Afrinvest Weekly Update |Current Account Deficit Improves in Q3:2020 Despite Fragile Conditions
(Source: Afrinvest Research , Date: 22-Jan-2021)
Current Account Deficit Improves in Q3:2020 though External Conditions Remain Fragile
Nigeria's external sector remains fragile, with the country maintaining negative current account balances for nine straight quarters, the worst trend on record. In Q3:2020, the current account deficit moderated by 7.2% q/q to -$3.3bn (-3.2% of GDP) from the -$3.6bn (-4.0% of GDP) reported in Q2:2020. This was supported by a faster increase (11.6% q/q) in current transfers to $4.4bn from $3.9bn as workers' remittances rose by 14.8% q/q to $3.9bn from $3.4bn in Q2:2020. Nevertheless, remittances remain significantly below 10-year historical average of $5.3bn due to the continued disruptions from COVID-19 in economic regions with huge Nigerian diaspora flows such as Europe and America.
There was a reduction in the services deficit to -$1.8bn from -$2.6bn in Q2:2020 due to continued weakness in demand for international travel and tourism amid a second wave of COVID-19 as other business services deficit fell to $878.8mn from $1.9bn in Q2:2020. The deficit in the income account rose marginally to -$965.5mn from -$808.1mn in Q2:2020 following continued FX illiquidity and an increase in the investment income deficit to $1.0bn from $836.4mn in Q2:2020 driven by fewer Nigerian residents earning income abroad.
That said, the historically surplus component of the current account remains under pressure. Goods trade deficit at -$4.9bn from -$4.1bn in Q2:2020 reached the highest level on record based on quarterly data despite the increase in exports (27.3% q/q) during the quarter relative to imports (24.3% q/q), suggesting an increase in trade activities following the reopening of economies. Driven by the recovery in oil prices during the quarter (15.6% to average $45.0/b), there was a notable increase in the value of oil & gas export (up 40.6% q/q to $7.4bn) while the non-oil export component remains weak (down 35.5% q/q to $0.651.7m).
The recent recovery in oil prices to an average of $45.7/b and $54.7/b in Q4:2020 and January 2021 respectively is a positive development, supported by agreed extra production cuts of 1mbd by Saudi Arabia. However, oil demand outlook remains weak on the back of a slow paced recovery following renewed lockdowns in major economies such as Europe to contain the virus. With the OPEC+ cut agreement in place, the recovery in oil prices alone is insufficient to correct Nigeria's weak external position. With the gradual increase in the mass-distribution of C-19 vaccines, we expect an uptick in international travels and demand for imports which suggests that the trade deficit would remain large. While the reversal of the CBN's policy on diaspora remittances in December 2020 may encourage marginal increase in inflows, we expect remittances to remain weak as Nigerians abroad continue to adjust to the post-COVID environment implying bleak outlook for the Naira.
Global Equities Market: Markets Respond Positively to Biden's Resumption
Global COVID-19 cases remained on the rise this week at 96.0 million, an increase of 4.5% from last week while the death toll rose 4.4% to 2.1 million. The US remains the major epicentre of the pandemic with 24.2m reported cases as President Joe Biden warns that the country may record as many as 100,000 fatalities from the virus in the coming month. Upon assumption of office, President Joe Biden has signed numerous executive orders with some of the orders repealing President Trump's agenda, chief of which is reversing travel ban and immigration decisions. The president is also pushing for a massive $1.9tn COVID-19 relief package while facing staunch opposition from Republican lawmakers.
Performance in the developed markets was bullish with 5 of 7 indices advancing w/w. In the US, the S&P 500 and NASDAQ indices rose 1.9% and 3.8% w/w respectively. In the UK, the FTSE All-Share and France CAC 40 indices declined by 0.9% and 1.5% w/w due to disappointing economic data while Germany's XETRA DAX index advanced 2.6% w/w. Hong Kong's Hang Seng index rose 3.1% w/w while Japan's Nikkei 225 index closed the week higher by 0.4% w/w.
Performance across the BRICS markets was mixed with 3 indices closing lower w/w. China's Shanghai Composite index advanced 1.1% while South Africa's FTSE/JSE All-Share index appreciated 0.7% despite weak macro-economic data. Conversely, Russia's RTS lost the most, down 3.4% w/w due to concerns over western sanctions. Similarly, Brazil's Ibovespa and India's BSE declined 2.8% and 0.3% w/w respectively.
