: Dirham 9.6 0.4% 1.1% -1.2% 9.8 9.8
NGN BGN CurncyNigeria NGN: Naira 387.7 0.2% -0.1% -6.5% 425.4 463.9
ZAR BGN CurncySouth Africa ZAR: Rand 17.1 -2.5% 2.3% -18.4% 17.5 17.8
TND BGN CurncyTunisia TND: Dinar 2.8 -0.2% 0.2% -2.3% na na
XOF BGN CurncyWAMU CFA: Franc 581.1 -0.2% 1.0% 0.1% na naBWP BGN Curncy 5
Commodities Spot Rate WTD MTD YTD 52 Week High 52 Week Low 12M Forward
CO1 ComdtyBrent Crude USD/bbl. 39.7 -2.6% 15.2% -38.3% 72.0 16.0
GC1 COMB ComdtyGold USD/ t oz 1,720.3 1.3% -1.1% 12.8% 1,775.8 1,335.0
HG1 COMB ComdtyCopper USD/lb. 256.7 0.1% 6.3% -7.8% 288.6 206.0
CCH0 ComdtyCocoa USD/MT na -- -- -- 2,998.0 2,188.0
Macro & Fixed Income 10Yr Bnd Yld Inflation Real Return Policy Rate *GDP ($'b) **GDP Growth Reserves ($'b)
Angola 8.8% 2.1% 6.7% 18.0% 105.8 2.5% 16.4
Egypt 13.4% 4.7% 8.7% 10.3% 250.9 5.6% 37.0
Ghana 19.0% 11.3% 7.7% 14.5% 65.6 4.9% 6.5
Kenya 12.1% 5.5% 6.6% 7.0% 87.9 5.5% 9.7
Mauritius 4.3% 2.8% 1.5% 1.9% 14.2 2.8% 6.9
Morocco 2.7% 0.9% 1.8% 1.9% 117.9 1.9% 28.3
Nigeria 10.3% 12.4% -2.1% 12.5% 397.3 1.9% 36.3
South Africa 9.4% 4.1% 5.3% 3.8% 368.3 -0.5% 52.8
Tanzania 12.9% 3.4% 9.5% 12.0% 58.0 6.7% 5.6
Tunisia 9.7% 6.3% 3.4% 6.8% 39.9 0.9% 8.1
Performance Summary
June 15, 2020
Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
Movements in Global Indices vs Africa
MSCI World S&P 500
FTSE 100 MSCI Africa
*GDP ($’b): Annual GDP by World Bank
** GDP Growth: Latest Quarterly y/y GDP Growth
Domestic
Macro and
Policies
Nigeria H2-2020 Outlook: Up in the Air
36 www.unitedcapitalplcgroup.com
Domestic Macroeconomic Overview
…H1-2020 Review
As at Jan-2020, when we published our FY-2020 outlook report titled “A different playing
field,” we estimated that growth in economic activities in Nigeria will remain above 2.0%
levels. Regrettably, we downplayed the possibility that the coronavirus outbreak, which
was brewing in Wuhan city in China at the time of writing the January report, would
become a pandemic, upset the fragile balance in the oil market, and bring global
economic activities to a halt! But no one saw this coming either. The situation was a
double whammy for Nigeria, as the oil market collapse wiped off export earnings and
50.0% of government revenue, while domestic economic activities were grounded in the
key states of Lagos, the FCT and Ogun for five weeks, before a partial restriction was
imposed thereafter.
Certainly, with the global and domestic spread of COVID‑19, the measures required to
contain the virus and its impact on the outlook for key macroeconomic variables, a
broad-based review and update of our domestic economic outlook for the rest of the
year is necessary. One thing is clear from where we stand today, the coronavirus
outbreak will take a huge toll on the Nigerian economy and the earlier the virus is
contained globally, or a vaccine is found, the better for world economy, Nigeria inclusive.
Already, domestic economic growth in Q1-2020 slowed to 1.87% and the figure for Q2
2020 is set to come in negative. However, with concerted effort by global health and
other multi-lateral agencies, we expect economic activities to gradually recover from H2-
2020.
Fiscal Policy
Fiscal Policy Response to COVID-19
Nigeria’s fiscal policy stance for 2020 was predicated on the need to boost government
revenue via the Strategic Revenue Growth Initiative (SRGI), a response to rising recurrent
spending, bloated public debt profile and weaker oil revenue. Standing on the pedestal
of this policy stance, President Buhari signed the Finance Bill, 2019 (now Finance Act) into
law in January 2020, thus, introducing some sweeping changes to Nigeria’s tax laws. It
must be noted that the Finance Act was designed to promote fiscal equity, incentivize
investments in infrastructure & capital markets, support small businesses and raise
revenues for the Government. Unfortunately, what could have been a flourishing fiscal
year for the Nigerian government was caught in the web of a global public health crisis
which grounded economic activities and threatened both oil and non-oil revenue.
Nonetheless, to alleviate the economic impact of the twin shock (outbreak of COVID-19
and crude oil price crash) and palliate the economic impact of the pandemic, the fiscal
authorities announced various interventions, ranging from restriction of movement, the
adjustment of the 2020 budget, announcement of various fiscal stimulus package,
The COVID-19 situation
was a double whammy
for Nigeria, as the oil
market collapsed and
domestic economic
activities were
grounded in the key
states
New Fiscal measures
arose, such as the
establishment of
economic sustainability
teams and stimulus
packages
Domestic Macro Overview
Already, domestic
economic growth in Q1
-2020 slowed to 1.87%
and the figure for Q2
2020 is set to come in
negative
Nigeria H2-2020 Outlook: Up in the Air
37 www.unitedcapitalplcgroup.com
establishment of economic sustainability teams, postponement of the planned increase
in electricity tariffs and the reduction in pump price of petrol.
1. Restriction of movements: At the end of March-2020, the Nigerian Government
implemented restriction of movement (with exemption of some essential services and
industrial establishments) within Lagos (commercial hub), Ogun (industrial hub) and Abuja
(administrative capital) for an initial period of 2-weeks. This was in a bid to curb the spread
of the virus within the country. Also, in addition to the already closed land border, the
President announced the closure of air and water ways (international airports and
seaports) while permitting only cargos that have been at sea for more than 14 days to
dock at the seaports.
Notably, as more cases of COVID-19 were recorded across the country, the President
banned inter-state travel, as well as extended all restrictions on April 13 (by another 2-
weeks) and on April 27 (by 1-week). However, compelled by the rising cases of social
violence/unrest within states under lockdown (specifically; Lagos and Ogun state), the FG
relaxed some of the domestic restrictions (with extended curfew from 8pm to 6pm every
day) on May 4 (Phase 1) and was further extended by 2-weeks on May 18. The President
eased some of the existing restrictions on June 1st (Phase two) for a period of four weeks,
spanning 2nd – 29th June, 2020. Worthy of note in the phase two announcement was the
relaxation of the restriction on places of worship subject to each state government
policies and the readjustment of curfew to within 10pm - 4am.
2. Amendment of Nigeria’s 2020 budget (Supplementary budget): In April-2020, the
Presidency through the Minister of Finance (MoF), Zainab Ahmed, commenced the
amendment of the approved 2020 Budget and revision of the 2020 – 2022 Medium-Term
Expenditure Framework/Fiscal Strategy Paper (‘MTEF/FSP’) to reflect the new realities in
Domestic Macro Overview
The Nigerian economy
is currently in phase
two of easing the
lockdown
Source: NCDC, United Capital Research
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
27-F
eb
05-M
ar
12-M
ar
19-M
ar
26-M
ar
02-A
pr
09-A
pr
16-A
pr
23-A
pr
30-A
pr
07-M
ay
14-M
ay
21-M
ay
28-M
ay
04-J
un
11-J
un
FG eased domestic lockdown; even as COVID-19 continues to spreadStatistics of COVID-19 cases in Nigeria
Total confirmed case Total recovery Death
Nigeria
reports its
first case of
COVID-19
Buhari established
Covid-19
Presidential Task
Force
20th
National
Sports
Festival
was
postponed
Suspension
of Visa
issuances
and NYSC
camp
Closure
of
schools
FG released
N10.0bn to Lagos
State and N5.0bn
to NCDC
Lagos, Ogun
and Abuja
Lockdown
Lockdown
extended
by 2-weeks
Lockdown
extended
by 1-week
FG eases
lockdown,
(Phase 1)
FG extends
Phase 1 by
two weeks
FG further
eases
lockdown
(Phase 2)
Figure 30
Revision of budget and
fiscal frameworks
emerged due to the
effect of the pandemic
Nigeria H2-2020 Outlook: Up in the Air
38 www.unitedcapitalplcgroup.com
the macroeconomic environment. Clearly, Nigeria’s actual revenue for 2020 is expected
to underperform initial estimates amid the plunge in crude oil prices which is now well
below the approved budget benchmark of $57.0/b, lower production quota assigned by
OPEC+, and slowdown in economic activities in the wake of COVID-19 outbreak.
Accordingly, the MoF submitted its review of the approved budget at the Federal
Executive Council (FEC) meeting in May-2020. Notably, the council members made some
further adjustment to the reviewed copy for onward submission to the National Assembly.
The net effect of the proposed adjustments is an increase in projected budget deficit
(inclusive of the expenditures funded by project-tied loans) from N2.175tn to N4.95tn. This
Domestic Macro Overview
Figure 17
Source: World Bank, United Capital Research
Fiscal Items (N'tn) FY-2019 Actual 2020 Initially Approved
Budget 2020 Proposed Revision % Change
Total Expenditure 8.29 10.59 10.51 -0.8%
Total Revenue 4.12 8.42 5.56 -34.0%
Total Budget Deficit 4.17 2.17 4.95 128.0%
Available Breakdown
Deficit to be finance by:
Privatization proceeds 0.25 0.13 -50.0%
Borrowing from FGN Special Accounts 0.00 0.26 n/m
Multi-lateral / Bi-lateral Project-tied Loans 0.33 0.39 18.0%
New Borrowings: 1.59 4.17 161.7%
Domestic Borrowing 0.74 2.19 193.8%
Foreign Borrowing 0.85 1.98 133.5%
Revenue:
Oil Revenue (inclusive of Minerals & Mining) 1.38 2.78 1.01 -63.8%
Non-Oil Revenue 1.23 1.81 1.62 -10.3%
Other Revenue: 1.51 3.83 2.93 -23.5%
Independent Revenue 0.56 0.85 0.93 9.8%
Balances in the Special Accounts/Levies 0.55 0.65 0.65 0.0%
Signature Bonus/renewals 0.35 0.94 0.35 -62.7%
Domestic recoveries, asset & fines 0.06 0.24 0.24 0.0%
Grant and Donor Funding 0.00 0.04 0.09 155.4%
Stamp Duty 0.46 0.20 -56.9%
Net Revenue from GOEs 0.55 0.47 -15.1%
Exchange Rate Differentials 0.13 0.00 -100.0%
Expenditure:
Statutory Transfers 0.43 0.56 0.40 -28.9%
Capital Expenditure (CAPEX) 1.17 2.47 2.23 -9.5%
Other Recurrent Expenditure: 6.70 7.57 7.88 4.1%
Non-Debt (ex. Special Interventions) 4.25 4.49 4.58 1.9%
Special Interventions 0.000 0.35 0.35 0.0%
Sinking Fund 0.005 0.27 0.27 0.0%
Debt Servicing Cost 2.45 2.45 2.68 9.2%
Key Assumptions
Oil Price Benchmark ($/b) 67.20 57.00 25.00 -56.1%
Oil Production Benchmark (mbpd) 1.96 2.18 1.90 -12.8%
Exchange Rate (N/$) 305.00 305.00 360.00 18.0%
Key Ratios
Deficit to GDP 0.03 0.02 0.04 2.0%
Deficit to Revenue 1.01 0.26 0.89 63.3%
Debt Servicing Cost/Revenue 0.59 0.29 0.48 19.1%
CAPEX to Total Expenditure 14.06% 23.28% 21.23% -2.1%
Sources: MoF, BudgIT, United Capital Research
Variances between the Initially Approved and Revised 2020 budget Figure 31
Nigeria H2-2020 Outlook: Up in the Air
39 www.unitedcapitalplcgroup.com
will be financed via privatization proceeds of N126.0bn (down from N252.0bn previously
approved); N263.63bn to be borrowed from FGN Special Accounts; drawdowns on
multilateral/bilateral project-tied loans of N387.3bn; and new borrowings (foreign and
domestic) totaling N4.16tn.
After the FEC meeting in May-2020, the MoF further disclosed that the FG intends to
partially finance the huge budget deficit by taking concessionary loans from the IMF
($3.4bn), World Bank ($2.5bn), AfDB ($0.5bn), IDB ($0.1bn) and AFREXIM Bank ($0.5bn) -
totaling c. $7.0bn (N2.5tn). Also, she noted that the external borrowing would be
complemented by borrowings from the domestic debt capital market where interest
rates appear more attractive when compared to the international debt capital market.
Although, a full draft of the approved budget is yet to be made public, reports from the
official Twitter page of the Nigerian Senate indicated that the upper chamber further
revised the total budget size for 2020 from N10.51tn to N10.81tn. This was as the Senate
members believe there is the need for the nation to spend its way out of looming
recession.
3. IMF Loan: In April-2020, the International Monetary Fund (IMF) approved and
disbursed Nigeria’s request for emergency financial assistance of SDR2.45bn ($3.4bn,
100% of quota) under the Rapid Financing Instrument (RFI), to support the economy
against COVID-19 shock. Notably, the $3.4bn RFI is the country’s first lending arrangement
with the IMF since becoming a member in 1961 and the largest emergency financing
provided by the IMF to any country since the COVID-19 pandemic.
Domestic Macro Overview
...the $3.4bn RFI is the
country’s first lending
arrangement with the
IMF since becoming a
member in 1961
0.31.2
2.21.3 1.9 2.1
0.3 0.8 1.2
1.21.1
0.9
2.52.3
0.60.3
0.31.3 0.7
1.4
0.7
2.1 2.1
2014 2015 2016 2017 2018 2019 2020
Approved
2020
Revised
2020E
We expect FG's fiscal deficit to widen from 4.8% of real GDP in
2019 to 8.0% in 2020Compositional trend in FG's fiscal deficit (N'tn)
Other Deficit Financing sources* Foreign Borrowing Domestic Borrowing
Sources: Budget Office, United Capital Research
Figure 32
The Upper Chamber of
Nigerian Senate further
revised the total
budget size for 2020
from N10.51tn to
N10.81tn
Nigeria H2-2020 Outlook: Up in the Air
40 www.unitedcapitalplcgroup.com
Prior to the approval of the RFI request, Nigeria has had four Stand-by Arrangements with
the IMF (granted in 1987, 1989, 1991, and 2000), but were never drawn due to opposition
to IMF policies and conditionalities. This time around, the borrowing request faced little
opposition, given the magnitude of the unprecedented COVID-19 shock, and the fact
that the RFI is a non-concessional lending arrangement that comes with little or no
conditionality.
According to the MoF, the facility has a repayment moratorium of 3.25-years, and a
repayment period of 5-years. This implies that Nigeria faces over $4.5bn external debt
obligations between 2024 and 2025 ($3.4bn RFI and $1.1bn Eurobond maturity in 2025). In
the medium term, we believe authorities will be faced with a choice between refinancing
the debt obligations with relatively expensive external commercial debts (Eurobonds), or
switching to a full-fledged IMF program.
