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New Thinking.
New Opportunitieswww.novambl.com
NOVA Economic Outlook H2 2020
A Contraction Like Never Before
July 2020
6
Global Economy and Capital Flows
Domestic Economy: Economic Growth
Balance of Payment and Currency
Consumer Prices
Monetary Policy
Fiscal Policy
Fixed Income and Strategy
Executive Summary
Table of Content
Page 3
Page 7
Page 17
Page 23
Page 33
Page 37
Page 42
Page 48
Crude Oil Page 12
6
EXECUTIVE SUMMARY
Summary of Expectations for 2020 (1/3)
• Global Economy: Notwithstanding recent slower rate of contraction in manufacturing and services PMI, the shock occasioned by
Covid-19 is expected to depress economic activities for the rest of the year. GDP in Advanced economies is projected to contract
8.0% YoY in 2020 from 1.7% growth in 2019. Compared to the 2009 financial crisis wherein emerging and developing economies
showed resilience, the Covid-19 shock is expected to reverberate across most emerging and developing markets. GDP in
emerging and developing economies is expected to contract 3.0% YoY from 3.7% growth in 2019.
• Crude Oil: While the global crude oil market is forecast to record an average deficit of 3.3mbpd in H2 compared to average
surplus of 6.7mbpd in H1, the high inventory build-up occasioned by the cumulative market surplus of 40.2mbpd over H1 2020 will
keep crude oil prices range bound over H2 at $41.5/barrel compared to year to date average of $39.9/barrel and Q2 low of
$29.3/barrel.
• Nigerian Economy: We expect the Nigerian economy to contract by 2.9% YoY over 2020 compared to 2.1% YoY growth in 2019.
We believe compliance to the recent OPEC+ agreement has become necessary though not convenient. Compared to the
stipulated cut of 1.41mbpd, we estimate Nigeria average crude oil production of 1.57mbpd which combined with condensates
should average 1.85mbpd compared to Q1 20 average of 2.07mbpd. Even with our expectation of the complete opening of the
economy at the end of July with strict rules on social distancing over the rest of the year, the return to full-fledged economic
activities might remain slow as complete containment without major escalation of Covid-19 could extend until the end of Q3 2020.
• Balance of Payment: Over 2020, the depressed global crude oil prices amidst pressured demand pose major risks for exports
and the trade balance. Beyond CBN actions, the spread of Covid-19 across major economies will have a major impact on travel
and related services for the rest of the year. Also, given the expected lower return on investment and feedthrough of the global
shock on individual income, we model lower income deficit and workers’ remittances respectively. Overall, we forecast current
account deficit of $16.6 billion on our base case. On the financial account, with the current risk-off across emerging markets
amidst depressed yields in local short-term debt securities, we expect further exodus of FPI with a negative financing of $3.4
billion and overall negative balance of $19.9 billion compared to 2019 overall negative balance of $5.5 billion.
Summary of Expectations for 2020 (2/3)• Currency and Reserves: We believe there is a strong risk of further haemorrhaging in the gross external reserves over H2 2020.
Assuming resumption of CBN intervention sales at the IEW starting August with 25% repatriation of backlog and maturing offshore
holdings between August and December, even with lower imports and services demand, the gross reserve could close the year at
$31.8 billion on our best case scenario. Our base scenario assumes that if 50% of the backlog and maturing offshore holdings are
repatriated between August and December, the gross external reserves could end the year at $29.0 billion. With limited inflows
and reduced avenues to control outflows, recent unification of rates will have limited impact on the reserves. We believe an
outright floating of the exchange rate with intermittent intervention to avoid unnecessary speculative attacks will have more
meaningful impact. Based on our purchasing power parity model (PPP), the fundamental value of naira lies between N427/$ and
$430/$ (~11% overvaluation from current NAFEX rate of N387.2/$ and an undervaluation from current parallel market rate of
N447/$).
• Consumer Prices: The pressure on consumer prices over H2 will largely reflect the impact of the breakup in supply chains and
volatility occasioned by the oscillating PMS price. While the impact of the border closure is expected to largely fade off in August,
recent events have overtaking its impact. The combined effect of Naira depreciation and expected volatility occasioned by the
market reflective PMS price will further add to the pressure on the core index over the rest of the year. Adjusting our model for the
above-mentioned pressures, we arrived at a base average inflation rate of 12.3% in 2020, compared to average of 11.41% in
2019.
• Monetary Policy: Beyond doubt, the LDR policy has proven to be more potent in driving real sector lending and at the same time
moderating the cost of borrowing due to the increased competition for corporate names. However, the distribution of loans
continues to favor largely the prime sectors and borrowers with limited transmission to the CBN’s preferred sectors. Going by
feedback across the banking system, banks are concerned about liquidity and credit risk given current conditions. Due to the
impact unusual debits have had on system liquidity and overall interbank rates, we believe a gradual refund of excess CRR will
have a more positive impact on rates in the interim, but actual lending by DMBs will require a fundamental change in the
economic environment. Over the second half of the year, we expect the CBN to focus on reflating the banking system and to
adopt more efficient measures around the LDR to further support credit creation, especially to consumption stimulating sectors.
However, we see possible transmission of any further cut of the MPR to CBN development programs and intervention initiatives.
Summary of Expectations for 2020 (3/3)
• Fiscal Policy: Overlaying lower oil revenue (from lower prices and compliance to OPEC cut), we estimate total 2020 FGN
revenue of N3.2 trillion (-22% YoY). We believe the implementation of the 2020 budget is largely doubtful with the scapegoat
being the capital expenditure. With our base case scenario assuming budget implementation of 80% (5-year average: 84.4%), we
estimate budget deficit could range between N4.5 trillion and N5.5 trillion in 2020. While the IMF loan of $3.4 billion and the $150
million drawdown from NSIA will unlock about N1.4 trillion for the federation, the 2020 budget will still have a financing gap of N3.2
trillion. To fund the gap, our preferred scenario assumes FG secures the remaining external funding of $2.1 billion and no
proceeds from privatization. It models financing half of the excess amount of N2.4 trillion partly by CBN and domestic borrowings.
• Fixed Income and Strategy: With the paucity of dollars for repatriation and limited avenue to attract FPI funds, the apex bank
might not be aggressive in raising OMO rates from current levels and could be more inclined to lower it further. On the part of the
FGN, to meet up with the planned domestic borrowing, the FG will have to issue a total of N2.8 trillion between July and
December, which compared to maturing NTB of N1.6 trillion and non-bank corporates estimated OMO maturity (between July and
October) of N1.2 trillion suggest excess liquidity of N680 billion. With PFAs and individuals largely dominating NTB and Bond
auctions, we see the liquidity pressure further gravitating NTB and Bond stop rates lower from current levels of 2.5% and 10.4%
on average respectively. In all, we expect CBN to continue to pressure banks to drive OMO stop rates modestly lower, with 1-year
stop rate likely to fall lower within the range of 6.5% - 7.5%. Bond rates could fall at the next auction due to demand pressure to
10% with a gradual convergence to OMO single digit rates. NTB 1-year stop rate could gravitate between 2% - 3%.
6
GLOBAL ECONOMY
AND CAPITAL FLOWS
Global GDP Growth – Social Distancing Takes Center Stage
Ending 2019 with optimism of the receding impact of trade wars, the outbreak of Covid-19 and related lockdowns to contain the spread depressed
growth across developed economies over the first quarter of 2020.
Given the scale of the transmission and the implementation of associated lockdowns, the impact on economic activity was milder across most
emerging market economies over Q1 2020, but Q2 is expected to deliver much more broad based deceleration across emerging markets.
3.1
1.4 0.8
21.5
2.0
1.20.9
1.3
2.0
2.1
1.21.8
1.31.6
2.1
1.0
-0.7
1.11.5
-5.0
-3.2
-2.2-1.6
-0.9
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
U.S.A Euro Zone Japan UK Canada
Q1 19 Q2 19 Q3 19 Q4 19 Q1 20
Data Source: IMF, Nova Research
6.25.2
1.1 1.08
-1.15-1.63
1.0
6.0
4.4
1.5 1.2
-0.4
1.00.1
6
4.1
2.1 1.67
-0.73
5.96
-0.6
-6.8
3.1
1.6
-0.25-1.37
4.54
-2.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
China India Russia Brazil Mexico Turkey South Africa
Q2 19 Q3 19 Q4 19 Q1 20
Global GDP to Contract 4.9% YoY Compared to 0.1% Contraction During 2009 Financial Crisis
Notwithstanding recent slower rate of contraction in manufacturing and services PMI, the shock occasioned by Covid-19 is expected to depress
economic activities for the rest of the year. GDP in Advanced economies is projected to contract 8.0% YoY in 2020 from 1.7% growth in 2019.
