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Afrinvest Weekly Update |Q4:2020 Debt Report: Pandemic-induced Fiscal Deficit and Currency Devaluation Fuels Higher Debt Burden
(Source: Afrinvest Research , Date: 02-Apr-2021)



Q4:2020 Debt Report: Pandemic-induced Fiscal Deficit and Currency Devaluation Fuels Higher Debt Burden
The Q4:2020 debt report as recently published by the Debt Management Office (DMO) and the Nigerian Bureau of Statistics (NBS) reveals a 20.1% rise in Nigeria's public debt stock to ₦32.9tn and a 23.4% increase in FG's debt burden to ₦26.9tn as at 2020 year-end. The current debt amount implies a Debt-to-GDP ratio of 21.6% for 2020 (2019: 18.8%), using FY:2020 nominal GDP figure. The expansion in debt reflects the devaluation in the domestic currency by 19.3% from ₦306.00/$1.00 to ₦379.00/$1.00 at the CBN official window by the end of 2020. In addition, increased borrowing during the year as the Federal Government obtained multilateral financing from the IMF ($3.5bn), World Bank ($1.4bn) and AfDB ($307.1bn) to plug the pandemic-induced fiscal deficit also fueled the rise in debt. Hence, external debt burden for both FG and States surged 40.8% to ₦12.7tn ($33.3bn) and the external debt for FG alone spiked 44.5% to ₦10.9tn ($28.5bn). The FG also increased domestic borrowing by 12.3% y/y to ₦16.0tn, leveraging the low-yield environment as borrowings via bonds, promissory notes and Sukuk bonds increased by 12.4%, 32.6% and 81.3% y/y respectively in 2020. 

Although debt-to-GDP remains below the threshold advised by the IMF, debt-servicing costs paints a different picture, especially when compared with the weak level of government revenue. Debt-service costs rose by 15.4% to ₦2.4tn and debt service-to-revenue worsened to 62.2% from 50.7% in 2019. External debt-servicing costs rose by 16.7% to $1.6bn due to increase in multi-lateral and bi-lateral financing. The weakness in the domestic currency however drove a faster rise of 36.4% to ₦592.9bn in Naira terms. Domestic debt-servicing costs also increased 10.0% y/y to ₦1.9tn from ₦1.7tn reported in 2019.

In terms of debt composition, external debt represented 40.5% of total FG's debt in 2020, above FG's target of 40.0% as external debt rose faster due to the aforementioned factors. Looking ahead, we do not expect increased significant external borrowings in 2021 as the FG's target for debt composition has been changed to 70:30 in the 2020-2023 MTEF, estimated service costs of existing Eurobonds in 2021 totaling about $806.3m and still-low yields in the domestic bonds market. We expect the FG to continue feasting on the low-yield environment to bridge its financing gap in 2021 in order to align with the new debt mix target. We anticipate debt service-to-revenue to remain worse due to low revenue collection and currency weaknesses.

Global Equities Market: Additional Recovery Package Buoys Sentiment 
The uptrend in global C-19 cases persisted this week as total cases rose 2.8% to 129.6 million while the death toll increased 2.3% to 2.8 million. As an update on vaccines, Pfizer shot's overall efficacy rate slowed to 91.3% from 95% in November after new trial though it proves efficient for the new variant found in South Africa. Meanwhile, Johnson and Johnson experienced a setback in its vaccine production after quality control issues ensued. Elsewhere in the US, total claims fell 46,000 to 3.8 million while weekly unemployment claims rose to 719,000 from 684,000 despite the rapid vaccine disbursement and economy reopening. This came after President Biden unveiled a $2.25tn infrastructure and economic recovery package funded through a 28.0% increase in corporate tax and targeted at reviving US transportation, water systems, broadband, manufacturing, and other sectors. 