4. Economic Sustainability and COVID -19 Response Teams: In addition to the
technocratic Presidential Economic Advisory Council (EAC), which is responsible for
assessing the macroeconomic policy measures needed to ensure economic stability and
reduce poverty, the Nigerian President in March-2020, constituted an Economic
Sustainability Committee (ESC) chaired by Vice President Professor Yemi Osinbajo, to
develop a comprehensive economic plan to respond to the disruptions and dislocations
caused by the COVID-19 pandemic. Accordingly, the ESC submitted a comprehensive
Nigeria faces over
$4.5bn external debt
obligations between
2024 and 2025
Domestic Macro Overview
Nigeria’s four stand-by
arrangements with the
IMF were never drawn
3.4
2.8
1.41.0
0.7 0.7 0.7 0.6 0.5 0.5
Nigeria Egypt Pakistan Ghana Tunisia Kenya Dominican
Rep.
Ecuador Jamaica Panama
Nigeria's $3.4bn RFI purchase is largest emergency financing
provided by the IMF since the COVID-19 pandemic struckTop-10 emergency loan approved by IMF YTD ($'bn)
Sources: IMF, United Capital Research
Figure 33
0.5 0.3 0.51.1 1.5 1.3 1.0 1.5 1.3 1.5
0.8
3.4
2021 2022 2023 2024 -
2025
2027 2030 2031 2032 2038 2047 2049
Nigeria faces c. $4.5bn external debt obligations between 2024
and 2025Nigeria's Eurobond and RFI maturity profile
Eurobond RFI
Sources: DMO, United Capital Research
Figure 34
The birth of the
Economic Sustainability
Committee (ESC) was
prompted by the
COVID-19 pandemic
Nigeria H2-2020 Outlook: Up in the Air
41 www.unitedcapitalplcgroup.com
plan in June-2020 on strategies to keep the economy working and ensure jobs are not
only retained but that more are generated.
Also, an economic team, headed by the Minister of Finance, Budget and National
Planning was set up to examine the impact of COVID-19 on the economy and
recommend appropriate as well as immediate response strategies. Lastly, the President
established a Presidential Task Force (PTF) on COVID-19, chaired by the Secretary to the
Government of the Federation, to coordinate Nigeria’s multi-sectoral and inter-
governmental approach to COVID-19.
Notably, we observed that since the constitution of the EAC in Sep-2019, the President
has been more willing to sign off on new reforms such as naira devaluation, petrol subsidy
removal, openness to adopt electricity tariff removal, tax adjustments and taking IMF
loans. Thus, this suggests that the President is willing to follow through on policy reforms
during this period. Overall, we believe with this team working together, there will be better
coordination of Nigeria’s fiscal, monetary as well as trade policies, in the difficult days and
months ahead.
5. COVID-19 Relief Packages: Despite the need to cut cost in the face of an
expected weaker revenue, the FG also rolled out series of fiscal palliatives to cushion the
impact of COVID-19 pandemic and the associated lowdown, on states, households and
SMEs.
In addition to the stimulus package announced by President Buhari and the Minister of
Finance, the National Assembly is considering passing an Emergency Economic Stimulus
(EES) bill, to address the general wellbeing of Nigerians pending the eradication of the
pandemic and a return to economic stability. Also, all 43 cabinet ministers were reported
Domestic Macro Overview
Source: United Capital Research
Figure 35
Since the constitution of
the EAC in Sep-2019,
the President has been
more willing to sign off
on new reforms
Nigeria H2-2020 Outlook: Up in the Air
42 www.unitedcapitalplcgroup.com
to have donated 50.0% of their March-2020 salaries to support the FG’s efforts. Lastly, the
Nigeria Sovereign Investment Authority (NSIA) launched the Nigeria Solidarity Support
Fund (NSSF) to enable Nigerians at home and abroad, as well as other international
donors to directly contribute to Nigeria’s fight against the pandemic.
6 Sub-national Government Support Initiatives: To close the expected shortfall in
FAAC distributions, in the months after May 2020, the FG ordered the disbursement of
$150.0mn from the NSIA to support June-2020 FAAC distribution as well as the suspension
of deductions of loans and bailout funds from states’ monthly allocation for one year.
However, we believe this may not be sufficient to prevent a sub-national fiscal crisis.
Accordingly, more consideration may be required to address this – possibly through a
combination of grants and low interest loans, but with stringent conditions that will support
economic growth across the country.
Monetary policy
CBN’s Policy Response
Prior to the outbreak of COVID-19 in Nigeria, the Central Bank of Nigeria (CBN) had
adopted a largely indirect expansionary monetary policy stance by increasing minimum
LDR (to 60.0% in July-2019 and to 65.0% in Oct-2019) to compel banks to lend to the real
sector and restricting the non-bank domestic investors from investing in the OMO market,
to drive up liquidity in the financial system and promote appetite for riskier assets.
These policies were successful in significantly increasing credit to the private sector as well
as pushing market interest rates downwards. Notably, total gross credit of the banking
system grew by c. N2.3tn, between Jul-2019 (when LDR was first increased) and mid Mar-
2020 (prior to the COVID-19 monetary responses), with the biggest beneficiaries being the
manufacturing, consumer credit, general commerce, information and communication as
well as the agricultural sectors.
Domestic Macro Overview
77%
69%
43% 41% 38% 38% 35% 35% 34% 33% 32% 30% 28% 26% 24% 24% 23% 22% 21% 20% 20%16% 16% 16% 15% 15% 14% 14% 13% 12% 12% 11% 10% 10% 10% 10%
60%
La
go
s
Og
un
Riv
ers
Osu
n
Kw
ara
Cro
ss R
ive
r
Ka
no
Ka
du
na
En
ug
u
Ed
o
Oyo
An
am
bra
On
do
Pla
tea
u
De
lta
So
ko
to
Ab
ia
Be
nu
e
Za
mfa
ra
Im
o
Ko
gi
Na
sara
wa
Nig
er
Ekiti
Ba
uc
hi
Jig
aw
a
Go
mb
e
Ad
am
aw
a
Eb
on
yi
Ta
rab
a
Akw
a Ib
om
Ka
tsin
a
Bo
rno
Yo
be
Ke
bb
i
Ba
ye
lsa
34 of 36 States do not meet the minimum requirement to raise debt capitalState by State debt sustainability
IGR/Revenue (2017-2019) MoF/SEC's minimum requirement
Sources: NBS, United Capital Research
Figure 36
The FG ordered the
suspension of
deductions of loans
and bailout funds from
states’ monthly
allocation for one year
Notably, total gross
credit of the banking
system grew by c.
N2.3tn, between Jul-
2019 and mid Mar-2020
Nigeria H2-2020 Outlook: Up in the Air
43 www.unitedcapitalplcgroup.com
In response to the negative impact of the twin shocks, the CBN complemented its indirect
expansionary monetary policies with more direct/targeted liquidity injections (intervention
loans) to sectors that have been negatively impacted by the virus. Specifically, the CBN
launched a N3.5tn (or 2.4% of GDP) stimulus program in Mar-2020 to support Nigeria’s
COVID-19 response, including a 400bps interest rate cut on its c. N3.0tn loan book to 5.0%.
Additionally, having previously maintained the status quo at the Mar-2020 meeting in a
bid to avoid exacerbating inflationary pressures, the Monetary Policy Committee (MPC)
further consolidated the CBN’s effort by easing the benchmark monetary policy rate by
100bps to 12.5% at the May-2020 unprecedented one-day meeting. In justifying its
decision, the committee emphasized the need to signal a direction towards economic
recovery, and further stimulate credit expansion to critical sectors, particularly as the
pace of acceleration in inflation rate is still slow.
Domestic Macro Overview
Sources: CBN, United Capital Research
11
13
15
17
19
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20
Stringent LDR policies spurs credit growth significantlyTotal Private Sector Credit (N'tn)
Figure 37
Source: United Capital Research
Figure 38
...the CBN launched a
N3.5tn (or 2.4% of GDP)
stimulus program in
Mar-2020 to support
Nigeria’s COVID-19
response
A 100bps cut in the
MPR further cemented
the CBN’s
expansionary stance
Nigeria H2-2020 Outlook: Up in the Air
44 www.unitedcapitalplcgroup.com
Notably, the May-2020 MPC meeting communique indicated that total banking sector
credit further grew by c. N600.0bn between the Mar-2020 meeting and the May-2020
meeting. Specifically, the communique showed that the CBN has already disbursed
N10.15bn under the N100.0bn Healthcare Sector Intervention Fund, N93.2bn under the
N1.0tn Real Sector Support Fund, and N4.1bn under the N50bn Targeted Real Sector
Facility for households and SMEs. Put differently, of the N1.15tn available for disbursement
under the three earlier mentioned CBN facilities, only c. 9.34% has been disbursed.
Looking ahead, we expect the apex bank to move to the next stage of its expansionary
policy response as stated in the 27-page report presented by the bank’s governor,
Godwin Emefiele, titled “Turning the COVID-19 tragedy into an opportunity for a new
Nigeria.” This is predicated on our expectation for the economy to be fully reopened in H2
-2020. According to the guideline, the CBN will expand its sectoral interventions, offer long
-term financing for the entire healthcare value chain, promote the establishment of
InfraCo Plc (with combined debt and equity take-off capital of N15.0tn), and prioritize the
provision of FX for the importation of machinery as well as other critical raw materials
needed to drive a self-sufficient Nigerian economy once the COVID-19 transmission curve
flattens and restrictions are eased. This should help create a further boost for economic
recovery in H2-2020.
Notably, we expect the apex bank to sustain its current heterodox policies till the end of
Domestic Macro Overview
Source: Bloomberg, United Capital Research
...of the N1.15tn
available for
disbursement under the
three earlier mentioned
CBN facilities, only c.
9.34% have been
disbursed
Our expectation for H2-
2020 is for the Apex
bank to move into its
next phase of
expansionary policies
7.0%
11.0%
15.0%
19.0%
May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Jan-19 Sep-19 May-20
MPC consolidates the CBN's expansionary policy in May-2020Monetary Policy Rate vs. Headline Inflation Rate
Headline Inflation rate MPR
Figure 39
CBN's Intervention Facilities Total size
(N'bn)
Amount disbursed
(N'bn)
% dis-
bursed Beneficiaries
Targeted Real Sector Facility
for households and SMEs 50 4.1 8.2%
5,868 successful benefi-
ciaries
Healthcare Sector Interven-
tion Fund, 100 10.2 10.2% n/a
Real Sector Support Fund 1,000 93.2 9.3% 44 greenfield and
brownfield projects
Total 1,150 107.5 9.3%
Sources: CBN, United Capital Research
Details on the three CBN Intervention Facilities Figure 40
Nigeria H2-2020 Outlook: Up in the Air
45 www.unitedcapitalplcgroup.com
the year. Also, we expect monetary policy stance to remain broadly accommodative
with an intent to spur growth at the cost of further inflationary pressure
Policy reforms: Will Nigeria let a good crisis go to waste again?
The current crisis has presented the Nigerian government and the CBN with the
opportunity to silently implement long-needed but unpopular policy reforms. Unlike in
2016, the government and the CBN seem to be more willing to leverage on the crisis to
implement those reforms.
1. Petroleum Subsidy Removal: In line with lower international crude oil prices, the
Ministry of Petroleum Resources has committed to flexible pricing of petrol and the
elimination of subsidy, which cost the federation N731.0bn in 2018 (0.6% of GDP) and
N405.0bn in H1-2019 (0.6% of GDP). However, time will tell whether the government is
determined to go all the way.
3. Implementation of Oronsaye Report: As the need to block fiscal leakages and cut the
cost of governance in Nigeria continues to bite amid the COVID-19 outbreak, the
Nigerian President appears to be ready to bite the bullet. According to Special
Assistant to the President on Digital & News Media reports, the President has
approved the implementation of the long written and reviewed Oronsaye-led
committee report on reform of government parastatals, commissions, and agencies.
The report which was submitted during the administration of the former President
Goodluck Jonathan, recommends that the FG should abolish 38 agencies,
consolidate 52 agencies, reverse 14 agencies to departments in the relevant
ministries, and discontinue government funding of professional bodies/councils.
However, since the report was submitted in 2012, the previous and current
administration have failed to implement most of the recommendations entrenched in
the report,
4. FX convergence: The sudden plunge in international crude oil prices, which
contributes above 80.0% and 50.0% to Nigeria’s export and FG’s earnings,
exacerbated the overvaluation of the naira and prompted a major shift in policy for
the central bank and government. This was as the CBN weakened its official
Domestic Macro Overview
Sources: PPPRA, Budgit, IMF , United Capital Research
0.3 0.3
0.60.5
0.7
2.1
1.4 1.31.2
0.7
0.00.1
1.2
0.6
0.1
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E
History of Nigeria’s oil expenditure on petrol import subsidy Fuel Subsidy (N'tn)
Figure 41
The pandemic
prompted the need to
revisit the Oronsaye
Report
The Ministry of
Petroleum Resources
has committed to
flexible pricing of petrol
and the elimination of
subsidy
The government will still
need to get the
National Assembly’s
buy-in to be able to
fully implement the
recommendations
Nigeria H2-2020 Outlook: Up in the Air
46 www.unitedcapitalplcgroup.com
exchange rate (for the first time since mid-2016) for the naira by 15.0% (from N307.0/$
to N361.0/$) and commenced convergence of its various foreign exchange (FX)
windows to the Investors and Exporters (I&E) windows rate.
We agree with the IMF that a unified and more flexible exchange rate (with FX
interventions only limited to smoothing large fluctuations) will be an important shock
absorber, especially in turbulent times. Also, we note that the rationing of FX - such as
occurred in 2015 and Q2-2020 - must be avoided going forward as it would only
hamper trade and investor confidence, hence further delaying the economic
recovery once the current crisis passes.
4. Power sector reforms: In addition to the above reforms, the Ministry of Power has
committed to a more cost-reflective power tariff while working with the German
government and Siemens AG to overhaul Nigeria’s power generation, transmission,
and distribution infrastructure, under the 3-phase Presidential Power Initiative (PPI).
Specifically, the President kicked off the implementation of the phase 1 part of the
deal as he directed the power and finance ministers to commence the pre-
engineering and concessionary financing aspects of the project.
According to the Presidential statement, the project is to be financed by
concessionary loans (up to 3-year moratorium and 12-year repayment at
concessionary interest rates) covered by Germany’s Euler Hermes Group SAS, a large
provider of credit insurance, and the funding will be on-lend as a convertible loan to
the electricity distribution companies. Additionally, Siemens AG will have sole
responsibility for selecting its contractors.
Overall, we note that the crisis also presents the opportunity to look inwards to upgrade
capacity and service provision across several essential areas including health, power,
tech infrastructure, welfare, education, and enhance productivity in the agriculture as
well as manufacturing sector. Also, we believe this is the time to strengthen public trust by
removing all forms of subsidy and applying reform mechanisms such as the unbundling of
NNPC and passage of the Petroleum Industry Bill.
Domestic Macro Overview
Source: NBS, United Capital Research
We note that the
rationing of FX must be
avoided going forward,
as it would only
hamper trade and
investor confidence
A breakdown of Nigeria’s current FX windows Figure 42
Source: CBN, FMDQ , United Capital Research
Window Participants Pre-COVID (N/$) Current (N/$) Level of liquidity
Official exchange rate Used for all government trans-
actions, oil revenue, 306.5 361.0
Low liquidity, only $100,000 to
banks daily
Investors and Exports Win-
dows (IEFX)
Investors, Exporters and all
market players foreign and
domestic
358-366 380-390 First introduced at N/$380. This
is expected to move with mar-
ket forces.