In Africa, performance was mixed with 3 of 6 indices under our coverage advancing w/w. Egypt's EGX 30 and Ghana's GSE Composite appreciated 1.8% and 1.7% w/w respectively. Similarly, Morrocco's Casablanca MASI gained 0.4% w/w. On the flipside, Kenya's NSE 20 led the losers with a 1.7% decline. Nigerian All-Share index also lost 0.4% as investors booked gains from previous week while Mauritius' SEMDEX indices lost 0.3% w/w.
Across the Asian and Middle East markets, performance was also mixed as UAE's ADX General and Turkey's BIST 100 indices gained 6.5% and 1.2% w/w respectively. Conversely, Qatar's DSM 220 and Thailand's Set declined 1.6% and 1.4% w/w respectively. Lastly, Saudi Arabia's Tadawul All Share index lost 0.2% w/w.
Domestic Equities Market: Bearish Performance Resurfaces... ASI down 0.4% w/w
The equities market closed in the negative territory following losses on 4 of 5 trading sessions. Accordingly, the benchmark index lost 0.4% w/w to 41,001.99 points following sell-offs in DANGCEM (-1.3%), BUACEMENT (-1.1%) and MANSARD (-20.0%). Investors' value also declined ₦81.6bn as market capitalisation fell to ₦21.4tn while YTD return settled at 1.8%. Activity level was mixed as average volume rose 5.2% to 725.2m units while value traded declined 21.8% to ₦5.1bn. The most traded stocks by volume were TRANSCORP (566.0m units), MBENEFIT (150.0m units) and UNIVINSURE (123.1m units) while GUARANTY (₦3.6bn), ZENITH (₦2.6bn) and BUACEMENT (₦2.2bn) led by value.
Performance across sectors was lacklustre w/w as all indices under our coverage lost save the AFR-ICT index which closed flat. The Banking index led the pack, down 1.3% following losses in UBA (-5.9%) and ACCESS (-5.7%). Trailing, the Insurance and Industrial Goods indices fell 0.8% and 0.5% respectively, following price declines in MANSARD (-20.0%), DANGCEM (-1.3%) and BUACEMENT (-1.1%). Similarly, sell pressures in MRSOIL (-18.5%), INTBREW (-3.1%) and DANGSUGAR (-2.9%) dragged the Consumer Goods and Oil & Gas indices down by 0.1% apiece.
Investor sentiment as measured by market breadth (advance/decline ratio) waned to 1.9x from 3.1x last week as 50 stocks gained against 26 that declined. CHAMPION (+44.4%), TRANSEXP (+37.5%) and NCR (+32.2%) led the top gainers while MANSARD (-20.0%), MRSOIL (-18.5%) and FTNCOCOA (-13.0%) led the decliners. In the coming week, we anticipate a positive performance as investors seek bargain hunting opportunities.
Foreign Exchange Market: IEA Cuts Global Oil Demand Forecast
Brent crude oil price fell 0.6% w/w to $56.06bbl (1/21/2021) after International Energy Agency (IEA) slashed its 2021 oil demand outlook. IEA forecasts a dip in Q1:2021 and annual global oil demand to 94.1mbpd and 96.6mpd, down 0.6mbpd and 0.3mbpd respectively. This was on the back of slower pace of recovery following renewed lockdowns to contain the pandemic. Locally, the external reserves increased 0.6% w/w to $36.5bn (1/20/2021).
In the FOREX market, the CBN spot rate traded flat all week at ₦379.00/$1.00 while rate at the parallel market depreciated ₦2.00 w/w to ₦477.00.00/$1.00. At the Investors & Exporters (I&E) Window, the NAFEX rate appreciated ₦0.50 w/w to ₦394.17/$1.00. Activity level in I&E Window fell this week as total turnover declined 23.6% to $302.7m from $396.3m recorded in the previous week.
At the FMDQ Securities Exchange FX Futures Contract Market, the total value of open contracts settled at $8.5bn, up 0.2% ($13.4m) from the prior week. The January 2022 instrument (contract price: ₦436.84) had the most demand with additional subscription of $5.0m putting the total value at $25.0m. Meanwhile, the January 2021 instrument (contract price: ₦423.90) saw sell-off worth $12.0m as the total value settled at $1.6bn. In the coming week, we expect Naira to remain within similar band across the different FX segments.
