Fitch's Outlook on Nigeria... A Glimmer of Hope?
After downgrading Nigeria's Long-Term Foreign-Currency Issuer Default Rating (IDR) to "ËœB' from "ËœB+' with a negative outlook in April 2020 due to COVID-19 pressures, Fitch Ratings has revised its outlook to stable following reduced uncertainties, stable oil prices and the reopening of the economy. The rating action was also largely influenced by CBN's management of external liquidity pressures through partial exchange rate adjustment, capital controls, FX restrictions and the rise in external reserves following the disbursement of IMF's $3.4bn Rapid Financing Instrument (RFI). However, the rating agency cited the persistence of external vulnerabilities due to an overvaluation of the naira and a large FX demand backlog.
The revision to the rating is surprising given that severe external and fiscal financing pressures persist. While Fitch alluded to stable oil prices, the potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices. The slow and uneven recovery in global oil demand is also expected to linger till the end of 2021, implying that oil prices would remain below 2018 levels while uncertainties still abound in the oil market due to global geo-political tensions.
Beyond oil & gas exports which only accounts for 35.8% of current account receipts, inflows from foreign investment and remittances are expected to sharply reduce. External reserve at $36.2bn, despite inflows from IMF, is still down 15.5% YTD. Meanwhile the adjustments to the official exchange rate from ₦307.0$1.0 to ₦380.0/$1.0 in August and the slight weakness in the NAFEX to ₦380.0/$1.0 from ₦360.0/$1.0 are too weak to correct the shock from weak oil prices, falling remittances and reduced capital flows. The restrictions on FX demand and the existing FX demand backlog have brought about a significant premium of around ₦79.0 in the parallel market, which we now consider to be a more market-reflective segment. The implication of the measures CBN has adopted appear to be understated by Fitch, despite citing the impacts in the form of poor investor confidence, slow growth recovery and trade weakness. With foreign investors still holding around $10.0bn of OMO bills as at August 2020 according to Fitch, we believe there remains severe risks to the external reserves and the currency, especially given weak prospects for the recovery of oil and non-oil sources of FX supply.
With debt service to revenue at 72.2% between January and May 2020, the FG's fiscal position is under pressure. This is a more prominent debt sustainability risk than Nigeria's low debt to GDP ratio of around 20.4%, since revenue collection has been underwhelming and below peers at less than 10.0% of GDP. While we believe the subsequent adjustment to the official exchange rate to ₦380.0/$1.0 in August, removal of energy subsidies and the recovery in oil prices since Q2:2020 would have supported revenues in Q3:2020, we suspect that this would not be enough to significantly close the fiscal funding gap. Accordingly, we are a little less optimistic than Fitch that recent developments have lowered Nigeria's external and fiscal risks.
Global Equities Market: Positive Sentiments on Additional Fiscal Stimulus
This week, COVID-19 cases increased 5.2% to 33.8 million while total deaths surpassed the million mark, increasing 3.1% to 1.0 million. Globally, the US (7.1 million), India (6.3 million) and Brazil (4.8 million) have the most confirmed cases. As the second wave of the virus is spreading, countries are imposing fresh lockdowns and stricter measures. In the US, House Democrats passed a $2.2tn fiscal stimulus package to support the economy. However, this is unlikely to receive support in the Senate, prompting further negotiations with the Treasury Secretary, Steve Mnuchin. Likewise, there are positive sentiments around a possible resolution to internal disputes preventing the European Union (EU) from passing a Ã¢â€šÂ¬1.8tn coronavirus recovery package.
The developed markets under our coverage recorded a positive performance as 6 of the 7 indices gained. In the US, the S&P 500 and NASDAQ indices rose 1.8% and 2.6% w/w respectively, reversing the previous week's losses following approval of the stimulus package in the House. In the UK, despite surging COVID-19 numbers and stricter lockdown measures, the FTSE All-Share index inched higher by 0.7% w/w following optimism on post Brexit trade deal with the EU. Similarly, France's CAC 40 and Germany's XETRA DAX indices gained 1.5% and 1.3% w/w respectively, following another attempt by the EU to pass the Ã¢â€šÂ¬1.8bn recovery package. Hong Kong's Hang Seng index rose 1.0% w/w. Conversely, Japan's Nikkei 225 index closed the week lower by 0.8% w/w.
In the BRICS region, there was a mixed performance albeit negatively skewed as 3 of the 5 indices that we track lost w/w. Russia's RTS index slipped 1.5% w/w as crude oil prices remain upward sticky. Trailing, Brazil's Ibovespa and China's Shanghai Composite indices fell 1.4% and 4bps w/w respectively. On the other hand, India's BSE Sens and South Africa's FTSE/JSE All-Share indices rose 3.5% and 1.2% w/w.
In the African region, performance was bullish as 5 of the 6 indices under our coverage gained w/w, save the Mauritius' SEMDEX index which lost 2.7%. Nigeria's All-Share index led gainers, up 2.5% following increased buying interest in the stock market ahead of earnings season. Similarly, Egypt's EGX 30 and Morocco's Casablanca MASI indices reversed last week's losses, rising 1.3% apiece. Likewise, Ghana's GSE Composite and Kenya's NSE 20 indices rose 0.6% and 0.2% respectively.