Retail Secondary Market
Intervention Window,
Local corporates, manufac-
turers
335-360 380-385 $250.0mn sold by the CBN
every two weeks, spots and
forwards
Wholesale Secondary Mar-
ket Intervention window
Mostly large corporates
through banks 335-360 380-385 $100.0mn a week pre-COVID,
no auction
BDCs, invisibles, travel Open to all 358-369 440-460
Sources: FMDQ, CBN, Aboki FX, United Capital Research
...we note that the crisis
also presents the
opportunity to look
inwards to upgrade
capacity and service
provision across
several essential areas
Nigeria H2-2020 Outlook: Up in the Air
47 www.unitedcapitalplcgroup.com
Domestic Output and Price Level
Will the stimulus package be enough to avoid an economic slowdown?
In FY-2019, the Nigerian economy remained on the path of recovery as real GDP
expanded by 2.27% (vs. 1.91% in FY-2018). However, in Q1-2020 the growth in economic
activities slowed to a nine-quarter low of 1.87% y/y from 2.55% y/y in Q4-2019 and 2.12% y/
y in Q1-2019. This was as the impact of the COVID-19 pandemic, decline in crude oil
demand and the social distancing measures announced to curb the spread of the virus,
left a negative imprint on March-2020 performance.
Notably, the CBN’s PMI data for March-2020, which was published before the President
announced a full lockdown of the economy, already showed early signs of contraction in
economic activities, particularly in the non-manufacturing sector. This was as the non-
manufacturing index indicated a contraction in services sector, falling to a 3-year low of
49.2pts amid contraction in new orders, employment level and inventories. Meanwhile,
the Manufacturing PMI showed a slower pace of expansion, with the index settling at
51.1pts - the lowest level since May-2017.
Additionally, the PMI report for May and Jun-2020 signaled a deep contraction in
economic activities during the period as both the manufacturing and non-manufacturing
index came in below the 50.0pts expansionary levels. This reflected the impact of the
implementation of a full economic lockdown through April-2020 and partial lockdown
from May-2020. Accordingly, we expect economic performance to transition from the
broad-based slowdown we saw in Q1-2020 to a broad-based contraction in Q2-2020.
Notably, contrary to the expansion in Q1-2020 of 5.06% y/y, we expect the oil sector to
contract from Q2-2020, due to partial compliance with OPEC+ production cut agreement
and the plunge in average crude oil price in Q2-2020. Under the OPEC+ agreement,
Nigeria’s oil production is capped at 1.41mbpd between May and Jun-2020, and
1.50mbpd between July and Dec-2020. However, with Nigeria’s inability to comply fully
with the agreed quota in May-2020, the country is now required to compensate for such
in the following months and future non-compliance will be followed with a deeper supply
Domestic Macro Overview
Sources: CBN, United Capital Research
20
35
50
65
Jul-14
Oc
t-14
Ja
n-1
5
Ap
r-15
Jul-15
Oc
t-15
Ja
n-1
6
Ap
r-16
Jul-16
Oc
t-16
Ja
n-1
7
Ap
r-17
Jul-17
Oc
t-17
Ja
n-1
8
Ap
r-18
Jul-18
Oc
t-18
Ja
n-1
9
Ap
r-19
Jul-19
Oc
t-19
Ja
n-2
0
Ap
r-20
Q2-2020 PMI indicates economic activities are contractingTrend in CBN's Manufacturing and Non-Manufacturing PMI
Manufacturing PMI Non-Manufacturing PMI 50 points threshold
Figure 43
...the growth in
economic activities
slowed to a nine-
quarter low of 1.87%
y/y in Q1-2020
We expect economic
performance to
transition from the
broad-based
slowdown in Q1-2020
to a broad-based
contraction in Q2-2020.
Nigeria H2-2020 Outlook: Up in the Air
48 www.unitedcapitalplcgroup.com
cut. Specifically, with the fall in total domestic rig count from a high of 23 in Feb-2020 to 8
in May-2020, we expect a deep contraction in oil sector GDP in Q2-2020. Notably, we
imagine that crude oil production will rebound from Q3-2020 as the global economy
begins to reopen for business. However, we do not expect production or demand to
return to pre-COVID19 levels in 2020. Thus, we have modelled a contraction in oil GDP
from Q2-2020.
Domestic Macro Overview
Sectors Contribution
to 2019 GDP
5-year
CAGR
Impact of
COVID-19
and Lock-
down
Remark
Agriculture 25.2% 3.0% Moderate Monetary and Fiscal Interventions to support the sector
but supply chain issues will leave a negative imprint
Trade 16.0% -0.6% Negative A highly informal trade sector to be dragged by lock-
down
Information and Communication 13.0% 5.3% Positive To benefit from the implementation of work from home
policy across the formal sector
Manufacturing 9.1% -0.4% Moderate
To be supported by liquidity injections and rise in demand
for necessities like Food, Beverage and Tobacco. Howev-
er, other non-necessities manufacturing will drag the sec-
tor
Crude Oil and Natural Gas 8.8% -1.4% Negative To be dragged by the plunge in global crude price and
demand
Real Estate 6.1% -4.6% Negative Collapse in demand for commercial real estate amid
WFH; rising cases of rent default amid job loss
Construction 3.7% -0.3% Negative
To be dragged by declines in private and govt CAPEX
spending. Bright spot lies in the construction of new
healthcare facilities
Professional, Scientific and Technical
Services 3.6% 0.3% Negative Travel restrictions to leave a negative imprint
Other Services 3.4% 2.8% Negative Services sector highly impacted by social distancing
measures
Financial and Insurance 3.0% 0.3% Moderate
Banks will have to battle with the quadruplet factor of
CBN's squeeze, COVID-19 lockdown, naira devaluation,
and impact of lower oil prices on O&G loans while being
compelled to still create credit
Education 2.1% 0.3% Negative Highly impacted by social distancing measures
Public Administration 2.1% -2.8% Negative Dragged by the impact of FG, State and LGs cut in over-
head and CAPEX spending
Transportation and Storage 1.5% 7.1% Negative Highly impacted by the restriction in movement policies
across the country
Accommodation and Food Services 0.9% -0.6% Moderate Negatively impacted by lockdown
Human Health and Social Services 0.7% -0.5% Positive Buoyed by the rise in healthcare spending
Electricity, Gas, Steam and Air Condi-
tioning Supply 0.4% 0.3% Moderate
The postponement of tariff hike to leave a negative im-
print; and could worsen if the Senate passes the bill pro-
posing a 2-month holiday on payment of electricity bills
Arts, Entertainment And Recreation 0.2% 3.6% Negative Negatively impacted by social distancing measures
Water Supply & Waste Utilities 0.2% 6.5% Moderate Negatively affected by lack of activities in office building
Administrative & Support Services 0.0% 0.4% Negative Negatively impacted by work from home policies
Overall GDP 100% 0.80% Negative Clearly the overall impact of the pandemic on growth
would depend on how long the lockdowns persist
Sources: NBS, United Capital Research
Figure 44 Impact of the COVID-19 Pandemic on GDP Drivers
Nigeria H2-2020 Outlook: Up in the Air
49 www.unitedcapitalplcgroup.com
Elsewhere, we assume the non-oil sector will contract between Q2 and Q3-2020, with
possibility of recovery by Q4-2020. This assumption is predicated on the expectation that
the implementation of social distancing measures, supply chain disruptions, FX scarcity,
and rising unemployment will negatively reflect on the Industrial (ex. Food, Beverage and
Tobacco as well as Oil sector), and Services (ex. ICT and Healthcare) sectors during the
period. Specifically, we believe sectors like ICT, Agriculture, and Food, Beverage and
Tobacco, which contribute c. 40.0% to GDP, will continue to stay resilient during the dark
times in Q2 and Q3-2020.
Though the Federal Government and CBN have announced some stimulus packages
aimed at easing the impact of the pandemic on businesses, the quantum of the stimulus
compared to the size of the Nigerian economy may mean there would only be a
marginal impact. To give perspective, the total amount of monetary support announced
by both the FG and CBN is estimated at c. N5.3tn ($14.6bn), equivalent to 3.7% of GDP.
However, we expect access to intervention funds to be limited to the formal sectors and
big corporates. Thus, leaving the country’s large informal sector (above 60.0% of the
economy) exposed to the vagaries of the COVID-19 pandemic.
Also, using the expenditure approach at measuring GDP, we argue further that the net
impact of recent government and CBN policy actions may not hasten output growth
significantly. The measures adopted to flatten the COVID-19 curve are by design,
deliberately aimed at minimizing social interaction and curtailing economic activity. In
view of this, unemployment, and underemployment rate, which were last reported at
23.1% and 20.1% respectively, are expected to increase further, which could weigh on
household income and consumer spending. Even in advanced economies with targeted
policies to salvage jobs, unemployment rates have crept up to record levels. Again, at
6.0% of GDP, the multiplier effect of higher government spending (G) may not be enough
to bolster GDP, with 25.0% expended on debt servicing relative to 21.0% on capital
spending and 54.0% on recurrent spending.
Additionally, we expect gross investment (16.5% of GDP) to slow considerably in 2020 as
companies (especially those in the sectors that are directly and negatively impacted by
COVID-19) grapple with business survival amid surprising demand destructions. While gross
domestic local investments (Id) may be supported by the CBN’s effort to targeted liquidity
injections, Foreign Direct Investment (FDI) growth is unlikely to improve in the current
Domestic Macro Overview
…the quantum of the
stimulus compared to
the size of the Nigerian
economy may mean
there would only be a
marginal impact
...we assume the non-
oil sector will contract
between Q2 and Q3-
2020, with possibility of
recovery by Q4-2020
Even in advanced
economies with
targeted policies to
salvage jobs,
unemployment rates
have crept up to
record levels
Sources: NBS, United Capital Research
Figure 45
Pre-recession Slowdown Recession Early Recovery Recovery Recovery
2011 - 2014 2015 2016 2017 2018 2019 Bear Case Base Case Bull Case
Household Consumption 59.0% 4.0% 1.5% -5.7% -0.4% 4.6% -1.5% -3.0% -2.0% -0.1%
Gov ernment Consumption 6.0% -5.3% -11.9% -15.1% -12.4% 39.9% 15.0% -13.0% -8.0% 3.5%
Gross Fixed Capital Formation 15.8% 2.3% -1.3% -5.0% -2.8% 9.7% 8.3% -4.0% -3.5% -1.5%
Inv entory 0.7% 39.7% -5.7% -1.2% 20.5% 3.9% -26.2% -20.0% -15.0% -6.0%
Net Exports 18.5% 29.6% 19.5% 21.8% 9.4% -17.5% 7.6% -2.0% -1.0% 0.5%
Aggregate GDP at Mkt. Price 100.0% 4.7% 2.7% -1.6% 0.8% 1.9% 2.2% -3.7% -2.4% 0.0%
% of 2019 GDPReal Expenditure (y/y)2020 Projections
2020 projections for GDP Growth
Nigeria H2-2020 Outlook: Up in the Air
50 www.unitedcapitalplcgroup.com
environment, especially amid the uncertainty in the FX market. Finally, Net Export (Xn),
accounting for 18.5% of GDP, is expected to deteriorate further as global outbreak of
COVID-19 has resulted in significant fall in the demand for crude oil, which contributes
more than 80.0% to the country’s export earnings. Although we expect import to also
shrink, especially amid lack of FX supply, shutdown in airline and port activities across the
world. However, the need for Nigeria to continue to import medical items in the fight
against COVID-19 should keep the import bill considerably large in 2020.
Lastly, due to the fact that the current crisis is supply-side heavy (restriction of movement
and business shutdown), we doubt that the current demand-side responses from both the
fiscal and monetary authorities (liquidity injections) can prevent a contraction of
economic activities in the short term. However, we believe that the palliatives and reforms
that are being announced will help the country avoid a deep recession and hasten the
recovery process once the incidence rate of the pandemic begins to drop and the
economy is fully re-opened.
Inflation rate
COVID-19 outbreak and lockdown, any impact on price?
In our FY-2020 outlook report published in Jan-2020, we highlighted 6 key upside risks to
consumer prices in 2020 and concluded that the headline inflation rate will climb
northward in H1-2020. Those factors were
• Demand-side impact of full implementation of the new minimum wage;
• VAT rate hike, based on the passage of the Finance Bill 2019;
• Food price increase amid continued closure of land borders with neighboring
countries;
• Transition to a more cost-reflective electricity tariff;
• CBN’s expansionary monetary policy stance;
• Mild possibility of naira adjustment
Domestic Macro Overview
FDI growth is unlikely to
improve in the current
environment,
especially amid the
uncertainty in the FX
market
Sources: NBS, United Capital Research
6.8%6.2%
6.5%6.2%
5.9%
4.0%
2.4%2.8%
2.1%
-0.7%
-1.5%
-2.3%
-1.7%
-0.9%
0.7%1.2%
2.1% 2.0%1.5%
1.8%
2.4%2.1% 2.1% 2.3%
2.6%
1.9%
-3.6%
-2.6%
-0.5%
Q4
-13
Q1
-14
Q2
-14
Q3
-14
Q4
-14
Q1
-15
Q2
-15
Q3
-15
Q4
-15
Q1
-16
Q2
-16
Q3-1
6
Q4
-16
Q1
-17
Q2
-17
Q3
-17
Q4
-17
Q1
-18
Q2
-18
Q3
-18
Q4
-18
Q1
-19
Q2
-19
Q3
-19
Q4
-19
Q1
-20
Q2
-20
Q3
-20
Q4
-20
Base Case: We expect a "V" shape recovery post-COVID-19
outbreakNigeria's Quarterly GDP growth rate (y/y)
Recession
Slow recovery
Peak
Contraction
Recession
Contraction
V-recovery
Figure 46
Nigeria H2-2020 Outlook: Up in the Air
51 www.unitedcapitalplcgroup.com
True to our projection and expectation, headline inflation maintained an upward trend
up to May-2020, averaging 12.27% (vs. 11.34% in the same period in 2019). Also, as at May
-2020, both the Food and Core inflation sub-index climbed to their 26-month and 22-
month high of 15.04% y/y and 10.12% y/y respectively, driven by the crystallization of the
factors highlighted above (except for the transition to cost-reflective electricity tariff).
The outbreak of COVID-19 and restriction of economic activities had a mixed impact on
the headline number as it fueled a spike in food prices while having a more negligible
impact on the core sub-index. Also, the transmission effect of naira devaluation on the
core-index was muted as importation activities were largely limited in H1-2020 due to
land, port, and airline closure. However, the reduction in the regulated price of PMS
(petrol) by c. 13.8% in March-2020 to N125/litre, and by a further 1.2% in Apr-2020 to
N123.5/litre helped to further lessen the overall pressure on the core index. This was
evident, as inflation rate in the utilities division of the CPI (Housing Water, Electricity, Gas
and Other Fuel) moderated from 7.81% y/y in Feb-2020 to 7.77% y/y in May-2020.
In the month of June-2020, we expect the pressure on the headline inflation rate to persist.
Specifically, we expect pressure food prices to remain despite the ease in lockdown
policies, as restrictions on interstate travel and closure of borders continue to limit the
supply of foods across the country. Also, we expect pressures on the core inflation sub-
index to persist amid increase in prices of health care products, transportations, and other
services.