Money Market: Rates Close Higher Despite Elevated System Liquidity
In the money market this week, interbank rates trended lower on 2 of 5 trading days due to improved system liquidity. At the start of the week, Open Buy Back (OBB) and Overnight (OVN) rates closed at 0.5% and 0.8% respectively, from 0.5% and 1.0% recorded on the previous Friday as system liquidity declined to ₦374.6bn. On Tuesday, rates trended lower as system liquidity increased to ₦732.8bn supported by ₦226.3bn inflows from OMO maturities hence, OBB and OVN rates closed at 0.4% and 0.5% respectively. On Friday, OBB and OVN rates surged to 10.0% and 10.5% respectively despite robust system liquidity at ₦704.3bn.
Following the inflow from OMO maturities worth ₦226.3bn, on Thursday, the CBN conducted OMO auction worth ₦170.0bn to mop-up excess liquidity in the system. Demand at the auction was healthy as the 103-day (Offer: ₦20.0bn; Subscription: ₦51.1bn; Sale: ₦20.0bn), 180-day (Offer: ₦20.0bn; Subscription: ₦79.8bn; Sale: ₦20.0bn) and 362-day (Offer: ₦130.0bn; Subscription: ₦569.4bn; Sale: ₦130.0bn) instruments were oversubscribed by 2.6x, 4.0x and 4.4x with marginal rates of 1.5%, 4.3% and 5.7% respectively.
In the treasury bills secondary market, the performance was mixed albeit negatively skewed as average yield across benchmark tenors trended higher on 3 of 5 trading days. The week started on a bullish note as average yield across tenors settled at 0.4%, down 14bps from 0.6% recorded the previous Friday. On Tuesday and Wednesday, sentiment was bearish as average yield rose 1bp and 15bps respectively. Following that, average yield fell 5bps on Thursday and rose 9bps on Friday. Consequently, the average yield across the market increased 6bps w/w to settle at 0.6%.
In the coming week, we expect the CBN to sustain its OMO auction given that OMO maturities worth ₦190.2bn will impact system liquidity levels. Also, we envisage the elevated system liquidity levels would continue to drive rates lower at the secondary T-Bills market.
Bonds Market: Bearish Trend Continues
The domestic bonds market in the week experienced continuous sell pressures with average yield rising on 3 of 5 trading days to close at 7.0% relative to previous week's close of 6.7%; average yield rose 33bps w/w. Across the term structure, we noticed the market sustained a bearish streak at the long and medium end of the curve with average yield rising 56bps and 33bps w/w respectively. Likewise, average yield on the short term maturities rose marginally by 1bp w/w.
At the primary market, there was a healthy demand for bonds on the three instruments that were opened via the DMO auction on Wednesday. The MARCH 2027, MARCH 2035 and JULY 2045 were offered with respective size of ₦50.0bn apiece. The MARCH 2027 and 2035 instruments were oversubscribed by 1.8x and 2.1x respectively while the JULY 2045 instrument was undersubscribed by 0.8x. The respective marginal rates of the instruments were 8.0%, 8.7% and 9.0% for MARCH 2027, MARCH 2035 and JULY 2045. All the instruments were issued at premium to par value and on the aggregate, a total subscription and allotment of ₦238.3bn and ₦122.4bn respectively.
At the SSA Eurobond segment, the market rebounded from last week's performance as average yields fell 1.3% to settle at 6.2%. The Senegal 2021 instrument enjoyed the most buying interest, shedding 28bps w/w. Similarly, the Ghana 2023 and Ivory Coast 2032 instruments fell 19bps and 17bps w/w respectively. Conversely, the Zambian 2022 and 2024 instruments recorded a bearish performance as average yields rose by 189bps and 89bps w/w respectively. For the African Corporate Eurobonds under our coverage, there was a positive performance as average yields declined 2.0% to close at 3.2%. The NEERG ENERGY LTD instrument led gainers, down 96bps w/w while SEPLAT PETROLEUM DEV CO 2023 trailed, falling 29bps w/w. Conversely, OFFICE CHERIFIEN DES PHO 2044 and ABSA GROUP LTD 2028 rose 0.4% apiece w/w.
Ahead of next week's trading, we expect investors to cherry-pick on bonds with attractive yields ahead of coupon inflows of about ₦50bn while trading at the Eurobonds segment should target specific instruments with optimal returns potential.