Across the developed markets, performance was impressive w/w as all indices gained. The US S&P 500 and NASDAQ indices rose 0.8% and 2.3% w/w respectively following the announcement of the recovery plan. Similarly, France's CAC 40, Germany's XETRA DAX and UK's FTSE All-Share indices advanced 1.9%, 2.4%, and 0.2% w/w respectively despite the lockdown measures in the region. Also, Japan's Nikkei 225 and Hong Kong's Hang Seng indices appreciated 2.1% and 0.7% w/w respectively.

In the BRICS markets, performance was also positive as all indicators trended northward w/w. India's BSE Sens index led the pack, up 2.1% w/w. Trailing, China's Shanghai Composite and Brazil's Ibovespa indices climbed 1.4% and 0.7% w/w respectively. South Africa's FTSE/JSE All Share and Russia's RTS indices also closed the week higher by 0.6% and 0.5% respectively. 

Across African markets under our coverage, performance was poor as only Morocco's Casablanca MASI index gained 0.5% w/w. Egypt's EGX 30 and Kenya's NSE 20 indices were the biggest losers, down 2.8% and 2.0% w/w respectively. Also, Nigeria's ASI and Ghana's GSE Composite indices dipped 0.7% and 0.1% w/w respectively. Lastly, Mauritius' SEMDEX fell 1bp w/w. 

Performance in the Asian and Middle East markets under our coverage was bullish as all indices appreciated w/w. Saudi Arabia's Tadawul ASI index recorded the highest gain, up 5.1% w/w as investors position ahead of OPEC+ decision. Similarly, UAE's ADX General and Qatar's DSM 220 indices rose 3.8% and 2.8% w/w respectively. Finally, Turkey's BIST 100 and Thailand's SET indices climbed 2.3% and 1.5% w/w respectively. 

Domestic Equities Market: Bears Dominate the Bourse... ASI down 0.7% w/w
The local bourse recorded losses on 3 of the 4 trading sessions as the market witnessed sell-offs. Consequently, the NSE All-Share Index fell 0.7% w/w to settle at 38,916.7 points, YTD loss worsened to -3.4% while market capitalisation declined ₦156.7bn w/w to settle at ₦20.4tn. Activity level advanced as average volume and value traded rose 18.1% and 11.7% to 361.2m units and ₦4.8bn. The top traded stocks by volume were GUARANTY (279.7m units), UBN (237.2m units) and WEMABANK (153.5m units) while GUARANTY (₦8.9bn), ZENITH (₦1.5bn) and UBN (₦1.3bn) led by value. 

Across sectors under our coverage, performance was mixed w/w. The Insurance index led gainers with 2.8% w/w following gains in LINKASSURE (+41.2%) and MBENEFIT (+17.9%). Similarly, the Consumer Goods and AFI-ICT indices rose 1.9% and 0.1% w/w respectively due to buying interest in GUINNESS (+31.5%), CHAMPION (+6.1%), and MTNN. On the flip side, the Industrial Goods index led laggards, down 2.1% w/w on the back of sell-offs in DANGCEM (-4.4%). Finally, the Banking and Oil & Gas indices declined 1.3% and 0.3% w/w respectively due to profit-taking in UNITYBNK (-6.7%), FCMB (-5.0%), and OANDO (-4.8%).

Investor sentiment as measured by market breadth (advance/decline ratio) worsened to 2.0x from the 2.5x recorded last week as 40 stocks advanced against 20 stocks that declined. The top performing stocks for the week were LINKASSURE (+41.2%), GUINNESS (+31.5%) and ROYALEX (+26.9%) while FTNCOCOA (-17.6%), DAARCOMM (-16.0%) and REGALINS (-12.1%) were the laggards. With the continued recovery of yields in the fixed income market, we anticipate a soft equities market in the coming week.

Foreign Exchange Market: Naira Remains Stable across Markets
Oil market sustained some level of volatility this week as traffic resumes gradually on the Suez Canal and imposition of lockdown in some countries in Europe and Africa. Consequently, Brent crude oil price declined marginally by 0.1% to $64.99/bbl this week. Locally, external reserves rose 0.5% w/w to $34.5bn (3/30/2021). 