Further out, our outlook for the headline inflation rate remains biased to the upside in H2-
2020. Although we believe the inflationary pressures from the implementation of the new
minimum wage might now be behind us amid the current fiscal challenges, we note that
as economic activities begin to pick up in Q3-2020, the impact of a higher VAT rate will
continue to be felt till the end of the year. Also, as CBN fully resumes FX intervention sales
and international trading activities re-open globally, we might see an upward pressure on
the core index amid a relatively weak naira valuation. Meanwhile, we note that the
CBN’s targeted liquidity injections are not likely to stoke inflationary pressures as they are
expected to be matched with productive use. Food inflation rate is expected to continue
to track higher as the FG is unlikely to re-open land border until Q4-2020 (our best-case
Domestic Macro Overview
True to our projection
and expectation,
headline inflation
maintained an upward
trend up to May-2020,
averaging 12.27%
...the reduction in the
regulated price of PMS,
helped to further lessen
the overall pressure on
the core index
Source: NBS, United Capital Research
6.6%
15.2%13.9%
11.7%10.3%
12.0%
7.9% 8.0%9.6%
18.6%
15.4%
11.5% 12.0%13.3%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Inflation oulook remains biased upward in H2-2020End-Period Headline Inflation Rate
Figure 47
Our outlook for the
headline inflation rate
remains biased upward
in H2-2020
Nigeria H2-2020 Outlook: Up in the Air
52 www.unitedcapitalplcgroup.com
scenario). The next harvest season could also be disappointing due to logistical
challenges. Lastly, we expect the Nigerian Electricity Regulatory Commission (NERC) to
proceed with a minor adjustment to tariffs in H2-2020 as fiscal pressures bite. Hence, on a
balance of risk, we believe risks to inflation are biased upward. Overall, we expect
headline inflation rate to settle at 13.3% y/y by Dec-2020 (Pre-COVID-19 expectation –
11.9% y/y).
External Sector
Foreign Exchange Rate and Reserves: Any possibility for further naira
adjustment?
As we had noted earlier in this report, the currency market dynamics worsened in H1-2020
and led to an adjustment in the exchange rate by the CBN. Notably, the CBN adjusted its
official exchange rate by c. 15.0%, amid oil price shocks (down 60.0% ytd in March-2020)
and dwindling foreign interest in central bank bills (down 43.0% ytd in March-2020 to
$7.5bn) that led to decline in FX reserves (down 10.0% ytd in March-2020 to $34.0bn). Thus,
bringing the official rate much closer to the I&E rates.
Also, the various exchange rate windows were broadly unified around the rate in the
investors and exporters (I&E) window, which is considered more market reflective.
However, on the backdrop of the ravaging impact of the COVID-19 global economic
fallouts and the FG’s implementation of lockdown policy at the major economic and
administrative centers of the country (Lagos, Ogun, and Abuja), the CBN suspended most
of its FX intervention sales across various windows. This pushed demand to the parallel
market segment where naira was being quoted as high as N470/$.
Thanks to the gradual recovery in the crude oil market in May-2020 (as most countries
began to ease their lockdown policies) which coincided with disbursement of the IMF’s
$3.4bn emergency loan to Nigeria (boosting the country’s FX reserves which was down to
$33.0bn before increasing to $36.5bn), the CBN gradually resumed its FX intervention sales
during the period. However, the apex bank weakened its offer rate at the derivative
market by c. 14.51% across all the tenors available on the OTC FX futures, to reflect the
Domestic Macro Overview
The currency market
dynamics worsened in
H1-2020, leading to an
adjustment in the
exchange rate by the
CBN
On the back of the
gradual oil market
recovery and dollar
inflows (from IMF’s
$3.4bn) the CBN
gradually resumed its
FX intervention sales
Sources: Bloomberg, FMDQ, United Capital Research
0.0% 0.0% 0.0% 0.0% -0.2% -1.0% -1.4% -1.6% -2.7% -3.3% -3.9% -4.3% -5.3% -5.7%-7.4%
-10.4%-10.6%-13.8%-13.9%-15.0%
-19.0%-20.8%
U.A
.E. (p
eg
ge
d)
Om
an
(p
eg
ge
d)
Sa
ud
i (p
eg
ge
d)
Ba
hra
in
Aze
rba
ijan
Eq
. G
uin
ea
Ku
wa
it
Ind
on
esi
a
Ga
bo
n
Bru
ne
i
Ca
na
da
Ma
laysi
a
Ka
zakh
sta
n
Nig
eria
(N
AFE
X)
Alg
eria
Co
ng
o
Ru
ssia
Arg
en
tin
a
Me
xic
o
Nig
eria
(O
ffic
ial)
An
go
la
Bra
zil
Oil exporters currencies have weakened against the US$ amid
plunge in crude price and demandYTD Currency Performance of oil producers (Base Currency - $)
Figure 48
Nigeria H2-2020 Outlook: Up in the Air
53 www.unitedcapitalplcgroup.com
higher risk content in the environment.
Despite the initial policy responses by the monetary and fiscal authorities, opinions are
divergent as to if the macroeconomic adjustments are enough to contain the current
external shocks. Although the tacit devaluation by the CBN took the naira towards its fair
value implied by the monthly IMF Real Effective Exchange Rate (REER), we think a much
deeper adjustment will be required to structurally plug the current account shortfall that
has been exacerbated by the COVID-19 outbreak.
Put differently, IMF’s implied naira REER (which tracks the official exchange rate)
indicated that the naira is overvalued by 40.4% since the end of 2016. Thus, the CBN’s
devaluation of the official rate by 15.0% leaves the rate overvalued by 25.4%.
Clearly, Nigeria’s export revenue is set to crash in 2020 amid global crude oil price plunge
and low global demand for crude oil which contributes above 80.0% to the country’s
export. Notably, Nigeria has had two episodes of export crash in the past two decades:
34% y/y decline in 2009, and a 58% contraction between 2016 and 2014. Both episodes
required a large exchange rate adjustment to rebalance the current account: 22% in
2009 and 56% between 2014 and 2017. Thus, considering the magnitude of the current
export shock, and the pre-existing imbalance in the current account, we believe the
c.15.0% devaluation by the CBN might just be the first leg in several adjustments to come.
Domestic Macro Overview
Sources: CBN, IMF, United Capital Research
50.0
150.0
250.0
350.0
450.0
550.0
Jan
-00
Oc
t-00
Jul-01
Ap
r-02
Jan
-03
Oc
t-03
Jul-04
Ap
r-05
Jan
-06
Oc
t-06
Jul-07
Ap
r-08
Jan
-09
Oc
t-09
Jul-10
Ap
r-11
Jan
-12
Oc
t-12
Jul-13
Ap
r-14
Jan
-15
Oc
t-15
Jul-16
Ap
r-17
Jan
-18
Oc
t-18
Jul-19
Ap
r-20
Despite devaluation, the naira remains overvalued on REER basisHistorical trend of official FX and implied IMF REER rate (N/$)
Official Rate Implied IMF REER Valuation
Figure 49
...the CBN’s
devaluation of the
official rate by 15.0%
leaves the rate
overvalued by 25.4%
Sources: CBN, FMDQ, Aboki FX,, United Capital Research
50.0
150.0
250.0
350.0
450.0
550.0
Jan
-00
Oc
t-0
0
Jul-0
1
Ap
r-0
2
Jan
-03
Oc
t-0
3
Jul-0
4
Ap
r-0
5
Jan
-06
Oc
t-0
6
Jul-0
7
Ap
r-0
8
Jan
-09
Oc
t-0
9
Jul-1
0
Ap
r-1
1
Jan
-12
Oc
t-1
2
Jul-1
3
Ap
r-1
4
Jan
-15
Oc
t-1
5
Jul-1
6
Ap
r-1
7
Jan
-18
Oc
t-1
8
Jul-1
9
Ap
r-2
0
Naira devaluation correlates with export crashesHistorical Naira/$ trend
I&E (NAFEX Rate) Official rate BDC rate SMIS
c. 34.4% export collapse in 2019
was trailed by a 22.0%
devaluation in the offical rate
Due to COVID-19
and the plunge in
crude oil price we
expect export to fall
by at least 50.0% in
2020
Figure 50
...we believe the
c.15.0% devaluation by
the CBN might just be
the first leg in several
adjustments to come
Nigeria H2-2020 Outlook: Up in the Air
54 www.unitedcapitalplcgroup.com
If the past is any indication of the future, we think a c.30% - 40% currency adjustment will
be needed to structurally rebalance the current account by year-end.
The capital account is another source of vulnerability, given the large FPIs ownership of
CBN OMO bills. Despite increased capital outflows in recent months, FPIs still hold a
sizeable portion of OMO bills, estimated at c. $7.5bn in Mar-2020, which translates to 21.4%
of external reserves and 28.7% of outstanding OMO bills. If these maturities are not rolled
over by the FPIs amid the increased global risk aversion and the CBN continues to defend
the current de-facto FX peg after fully lifting the current capital flow restrictions (e.g
stoppage of sales to BDCs), the FX reserves (even after factoring the IMF loan) is likely to
drop below the sacred $30.0bn level before the year ends. Thus, indicating the need for a
further adjustment in the naira to plug the expected current account deficit.
Putting all the above together, we believe the odds are currently in favor of another naira
adjustment which may take the official rate to N410/$ - N430/$ by year end.
Capital Inflows
Q1-2020 is as good as it gets for 2020
According to the capital importation data for Q1-2020 published by the NBS, the total
capital imported into the Nigerian economy declined by 31.2% y/y to $5.85bn in Q1-2020.
The breakdown of the data revealed that inflows from portfolio investments continued to
dominate the gross investment inflows (accounting for 73.6%) followed by other
investment (22.7%) and foreign direct investment (3.7%). Notably, the reduction in foreign
inflows was largely driven by a 39.4% y/y decline in inflows from FPIs owing to lower inflows
to bonds (-59.2% y/y), money market (-41.6% y/y) and equity instruments (-2.5% y/y).
In our view, the decline in portfolio investment was due to investors risk-off sentiment
which was sparked by the outbreak of COVID-19, plunge in crude oil prices and fears as
well as the eventual devaluation of the naira in March-2020. We note that the
underwhelming nature of FDI inflows continues to reflect the inability of the country to
attract the much-needed capital for unlocking its economic potentials amid long-term
uncertainties.
Domestic Macro Overview
The capital account is
another source of
vulnerability, given the
still large FPIs
ownership of CBN OMO
bills
Sources: CBN, IMF, United Capital Research
32 3237 36 35 34 35 33 34 32 31 34 33 33
27 29 29 27 27 26 25 23 24 26 2329
7 98 11 13 13 12 12 11 10 9
9 9 1015 16 16 17 18 18 17 18 16 13 15 8
De
c-1
7
Jan
-18
Feb
-18
Ma
r-18
Ap
r-18
Ma
y-1
8
Jun
-18
Ju
l-18
Au
g-1
8
Se
p-1
8
Oc
t-18
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Ju
l-19
Au
g-1
9
Se
p-1
9
Oc
t-19
No
v-1
9
De
c-1
9
Ma
r-20
Nigeria's FX reserves might fall below $30.0bn if FPIs do not
rollover OMO maturityComponent trend in FX reserves ($'bn)
Reserves (ex-FPIs holding of OMO bills) FPIs holding of OMO Bills
Figure 51
Lower FPI inflows across
all financial instruments
in Q1-2020: Bonds (-
59.2% y/y), Money
market (-41.6% y/y)
and Equity (-2.5% y/y)
Nigeria H2-2020 Outlook: Up in the Air
55 www.unitedcapitalplcgroup.com
Looking ahead, we believe that given the current issues around FX illiquidity (as
highlighted in the FX segment of this report), fears of a further naira devaluation, low
interest rate environment in the OMO market, are likely to discourage large-sized FPI and
FDI inflows for the rest of the year. Accordingly, we expect the overall capital imported in
2020 to underperform that of 2019.
Domestic Macro Overview
Sources: NBS, United Capital Research
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2014 2015 2016 2017 2018 2019 2020
We expect 2020 capital importation into Nigeria to underperform
that of 2019Capital importation into Nigeria 2014 to Q1-2020
FPI Equity
FPI Money market
FDIs
Loans & other Claims
Figure 52
Overall, we expect the
total capital imported
in 2020 to underperform
that of 2019
Financial
Markets
Nigeria H2-2020 Outlook: Up in the Air
58 www.unitedcapitalplcgroup.com
Financial Markets Review and Outlook
The COVID-19 pandemic sparks a reassessment of risk
In Jan-2020, we postulated that 2020 will be a private issuer market due to the low yield
environment. This was based on our assessment that yields on FGN T-bills will stay in the
single-digit region in H1-2020 and Bond yields at low double-digit levels. As such, interest in
riskier assets, mostly corporate papers, will increase. With the exclusion of non-bank
corporates & individuals from the OMO bills market in Q4-2019, we also noted that the
rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as
the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit
an impending capital outflow, while preserving the stock of dollar reserves above the
$30.0bn threshold. Overall, we expected the normalization of the sovereign curve in H1-
2020.
While we argue that the basis for our position above were rock solid, 2020 came with its
own pandora’s box, as the spread of the COVID-19 disease across the world triggered an
unanticipated financial market volatility, amid flight to safety by FPIs and local investors.
Crude oil prices took a significant hit, falling from a high of $68.9/b in Jan-2020, to a low of
$19.3/b in Apr-2020. Given the historic positive correlation between the local currency
and oil prices, it was no surprise when the CBN adjusted the value of the local currency
downward. Accounting for all these new shocks, investors repriced the risk of Nigeria’s
debt instruments in Q1-2020, causing average yield on OMO bills and domestic bonds to
increase from 13.1% and 10.8% at the end of Dec-2019, to 15.1% and 11.9% respectively
as at the end of Mar-2020.
However, at the NTB market, the effect of CBN’s decision to bar locals from the OMO
market, as well as the elevated system liquidity, driven by huge OMO, FAAC and bond
coupons etc, depressed average yield at the NTB market to 3.7% as at the end of Mar-
2020, from 4.9% as at the end of Dec-2019.
In Q2-2020, the yield curve experienced a downward shift, as optimism in the global and
domestic market economy partially rebounded. The biggest factors were the mild
Investors repriced the
risk of Nigeria’s debt
instruments in Q1-2020,
causing OMO and
bond yields to track
higher
Financial Markets
1
4
7
10
13
1M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 20Y 30Y
High Volatility in the yield curve amid
COVID-19 pandemicNigerian Soverign Yield Curve (%) - NTB &
Bond
Dec-19 Mar-20 Jun-20
Figure 53
Sources: FMDQ, United Capital Research (Jun-2020 figures as at June
We expected the
normalization of the
sovereign curve in H1-
2020
3
6
9
12
15
1M 3M 6M 9M 1Y
High Volatility in the yield curve amid
COVID-19 pandemicNigerian Soverign Yield Curve (%) - OMO
Dec-19 Mar-20 Jun-20
Figure 54
Nigeria H2-2020 Outlook: Up in the Air
59 www.unitedcapitalplcgroup.com
recovery in oil prices and the higher level of system liquidity in Q2-2020 (averaged
N423.4bn as at June 15) vs N380.6bn in Q1-2020. In addition, with significantly reduced
dollar supply from the CBN from Apr-2020, especially at the I & E window, demand
increased from FPIs with idle funds. On the back of the above-mentioned factors,
average yield at the OMO and Bond market decreased to 4.9% and 10.0% as of June
15th, vs 15.1% and 11.9% as at the end of Mar-2020, respectively. For the NTB market in Q2-
2020, the narrative remained the same, with demand outweighing supply. As a result,
average yield remained depressed at 3.4% as of June 15 vs 3.7% as at the end of Mar-
2020.
Primary Market: DMO makes the best of low yields as FGN guns for N2.3tn local
debt
Elsewhere, in the primary market segment, the DMO, through the CBN, sold 1.2x the
amount of NTBs that matured in H1-2020. Notably, the DMO took advantage of the strong
demand for NTBs, to significantly average down borrowing costs, as average stop rate for
the period was 3.6% (vs. 10.3% in H2-2019). Elsewhere, the CBN mopped up only N3.4tn
(via OMO sales) translating to 63.5% of the c. N5.4tn OMO maturities that hit the system
during H1-2020, at an average stop rate of 10.1% (vs 11.3% and 13.1% in H2-2019 and H1-
2019 respectively). Worthy of note, following the crash in crude oil prices in Mar-2020,
OMO stop rates climbed to 17.0%, with the CBN making no sales during those specific
auctions. Finally, a net total of N691.7bn was freshly borrowed in the domestic sovereign
bonds market at an average stop rate of 11.2%, a 240bps decline from the average rate
in H2-2019.