Compared to the 2009 financial crisis wherein emerging and developing economies showed resilience, the Covid-19 shock is expected to reverberate
across most emerging markets. GDP in emerging and developing economies is expected to contract 3.0% YoY from 3.7% growth in 2019.
Data Source: IMF, Nova Research
2.9
1.91.4
0.8
2.0
2.31.3 1.4 0.7 1.7
-8.0
-10.2 -10.2
-5.8
-8.4
-11.0
-10.0
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
U.S.A Euro Area UK Japan Canada
2018 2019 2020F
1.1
6.6 6.8
2.0 2.3 2.8
0.81.1
6.1
4.2
-0.3
1.3 0.90.2
-9.1
1.0
-4.5
-10.5
-6.6
-5.0
-8
-11.0
-9.5
-8.0
-6.5
-5.0
-3.5
-2.0
-0.5
1.0
2.5
4.0
5.5
7.0
Brazil China India Mexico Russia Turkey South Africa
2018 2019 2020F
Limited Stimulus to Magnify Pandemic Shocks Across Africa
With the impact of the lockdown expected to have a more telling impact in Africa, due to minimal stimulus packages to support household and
businesses, economic activity is forecast to contract across regions.
The scale of economic contraction across key economies in SSA is expected to be compounded by lower oil prices and the restriction on international
travels which is expected to weigh on activities in commodity importing economies.
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2016 2017 2018 2019 2020F
CEMAC COMESA East African Community ECOWAS SADC North Africa Africa
Data Source: IMF, Nova Research
-9.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
2016 2017 2018 2019 2020F
Sub-Saharan Africa South Africa Kenya Angola Ghana Côte d'Ivoire
Broad Based Contraction in Capital Flows and Remittance to Emerging Markets
After recording portfolio meager inflow of $3.4 billion in H1 20 vs. $122 billion in H2 19, IIF estimates total non-resident capital flows to EMs to
decline 42% YoY to $472 billion in 2020, driven largely by the COVID-19 shock to global growth, risk sentiment and fall in commodity prices.
Largely reflecting the job losses occasioned by the global disruption, World Bank projects remittances to low and middle income countries to fall by
20% YoY to $445 billion. Irrespective, remittance flows are still expected to become even more important as FDI and FPI slows.
Data Source: World Bank, IIF, Nova Research
48
58
143
132
61
89
48
59
147140
65
96
37
47
128
109
47
77
20
35
50
65
80
95
110
125
140
155
SSA MENA East Asia & Pacific South Asia Europe & Central Asia Latin America & Caribbean
2018 2019 2020
633
568
507 507
581
511
414
313
48
191
420
229
302
58
585
366
474
637
415
511
252
0
100
200
300
400
500
600
700
2014 2015 2016 2017 2018 2019 2020
Foreign Direct Investment ($'Billion) Foreign Portfolio Investment ($'Billion) Total (Ex-China in $'Billion)
6
GLOBAL ECONOMY:
Crude oil
Collapse of OPEC+: Everyone Paid the Price
Source: EIA, Bloomberg, Nova Research
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
30-J
an-1
8
28-F
eb-1
8
31-M
ar-1
8
30-A
pr-1
8
31-M
ay-1
8
30-J
un-1
8
31-J
ul-1
8
31-A
ug-1
8
30-S
ep-1
8
31-O
ct-1
8
30-N
ov-1
8
31-D
ec-1
8
31-J
an-1
9
28-F
eb-1
9
31-M
ar-1
9
30-A
pr-1
9
31-M
ay-1
9
30-J
un-1
9
31-J
ul-1
9
31-A
ug-1
9
30-S
ep-1
9
31-O
ct-1
9
30-N
ov-1
9
31-D
ec-1
9
31-J
an-2
0
29-F
eb-2
0
31-M
ar-2
0
30-A
pr-2
0
31-M
ay-2
0
30-J
un-2
0
0.8
-1.4
1.3 -0.2 0.1 -0.6
-2.3 -1.0
-2.1
0.6 0.3 -0.3
4.7 2.9
8.9
20.5
5.1
-1.9
-5.0
-2.0
1.0
4.0
7.0
10.0
13.0
16.0
19.0
22.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-1
9
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-2
0
Ma
y-2
0
Jun
-20
Demand Supply Balance (RHS)
With the disruption in demand occasioned by Covid-19 associated lockdown and restrictions, the global crude oil market recorded average surplus
of 6.7mbpd in H1 2020. While demand fell to a low of 79.4mbpd in April, supply remained flat over the same period at 100mbpd.
Crude oil prices hit a low of $18.4/barrel in April, with Brent Crude price averaging $39.9/barrel in H1 2020 compared to H2 2019 average of
$62.7/barrel. Notably, the average in H1 2020 still fell below the level over 2016 of $43.6/barrel.
OPEC+ Cuts Could Be Deeper for Longer
Source: OPEC, EIA, Nova Research
After falling materially short of the agreed production cut in May, OPEC and allies achieved a strong compliance of 100% in June, with combined
production falling to 34.0mbpd. The cut by OPEC 10 is magnified by excess cuts implemented by Saudi Arabia and UAE
Jan-20 Feb-20 Mar-20 Apr-20 New Quota May-20 Jun-20 May Compliance June Compliance
Algeria 1,012 1,009 1,030 1,006 814 819 809 98% 102%
Angola 1,375 1,387 1,402 1,313 1,177 1,275 1,224 72% 87%
Congo 294 305 294 293 250 285 295 53% 40%
Equatorial Guinea 125 122 122 125 98 90 114 128% 45%
Gabon 192 194 202 196 144 194 204 -16% -40%
Iran, I.R. 2,082 2,070 2,022 1,973 Exempt 1,954 1,947 N/A N/A
Iraq 4,508 4,604 4,571 4,505 3,583 4,165 3,716 46% 88%
Kuwait 2,658 2,670 2,873 3,118 2,163 2,198 2,103 95% 109%
Libya 793 147 91 82 Exempt 80 93 N/A N/A
Nigeria 1,760 1,788 1,844 1,777 1,408 1,592 1,504 56% 77%
Saudi Arabia 9,739 9,671 9,997 11,642 8,470 8,479 7,557 100% 136%
UAE 3,027 3,065 3,507 3,841 2,439 2,478 2,349 95% 112%
Venezuela 756 760 660 624 Exempt 555 356 N/A N/A
OPEC 10 24,690 24,815 25,842 27,816 20,546 21,575 19,875 83% 111%
OPEC 28,321 27,792 28,615 30,495 20,546 24,164 22,271 N/A N/A
Jan-20 Feb-20 Mar-20 Apr-20 New Quota May-20 Jun-20 May Compliance June Compliance
Russia 11,523 11,527 11,523 11,565 8,470 8,720 8,626 90% 94%
Mexico 1,710 1,714 1,593 1,721 1,653 1,642 1,634 111% 119%
Kazakhstan 1,690 1,716 1,564 1,761 1,316 1,440 1,303 68% 103%
Oman 820 820 800 930 680 667 683 106% 99%
Azerbaijan 789 770 769 775 553 654 651 39% 40%
Malaysia 735 716 694 596 458 519 528 55% 49%
Bahrain 144 144 144 199 158 145 148 128% 121%
South Sudan 178 178 178 126 100 126 105 13% 83%
Brunei 110 110 110 109 79 97 77 22% 109%
Sudan 79 79 79 86 58 84 65 -53% 59%
NOPEC 17,778 17,774 17,455 17,868 13,525 14,094 13,820 84% 92%
Total OPEC+ 42,468 42,589 43,297 45,684 34,071 35,669 33,695 84% 104%
Crude Oil Market to Record Deficit Average of 3.3mbpd in H2 Compared to Surplus of 6.7mbpd in H1
Source: EIA, Nova Research
10.3 10.5 11.2 11.9 11.8 12.1 12.2 12.8 12.7 11.4 11.3 11.1
31.6 31.3 31.5 31.4 29.9 29.5 28.6 29.0 28.3 25.8 23.7 26.4
14.4 14.4 14.6 14.9 14.9 14.4 14.6 14.7 14.7 13.2 12.7 13.2
43.1 43.6 44.2 44.2 43.7 44.4 44.7 45.0 45.0 41.9 43.1
43.9
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
Q2 2
0
Q3 2
0F
Q4 2
0F
U.S OPEC Former Soviet Union Others
20.3 20.4 20.7 20.6 20.3 20.3 20.7 20.6 19.3 16.1 18.7 19.2
14.1 14.2 14.7 14.1 13.9 14.0 14.5 13.9 13.211.1
12.9 13.0
14.0 14.1 13.9 14.1 14.4 14.7 14.4 14.6 13.112.2
13.1 14.5
13.6 13.8 13.4 13.7 14.0 14.0 13.6 13.913.3
11.813.1 13.8
37.3 37.2 37.9 37.8 37.5 37.2 38.2 38.336.3
33.2
36.6 37.1
Q1 1
8
Q2 1
8
Q3 1
8
Q4 1
8E
Q1 1
9
Q2 1
9
Q3 1
9F
Q4 1
9F
Q1 2
0
Q2 2
0
Q3 2
0F
Q4 2
0F
U.S. Europe China Other Asia Others
With confluence of voluntary and involuntary production cuts, global oil production is forecast to decline by 3.8mbpd in H2 20 to 92.7mbpd
compared to average of 96.5mbpd in H1 20. 2020 average production will contract by 6.0mbpd to 94.6mbpd compared to 100.6mbpd in 2019.