In the FX market, naira remained flat in the parallel market and CBN spot rate to settle at ₦485.00/$1.00 and ₦379.00/$1.00 w/w respectively. Also, rate at the Investors' & Exporters' (I&E) Window appreciated by 70kobo w/w to ₦409.30/$1.00. Activity level in I&E Window dipped 40.2% to $186.6m from $312.0m in the previous week.

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts fell 20.6% ($1.3bn) to $5.1bn. The MAR 2022 instrument (contract price: ₦435.58) sustained its strong buying interest with an additional subscription of $193.9m, which took total value to $204.5m. Also, the APRIL 2022 instrument (contract price: ₦437.88) saw a significant gain, as total value increased $78.0m to $80.5m. In the coming week, we anticipate rates to remain in the same band across the segments of the FX market. 

Money Market: Market Activities Bullish Given Robust System Liquidity 
Market activities were generally upbeat this week, despite a ₦180.8bn OMO mop-up. The CBN held a T-bill primary market auction on Wednesday, offering 91-day, 182-day and 364-day instruments, which closed at marginal rates of 2.0%, 3.5% and 8.0% respectively. The short and mid tenor instruments were undersubscribed with bid-to-offer ratio settling at 0.9x and 0.7x respectively for the 91-day and 182-day instruments. However, the 364-day instrument was 2.8x oversubscribed. Same day, the CBN held its OMO auction during the week, offering 97-day, 181-day and 342-day instruments at stop rates of 7.0%, 8.5% and 10.1% respectively. All the tenors were oversubscribed at 3.4x, 2.4x and 3.5x respectively with a total amount of ₦100.0bn successfully allotted in line with the offered amount.

The secondary market moved in tandem with liquidity levels at the start of the week as average yield declined by 4bps to 4.6%. However, as liquidity levels increased through the week, we noticed yields declined to average 4.5%, down 0.1% w/w. Despite the robust liquidity levels, money market rates "" OBB and OVN rose significantly, settling 19.5% and 21.8% higher by the end of the week to 30.0% and 32.5% respectively. Given that system liquidity is expected to remain tempered as the CBN sustains OMO auctions with ₦34.0bn worth of instruments expected to mature on the 6th of April 2021, we expect rates to remain subdued next week.

Bonds Market: Sell-Offs Persist in Domestic Sovereign Market  
In the domestic bonds market, performance was mixed during the week with the average yield on sovereign bonds increased on 2 of the 4-day trading week. Consequently, average yield rose 15bps w/w to 9.9% from 9.7% in the previous week. The medium-term bonds recorded the most sell-offs as yields rose by 34bps w/w and the long-term bonds yields inched higher by 7bps w/w. On the other hand, the short-dated bonds recorded gains, with yields declining 3bps w/w. In the coming week, we expect yields to rise further as activity level remains restrained.

The activities in the Sub-Saharan Africa (SSA) sovereign Eurobonds market mirrored the sovereign naira market, as average yield on instruments increased by 0.3% to 8.2%. The general sentiment in the market was seemingly bearish with most bonds recording yield increases, save for the Ghana 2023 (-1bp), Ivory Coast 2032 (-5bps), Zambia 2027 (-3bps) and South Africa (-14bps). On the other hand, the largest increase in average yield was recorded by the Ghana 2022 (3.0%) and Zambia 2022 (0.8%) instruments.

The activities in the corporate Eurobonds market however were dissimilar from the other bond markets, as the average yield on the Eurobonds pared 1.4% to 3.9%. The largest decline in yield was recorded on the SEPLAT PETROLEUM DEV 2023 instrument, which pared 23.8%, as the bond was recalled on the 29th of March 2021. Also, the yield on the NEERG ENERGY 2022 instrument declined in the trading week, as the Ask-yield on the bond fell by 2.2% to settle at 0.7%. In the coming week, we expect yields in the Eurobond market to be guided by the direction of the US treasury instruments while in the corporate space, we expect the bullish sentiment to be sustained.

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