As a response to the coronavirus shock which worsened Nigeria’s fiscal position, the
House of Representatives, and the Senate, approved the FG’s request to convert
N850.0bn specified for external borrowing in the 2020 Appropriation Act, to local sources.
As a result, starting from the June-2020 bond auction, the upper limit on the amount
offered was reviewed from N60.0bn to N165.0bn. Also, given the relatively lower rate
(compared to other half year periods) at the primary bond and NTB market, the DMO
allotted more funds compared to what was offered, in the month of May and June.
Q2-2020 was a twist
from the prior quarter,
with yields declining on
the back of higher
system liquidity and oil
price recovery
Financial Markets
Sources: CBN, United Capital Research
0
100
200
300
400
500
0.0
2.0
4.0
6.0
8.0
Bill
ion
sStop rates kick up in May, following increased allotmentTrend of NTB Auctions from year to date
Total offered (RHS) Total Sold (RHS) 91-day (LHS)
Jan-2020 Feb-2020 Mar-2020 Apr-2020 May-2020 Jun-2020
Figure 55
Following the drastic
shock to financial
markets in Mar-2020,
stop rates at OMO
auctions climbed as
high as 17.0%
Nigeria H2-2020 Outlook: Up in the Air
60 www.unitedcapitalplcgroup.com
Corporate and Sub-National Issuers: Dangote and Lagos State tap into the bond
market
Elsewhere, as noted in our 2020 outlook report, the year so far has been a corporate issuer
market, driven by buoyant system liquidity and the extremely low yield environment.
According to data from FMDQ, about 14 corporates issued multiple commercial papers,
totaling N445.7bn. Of the commercial paper issuances, MTN Nigeria Communications Plc
recorded a 400.0% oversubscription on its debut N100.0bn CP programme, with its 180-
day and 270-day clearing at effective yields of 4.90% and 5.95% respectively. In the bond
market, Lagos State successfully issued N100.0bn, the third series under the state’s
N500.0bn Bond Issuance Programme. The issuance was oversubscribed by 1.96x, with
average stop rate at 12.25%. Also, Dangote Cement Plc conducted a debut bond
issuance of N100.0bn under its N300.0bn program, with an oversubscription of 1.55x and
12.5% yield. Flourmills of Nigeria also took advantage of the low yield environment to issue
a total of N20.0bn bonds, at an average yield of 10.55%. Elsewhere, United Capital Plc
successfully raised N10.0bn for a 5-year tenor, under its N30.0bn Medium-Term Debt
Programme, at 12.5%. Finally, the FG continued its recent lovefest with alternative debts,
as it offered N150.0bn worth of 7-year Sukuk bond, at a rental yield of 11.2%.
Eurobond Market: At the mercy of external headwinds
Notably, with the continued dovish chorus by global monetary authorities and FPIs rising
interest in high-yielding EM/FM debts, Nigeria positioned for a return to the international
debt market early in Q1-2020, with plans to issue $3.3bn worth of Eurobonds. However,
with the realities of the COVID-19 shock on the global financial and oil markets, Nigeria
opted for loans from multilateral agencies which are concessionary.
Meanwhile, the performance at the secondary Eurobond market mirrored that of the
domestic market in Q1-2020, as average yield on sovereign Eurobonds jumped from
6.25% as at Dec-2019 to 13.3% as at Mar-2020. In the same vein, with average yield on
corporate Eurobonds, which include some tier-one banks (ACCESS, ZENITH and UBA) and
SEPLAT, moved to 11.2% in Mar-2020, from 5.1% in Dec-2019. The sell-off pressures were
further ignited by a rating downgrade by Fitch and S & P (renowned global credit rating
agencies), and a change in outlook by Moody’s and S & P, from stable to negative. Also,
bearing in mind the risks to commercial banks, Moody’s downgraded the banking system
in Nigeria, from stable to negative.
By Q2-2020, the slight rebound in oil prices (above $40.0/b), driven by gradual recovery in
the world economy and OPEC+ extended supply cuts, rekindled interests for Nigeria’s
sovereign Eurobonds. As a result, average yield at the sovereign segment declined to
8.02% as at Jun-15. In the same vein, prospects at the corporate Eurobond segment
improved, as average yield dropped to 9.19% as at Jun-15. We note that the bullish
performance was driven mostly by the improved outlook on economic activities, the
continued dovish actions by global monetary authorities, and the hunt for better EM
yields.
Alternative debt
lovefest continued, as
the FG offered
N150.0bn worth of 7-
year Sukuk bond
Financial Markets
In terms of foreign
borrowing, Nigeria
opted for loans from
multilateral agencies
which are
concessionary
Bullish performance in
the secondary
Eurobond market was
driven mostly by the
improved outlook on
economic activities
and oil performance
Nigeria H2-2020 Outlook: Up in the Air
61 www.unitedcapitalplcgroup.com
H2-2020 Outlook: Riding on a myriad of factors
In H2-2020, we expect the dynamics of demand and supply for debt instruments, to be
driven by global monetary policy easing, the size of domestic system liquidity, increased
sovereign funding needs, the CBN’s resolve to defend the naira and keep reserves
buoyant as well as recent appetite by corporate issuers. As a result, we highlight the
major buy and sell side factors that will determine the overall yield environment.
Buy Side Factors
System liquidity in H2-2020: Thinning out?
For us, a number of factors are pointing towards reduced system liquidity in H2-2020. First,
on the domestic front, net inflows of funds from maturing OMO bills belonging to local
players will begin to wane from Q3-2020. We recall that the decision taken by CBN to stop
OMO sales to locals was taken towards the end of Oct-2019. Judging by the chart below,
from Dec-2019, the amount of OMO bill holdings belonging to local non-bank corporates
has dropped significantly, to N3.9tn as at the end of Apr-2020. This means that from Apr-
2020 to the end of Oct-2020, all holdings in the hand of local non-bank corporates (N3.9tn
as at Apr-2020) is expected to be exhausted. Also, by implication and accounting for
time passage, a larger proportion of portfolio holdings on OMO bills will be in the hands of
FPIs and Banks in Q4-2020, with these set of investors calling the shots at the OMO market.
Financial Markets
The yield environment
in H2:2020 depends on
a mix of both buy-side
and sell-side factors
Sources: FMDQ, Bloomberg, United Capital Research (Jun-2020 figures as at June 15th)
3
5
7
9
11
13
15
17
1Y 2Y 3Y 5Y 7Y 10Y 11Y 12Y 18Y 27Y 29Y
Investors weighed in volatility in crude prices in pricing Nigeria's
EurobondsNigerian Soverign Yield Curve (%) - Eurobond
Dec-19 Mar-20 Jun-20
Yield curve when Oil
price was $66.0/b
Yield curve when Oil
price was $39.8/b
Yield curve when Oil
price was $22.7/b
Figure 56
Domestic holdings in
OMO bills are
expected to be
exhausted by the end
of Oct-2020
Nigeria H2-2020 Outlook: Up in the Air
62 www.unitedcapitalplcgroup.com
Also, inflows from FAAC are likely to come in lower than the previous year, as the
government’s revenue takes a hit from the lower oil prices. Overall, we expect inflows
from domestic sources to track lower in H2-2020, strengthening the case for a potential
increase in yields compared to H1-2020.
Foreign Portfolio Inflows: Will the market movers be back?
Going into H2-2020, the major factor to spur the need for FPIs to hunt for juicy yields, will
be the policy decisions by global monetary authorities. The expectation remains that
monetary tools will be deployed to bring economies back on the path of growth, such as
cutting key policy rates. As a result, FPIs will continue the carry trade in H2-2020, focused
on emerging and frontier markets. For Nigeria, we believe the current low OMO yield
environment is driven by large foreign net-outflows from OMO maturities, and the
challenges surrounding FX supply, as the CBN is yet to resume intervention sales at the I &
E window. Therefore, depending on when the CBN opens the tap on dollar supply (in form
of intervention sales at the I & E window), we expect a massive outflow of foreign capital
in Q3-2020, as FPIs are displeased with any form of capital restriction or control. However,
given the global low interest rate environment and the positive trajectory of oil prices
since its crash in Apr-2020, we believe a gradual return to the Nigerian OMO market is
highly possible. In all, the return of FPIs to Nigeria’s market in H2-2020 is a tough call, which
Financial Markets
...inflows from FAAC are
likely to come in lower
than the previous year,
as the government’s
revenue takes a hit
from the lower oil
prices
2.4 2.3
0.7 0.7 0.6 0.50.3
0.5
1.2
1.7
0.7
1.8
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
Jan
-20
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-20
Au
g-2
0
Se
p-2
0
Oc
t-20
No
v-2
0
De
c-2
0
A bulk of the H2-2020's OMO maturities are tilted towards Q4-
2020OMO maturities in 2020 (N'tn)
Sources: CBN, FMDQ, United Capital Research
3.94.1
4.5
3.9
Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20
Allocation of CBN Bills across FPIs, Locals and Banks Trend of OMO bill holdings (N'tn)
FPI Holdings Bank Holdings Resident Non-Bank Holdings
CBN's bars local
nonbank players
CBN bills with
locals gradually
decreasing, with
FPIs and Banks
expected to
have a greater
share
Post ban -
Banks
holdings start
increasing
Figure 57
Sources: CBN, United Capital Research
Figure 58
With dovish global
monetary policies, FPIs
will continue the carry
trade in H2-2020,
focused on emerging
and frontier markets
Nigeria H2-2020 Outlook: Up in the Air
63 www.unitedcapitalplcgroup.com
also depends on the CBN’s resolve to preserve FX flows, versus the need to save the
Nigerian economy from an impending recession.
Sell Side Factors
Monetary Policy: What is the end game for the CBN’s OMO market Dichotomy?
No doubt, the dovish rhetoric from the global market is expected to create a more
accommodative CBN in H2-2020, especially as it aims to boost overall economic growth.
However, given the pressure on exchange rate, the need for the CBN to aggressively
attract and keep FPI inflows in H2-2020 is paramount, especially as it resumes intervention
sales. With a bulk of the remaining OMO maturities in 2020 now in the hands of Foreign
Portfolio Investors, we believe the bargaining power of CBN will weaken, albeit at a slower
rate.
Notably, the FG is looking to rake in a total of $5.5bn from multilateral agencies, with
$3.4bn and $0.3bn already received from the IMF and AfDB respectively. However, as at
March-2020, according to IMF’s estimates, the total OMO holding belonging to FPIs was
$7.5bn. Marrying the two points together, should the entire funds from OMO be taken out
of Nigeria, the net reduction from the reserves would be $2.0bn, bringing the reserves to
about $31.0bn (pre-IMF loan). Therefore, we believe the CBN’s strategy will be to return
OMO rates to a relatively attractive level, to preserve the current FPI flows in the financial
system. As a result, rates on OMO bills are likely to track higher from H1-2020’s ending, to
preserve foreign capital. Apart from FPIs, we believe banks will also be looking for higher
rates on OMO bills, to preserve interest income, amid impairment losses due to COVID-19.
Fiscal Policy: Debt to be obtained from the cheapest source!
The 2020 budget which was approved in Dec-19, has gone through several reviews this
year, to reflect the current realities in the oil market and lower budget revenue
projections. Notably, the budget deficit was increased from N2.2tn to N5.4tn, with new
borrowings increasing from N1.6tn to N4.2tn. Looking at the specific allocation between
sources, the FG is planning to source N2.3tn from the domestic market, with N2.0tn from
multilateral organizations. This is as loans from concessionary sources are much cheaper,
than funding from the international market for Eurobonds. Bearing the above in mind, we
expect the FG to capitalize on the relatively lower rates in the domestic market, to rake in
cash to fund the budget.
H2-2020 Yield Analysis & Forecast: Outlook for the yield curve
For H2-2020, we expect the yield curve to remain normalized or upward sloping, with a
possible upward shift, as the bargaining power of the demand-side players improve. Also,
with domestic liquidity expected to thin out in Q4-2020, we note that a more aggressive
DMO will frontload its issuances in Q3-2020. For the shape of the yield curve, we expect
rates at the long end of the curve to rise in a larger proportion than shorter maturities. Our
rationale is that the FG will be looking to lock in funds for a longer period of time, given
Financial Markets
... we expect the FG to
capitalize on the
relatively lower rates in
the domestic market,
to rake in cash to fund
the budget
With a bulk of the
remaining OMO
maturities in 2020 now
in the hands of FPIs, we
believe the bargaining
power of CBN will
weaken, albeit at a
slower rate
Nigeria H2-2020 Outlook: Up in the Air
64 www.unitedcapitalplcgroup.com
the current uncertainty in the short-term, as unfavourable market conditions, revenue
deficits and a potential recession, are near-term factors that can impair borrowing at
more cost effective rates.
As the world scrambles to mitigate the impact of COVID-19 and rebuild strong economic
foundations, we believe FPI’s focus will be fixed on the trajectory of crude oil prices and its
consequences on Nigeria’s macroeconomic picture. Also, developments in the global
monetary policy- space, as well as credit rating decisions by international credit rating
agencies, are sure to influence foreign sentiments towards Nigeria’s yield environment.
Fixed income strategy for H2-2020: Maintaining a short duration
In addition to our expectation for the yield curve to remain upward sloping, as well as an
upward shift in the yield curve, we expect Q4-2020 to be a period of heightened volatility,
as OMO net inflows from locals exhaust and system liquidity tightens significantly. As a
result, we advise bond investors to maintain short durations in H2-2020 (particularly at the
tail end of the period), to reduce their exposure to interest rate risk from the expected
rising-rate environment. Also, given the expectation for increased local borrowings, the
odds are in favour of an upward repricing in high-yielding corporates issuances, expected
to flood the market in H2-2020. As a result, we advise investors playing in the short-term
Financial Markets
Source: United Capital Research
1M 3M 6M 9M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Possible movement in the yield curve in H2-2020Nigerian Soverign Yield Curve - NTB & Bond
Jun-20 Dec-20
Figure 59
Factors Probability Yield Impact
Crude Oil Prices Moderate
Global Monetary Policy High
Domestic supply High
Inflation High
CBN Moderate
System Liquidity High
H2-2020 Views
Possible Triggers of Yield Movement in H2-2020
Abov e Inflation rate, fueled by disruption in local food supply
chains, currency dev alution and continued border closure
CBN's resolv e to maintain FPI inflows could lead to stop rates edging
upwards
Decreased system liquidity as FAAC drops, and OMO liqudity
belonging to locals decline
Continued recov ery in oil prices, as demand increases and supply
continues to wane amid OPEC+ cuts
More synchronized accomodativ e policies from global monetary
authorities, aimed at boosting economic growth
Increase in FGN domestic borrowing, to cov er for budget deficit
Figure 60
Source: United Capital Research
For the shape of the
yield curve, we expect
rates at the long end of
the curve to rise in a
larger proportion than
shorter maturities
Nigeria H2-2020 Outlook: Up in the Air
65 www.unitedcapitalplcgroup.com
space, to keep a well-diversified fixed income portfolio, consisting of both NTBs and
commercial papers, to increase their average yield. Finally, an outcome to watch is the
possible securitization of FGN’s debts being owed to CBN in H2-2020, which could provide
more investment outlets for local players.
Financial Markets
Nigeria H2-2020 Outlook: Up in the Air
66 www.unitedcapitalplcgroup.com
Financial Markets
Equities Market Review & Outlook
On a slow path to total recovery?