After contracting by 11.9mbpd in H1 20, global crude oil consumption is forecast to increase by 6.1mbpd in H2 20 to average 96mbpd as Covid-19
related lockdown and restrictions are relaxed. 2020 average demand will contract by 8.2mbpd to 92.9mbpd compared to 101mbpd in 2019.
Brent Crude to Average $41.5/barrel in H2 2020 as Elevated Inventory Limits Upside
Source: EIA, Nova Research
Given the high inventory build-up occasioned by the cumulative market surplus of 40.2mbpd over H1 2020, U.S. commercial inventory rose to a
historic high of 538.1 million barrels in May 2020.
The combined impact of a shift in market balance to a deficit and elevated commercial inventory are forecast to keep crude oil prices range bound at
$41.5/barrel over H2 2020 compared to year to date average of $39.9/barrel and Q2 low of $29.3/barrel.
448.8 451.7459.3
468.8480.2
464.0
442.1430.8 426.5
444.2 446.9432.9
442.8454.2
482.5
529.2 538.1 537.1
513.1
495.1487.6
493.8 492.5480.0
Ja
n-1
9
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Ju
n-1
9
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Ja
n-2
0
Fe
b-2
0
Mar-
20
Ap
r-20
Ma
y-2
0
Ju
n-2
0
Jul-2
0
Au
g-2
0
Se
p-2
0
Oct-
20
Nov-2
0
Dec-2
0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
Se
p-2
0
Oct-
20
Nov-2
0
Dec-2
0
WTI Brent
6
DOMESTIC ECONOMY:
Economic Growth
Q1 2020 GDP Escapes Full Impact of Covid-19, Q2 Not So Lucky
Q1 2020 GDP expanded by 1.87% YoY (compared to 2.1% YoY in Q1 2019) and contracted 14.27% QoQ – which is much deeper than the 3-year historical
Q1 QoQ decline of 13.5%.
• On an attribution basis, the services sector contributed 1.3% to overall growth in Q1, followed by agriculture and crude oil by 0.5%
each. While manufacturing and construction contributed 4bps and 7bps respectively, trade subtracted 48bps off growth in Q1 20.
• Although the headline GDP was better than estimates, agriculture recorded the slowest Q1 growth of 2.2% YoY, compared to 3-
year average Q1 growth of 3.2% YoY. Also, manufacturing growth over Q1 slowed to 0.4% YoY compared to 3-year average Q1
growth of 1.9% YoY. Retail & wholesale trade fell by 2.8% YoY to record the sharpest contraction in more than 13 quarters.
• The Q1 number was to some extent affected by COVID-19 related breakup in supply chains especially in the last month. It is
imperative to note that restrictions of movement and shutdown of most economic activities did not come into effect until March 30.
Source: NBS, Nova Research
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20
Agriculture Crude Oil Manufacturing Construction Trade Services Real GDP (RHS)
Nigeria Economic Sustainability Plan, Another Ambitious Plan
The NESP detailed plans to reposition the economy in light of Covid-19 Shocks. It has proposed stimulus package of N2.3 trillion funded by N500
billion from Special Accounts, N1.2 trillion from CBN structured lending and N302 billion from other funding sources.
Objectives of NESP
• To stimulate the economy by preventing business collapse and
ensuring liquidity;
• Retain or create jobs using labour intensive methods in key
areas like agriculture, facility maintenance and housing;
• Undertake growth enhancing and job creating infrastructural
investments in roads, bridges, power and communications;
• Promote manufacturing and local production at all levels and
advocate the use of Made in Nigeria goods and services
• Extend protection to the very poor and other vulnerable groups
Source: NBS, Nova Research
Pillars of NESP
• Real Sector Measures: Comprises a mix of project and
policy approaches, which focus on the creation of jobs across
key sectors of the economy
• Fiscal and Monetary Measures: Outlines steps that will be
taken to maximise government revenue, optimise expenditure
and enshrine a regime of prudence with an emphasis on
achieving value for money
• Implementation: Each Minister will be responsible for
supervising the implementation of plans situated in their
Ministry through a ministerial implementation Committee
chaired by the Minister.
Proposed Key Projects of NESP
✓ A Mass Agricultural Programme: expected to bring between
20,000 and 100,000 hectares of new farmland under
cultivation in every State of the Federation.
✓ Extensive Public Works and Road Construction
✓ Mass Housing Programme: Expected to deliver up to 300,000
homes annually
✓ Installation of Solar Home Systems: It will serve about 25
million Nigerians not currently connected to the National Grid
✓ Strengthening the Social Safety Net
✓ Support for Micro, Small & Medium Enterprises
✓ Promotion of Domestic Gas Utilization
Great Lockdown Necessitates Contraction Like Never Before
Beyond the compliance to the recent OPEC+ production adjustment, the economic disruptions occasioned by COVID-19 will have a far reaching
effect on economic activities over the rest of the year. We forecast 2020 GDP to contract by 2.9% YoY on our base case scenario.
Data Source: NBS, Nova Research Estimates
• We believe compliance to the recent OPEC+ agreement has become necessary though not convenient. Compared to the
stipulated cut of 1.41mbpd, we estimate Nigeria average crude oil production of 1.57mbpd which combined with condensates
should average 1.85mbpd compared to Q1 20 average of 2.07mbpd.
• While a large fraction of the formal sector continues to operate sub-optimally, the informal sector (which accounted for ~65% of
Nigeria’s 2017 GDP) was completely shut down for most part of the second quarter. Beyond actual shutdown of activities in the
informal sector, the income to participants was materially hampered with a transmission to lower consumption and demand.
• Even with our expectation of the complete opening of the economy at the end of July with strict rules on social distancing over the
rest of the year, the return to full-fledged economic activities might remain slow as complete containment without major escalation
of Covid-19 could extend until the end of Q3 2020.
1.87%
-6.58%
-4.01%
-2.78%-2.81%
-1.28%-0.71%
-11.13% -7.13% -5.03%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Q1 20 Q2 20 Q3 20 Q4 20
Base case Bull Bear
The Second Round Effect Could Have More Material Impact on the Formal Sector
Notwithstanding the partial operation of the essential services during the lockdown and subsequent opening of the economy, manufacturing and trade
activities will record material contraction both from supply constraints and materially lower demand.
• In all, we see the second-round effects of the economic disruption in the form of higher unemployment, weaker capital spending (in
both public and private sector), corporate defaults and even more significant supply-side disruptions.
• Our most positive scenario assumes that both fiscal and monetary measures will be sufficient to provide a fast reboot to the
economy, complete containment of Covid-19 by the end of May and limited compliance with the OPEC+ cut.
• For the negative scenario, we assume that ongoing fiscal and monetary measures will be insufficient to provide necessary jolt for a
fast restart of the economy. In this scenario, we expect a more telling impact of the second-round effects of the economic disruption
in the form of massive layoffs in the formal sector, corporate defaults, tightening of financial conditions and weaker capital
spending.