In Jan-2020, our outlook for stocks in 2020 was anchored on developments in the
domestic and global economy with monetary policy as the biggest factor to watch. We
insisted that from all indications, the only justification for an uptrend in the equities market
was the lower yield environment which was supported by increased local currency
liquidity. Interestingly, the year started out on a very good note as investors threw all
caution to the wind and launched a sector-wide demand for stocks in Jan-2020. Notably,
the Nigerian stock market jumped 10.7% in the first three weeks of the year, to emerge as
the global best performer. However, as the reality of the COVID-19 pandemic hit the
crude oil market from late February and was exacerbated by a breakdown of the
agreement between Saudi Arabia and Russia in March, the Nigerian stock market joined
the rest of the world in a global financial market crash, tumbling more than 20.0% by the
end of Q1-2020.
After two consecutive years of decline, the Nigerian equity market became deeply
undervalued, with dividend yields on top names across sectors for FY-2019 soaring above
double digits. However, market players (majorly FPIs) ignored the attractive dividend
yields, as the outlook for the economy turned negative.
In our 2020 outlook report, we highlighted that based on technical analysis, and
narrowing to a range of 10 years, a realistic support level for the NSE-ASI could be at
22,465pts in 2016. Notably, this was an aftermath of plunging oil prices (which hit a record
low of c.$27.0/b in Jan-2016), elevated currency crisis and poor policy responses. In
present times, history clearly repeated itself, with Brent price falling to a low of $19.3/b,
weakening the naira and Nigeria’s fiscal buffers substantially. As a result, sentiment
towards the equities weakened to record level, with the NSE ASI touching a low of
20,669.4 pts. In addition to the decline in oil prices, the period was also associated with
lockdown and restrictions in Nigeria and globally, hampering the operations of multiple
sectors.
Financial Markets
The Nigerian stock
market joined the rest
of the world in a global
financial market crash
H1-2020 Equity performance across world regions (as at June 15th, 2020) Figure 61
Sources: Bloomberg, United Capital Research
Equities Index Level Mcap ($'bn) YTD Return P/E P/B Div. Yield
Ghana 1,928.7 7.6 -14.6% 7.7 1.6 1.9%
Kenya 143.3 20.2 -13.9% 8.5 1.5 6.3%
Mauritius 1,670.5 5.0 -23.3% 32.9 0.8 5.4%
Morocco 10,020.3 53.0 -17.7% 18.6 2.2 4.4%
Nigeria 24,956.0 34.0 -7.0% 8.3 1.2 7.2%
South Africa 52,319.7 805.2 -8.6% 16.0 1.6 4.0%
MSCI BRIC 305.8 2,859.1 -10.0% 15.4 1.8 2.4%
S & P 500 3,005.3 26,229.7 -7.2% 21.0 3.4 2.0%
UK FTSE 100 6,031.3 2,002.6 -20.2% 21.3 1.4 4.6%
Global Market 2,164.5 79,650.1 -8.2% 20.9 2.4 2.3%
Frontier Market 479.3 286.2 -18.2% 11.1 1.5 4.3%
Emerging Market 987.0 17,049.7 -11.5% 16.0 1.6 2.8%
The NSE benchmark
index hit a low of
20,669.4pts in H1-2020
Nigeria H2-2020 Outlook: Up in the Air
67 www.unitedcapitalplcgroup.com
However, after tumbling by over 20.0% in March 2020, following the outbreak of the
coronavirus pandemic and the ensuing economic lockdown, we note that the stock
market recovered by more than half the initial downturn in the month of May amid
increased demand by local investors. In our opinion, the recovery was driven by the
rebalancing in the oil market after OPEC+ members implemented output cut; increasing
indications that governments around the world will reopen their economies regardless of
the anxiety around COVID-19; cheap market valuation of high quality stocks; attractive
dividend yield and sizable market liquidity. Although, in the month of June, the market
continued on a volatile path. In all, the All Share Index closed H1-2020 (June 15) at
24,954.3pts, with YTD loss pegged at -7.0%.
In terms of market participation, H1-2020 was primarily dominated by domestic players, as
excess liquidity (created by CBN’s OMO restriction), the hunt for double-digit yields and
depressed pricing, rekindled local interests. On the flip side, the Nigerian equity market
was not a top destination for FPIs, given their continued preference for CBN’s OMO bills,
despite the decreased yields. As a result, FPI net flows continued to dwindle, even at a
larger rate compared to 2019.
Elsewhere, in terms of corporate actions, the Nigerian market was treated to a cocktail of
acquisitions, divestments, and notable investments. Notably, FBN Holdings Plc concluded
a sale of its 65.0% stake in FBN Insurance Limited to Sanlam Emerging Markets Limited.
Financial Markets
19,000
29,000
39,000
10
30
50
70
90
Ap
r-15
Au
g-1
5
No
v-1
5
Feb
-16
Ma
y-1
6
Au
g-1
6
De
c-1
6
Ma
r-17
Jun
-17
Se
p-1
7
Jan
-18
Ap
r-18
Jul-18
Oc
t-18
Jan
-19
Ma
y-1
9
Au
g-1
9
No
v-1
9
Feb
-20
Jun
-20
Equity market amid declining crude oil prices and COVID-19
pandemic5 year trend of NSE ASI and Brent Crude Price
Brent Crude Price (RHS) NSE ASI (LHS)
Domestic market plunges as
oil price worry starts
Sources: NSE, Bloomberg, United Capital Research
Figure 62
Sources: NSE, United Capital Research
-20.0%
-10.0%
0.0%
10.0%
-70
-40
-10
20
50
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-19
Au
g-1
9
Se
p-1
9
Oc
t-19
No
v-1
9
De
c-1
9
Jan
-20
Feb
-20
Ma
r-20
Ap
r-20
Foreign investors exit, while domestic investors lock in Trend of Domestic and Foreign Net flows, as well as NSE ASI m/m
change
Domestic Net Flows (N'bn) Foreign Net Flows (N'bn) m/m % of NSE ASI (RHS)
Figure 63
We note that the stock
market recovered by
more than half the
initial downturn in the
month of May amid
increased demand by
local investors
The Nigerian equity
market was not a top
destination for FPIs,
given their continued
preference for CBN’s
OMO bills
Nigeria H2-2020 Outlook: Up in the Air
68 www.unitedcapitalplcgroup.com
Financial Markets
Also, PZ Cussons International Ltd announced an exchange of contracts with
FrieslandCapina WAMCO Nigeria, to sell assets associated with Nutricima Limited.
Elsewhere, Law Union & Rock Insurance Plc, notified the investing public of receiving a
binding offer from Verod Capital Management to acquire all the firm’s issued shares.
Union Bank also announced its planned divestment of its UK subsidiary, in line with its
strategy to geographically streamline its business operations to focus on growth
opportunities in Nigeria. Worthy of note was Access Bank Plc securing approval from the
CBN to acquire Transnational Bank Plc (Kenya), as it seeks to expand its footprints across
Africa. Finally, 11 Plc (Mobil) notified the exchange with its plans to delist and transfer its
real estate business to a new subsidiary, 11 Hospitality Limited.
Sector performance: Any winners and losers during the pandemic?
A breakdown of the performance of the Nigerian bourse by sectors indicated that
sentiments were broadly mixed, as three out of the five major sub-indices we track closed
negative, as of 15th Jun-2020. Notably, some of the most exposed sectors to the pandemic
were the largest losers, as investors weighed in skepticism on future profitability. The
Consumer Goods sector topped the list, losing -28.3% YTD. No doubt, weaker purchasing
power of Nigerian consumers, excise duties and high advertising expenses by brewers,
and other existing vulnerabilities in the Nigerian economy even before the virus outbreak,
capped investors’ interest in the sector. In addition, the Banking sector, which is
considered the most liquid, printed a loss of -17.5% YTD, as investors feared a drop in asset
quality, given the significant exposure to oil & gas and manufacturing sector loans. The Oil
& Gas sector also tumbled -16.7% YTD, as upstream players recorded large impairments in
the value of their assets. This was expected, as the COVID-19 induced decline in oil prices
called for a revaluation. On the flip side, the Industrial sector gained +9.4% YTD, driven by
a very impressive gain in the sector’s most capitalized stock (BUACEMENT). Finally, the
Insurance sector also gained, posting +8.9% YTD. This was as investors are still expectant on
the recapitalization exercise.
Notably, major winners due to the pandemic were domestic Healthcare stocks, for a
number of reasons. The huge deficit of local medical supplies and pharmaceutical
products created investment opportunities for the sector players. Furthermore, a
Access Bank Plc
secured approval from
the CBN to acquire
Transnational Bank Plc
(Kenya)
The Industrial sector
was the biggest gainer,
driven by impressive
gains in BUACEMENT
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
De
c-1
9
Jan
-20
Jan
-20
Feb
-20
Feb
-20
Ma
r-20
Ma
r-20
Ap
r-20
Ap
r-20
Ma
y-2
0
Ma
y-2
0
Jun
-20
A mixed sector performance in H1-2020Relative price movement of the key sectors on the NSE
Banking Industrial Goods Oil & Gas Insurance Consumer Goods
Figure 64
Sources: NSE, Bloomberg, United Capital Research
Nigeria H2-2020 Outlook: Up in the Air
69 www.unitedcapitalplcgroup.com
substantial amount of intervention by the CBN to healthcare companies, which included
access to a N100.0bn fund, as well as lower borrowing rates, boosted investor’s interests.
Also, recent policy measures by the FG, as well as fund flows from the private sector to
healthcare, improved the outlook for the performance of the sector.
Outlook: What is the investment case for H2-2020?
Looking into H2-2020, what is clear is that expectations for performance have shifted, with
the rest of the year seeming like a battle to stay afloat, for most equities. As a result, we
ask four key questions for H2-2020.
1. Could the current rally be sustained?
Like every other stock market, the Nigerian equities market has gone through periods of
booms and busts. 2020 is no different, as the health crisis has led to a massive outflow of
foreign capital from Nigeria’s capital market, causing the performance of the local
bourse to dip to levels not seen since the 2015/2016 recession. However, since April-2020,
the tides changed, with the market picking up and local investors making positive moves
on blue-chip stocks. Going into H2-2020, the most important question on the mind of
investors is, could the current positive sentiment causing the market to rally be sustained?
From a technical standpoint, there is a larger possibility that the current rally could be
sustained, as it appears that the market might have finally bottomed out. Looking at the
trend of the general market, the lowest level of the index over the last 10 years can be
traced to 19,732.34 in 2011. This occurred post the Global Financial Crisis, and during the
European sovereign debt crisis and the first sovereign rating downgrade of the United
States. The turnout of the multiple negative events led to a massive decline in global
equity markets. While these are not today’s challenges, global markets dipped in unison,
similar to what occurred in the middle of Q1/Q2-2020. Adopting the lowest point as a
proxy for the market’s support level, we think the potential maximum downtrend at the
end of 2020 is pegged at -26.5% YTD. By the same token, using the period post 2016/2017’s
economic recession and 2017/2018’s rising oil prices as a proxy for recovery, the potential
maximum upside for 2020 comes to a whopping 68.0%. By this metric, it seems the only
way is up for the domestic market.
Financial Markets
Sources: NSE, Bloomberg, United Capital Research
The macro outlook must
be attractive to spur
domestic and foreign
portfolio investment
H1-2020 performance of Major Healthcare stocks (as at June 15th, 2020) Figure 65
Healthcare Stocks 2018 YTD 2019 YTD H1-2020 YTD
NEIMETH 4.4% -12.7% 274.2%
MAYBAKER -5.8% -21.2% 63.7%
EKOCORP 0.0% 26.1% 41.2%
UNION -50.0% -12.0% 36.4%
MORISON 3.8% -9.9% 20.0%
GLAXOSMITH -32.9% -57.9% 16.4%
FIDSON 33.8% -37.4% 6.5%
Major winners due to
the pandemic were
domestic Healthcare
stocks
...since April-2020, the
tides changed, with the
market picking up and
local investors making
positive moves on blue
-chip stocks
From a technical point,
it seems the only way is
up for the domestic
equity market
Nigeria H2-2020 Outlook: Up in the Air
70 www.unitedcapitalplcgroup.com
However, the potential for a downside or upside and a sustenance in the current rally,
depends on a number of factors out of the scope of technical analysis. This includes the
trajectory of the COVID-19 pandemic and the possibility of a second wave, the
economic effect on businesses, continued uptick in crude oil prices, Nigeria’s fiscal
conditions and continued pressure on the local currency. As a result, in the next question,
we highlight more of fundamental analysis and what 2020 presents for businesses.
2. Has COVID-19 changed the underlying stock fundamentals?
As a result of over two years of continuous decline in prices, the market valuation for
Nigerian Equities has been a strong bargaining chip to woo investors, who seek both a
dividend and capital appreciation return. Using Price/Earnings Ratio as a proxy, as at
June 15, the local bourse is valued at 8.3 currently, vs 8.5x average in 2019, and
significantly below its 5-year average valuation at 11.9x. Compared to peers, the
attractiveness of the market is further shown, and is trading at a deep discount to EM
equities (14.4x) and FM equities (11.1x).
No doubt, from a valuation standpoint, the equity market seems like the biggest play in
2020 for both local and foreign investors. We also believe the recent downward
adjustment in the naira, gives more incentive to FPIs to lock in gains into cheaper and
fundamentally sound stocks. Although we identify rosy valuations as an opportunity to
Financial Markets
Sources: NSE, Bloomberg, United Capital Research
18,000
23,000
28,000
33,000
38,000
43,000
Jun
-10
Jan
-11
Au
g-1
1
Ma
r-12
Oc
t-12
Ma
y-1
3
De
c-1
3
Jul-14
Feb
-15
Se
p-1
5
Ap
r-16
No
v-1
6
Jun
-17
Jan
-18
Au
g-1
8
Ma
r-19
Oc
t-19
Ma
y-2
0
Where is the bottom?Ten year trajectory of the NSE-ASI
2018 Market
Resistance 2011 Market
Support Level
Figure 66
11.9
1.5
8.3
1.2
P/E P/B
Nigerian Equities are still trading below
their 5-year averagesNigerian equity valuation vs. 5-yr valuation
5-Year Average valuation Current valuation
Figure 67
11.9
19.6
14.4
12.3
8.3
20.9
16.0
11.1
Nigeria World EM FM
NSE-ASI trading at a sharp discount to
the worldNigerian equity valuation (PE) vs. 5-yr
5-Year Average valuation Current valuation
Figure 68
Sources: Bloomberg, United Capital Research
...the potential for a
downside or upside
and a sustenance in
the current rally,
depends on a number
of factors out of the
scope of technical
analysis
The local market
remains undervalued
compared to EM and
FM peers
Nigeria H2-2020 Outlook: Up in the Air
71 www.unitedcapitalplcgroup.com
invest for the mid to long term, the effects of the COVID-19 pandemic have clearly shifted
the underlying valuation and elevated more risks in the short term. As a result, we might
see one or two reasons for investors to steer clear of the market, going into H2-2020.
So far, one thing is clear, the strategy for businesses has undergone a complete shift this
year, from seeking growth opportunities to managing cash positions and staying afloat.
Also, with import and export activities under strain, continued layoffs, weaker demand,
lower production, and FX risks, Q2-2020 earnings season might reveal depressed numbers.
As a result, we expect to see reduced interim dividend announcement filter in this year, as
companies try to manage positions and weather the storm of this pandemic. Compared
to the previous year, where primary market activities supported market performance, we
expect none for H2-2020, with a few notable corporate actions. No doubt, these are
unprecedented times. Bearing all the above in mind, we expect P/E for 2020 to come in
at a 5-year low, given our expectation of weaker earnings.
3. FPI Inflows in H2-2020: Any possibility of a change in the narrative?
Despite the somewhat dovish tone across major central banks in the advanced
economies since the beginning of the pandemic, FPI net outflows from the domestic
equity market have continued to widen significantly. We do not expect this narrative to
change in H2-2020. Although the possibility of a global economic rebound and a
recovery in oil prices is imminent, we expect overall FPI inflows into Nigeria’s financial
market to remain underwhelming, with the equity market being the last destination for
any fresh inflows. Notably, we expect the current challenges with dollar supply as well as
the weaker macroeconomic environment caused by the pandemic to cloud FPI
participation in the equities market in H2-2020. In addition, although there has been a
positive shift in policy initiatives so far, lower attractiveness of risk-free securities, and
improving oil prices, FPIs preference for short-term investments will be unchanged, rather
than engage in riskier assets such as equities.
4. Domestic Inflows in H2-2020: Could the current narrative be sustained?
In H1-2020, the trend so far has been domestic players locking into equities at lower
prices, as the market dipped to new lows. However, we believe the renewed interests by
domestic players might come under pressure in H2-2020. Given the negative outlook for
Q2-2020 earnings and weaker macroeconomic conditions, interests will begin to wane,
with gradual decreased inflows into the equities market. Also, with the DMO set to open
the tap on domestic borrowing, we might see some capital outflow from the equities
market to the fixed income market, as dividend plays become unsure and fixed income
yields start appearing more attractive.
Our Projection for H2-2020
Putting the pieces together, our overall outlook for equities is lukewarm in H2-2020, despite
the expansionary monetary policy stance in the global space and the renewed domestic
interests pushing stock prices towards pre-pandemic levels. Although the argument for a
Financial Markets
Q2-2020 earnings
season might reveal
depressed numbers
We believe the current
challenges with dollar
supply will leave FPIs
preference for safe
OMO bills unchanged,
rather than engage in
equities
...renewed interests by
domestic players might
come under pressure in
H2-2020
Nigeria H2-2020 Outlook: Up in the Air
72 www.unitedcapitalplcgroup.com
continued recovery is increasingly compelling from a technical standpoint, we note that
weaker company fundamentals heightened by the COVID-19 pandemic, currency
movement risks and capital control at the I &E window, are key risks that could curtail the
ongoing rebound. As a result, we expect the market to remain highly volatile and ‘short-
term gain’ driven. In all, we peg our base case scenario for the YTD performance of the
NSE ASI in 2020 at -4.1%.
However, we believe these times provide opportunities for long term investors, as stocks
that have stood the test of time are still relatively cheap. While we know the COVID-19
pandemic still remains a challenge for the market, we expect the market to be well
positioned for a sustained rally when the following occur: a significant rebound in oil
prices to pre-pandemic levels, a vaccine is found to cure the disease, and all the world
economies reopen. Although, our positive expectation for a sustained rally could be
capped by the overall weak macroeconomic environment.
Financial Markets
Our Base case
projection is that
equities will decline by
4.1% YTD in 2020
Performance
Upside Factors H1-2020 Bear Base Bull
Low Yield Environment
Strong Huge Liquidity
Muted Oil Prices
Weak Fund Flows (FPIs)
Increased Domestic Participation
Downside Factors H1-2020 Bear Base Bull
Negative Corporate Earnings
COVID-19 Uncertainty
FX Supply Issues
Increased Govt. borrowings
All Share Index 24,954.32 23,871.33 25,746.52 29,628.84
YTD Return -7.0% -11.1% -4.1% 10.4%
Key
H2-2020 Scenerio
Source: NSE, Bloomberg, United Capital Research
H2-2020 projection for the local equities market (as at June 15th, 2020) Figure 69
Sectors
Nigeria H2-2020 Outlook: Up in the Air
75 www.unitedcapitalplcgroup.com
Agricultural Sector
On a slow path to total recovery?
Agric sector output growth further slowed to 2.2% in Q1-2020, well below the 5 years
average of 3.2% and Q4-2019 growth of 2.3%. Dissecting the component of the sector,
crop production which accounted for over 90% of agricultural output slowed to 2.4% in
Q1-2020 (vs. 2.5% in Q4-2019 and 3.3% in Q1 2019), livestock rebounded 0.63% (vs. -0.20%
in Q4-2019 and 0.88% in Q1-2019), forestry rose 1.7% (from 1.3% in Q4-2019 and 2.19% in Q1
-2019), while fishing slowed to 1.5% (from 2.3% in Q4-2019 and 7.09% in Q1-2019).
Similarly, food prices sustained uptrend as the food inflation sub-index rose to 15.03% y/y
as at May-2020 compared to 14.67% in Dec-2019. Mainly, the panic buying that greeted
the Coronavirus lockdown, supply shortages induced by stricter trade policies around
border closure and FX restriction on importation of staple foods are the drivers.
Meanwhile, rising demand and security challenges in food production hot beds of the
country are other concerns. Interestingly, the Poultry Association of Nigeria (PAN)
estimated that local poultry production increased to 7,000metric tons since the border
closure policy took off.
The above notwithstanding, policy stance of the government remained overwhelmingly
in favour of the sector. In January 2020, the Federal Ministry of Agriculture & Rural
Development (FMARD) launched a $1.1bn Agriculture Mechanization Scheme tagged
The Green Imperative Programme (GIP). The GIP is to be funded by the Brazilian
Government through a loan from the Deutsche Bank (DB), Brazilian Exim Bank (BNDES)
and Islamic Development Bank. According to the FMARD, the loan is be repaid at 3.0%
interest rate over a period of 15 years for the BNDESl and 7 years including 2 years
moratorium for the Deutshe Bank. The GIP is designed to benefit 100,000 young
entrepreneurs directly and 5 million indirectly. Also, it will facilitate the acquisition of 10,000
units of tractors and 50,000 units of assorted implement and equipment for assembly in
Nigeria. Beneficiaries would be trained over the course of 10 years across the 780 service
centres that would be established. GIP will hopefully, enhance the mechanization of
Agric sector output
growth further slowed
to 2.2% in Q1-2020
Sectors
3.5%3.0% 3.0%
4.2%
3.0%
1.2%
1.9%
2.5%
3.2%
1.8%2.3% 2.3% 2.2%
Q1-1
7
Q2-1
7
Q3-1
7
Q4-1
7
Q1-1
8
Q2-1
8
Q3-1
8
Q4-1
8
Q1-1
9
Q2-1
9
Q3-1
9
Q4-1
9
Q1-2
0
Covid-19 and planting season to drag
Agriculture sector growth
Agriculture sector, quarterly growth rate
0.6%
1.1%
1.6%
2.1%
12.0%
13.0%
14.0%
15.0%
16.0%
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-19
Au
g-1
9
Se
p-1
9
Oc
t-19
No
v-1
9
De
c-1
9
Jan
-20
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Food prices push upward amid
COVID-19 shock
Trend of food inflation (y/y)
Y/Y M/M
Figure 70 Figure 71
Sources: NBS, United Capital Research Sources: NBS, United Capital Research
...policy stance of the
government remained
overwhelmingly in
favour of the sector
Nigeria H2-2020 Outlook: Up in the Air
76 www.unitedcapitalplcgroup.com
agricultural specialized extension services and agro-processing in the 774 local
government areas and the 6 area councils in the FTC.
As a fallout of the outbreak of COVID-19, the CBN announced plans to fund farmers
under its 2020 Wet Planting Season Scheme (WPSS). This is covered under the Anchor
Borrowers Program (ABP) under which a total of N190.0bn has been disbursed since its
inception in 2015. Notably, the farmers who will be considered under the WPSS, are those
who produce; rice, cotton, oil palm, tomato, cassava, poultry, fish, maize, cocoa, and
livestock/dairy. The CBN insisted that the planned loans will aid the cultivation of 1million
hectares of land and produce 8.3m tonnes of the target commodities. The scheme is
proposed to be the largest ever in the history of the ABP with loans worth N432.0bn
expected to be disbursed to 1.1million farmers across the country. In addition to the
above, the CBN announced a reduction in all intervention fund for the Agric sector from
9.0% to 5.0% as well as a moratorium on all Bank of Agriculture loans to players in the Agric
space.
While a concerted effort by both the fiscal and the monetary policy authorities must be
commended, published data by the National bureau of Statistics continue to point to
weaker output and faltering growth. As noted above, output growth continued to slow,
from a record high of 4.5% in Q2-2016 to a low 2.2% in Q1-2020. Shockingly, a total of
N622.99bn has been disbursed via the Commercial Agricultural Credit Scheme since
inception aside other intervention programs. Accordingly, outlook for the sector for the
rest of the year is muted, as we do not see the impact of the intervention fund halting the
observed quarter on quarter slowdown.
Clearly, throwing huge amount of intervention fund at the sector does not seem to be
helping much except the structural and strategic challenges confronting the sector are
resolved. In our view, Nigeria must invest in training and education of farmers, storage
facilities, transportation network to facilitate movement of crops from farm to market, as
well as R&D to boost Agricultural yield. A more coordinated policy framework must be
developed for herders, grazing and livestock farming. Finally, to boost agricultural export,
create jobs and attract skilled manpower to sector, Nigeria must take the implementation
of The Green Imperative Programme seriously and identify select or strategic food and
cash crops/livestock to focus on with practical emphasis on the mechanization.
...the CBN announced
a reduction in all
intervention fund for the
Agric sector from 9.0%
to 5.0% as well as a
moratorium on all Bank
of Agriculture loans to
players in the Agric
space
Sectors
...Nigeria must take the
implementation of The
Green
Imperative Programme
seriously
Nigeria H2-2020 Outlook: Up in the Air
77 www.unitedcapitalplcgroup.com
Banking Sector Review and Outlook
A test of the avowed resilience
Coming into 2020, our outlook for the Nigerian banking sector was that interest and non-
interest income will be further pressured. We imagined that loan growth will be modest
amid concerns about asset quality. In all, we anticipated that margins will be strained,
and profitability will be slightly impaired. However, beyond regulatory pressure which
continue to eat-up asset yields, the banking sector was served a cocktail of woes in H1-
2020 as the outbreak of COVID 19 triggered currency devaluation, oil market crash,
halted business activities and worsened asset quality.
Sector Outlook
Loan Growth, Asset Quality, and Impairment losses
The impact of the COVID-19 pandemic and the control measures put in place were felt
across all sectors of the economy, some more than others. This economic slowdown
across various sectors does do not provide a favourable landscape for more loan
disbursement. Therefore, loan growth is expected to be muted as banks are conscious in
their risk management.
In terms of asset quality, we expect NPLs to increase significantly due to substantial
exposure to some the hardest hit sectors, especially oil & gas, manufacturing, and trade &
general commerce. Also, in the consumer lending space, we expect a significant level of
defaults as unemployment levels rise and salary cuts have become the order of the day.
By implication, impairment losses are also anticipated to surge on the back of guidelines
prescribed by IFRS 9. The key import of IFRS 9 is the introduction of a forward-looking
“expected loss” impairment standard that requires banks to provide more timely
recognition of expected credit losses (ECL), based on future expectations, in place of the
“incurred loss” model. As such, we expect banks to take higher impairment losses as a
reflection of weaker macroeconomic realities in 2020 as we know it.
...the banking sector
was served a cocktail
of woes in H1-2020
Sectors
...impairment losses are
also anticipated to
surge on the back of
guidelines prescribed
by IFRS 9
Impact analysis of COVID-19 on the banks’ loan book Figure 72
Source: CBN, United Capital Research
SectorsBanking Sector loan
exposure Impact of COVID-19
Oil and Gas (Upstream) 19.90% High
Manufacturing 15.30% High
Finance, Insurance and Capital market 7.40% Moderate
Trade and General Commerce 7.30% High
Oil and Gas (Downstream) 6.80% Moderate
Information and communication 5.10% Low
Agriculture 4.50% Moderate
Construction 4.20% High
Real Estate 3.50% High
...loan growth is
expected to be muted
as banks are conscious
in their risk
management
Nigeria H2-2020 Outlook: Up in the Air
78 www.unitedcapitalplcgroup.com
Interest Income: Lower yield, challenging macro environment and default rate
In terms of revenue, we expect that the interest income component of banks’ revenue
will be the most pressured. Firstly, banks have been forced to lower interest rates earlier in
a bid to meet the LDR requirement. Secondly, as part of the CBN’s expansionary
measures to support the economy in the COVID-19 era, MPR was reduced by 100bps to
12.5%. Also, banks have announced various types of relief programmes and made
provisions for restructuring of loans, that involve payment holidays. The summary of the
factors highlighted above means that the interest income on loans is expected to
reduce. Furthermore, the low interest rate environment and declining rates on fixed
income securities (T-bills, OMO and bonds) as well as the increase in the regulatory cash
reserve ratio from 22.5% to 27.5% means that overall asset yield will reduce.
That said, the cost of funds is also expected to reduce across board due to a drastic
reduction in the fixed deposit rates amid the low interest rate environment. This is
estimated to support net interest margin significantly and moderate pressure on earnings
yield.
Non-interest income: A mixed performance
On a brighter note, the lockdown and other social distancing measures might have
supported growth in volumes of online and mobile transactions. However, the 30-70%
multi-tiered cut on banking fees by the CBN towards the end of 2019 may counter-
balance the growth in Non-interest income in 2020. Notably, the E-business income
component which has been the fastest growing revenue component before now, might
remain flat this time around. This is as fees have been slashed, and some businesses (e.g.
Airline, Sport betting, Restaurants, Hotels and Cinemas) which generate high volumes
have not been so active. However, we expect an increase in trading income given the
level of market volatility that was experienced and is most likely to continue till the end of
the year.
It is not all negative
Overall, we think that 2020 will once again test the resilience of the Nigerian banking
sector. However, we note that the capacity of the banks to weather the storm is peculiar
for each of the banks. Banks that have the holding company structure such as Stanbic
IBTC, FCMB and FBNH are better positioned due to the multiplicity of their revenue
streams. In the same vain, banks that have a net dollar long position such as Zenith Bank
and Guaranty Trust bank are at an advantage, due to the devaluation and possible
further devaluation of the naira. In terms of asset quality, some banks have short term
hedges for a large percentage of their oil and gas loans, shielding them from the huge
blow of the oil price crashed witnessed in H1-2020.
...we expect that the
interest income
component of banks’
revenue will be the
most pressured
Sectors
Overall, we think that
2020 will once again
test the resilience of the
Nigerian banking
sector
On a brighter note, the
lockdown and other
social distancing
measures might have
supported growth in
volumes of online and
mobile transactions
Nigeria H2-2020 Outlook: Up in the Air
79 www.unitedcapitalplcgroup.com
Cement Sector
Victim of circumstance
In our 2020 Outlook report titled ‘’A different playing field’’ we expected the cement
industry to be on the path of growth, this growth was to be fueled by huge deficit in the
infrastructure space across the continent, renewed commitment of the Federal
Government of Nigeria (FGN) to invest heavily in transport (including road, rail, and ports)
and housing infrastructure, and coupled with low cement consumption per capita in
Nigeria which stands at 150kg compared to global average of 561kg . However, the
outbreak of covid-19 changed the narrative and made the cement Industry a victim of
circumstance as oil market crash led to a 9.5% downward review of Capital expenditure
in the 2020 budget.