YoY Growth Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20F Q3 20F Q4 20F FY 19 FY 20F
Oil GDP
Old -1.5% 7.2% 6.5% 6.4% 5.1% -11.1% -9.6% -8.1% 4.4% -6.7%
New -1.5% 7.2% 6.5% 6.4% 5.1% -9.7% -9.6% -9.7% 4.4% -6.1%
Non-Oil GDP
Old 2.5% 1.6% 1.8% 2.3% 1.5% -4.0% -1.7% -0.1% 2.1% -1.1%
New 2.5% 1.6% 1.8% 2.3% 1.5% -6.8% -3.1% -2.0% 2.1% -2.6%
Real GDP
Old 2.1% 2.1% 2.3% 2.6% 1.8% -4.6% -2.5% -0.7% 2.3% -1.6%
New 2.1% 2.1% 2.3% 2.6% 1.9% -7.0% -3.7% -2.6% 2.3% -2.9%
Data Source: NBS, Nova Research Estimates
Broad Based Contraction Estimates with Varying Magnitude
Source: NBS, IMF, World Bank, NESP, Nova Research Estimate
The NESP/ERGP assumes average oil price of $30/barrel over the rest of the year. Largely, the 4.4% contraction is anchored on the absence of any
fiscal stimulus, simply sticking to the budget.
0.7%
1.9%2.3% 2.2%
-2.9%
0.8%
2.1% 2.3%
-5.4%
1.2%
2.1% 2.1%
-3.2%
2.2%
4.8%
3.0%
-4.4%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2017 2018 2019 2020F
Actual NOVA IMF World Bank ERGP/NESP
• Following measures implemented to slow the domestic spread of Covid-10, World Bank estimates non-oil output to decline by 2.1%
YoY. The oil sector is projected to contract by 10.6% YoY. The impact of lower oil prices is expected to dent investor confidence,
while the assumed fiscal adjustment to lower oil revenues and tighter borrowing conditions is expected to constrain public
investment.
• According to IMF, the domestic disruptions occasioned by Covid-19 are magnified by the sharp collapse in oil prices. The fall in oil
prices is expected to reverberate through the non-oil and non-agricultural economy – which represents 65% of GDP and is still in
large part dependent on the recycling of petrodollars and FX proceeds.
6
DOMESTIC ECONOMY:
Balance of Payment and Currency
Current Account Imbalance Becoming Evident Again…
Nigeria’s current account (CA) deficit widened to $4.9 billion in Q1 2020 compared to $2.7 billion in Q1 2019. Decline in exports and remittances, more
than outweighed moderation in imports, services deficit and income deficit.
While imports fell 5.2% YoY to $13.8 billion, export declined by 12% YoY to
$13.4 billion, resulting in a trade deficit of $440 million in Q1 2020.
Source: CBN, Nova Research
Following the decline in remittances, the current transfer declined 20% YoY
to $6.1 billion, while Services and Income deficits moderated in Q1 2020.
Period of currency crisis, prior to major depreciation
in 2016 and introduction of IEW in 2017
Expanding current account deficit in the face of
lower trade surplus and elevated services deficit.
-5.7
-2.1
-5.7
-2.0
1.1
-1.7
0.0
3.3 3.4
1.42.0
3.7
1.4
4.4
-1.5
-0.3
-2.7
-4.6
-2.7
-7.0
-4.9
Q1 1
5
Q2 1
5
Q3 1
5
Q4 1
5
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
2.3 2.0
3.4
5.5
4.4
7.4
3.8
4.9
0.6 0.8
3.0
-1.5
-0.4
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
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
Total exports Total Imports Trade balance (RHS)
-4.3 -4.7 -5.5 -5.2-7.1 -8.3 -8.0 -8.1 -8.5 -9.3
-7.8
-3.0 -3.0-3.3 -3.9
-4.2-3.3 -3.0 -3.1 -3.2
-3.2
-2.8
5.8 5.9 5.8 6.0 6.0 6.37.6
5.8 6.0 7.0 6.1
Q3
17
Q4
17
Q1
18
Q2 1
8
Q3
18
Q4
18
Q1
19
Q2
19
Q3
19
Q4
19
Q1
20
Services Income Current Transfer
Exodus of Portfolio Investments Necessitated Deficit in the Financial Account
The financial account booked a negative net balance of $6.3 billion over Q1 20, from a positive net balance of $4.8 billion in Q1 19. The negative
balance over Q1 2020 emanated largely from the exodus of portfolio investment over the period.
Portfolio investments recorded a net outflow of $8.3 billion in Q1 20 compared
to inflow of $14.4 billion in Q1 19, with FDI reaching lowest since Q1 19.
Source: CBN, Nova Research
6.8
-4.0-2.6
-5.4-7.7
7.5 7.6
-5.8
0.4
2.9
-3.7 -3.5
-1.0
-3.4 -2.9
-5.8
4.8
-6.4
6.4
13.2
-6.3
Q1 1
5
Q2 1
5
Q3 1
5
Q4 1
5
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
Period of currency crisis, prior to
major depreciation in 2016
0.2
0.4
0.6
0.8
1.0
1.2
1.4
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
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
Net FPI Net Other Liabilities Net FDI (RHS)
-1.2
-0.7
-0.2
0.3
0.8
1.3
1.8
2.3
-9.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
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
Short-term Debt Equity Long term Debt (RHS)
The FPI exodus was dominated by $6.3 billion exits from local debt
securities, of which 90% were short-term securities.
Impact on exchange rate and reserve was
muted by CA surplus over the same period.
Financing Gap Widens as Pressure Mounts
Over 2020, the depressed global crude oil prices amidst pressured demand pose major risks for exports and the trade balance. Intuitively, we
reckon sustained pressure on oil revenue will result in CBN implementing some administrative measures to limit the scale of imports.
Data Source: CBN, NOVA Research Estimates
2017 2018 2019 2020 Estimates
($' Million) Bear Base Bull
Oil production (mbpd) 1.90 1.92 2.01 1.75 1.86 1.98
Oil price ($/bbl) 54.09 74.69 65.81 36.50 40.33 44.16
Crude Oil Export 42,297 56,555 54,511 26,976 31,324 36,169
Non-Oil Export 3,521 4,666 10,466 5,189 6,024 6,956
Total exports 45,817 61,221 64,978 32,165 37,348 43,124
Non-Oil Import 24,514 29,187 51,085 36,766 36,188 34,429
Oil Import 8,155 11,566 11,025 9,582 9,429 8,963
Total Imports 32,669 40,754 62,110 46,348 45,617 43,392
Balance of Trade 13,148 20,467 2,868 -14,183 -8,269 -268
Services Defici/Surplus -13,234 -26,066 -33,761 -20,162 -19,036 -18,248
Income Deficit/Surplus -11,510 -14,658 -12,492 -10,015 -9,387 -8,919
Current Transfer Deficit/Surplus 21,996 24,134 26,369 19,144 20,122 21,519
Current Account Deficit/Surplus 10,399 3,878 (17,016) (25,216) (16,569) (5,914)
% of Nominal GDP 2.32% 0.93% 3.58% 7.1% 4.5% 1.6%
• Beyond CBN actions, the spread of Covid-19 across major economies – even as we expect a successful containment without
major escalation beyond July – will have a major impact on travel and related services for the rest of the year.
• Also, given the expected lower return on investment and feedthrough of the global shock on individual income, we model lower
income deficit and workers’ remittances respectively.
• On the financial account, due to the minimal activity at the IEW in Q2, we believe the portion of offshore holdings of maturing fixed
income securities, estimated at $2.4 billion, is yet to be repatriated and could be rolled over to the rest of the year.
• With the current risk-off across emerging markets amidst depressed yields in local short-term debt securities, we expect further
exodus of FPI with a negative financing of $3.4 billion and overall negative balance of $19.9 billion.
Massive FPI Exodus Helped by Suspension of FX Sales
The shock occasioned by Covid-19 amidst risk off sentiment and contraction in fixed income yields resulted in material decline in FPI inflow over
Q2 20. The likely outflow of funds was limited by suspension of FX sales across most segments by the CBN over Q2.
Source: FMDQ, Nova Research
1.6
5.76.6
7.67.3
4.84.3
10.9
6.7
5.2 5.4 5.7
1.30.9
2.6 2.8 2.5
5.1
7.16.4
4.54.1
7.77.0
9.2
1.2
Q2 1
7
Q3 1
7
Q4 1
7
Q1 1
8
Q2 1
8
Q3 1
8
Q4 1
8
Q1 1
9
Q2 1
9
Q3 1
9
Q4 1
9
Q1 2
0
Q2 2
0
Inflow ($'Billion) Outflow ($'Billion)
The elevated fixed income maturity profile over Q1 was largely associated with exodus of offshore funds. Compared to offshore inflows of $7 billion,
outflows was $10 billion in H1 2020, with total net outflow of $3.4 billion.