Looking ahead, our optimism about Nigeria’s cement industry is damped as we believe
that the industry may be in for a difficult H2-2020 due to COVID-19 pandemic. Notably,
the health crisis forced the government to lockdown economic activities on three key
construction hubs in the country (Lagos, Abuja and Ogun States). However, the recently
submitted Economic Sustainability Plan (ESP) by Vice President led committee on
economic sustainability, raise some hope for the cement industry if implemented within
the time frame stipulated. Based on the ESP report, the FG plans to shift attention to the
usage of locally available materials like limestone, cement, and granite for road
construction in a bid to save cost from the importation of bitumen. FG also plans to
construct about 300,000 homes in the next 12-months coupled with renewed
commitment toward the construction and maintenance of federal highways, roads and
bridges, road interventions within federal tertiary institutions across the country. The
unrelenting effort of the FG toward infrastructural development in the country appears
like a plus for the cement industry. However, history has shown that the percentage of
implementation of capital expenditure in Nigeria average c.52.7% in the last 7years which
supports our views of not being overly optimistic about growth in the sector. Bearing the
above in mind, we expect performance of operators in the sector to weaken in 2020
The outbreak of COVID
-19 changed the
narrative in the cement
sector
Sectors
-4.0
-2.0
0.0
2.0
4.0
-10.0
-7.0
-4.0
-1.0
2.0
5.0
8.0
Q1-1
6
Q2-1
6
Q3-1
6
Q4-1
6
Q1-1
7
Q2-1
7
Q3-1
7
Q4-1
7
Q1-1
8
Q2-1
8
Q3-1
8
Q4-1
8
Q1-1
9
Q2-1
9
Q3-1
9
Q4-1
9
Q1-2
0
Recovery in sight?Construction and Cement Sector GDP vs
Aggregrate GDP (%)
Cement Construction Aggregrate GDP (RHS)
Figure 74
5.0%
25.0%
45.0%
65.0%
85.0%
50.0
550.0
1,050.0
1,550.0
2,050.0
2,550.0
2012 2013 2014 2015 2016 2017 2018 2019
Trend of FGN capital expenditure (N'bn)Performance Percentage
Budget Actual Performance
Figure 75
Sources: NBS, United Capital Research Sources: Budget Office, United Capital Research
Our initial optimism
about Nigeria’s cement
industry in 2020 is now
dampened by the
outbreak of COVID-19
Nigeria H2-2020 Outlook: Up in the Air
80 www.unitedcapitalplcgroup.com
Speaking briefly about the key players, DANGCEM appears to be the hardest hit, aside
COVID-19 induced disruption in supply chain, its bottom-line will most likely be under
pressure due to greater income tax deductions as the pioneer tax grants on Ibese Lines 3
& 4 and Obajana Line 4 expired in February 2020. We see BUACEMENT exploiting the
consolidation of CCNN and Obu cement to deliver an inorganic growth come FY-2020,
While WAPCO management has guided that it is preparing for a revenue shortfall in the
second quarter of 2020 due to subdued activity in the construction sector despite 10.0%
growth in Q1-2020 revenue. However, we expect to see a mild increase in FY-2020 y/y
performance fueled by significant reduction in finance cost.
We expect a mild
improvement in
WAPCO’s H2-2020
performance fueled by
significant reduction in
finance cost
Sectors
Nigeria H2-2020 Outlook: Up in the Air
81 www.unitedcapitalplcgroup.com
Consumer Goods Industry
Riding the tide of challenges
In our FY-2020 outlook released in Jan-2020, we had forecasted a tough year for the listed
consumer goods players and estimated that much of the growth we are likely to see in
2020 will be driven by higher prices, rather than higher consumer demand. True to our
projections, many of our coverage companies increased prices in the face of the Value
Added Tax (VAT) increment and new minimum wage implementations. Also, some of the
sector players that had been struggling with competition from smuggled goods,
benefited from the positive impact of the closure of land borders. Clearly, the reduction in
the activities of smugglers allowed operators to push more volumes within the domestic
market in Q1-2020.
However, the outbreak of the COVID-19 disease added a new layer of concern for most
of the industry players as lockdown in key revenue generating and industrial states (Lagos,
Abuja, and Ogun States) as well as the ban on inter-state movement depressed
performance. Also, the disruption in global supply chains, naira adjustment, and FX
market illiquidity throughout Q2-2020, added more concerns for companies with sizable
import needs (specifically, brewery players and PZ).
Specifically, we believe industry players with low portfolio concentration in products that
are considered essential (food, beverages, agro-allied and home & personal care) as
well as those with high factory location concentration in the first three states that were
placed on lockdown (Lagos, Abuja, Ogun state), would have suffered the most as a result
of the restrictions implemented in Q2-2020. Thus, we expect a largely underwhelming top
line performance from GUINNESS, INTBREW, PZ and UNILEVER in Q2-2020. Meanwhile, we
expect the topline performance of NESTLE, DANGSUGAR and FLOURMIL to further improve
in Q2-2020, reflecting consumers panic purchase of essential items ahead of and during
the lockdown periods.
Looking beyond Q2-2020, we have a moderate outlook for topline performance across
the sector in H2-2020. This is as we expect economic activities to pick up from Q2-2020’s
low. Also, predicated on our assumption that the government would not be implementing
another round of lockdown in H2-2020 and with earnings of most consumers under
True to our projections,
many of our coverage
companies increased
prices early in 2020
Sectors
Looking beyond Q2-
2020, we have a
moderate outlook for
top-line performance
across the sector in H2-
2020
Overview of Coverage Companies: Figure 73
Source: NSE, FMDQ, Company Filings, United Capital Research
S/N Company Category Factory Location in NigeriaFinancial Market
Activities2020 Outlook
1 DANGSUGAR Food Processing Lagos State (Apapa) N/A Positive
2 FLOURMIL Food Processing, Agro-Allied Lagos, Kano, Cross River, Niger, Oyo, Ogun and Kwara States CP and Bond Positive
3 GUINNESS Brewery Lagos, Abia and Edo States CP Negative
4 INTBREW Brewery Ogun, Osun, Rivers and Anambra States Rights Negative
5 NB Brewery Lagos, Abia, Anambra, Benue, Enugu, Imo, Kaduna, Ogun and Oyo States CP Moderate
6 NESTLE Food and Beverages Ogun State (Agbara and Flowergate) N/A Positive
7 PZ Food & Nutrition, Electricals, HPC Lagos State N/A Negative
8 UACN Food Processing, Agro-Allied, Paints, Real Estate Footprint in more than 28 States Rights Moderate
9 UNILEVER Food Processing, HPC Lagos and Ogun States N/A Negative
The outbreak of the
COVID-19 disease
added a new layer of
concern for most of the
industry players
Nigeria H2-2020 Outlook: Up in the Air
82 www.unitedcapitalplcgroup.com
pressure, we estimate a moderate growth in demand for essential and non-essential
items.
Our expectation for cost components across the sector is also moderate. Notably, we
expect the reduction in commodity prices, interest rates, domestic petrol prices, as well as
the lay-offs of some non-essential staff and downward adjustment in staff renumeration
within some of our coverage companies, to constrain growth in overall cost components,
across the sector in Q2-2020. Beyond Q2-2020, we note that weaker naira will have a
significantly negative impact on the input cost of brewers as they resume import of key
raw materials. Also, we expect the possible upward adjustment in electricity tariffs to spur
costs higher across the sector.
Overall, our best picks in the sector remain NESTLE buttressed by their solid balance sheet
position, product innovations and brand durability. Also, we remain positive on FLOURMIL
and DANGSUGAR amid the dominant nature of their product portfolios in essential items.
For the brewers, we believe sales will be affected by the closure of bars, as well as the
ongoing implementation of social distancing measures and late-night curfews. However,
of the three major players in the brewery space, we believe NB is in the best position to
ride the tide, given its efficient distribution system and its wide factory footprints across the
country. Elsewhere, we believe the deliberate decision by the management of UNILEVER
to tighten credit terms in H2-2019, will have a negative impact on their overall
performance in 2020.
Overall, our best picks
in the sector remain
NESTLE buttressed by
their solid balance
sheet position, product
innovations and brand
durability
Sectors
We remain positive on
FLOURMIL and
DANGSUGAR amid the
dominant nature of
their product portfolios
in essential items
Nigeria H2-2020 Outlook: Up in the Air
83 www.unitedcapitalplcgroup.com
Oil and Gas Industry
A Fall from Grace
The oil & gas sector was certainly one of the hardest hit sectors by the COVID-19
pandemic, as global economic lockdowns crippled the demand for crude oil. Notably,
the impact of the pandemic was felt across the value chain. The upstream sector was the
worst hit, given the unfavourable pricing of Nigeria’s Official Selling Prices (OSP) for its
crude grades, relative to higher production costs incurred by operators. These dynamics
forced upstream operators to cut back on production activities, evident by the decline in
rig count to 8 in May 2020, the lowest in 2 years. Also, due to demand shortfall for energy,
there were declines in refinery runs and shutdowns in major refining centres across Europe
and Asia. In response to the harsh operating climate, planned CAPEX programmes for the
year were cut by major IOCs and local players, and there was also deferment on major
projects.
For the downstream sector, the decline in crude oil prices gave the FG the opportunity to
somewhat remove the controversial fuel subsidy regime, as the NNPC reported over-
recovery. Accordingly, the Petroleum Product Pricing Regulatory Agency (PPPRA)
implemented a monthly market-based pricing regime, to provide prices reflective to
market reality for Oil Marketing Companies (OMCs). However, this was met with huge
difficulty, as monthly prices were reduced (from a high of N145/litre pre-market regime to
N121.5/litre for Jun-2020 sales), with OMCs still carrying inventory bought at higher prices.
Sector Outlook
For the rest of the year, while we note that the global crude oil market is on a better
balance of supply and demand, the return to pre-pandemic profitability for Nigeria’s oil
and gas players remains bleak. For the upstream sector, given the non-compliance of
Nigeria to the OPEC+ quota in May-2020 (produced 1.59mbpd vs 1.41mbpd quota), the
country is required to compensate for the excess production, and future non-compliance
The oil & gas sector
was certainly one of
the hardest hit sectors
by the COVID-19
pandemic
Sectors
...the return to pre-
pandemic profitability
for Nigeria’s oil and gas
players remains bleak.
1.3
2.5 2.31.7
-3.3-4.0
-1.1
1.5
2.7 2.41.9
-3.1-3.9
-1.1
De
c-1
9
Jan
-20
Feb
-20
Ma
r-20
Ap
r-2
0
Ma
y-2
0
Jun
-20
Given the oil demand destruction,
Nigeria sold at a discount Trend of Nigeria's crude grades at a
Premium/Discount to Brent
West Africa Bonny Light Crude OSP West Africa Qua Iboe Crude OSP
Figure 76
145.3 145.4 145.4 145.4
130.8129.7
De
c-1
9
Jan
-20
Feb
-20
Ma
r-20
Ap
r-20
Ma
y-2
0
Following the price modulation by
PPPRA, average PMS price has been
decliningMonthly Average PMS in Nigeria
Figure 77
Sources: NBS, United Capital Research Sources: NBS, United Capital Research
Nigeria H2-2020 Outlook: Up in the Air
84 www.unitedcapitalplcgroup.com
will be followed by deeper supply cuts. As such, the NNPC is expected to allocate
different levels of cuts to partners (mostly JV), while some producers have already willingly
shut down operations due to higher production costs. Also, given the unprecedented
level of shock to oil prices caused by the pandemic, we expect H2-2020 to be a period of
achieving reduced costs, production efficiency and conserving cash in the upstream
sector. Notably, the NNPC is targeting a unit operating cost among all oil producers at
$10.0/b, with costs for both JV and PSC operators in Nigeria estimated around $25.0/b
and $17.7/b respectively. For SEPLAT, the only upstream player under our coverage, the
outlook for the year remains negative, on the back of relatively lower prices and
negatively affected production.
Elsewhere, the Department of Petroleum Resources (DPR), announced the
commencement of the 2020 marginal field bid round exercise, looking to auction off a
total of 57 fields. Although the current challenges in the oil market are significant, we
expect domestic players to bid with a forward-looking perspective, and position for
production when the oil market fully recovers. However, our concern remains how
potential output from these marginal fields will be accounted for, amid an expectation
for sustained OPEC+ supply cuts beyond 2020. Finally, a bone of contention going into H2-
2020 is the long-awaited passage of the Petroleum Industry Bill or at least the Petroleum
Industry Governance Bill. Although we have noticed a general optimism during this
pandemic period, as the government seems to be attempting to pass various reforms in
different sectors, the little or no traction seen on the passage of the PIGB means that 2020
might end with the current regulatory environment being maintained.
For the downstream segment, the reactivation of the monthly market-based price regime
is laudable, however, the concern remains around policy backflip which is quite
common in Nigeria. Hence, the possibility of the FG backtracking the market-based price
regime once oil prices start tracking higher and pressure on consumer wallets begin to
mount remains in the offing. Nonetheless, we expect oil marketers to continue to diversify
into lubricants, diesel, and other unregulated product mixes. Bearing the above in mind,
we still expect margins of major industry players such as TOTAL, ARDOVA and MOBIL to
remain constrained, as the NNPC remains the sole importer of PMS in H2-2020. Hence,
profitability will boil down to operational efficiency across our coverage companies.
Elsewhere, the proposed completion date of the 650,000 bpd Dangote Oil Refinery
officially remains the end of 2020, with the complex expected to be operational by early
2021. However, given the negative impact of the pandemic on operations, we are of the
view that the proposed date is overly optimistic.
Finally, with Nigeria’s abundant gas reserves, the pandemic offers an opportunity for
Nigeria to increase its focus on gas by diversifying its crude oil portfolio. However, the
global market for gas has also been affected by the general weakness in energy
demand. For Nigeria, the key challenges remains the lack of adequate gas infrastructure.
The outlook for the year
remains negative for
SEPLAT, on the back of
relatively lower crude
oil prices and
negatively affected
production
Sectors
The pandemic offers an
opportunity for Nigeria
to increase its focus on
gas by diversifying its
crude oil portfolio
...the little or no traction
seen on the passage of
the PIGB means that
2020 might end with the
current regulatory
environment being
maintained
The concern for the
downstream segment
remains around policy
backflip which is quite
common in Nigeria
Disclosure
Appendix
Nigeria H2-2020 Outlook: Up in the Air
87 www.unitedcapitalplcgroup.com
Investment Rating Criteria and Disclosure
United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;
Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR
of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.
Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor
around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).
Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.
NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking
relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.
Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.
Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in
activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition,
research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s
Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published
research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable
conflicts of interest that may arise in the course of its business relationships.
Risk Rating
Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in
significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk.
Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from
government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets.
Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.
These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest,
government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.
United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem
applicable the company of focus. The ratings are defined below;
High: High probability of an imminent systematic risk or/and unsystematic risk
Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk
Low: Low probability of an imminent systematic risk or/and unsystematic risk
Analyst Certification
The research analysts who prepared this report certify as follows:
1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this
report.
2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in
this report.
Other Disclosures
United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,
potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report
are disclosed:
• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report
Disclosure keys
a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report
b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence
on the company’s operating decision directly or through proxy arrangements
c. UCAP is a market maker in the publicly traded equities of the Company
d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company
e. UCAP beneficially own 1% or more of the equity securities of the Company
f. UCAP holds a major interest in the debt of the Company
g. UCAP has received compensation for investment banking activities from the Company within the last 12 months
h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months
i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution
j. The Company is a client of UCAP
k. The Company owns more than 5% of the issued share capital of UCAP
Disclaimer
United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets
and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)
nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell
securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is
registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact
United Capital Plc, Afriland Towers (3rd Floor), 97/105, Broad Street, Lagos. ©United Capital Plc 2019.
Disclosure Appendix
Company Disclosure
Dangote Cement Plc a,h
Fidelity Bank Plc h
Flour Mills of Nigeria Plc h
Forte Oil Plc g
International Breweries Plc a,h
Nigerian Breweries Plc h
PZ Nigeria Plc h
Stanbic IBTC Plc g
Total Nigeria Plc h
UAC of Nigeria Plc h
Zenith Nigeria Plc a