0.3
-1.1-1.5
-0.2
-1.2
-0.6
0.9
2.8 2.7
1.20.8 0.7
-0.3
-1.9
-0.4 -0.5 -0.6 -0.5
0.6
-1.5
-2.7
0.0 0.1 0.0
-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
FI Maturity ($'Billion) IEW Net Flow ($'Billion - RHS)
Imports and Services Demand Magnified Increase in CBN Outflow
The first quarter of 2020 saw sizeable intervention sales by the apex bank across segments, with intervention sales at the IEW at a record high of
$5.4 billion. Following minimal sales in Q2, cumulative H1 20 sales is down 25% to $18.3 billion compared to $24.4 billion in H2 2019.
The higher sales by the CBN prior to Covid-19 associated lockdown largely reflects sizeable maturities of fixed income instruments amidst
expanding financing of visible and invisible imports. We note that import demands accounted for a large chunk of the outflow.
Source: FMDQ, CBN, Nova Research
(1.29) (1.14)
(2.11) (1.96)
2.70
(0.76)
(0.08) (0.19)
2.46
(0.32)
0.42
(0.15)
(0.78)
(1.91)(1.37)
(1.08)(0.83) (0.70)
(1.36)
(0.13)
(2.91)
2.77
0.03 (0.40)
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-1
8
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-1
9
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Visible & Invisible Imports ($'Billion) Reserve movement ($'Billion - RHS)
0.91.4
2.12.1 2.5
2.8 2.7 2.42.4 3.8 2.7
2.1
1.2
2.4 1.3
2.03.2
2.8
3.9 3.43.7
1.92.5 2.7
5.0
0.4
0.4
0.5
0.4 0.61.3
4.13.6 1.4
0.02.9 2.3 5.4
0.0
1.01.8
1.2 1.4 1.8 2.5 3.13.6
3.23.4 3.3
3.6
0.0
Q2 1
7
Q3 1
7
Q4 1
7
Q1 1
8
Q2 1
8
Q3 1
8
Q4 1
8
Q1 1
9
Q2 1
9
Q3 1
9
Q4 1
9
Q1 2
0
Q2 2
0
SMIS SME Invisibles Others IEW BDC
Sizeable Loss on Maturing Futures Contracts
The risk-off sentiment across emerging markets and the suspension of sales at the IEW and even to BDC operators, resulted in the widening of
the BDC-Interbank premium to 23.7% in June 2020, with the parallel market exchange rate rising to N448/$.
Source: CBN, FMDQ, Nova Research
17.6% 17.3% 17.0% 17.0% 17.2% 17.3% 17.1% 17.0% 17.0% 17.0% 17.0% 17.4% 17.6%17.0%
15.4%16.4%
23.0%23.7%
300.0
320.0
340.0
360.0
380.0
400.0
420.0
440.0
460.0
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
21.0%
23.0%
25.0%
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Feb-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
BDC-Interbank Premium Parallel mkt N/$ - RHS
345.0
350.0
355.0
360.0
365.0
370.0
375.0
380.0
385.0
390.0
395.0
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-1
9
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Inititaion Rate Settlement Rate
Following pressure at the IEW and subsequent depreciation of the NAFEX rate to N380/$ in March, sizeable loss were recorded on maturing
futures transaction between March and June 2020, compared to a gain in 2019.
Foreign Borrowings to Provide Temporary Support
While we assume inflow of the remaining FCY borrowings of $2.1 billion in August will provide some support for the reserve over the rest of the
year, resumption of sales to BDCs and across other segments (even below Q1 levels) will put significant pressure on the reserve over H2.
Source: CBN, Nova Research Estimates
5.35.6
4.1
5.0
1.9
1.21.4
4.4
2.4 2.5 2.7 2.7
6.7
5.7
7.0
2.2 2.32.1
2.6
4.14.4 4.4
3.9 4.0
(4,000)
(3,000)
(2,000)
(1,000)
-
1,000
2,000
3,000
4,000
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
Se
p-2
0
Oct-2
0
Nov-2
0
Dec-2
0CBN Inflow CBN Outflow Net Flow (RHS)
• In modelling the reserve position over the rest of the year, while we have adjusted expected oil inflows to reflect the modestly
improving oil price and expected foreign borrowings, we expect paucity of FPI inflows over the rest of the year.
• On oil inflows, on our modelled benchmark oil price of $44.96 /barrel and average production of 1.85 million barrels, we estimate
oil inflows to the apex bank to average $790 million over H2 20, compared to average in H1 20 of $1.1 billion.
• Also, with the fall in fixed income yields amidst fragile external position, we see limited inflows of hot money into the economy. As
such, we estimate that the non-oil inflows will be dominated by inflows of FCY borrowings.
• In all, we believe the apex bank will run on lower flows over 2020 with average monthly inflow of $2.7 billion over H2 20, compared
to H1 20 average of $3.8 billion.
Resumption of Sales to BDC and FPI Repatriation Will Mount More Pressure on the Reserves
Assuming resumption of CBN intervention sales at the IEW starting August, a base scenario that 50% of backlog and maturing offshore holdings
are repatriated, the gross external reserves could end the year at $29.0 billion, and $31.8 billion on our best case which assumes 25% repatriation.
Source: CBN, Nova Research Estimates
36.73 36.60 33.69 36.46 36.49 36.09 34.89 35.18 33.21 31.31 30.05 28.72
6.4
8.17.2
8.9
10.411.1 10.7
7.48.5
6.27.3
8.6
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
36.0
38.0
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
Se
p-2
0
Oct-2
0
Nov-2
0
Dec-2
0
Gross External Reserves - $'million Import Cover (RHS)
• The suspension of sales to BDCs by our estimate conserved about $3.0 billion between April and June, and an additional $1 billion
in July as sales are expected to only resume as soon as commercial international flights resumes.
• With the likely resumption of international flights in August by our estimate, demand for services (especially Business and Personal
travel allowances) and imports, even below Q1 levels, could further trigger a depletion in the reserve. Also, we model resumption
in BDC sales starting in August, with average monthly sales of $550 million compared to average over Q1 2020 of $1.2 billion.
• Due to the minimal activity at the IEW in Q2, we believe the portion of offshore holdings of maturing fixed income securities
estimated at $2.76 billion and other maturities prior to Covid-19 are yet to be repatriated and could be rolled over until August.
• Assuming resumption of CBN intervention sales at the IEW starting August, a base scenario that 50% of backlog and maturing
offshore holdings are repatriated, the gross external reserves could end the year at $29.0 billion on our base case.
FX Rate Gradually Converging to Fundamental Levels
With limited inflows and reduced avenues to control outflows, recent unification of rates will have limited impact on the reserves. We believe an
outright floating of the exchange rate with intermittent intervention to avoid unnecessary speculative attacks will have more meaningful impact.
Source: CBN, Nova Research Estimates
Based on our purchasing power parity model (PPP), the fundamental value of naira lies between N427/$ and $430/$ (~11% overvaluation from
current NAFEX rate of N387.2/$ and an undervaluation from current parallel market rate of N447/$).
PPP Inflation Differentials
Nigeria Inflation 2019 11.41%
US Inflation 2019 2.20%
Naira Spot Rate (2019) 386.64
2019 PPP 397.00
Nigeria Inflation 2020F 12.3%
US Inflation Rate 2020F 1.90%
Naira Future Spot Rate 426.72
PPP Interest Rate Differentials
Nigeria 2019 Average 1 Year Treasury Yield 13.00%
U.S. 2019 Average 1 Year Treasury Yield 2.05%
Naira Spot Rate (2019) 386.64
2019 PPP 406.24
Nigeria Average 1 Year Treasury Yield 11.0%
U.S. Average 1 Year Treasury Yield 0.63%
Naira Future Spot Rate 426.95
5.0
6.5
8.0
9.5
11.0
12.5
14.0
15.5
17.0
18.5
20.0
Ma
y-1
7
Jun
-17
Jul-1
7
Au
g-1
7
Se
p-1
7
Oct-
17
Nov-1
7
Dec-1
7
Jan
-18
Fe
b-1
8
Ma
r-18
Ap
r-18
Ma
y-1
8
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
BDC % Overvalation I & E % Overvaluation
6
DOMESTIC ECONOMY:
Consumer Prices
Inflation Rate Ascends From 2019 Lows
Inflation rate average 11.39% over 2019, a 75bps decline from 2018 average inflation rate of 12.15%. The moderation stemmed largely from
declines in both food and core inflation.
NNPC’s continued effort to keep petrol prices at N145/litre, saw core
inflation stay low over 2019, declining 138bps YoY to average 9.16%
Source: NBS, Nova Research
Despite the impact of conflict in the North, favorable planting conditions
kept food inflation moderated, declining 71bps YoY to average 13.73%
0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
1.3%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
Ma
y-1
8
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-1
8
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-1
9
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Headline YoY Headline MoM (RHS)
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Ma
y-1
8
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
May-2
0
Core Inflation Core MoM (RHS)
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
Ma
y-1
8
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
May-2
0
Food Inflation Food MoM (RHS)
Adjustment to Market Determined Price to Create Volatility in the Medium Term
While the PPPRA reviewed the average PMS selling price lower in April, the impact on the headline inflation was muted by the impact of the
restriction of interstate movement, which pushed transportation cost higher.
Data Source: NBS, PPPRA, Nova Research Estimates
• With average monthly PMS supply by NNPC (via DSDP and local refineries) of 1.66 billion liters, about N620.5 billion was charged
to the Federation Account over 2019 as subsidy/under recovery payment. So far in 2020, the decline in oil prices resulted in
estimated gain of N40.1 billion (between March and May).
• By our estimate, the increase in average oil price to $32.7/barrel in May and $40.80/barrel in June, suggests the NNPC still
subsidized PMS in May and June. However, given the lower consumption in April, we believe the level of import could have been
minimal in May and June.
• With oil prices expected to average $41.5/barrel in the second half of the year, we estimate PMS average expected market price
of N154/litre on official exchange rate of $361/$. If the unification of the official rate with the NAFEX rate takes effect over H2 with
exchange rate of ~N387/$, expected market price could increase to N161/litre.
165174
178188 188
175 174165
172166
173181
174
158
116
102
134
152
146 145 145 146 145 145 145 145 146 145 146 145 145 145 145 131 130 130
Jan
-19
Fe
b-1
9
Ma
r-1
9
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-
19
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-2
0
Ap
r-20
Ma
y-2
0
Jun
-20
PMS Expected Market Price Average PMS Price Fixed Price
Naira Depreciation and PMS Volatility to Pressure Consumer Prices
Adjusting our model for the above-mentioned impending pressures, we arrived at a base inflation rate of 12.3% in 2020, compared to average of
11.41% in 2019.
• With the ~38% increase in electricity tariff, earlier scheduled for July now expected to take effect in 2021, the pressure on consumer
prices will largely reflect the impact of the breakup in supply chains and and volatility occasioned by oscillating PMS price.
• While the impact of the border closure is expected to largely fade off in August, recent events have overtaking its impact. The
combined impact of Naira depreciation and expected volatility occasioned by the market reflective PMS price will further add to the
pressure on the core index over the rest of the year.
• Adjusting our model for the above-mentioned pressures, we arrived at a base average inflation rate of 12.3% in 2020, compared to
average of 11.41% in 2019.
12.1%
12.2%
12.3%
12.3%
12.4%
12.5%
12.5%12.5%
12.5%
12.4%
12.3%
12.2%
11.9%
12.0%
12.1%
12.2%
12.3%
12.4%
12.5%
12.6%
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
Se
p-2
0
Oct-2
0
Nov-2
0
Dec-2
0
Source: NOVA Research Estimates
6
DOMESTIC ECONOMY:
Monetary Policy
CBN Continues to Deliver Credit Growth
Largely reflecting increasing loan growth in our view, banking sector NPL worsened to 6.6% at the end of April from 6.1% in December 2019. Also,
banking sector liquidity ratio and liquid asset structure ratio declined to 67% and 36% from December levels of 104% and 68% respectively.
• Compared to the level at the end of 2019, aggregate private sector credit increased by N1.44 trillion between January and May to
N18.63 trillion.
• The increase largely reflects the CBN’s implementation of the minimum loan to deposit ratio of 65%. During the year, the apex
bank further strengthened the policy, with LDR compliance calculation to an average daily figure from a spot figure previously
adopted.
• However, given the increase in funding base over the same period by 23% (vs. credit growth of 8%), the banking sector LDR
declined from 68.5% at the end of 2019 to 60.1% at the end of May.
• Assuming steady loan growth over the month of June, even with an assumed flat growth in funding base, we estimate that the
apex bank could have sterilized as much N790 billion from the banking at the end of June.
Source: CBN, Nova Research
50.0
52.0
54.0
56.0
58.0
60.0
62.0
64.0
66.0
68.0
70.0
72.0
74.0
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
Jan
-18
Fe
b-1
8
Ma
r-18
Ap
r-18
May-1
8
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Feb-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Private Sector Credit (N'Trillion) Loans-To-Deposit Ratio (% RHS)
LDR Policy Kept Prime Lending Rate Depressed
Notwithstanding the counterintuitive nature of the increase in CRR implemented in January and series of unusual debits, the increase in total
gross credit was accompanied by moderation in the prime lending rate. Although, the unusual debits resulted in volatility in interbank rates.
Source: CBN, Nova Research
2.00
4.50
7.00
9.50
12.00
14.50
17.00
19.50
22.00
24.50
27.00
10.010.511.011.512.012.513.013.514.014.515.015.516.016.517.017.518.018.5
Ja
n-1
8
Fe
b-1
8
Ma
r-18
Ap
r-18
Ma
y-1
8
Ju
n-1
8
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Ja
n-1
9
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Ju
n-1
9
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Ja
n-2
0
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Ju
n-2
0
MPR (%) Prime Lending Rate (%) Interbank Call Rate (RHS)
The elevated system liquidity amidst 100bps cut in the MPR in April resulted in moderation in average fixed deposit rate by 168bps compared to
the level at the end of December.
5.05.56.06.57.07.58.08.59.09.5
10.010.511.011.512.0
Jan
-18
Fe
b-1
8
Ma
r-18
Ap
r-18
Ma
y-1
8
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Mar-
19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
6 Months Time Deposits Rate 12 Months Time Deposits Rate
Sizeable Maturity But Different Impact on OMO Rate
The exclusion of non-bank financial institutions from the OMO window resulted in largely net repayment of N3.95 trillion over H1 2020 compared to
net issuance of N3.27 trillion in H1 2019. CBN slashed OMO average rate by 165bps YoY to 10.9% in H1 2020 from 12.6% in H2 2019
Source: FMDQ, NBS, Nova Research
Compared to total OMO offering of N3.49 trillion over H1 2020, subscription came in at N5.55 trillion with the CBN allotting just N3.39 trillion. The
higher subscription provided convenient smothering of rates, with real return turning negative.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Ju
n-1
8
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Ja
n-1
9
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Ju
n-1
9
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Ja
n-2
0
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Ju
n-2
0
OMO Maturity OMO Issuance
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jun
-18
Jul-1
8
Au
g-1
8
Se
p-1
8
Oct-1
8
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-1
9
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
OMO rate Inflation Real rate - RHS
Economic Stability Regains Priority but Policy Options Still Limited
Higher CRR weighted costs occasioned by rising sterilization of funds as CRR (excluding LDR punitive measures), will continue to limit impact of
minimum loan-to-Deposit Policy on lending rates.
• While we reckon it is necessary at this stage for the MPC to adopt the most accommodative policy to restore the economy and
moderate the rate of economic contraction, we do not see any of its traditional policy tools having a material impact at this time
given the liquidity squeeze occasioned by the sterilization of DMBs funds by the CBN in a bid to stem speculative attacks.
• Although the MPC lowered the Monetary Policy Rate (MPR) by 100bps to 12.5% in May and lowered OMO rate by 281bps, the
impact on borrowing rates has been neutral given the higher CRR weighted costs occasioned by rising sterilization of funds,
excluding LDR punitive measures.
• Beyond doubt, the LDR policy has proven to be more potent in driving real sector lending and at the same time moderating the
cost of borrowing due to the increased competition for corporate names. However, the distribution of loans continues to favor
largely the prime sectors and borrowers, with limited transmission to the CBN’s preferred sectors of SMEs, retail, mortgage, and
consumer lending.
• Going by feedback across the banking system, banks are concerned about liquidity and credit risk with current conditions. As
such, a further downward adjustment to the MPR (supposedly to support consumption, reduce borrowing cost and possible
downward repricing of risk assets by banks) will not have any material impact on credit growth. However, we see possible
transmission of any further cut of the MPR to CBN development programs and intervention initiatives.
• Given the impact unusual debits have had on system liquidity and overall interbank rates, we believe a gradual refund of excess
CRR will have a more positive impact on rates in the interim, but actual lending by DMBs will require a fundamental change in the
economic environment.
• Over the second half of the year, we expect the CBN to focus on reflating the banking system and to adopt more efficient
measures around the LDR to further support credit creation, especially to consumption stimulating sectors.
6
DOMESTIC ECONOMY:
Fiscal Policy
Backdoor Financing Continues to Dominate Deficit Financing
Total debt provision over Q1 accounted for 99% of retained revenue. Capital expenditure in Q1 only amounted to N139 billion compared to
recurrent non-debt expenditure of N1.1 trillion.
Source: Budget Office, NBS, NOVA Research
▪ The decline in oil price over the first quarter of the year
was offset by higher non-oil revenue. As such, the decline
in FAAC allocation was marginal over Q1 2020.
▪ Due largely to lower independent revenue, total retained
revenue by the FGN was down 12.4% YoY in Q1 20 to
N950.6 billion.
▪ Compared to the prorated Q1 budget of NN1.97 trillion,
the FGN revenue fell short by 52%.
▪ On the other hand, FGN expenditure expanded 21.4%
YoY to N2.4 trillion, dominated largely by recurrent
expenditure and debt service.
▪ Total debt provision over Q1 accounted for 99% of
retained revenue. Capital expenditure in Q1 only
amounted to N139 billion compared to recurrent non-debt
expenditure of N1.1 trillion.
▪ The FGN recorded a budget deficit of N1.4 trillion in Q1.
However, the FG paper issuance over same period
amounted to N181.5 billion leaving a gap of N1.2 trillion,
which we believe was largely financed by the apex bank.962
530 517 833
1,085 951
1,035
1,082
1,734
2,148 1,952 2,370
Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020
FGN Inflow (N'Bn) FGN Outflow (N'Bn)
713.5
426.0 576.7
802.4 790.8 767.8
431.9
287.3
373.0
516.8 520.3 517.4
326.3
214.7
280.0
389.2 391.2 388.2
Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020
FGN (N'Bn) State (N'Bn) Local Government (N'Bn)
A Revised Budget Largely Funded by Borrowings
Aggressive projection for Other Revenue will largely anchor the lower revenue implementation of the 2020 budget. Also, the impact of OPEC
production cap could also distort oil revenue during the year.
Source: Budget Office, NOVA Research
▪ Following the shocks occasioned by Covid-19, the 2020
budget was revised alongside underpinning revenue
assumptions.
▪ Oil price and production estimates were revised lower to
$28/barrel and 1.9mbpd respectively. Accordingly, the oil
revenue assumption largely reflects current reality. Also,
the downward adjustment of Customs and VAT
collections resulted in a revision in non-oil revenue lower
by 10% to N1.6 trillion.
▪ On the other hand, the independent and Other Revenue
lines appear very optimistic. Outliers in Other Revenue
are related to projections for FGN share of Balances in
Special Accounts, Share of Signature Bonus, Stamp Duty
and Excess Crude Proceeds.
▪ With proposed expenditure largely unchanged compared
to 35% reduction in revenue, the proposed budget deficit
increased to N4.95 trillion.
▪ The FGN plans to finance the deficit from both domestic
and external sources. The plan reveals foreign
borrowings $5.5 billion and domestic borrowing of N2.2
trillion.
1,218 698
1,125 954
1,961
924
2,638 824
819
957 996
636
1,625
1,805
325
238
295 507
557 933
850
873
1,193 281 483
1,554 1,608
2,573
2015 2016 2018 2018 2019 New 2020Budget
Old 2020Budget
Oil revenue Non-Oil Revenue Independent Revenue Other Revenue
(N’Billion)
2015 2016 2017 2018 2019 New 2020 Old 2020
Oil Price ($/barrel)
Budget 53.00 38.00 44.50 60.00 60.00 28.00 57.00
Actual 52.66 43.87 54.09 71.30 64.31 N/A N/A
Oil Production (mbpd)
Budget 2.28 2.20 2.20 2.30 2.30 1.90 2.18
Actual 2.13 1.82 1.89 1.96 2.04 N/A N/A
Exchange Rate (NGN/$)
Budget 165.00 197.00 305.00 305.00 305.00 360.00 305.00
Actual 195.52 253.49 305.79 305.95 305.90 N/A N/A
Fiscal Position at a Critical Point
Overlaying lower oil revenue (from lower prices and compliance to OPEC cut), we estimate total 2020 FGN revenue of N3.22 trillion (-22% YoY),
which overlaid on revised budget implementation of 80% resulted in deficit of N4.6 trillion (+10% YoY).
Source: NOVA Research Estimates based on BOF Data
2017 Actual 2018 Actual 2019 Actual 2020 Budget 2020 Estimates
(N' billion) Bear Base Bull
Oil production (mbpd) 1.89 1.96 2.04 1.90 1.74 1.86 1.97
Oil price ($/bbl) 54.09 71.30 64.31 28.00 36.5 40.33 44.16
Exchange rate (N/$) 305.79 305.95 305.90 360.00 361.00 361.00 361.00
Oil and Gas Receipts 4,084 5,546 4,604 4,596 2,881 3,411 3,960
Net Oil Revenue after 13% Derivation 2,320 4,043 2,831 2,929 1,836 2,174 2,524
FG Share of Oil Revenue 1,125 1,961 1,373 924 890 1,054 1,224
FG Share of Non-Oil Revenue 957 1,125 636 1,625 891 1,026 1,103
Other Revenue 281 386 1,554 1,608 660 816 854
Independent Revenue 295 395 557 933 251 320 348
FG Total revenue 2,658 3,866 4,120 5,090 2,693 3,216 3,530
2017 Actual 2018 Actual 2019 Actual 2020 Budget 2020 Estimates
(N' billion) Bear Base Bull
Retained Revenue 2,658 3,733 4,120 5,090 2,693 3,216 3,530
Non-debt Recurrent 2,765 3,105 4,251 4,620 3,870 4,158 4,831
Debt Service 1,824 2,161 2,454 2,952 2,657 2,804 2,952
Capital 1,440 1,682 1,166 1,889 378 586 1,039
Tranfers 434 456 428 212 169 180 190
Total Expenditure 6,464 7,404 8,299 9,673 7,073 7,728 9,012 Fiscal Deficit (3,806) (3,671) (4,179) (4,583) (4,381) (4,512) (5,482)
We believe the implementation of the 2020 budget is largely doubtful with the scapegoat being the capital expenditure. Our base case scenario
assume budget implementation of 80% (5-year average: 84.4%). Fiscal deficit could range between N4.4 trillion and N5.5 trillion in 2020.
Still Sizeable Financing Gap
The IMF loan of $3.4 billion and the $150 million drawdown from NSIA will unlock about N1.4 trillion for the federation account to augment
shortfalls from both oil revenue, lower customs and VAT revenue. Irrespective, the 2020 budget will still have a N3.2 trillion gap.
Source: NOVA Research Estimates
• Scenario 1 and 2 assumes the FG completes the planned privatization and secures the remaining external funding of $2.1
billion. However, Scenario 1 projects the excess of N2.27 trillion will be financed by CBN (like the level in 2019). Scenario 2
assumes CBN financing of half of the excess to the tune of N1.14 trillion and domestic borrowing of N1.14 trillion.
• Scenario 3, which is our preferred scenario assumes FG secures the remaining external funding of $2.1 billion and no proceeds
from privatization. It models financing half of the excess amount of N2.4 trillion partly by CBN and domestic borrowings.
• Scenario 4 and 5 assumes no proceeds from privatization and no additional external financing. Scenario 4 projects the excess
will be funded partly by CBN Ways and Means (like the level in 2019) and domestic borrowings of N884 billion. Scenario 5
assumes half financing by both CBN and domestic borrowings.
N'billion Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Projected deficit 4,512 4,512 4,512 4,512 4,512
Privatization Proceeds 126 126 0 0 0
Foreign Borrowings 1,986 1,986 1,986 1,227 1,227
Stabilisation fund Drawdown 126 126 126 126 126
Net Deficit/Surplus 2,274 2,274 2,400 3,158 3,158
CBN ways and means 2,274 1,137 1,200 2,274 1,579
Domestic Capital Market Borrowings 0 1,137 1,200 884 1,579
2017 net issuance 1,283 1,283 1,283 1,283 1,283
2018 net issuance 669 669 669 669 669
2019 net issuance 913 913 913 913 913
Total Borrowing in 2020 1,986 3,123 3,186 2,112 2,807
Covid-19 Shocks Neutered Expected Boost from VAT Increase
The statutory allocation to the federating units could decline by 21% YoY over 2020 to N3.2 trillion following declines in oil and non-oil revenue.
Also, given the slow down in economic activities, internally generated revenue is forecast to decline by 30% YoY.
Source: NOVA Research Estimates
In other to lessen the pressure of lower revenue on the federating units, the Nigeria Economic Sustainability Plan is expected to
implement the following initiatives:
• Negotiate suspension of payments in respect of ISPO.
• Provide moratorium on deductions in respect of bailout loans.
• Develop guidelines to protect inter-state commerce and advised states to issue of promissory notes for their construction debts.
• Encourage States to achieve SIFTAS and other World Bank programme actions in order to access external support.
2018 2019 2020 Estimates
(N' billion) Bear Base Bull
Oil production (mbpd) 1.96 2.04 1.74 1.86 1.97
Oil price ($/bbl) 71.30 64.31 36.50 40.33 44.16
Exchange rate (N/$) 305.95 305.90 361.00 361.00 361.00
Oil and Gas Receipts 4,084 5,546 2,881 3,411 3,960
Net Non-oil Revenue 3,064 3,064 2,729 3,178 3,433
VAT 1,047 1,047 685 913 1,027
CIT 1,373 1,373 1,602 1,675 1,748
Customs/Excise 612 612 442 589 658
States and LGs Share of Oil Revenue 2,686 2,686 1,255 1,486 1,725
States and LGs Share of Non-Oil Revenue 1,939 1,939 1,838 2,152 2,330
Internally Generated Revenue 1,169 1,334 801 934 1,067
States and LGs Total revenue 5,794 5,959 3,894 4,572 5,122
6
TRADING STRATEGY:
Fixed Income
With excluded maturing funds from OMO dominating the NTB auctions, compared to NTB offering of N1.41 trillion over H1 2020, subscription
came in at N2.9 trillion with the DMO/CBN allotting just N1.52 trillion, with net issuance of just N182 billion
Source: FMDQ, Nova Research
1.5
2.5
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
-
50
100
150
200
250
300
350
400
450
500
550
600
650
Ju
n-1
8
Ju
l-18
Au
g-1
8
Se
p-1
8
Oct-1
8
Nov-1
8
Dec-1
8
Ja
n-1
9
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Ju
n-1
9
Ju
l-19
Au
g-1
9
Se
p-1
9
Oct-1
9
Nov-1
9
Dec-1
9
Ja
n-2
0
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Ju
n-2
0
Amount Sold (₦`Bn) Maturity Average Stop Rate (%)
DMO/CBN Slashed NTB Average Rate by 631bps to 3.5% from 9.8% in H2 2019
Average Fixed Income Yields Dropped Further at Both Ends Of The Curve.
While average bond primary market yields fell 256bps to 11.15% in H1 2020, yields in the secondary market contracted by 303bps to 9.83%
from 12.85% in H2 2019. Average NTB yields declined 710bps to 3.39% when compared to average of 10.48% in H2 2019.
Source: FMDQ, Nova Research
1.5%
3.0%
4.5%
6.0%
7.5%
9.0%
10.5%
12.0%
13.5%
15.0%
16.5%
Ja
n-1
8
Feb-1
8
Ma
r-18
Ap
r-18
Ma
y-1
8
Ju
n-1
8
Ju
l-18
Au
g-1
8
Se
p-1
8
Oct-1
8
Nov-1
8
Dec-1
8
Ja
n-1
9
Fe
b-1
9
Ma
r-19
Ap
r-19
Ma
y-1
9
Ju
n-1
9
Ju
l-19
Au
g-1
9
Se
p-1
9
Oct-1
9
Nov-1
9
Dec-1
9
Ja
n-2
0
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Ju
n-2
0
Average T-bill Average bond
System Liquidity to Moderate Impact of Higher Borrowings and FX Pressure
FGN fiscal deficit funding mechanism will determine the trend in primary and secondary market treasury yields in H2 2020. However, the still
elevated system liquidity and higher maturity starting September could keep rates at a depressed level.
• The bountiful liquidity occasioned by the exclusion of corporates and individuals from OMO will further moderate the uptrend in
yields that would have been occasioned by the FX pressure and higher borrowings.
• Also, delay in the repatriation of maturing offshore holdings of fixed income securities could further compound the liquidity
pressure. Beyond maturing fixed income securities, PFAs placements with banks at the end of April totaled N1.52 trillion, which
are exposed to ~300bps repricing following the contraction in OMO rates.
• With our expectation of CBN reflating the banking system and depressed treasury yields over H2, we expect lower appetite for
expensive term deposits by banks, which could result in a further rush for higher pricing fixed income instruments and subsequent
further contraction in the yield curve.
Source: FMDQ, Nova Research
1,833
2,329
671 742 626 771
375602
1,254
1,690
810
1,782
382
259
134286
93102
462214
320
345
219
87
606
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-2
0
Au
g-2
0
Se
p-2
0
Oct-
20
Nov-2
0
Dec-2
0
OMO (N'Billion) NTB (N'Billion) Bond (N'Billion)
The Odds Favor Persistent Lower Yields Over H2 2020
We see average fixed income rates settling in the single digit region over H2 2020 as demand pressure drive Bond rate convergence with OMO
rate, with real return remaining negative over the rest of the year as inflation spirals.
• With the paucity of dollars for repatriation and limited avenue to attract FPI funds (due to the lower inflows to emerging markets),
the apex bank might not be aggressive in raising OMO rates from current levels and could be more inclined to lower it further.
• On a fundamental driven basis, the CBN should maintain or raise the OMO rates modestly from current levels to limit the rate of
repatriation, but the liquidity pressure occasioned non-bank corporates deposits with banks will continue to constrain any upward
movement.
• On the part of the FGN, with approved domestic borrowings of N1.6 trillion and expected maturity (NTB and Bond) of N3.5 trillion
over 2020, we reckon that total paper issuance by the FGN will have to sum up to N5.1 trillion in 2020. Between January and
June, the FGN issued total securities of N2.82 trillion (NTB and Bond), with total maturity over the same period of N1.86 trillion.
• As such, to meet up with the planned domestic borrowing, the FG will have to issue a total of N2.8 trillion between July and
December, which compared to maturing NTB of N1.6 trillion and non-bank corporates estimated OMO maturity (between July and
October) of N1.2 trillion suggest excess liquidity of N680 billion.
• With PFAs and individuals largely dominating NTB and Bond auctions, due to limited alternative and likely lower repricing of term
deposits, we see the liquidity pressure further gravitating NTB and Bond stop rates lower from current levels of 2.5% and 10.4%
on average respectively.
• In all, we expect CBN to continue to pressure banks to drive OMO stop rates modestly lower, with 1-year stop rate likely to fall
lower within the range of 6.5% - 7.5%. Bond rates could fall at the next auction due to demand pressure to 10% with a gradual
convergence to OMO single digit rates. NTB 1-year stop rate could gravitate between 2% - 3%.
Fixed Income strategy – Adopt a Largely Balanced Duration Approach
With the current low-yield environment likely to continue over the second half of the year, traditional assets will continue to underperform. We
recommend a strategy focused on accumulating the highest-yielding securities with a balanced duration approach.
Strategy
Underweight Traditional Fixed
Income Instruments and
Overweight Non-traditional Fixed
Income Instruments
• Investment grade corporate debt issuance (bond and commercial papers) are likely to
be more attractive today, given demand pressure for traditional FI instruments.
• State bonds are likely to be scarce given current events but could be attractive if
states governments decide to fund lower revenue from the capital market.
• With likely further depreciation of the Naira, investment in Eurobonds could deliver
better returns than Naira assets.
• Given that a diverse mixture of these assets is helpful in generating more return in a
low yield environment, we advise balancing the portfolio appropriately.
Fix the Rate • Given the lower yield environment, we recommend going fixed on current traditional
and non-traditional fixed yield assets.
• Even if rates decline further, fixed yield assets will still outperform in comparison.
Balance the Duration • With current lower rates and potentially going lower, we recommend a balanced
duration, against a short or long position.
• We recommend a 30% allocation to long dated instruments, and 70% to short dated
instruments to allow for attractive reinvestment post the liquidity pressure.
NOVA Merchant Bank Limited
23, Kofo Abayomi Street
Victoria Island, Lagos. Nigeria.
Email: [email protected]
Telephone: +234 1 280 4000
www.novambl.comNEW THINKING.NEW OPPORTUNITIES.