Performance across the Asian and Middle East markets under our coverage was impressive as 4 of 5 indices tracked closed positive. Thailand's SET index was the lone loser, down 0.6% w/w. Conversely, Qatar's DSM 220 and Turkey's BIST 100 indices rose 2.2% and 2.0% w/w respectively. Saudi Arabia's Tadawul All Share Index and UAE's ADX General Index gained 0.7% and 0.6% w/w respectively.
Domestic Equities Market: The Positive Performance Continues... ASI up 2.5% w/w
The local bourse sustained the bullish run this week as the All-Share index rose 2.5% w/w to 26,985.77 points following price appreciation in TOTAL (+21.0%), GUARANTY (+7.4%) and MTNN (+4.8%). Consequently, market capitalisation increased to ₦14.1tn as investors gained ₦350.1bn. The YTD return turned positive for the first time since February 26, 2020, closing the week at 0.5%. Activity level varied as average volume traded advanced 6.3% to 333.2m units while average value traded weakened 6.0% to ₦3.9bn. ZENITH (337.6m units), STERLING (322.0m units) and UBA (156.1m units) were the most traded by volume while ZENITH (₦6.0bn), DANGCEM (₦2.4bn) and GUARANTY (₦1.7bn) led by value.
Performance across sectors was bullish as all indices under our coverage gained, save the Consumer Goods index which lost 0.7% w/w, following sell-pressures in NIGERIAN BREWERIES (-6.8%). On the flip side, the Banking and Industrial Goods indices led the gainers, up 4.2% and 3.2% respectively due to buying interest in GUARANTY (+7.4%), ZENITH (+4.3%) and BUACEMENT (+3.6%). Similarly, the AFR-ICT and Oil & Gas indices closed 2.5% and 1.8% w/w higher respectively, buoyed by gains in MTNN (+4.8%), TOTAL (+21.0%) and OANDO (+12.8%). Lastly, the Insurance index rose 0.6% following price appreciation in CUSTODIAN (+4.0%) and AIICO (+9.7%).
Investor sentiment as measured by market breadth (advance/decline ratio) rose to 2.4x from the 1.3x recorded last week as 34 stocks gained against the 14 that lost. TOTAL (+21.0%), OANDO (+12.8%) and STERLING (+10.3%) were the top gainers while CORNERSTONE (-15.5%), UPL (-12.7%) and ETRANZACT (-10.0%) led the decliners. We anticipate a sustained bullish run in the coming week as investors continue to position in fundamentally sound stocks ahead of earnings releases for the third quarter.
Foreign Exchange Market: Oil Price Slips on Higher Monthly Production Data
Rising production levels in OPEC countries, largely Iran and Libya (both exempted from the production quotas), continue to weigh on the oil market as output rose by 160,000bpd m/m in September. Similarly, the rising infection rate, death toll (1 million globally) and disappointing vaccine news during the week also dampened oil demand outlook. Consequently, Brent crude fell to a 19-day low at US$39.03/bbl from US$41.74bbl last week. Elsewhere, the external reserves decreased by 0.1% w/w to US$35.7bn (9/29/2020). We expect to see an uptick in Nigeria's reserve balance in the near term following the release of the $200m guarantee placed as security in the litigation with Process and Industrial Developments (P&ID).
The CBN spot rate traded flat all week at ₦379.00/US$1.00 while the rate at the parallel market gained ₦2.00 w/w to ₦465.00/US$1.00. At the Investors & Exporters (I&E) Window, the NAFEX rate appreciated ₦1.00 w/w to close at ₦385.00/US$1.00. Furthermore, weekly turnover at the segment advanced 23.1% to $432.0m from the $350.9m recorded in the previous week.
At the FMDQ Securities Exchange FX Futures Contract Market, the total value of open contracts settled at $11.1bn, up 1.3% ($145.9m) from last week. The SEP 2021 instrument (contract price: ₦420.09) recorded the highest demand with an additional subscription of $43.4m, putting the total value at $131.1m. Meanwhile, the MAR 2021 (contract price: ₦403.06) instrument saw the least buy interest at $3.94m with a total value of $1.5bn. In the coming week, we expect the naira to trade at a similar band across the different FX segments.
Money Market: Yields Trends Lower in the Secondary Market
Despite system liquidity falling to ₦194.7bn on Monday from ₦908.1bn at the close of last week, the interbank rates -OBB and OVN - opened the week lower at 3.0% and 4.0% w/w respectively from the close of 10.3% and 11.5%. By Thursday, the rates declined significantly to 1.0% and 1.8% as inflows from maturing OMO instruments entered the system. By the close of the week, the rates stood at 1.0% and 1.6% as system liquidity closed at ₦335.1bn.
To absorb liquidity from maturing treasury bills, the CBN offered a total of ₦114.0bn across the short, mid and long-tenor instruments at the primary market auction on Wednesday. The instruments were oversubscribed at an aggregate bid-to-cover of 3.1x as subscriptions totaled ₦348.3bn and the highest demand was recorded at the longest tenor with bid-to-cover ratio of 3.7x. Instruments worth ₦134.0bn were sold across the three maturities at marginal rates of 1.08%, 1.49% and 2.80% respectively, slight declines from respective rates of 1.09%, 1.50% and.3.05% recorded at the previous auction.
In the secondary market, performance turned bullish as average yield across tenors declined 22bps w/w to 1.7% from 1.9% last week. Significant buying interest was recorded at the mid end of the curve as yields fell by 48bps to 1.6%. Yields also declined at the long end by 32bps to 2.4% while short-term yields rose by 13bps to 1.2%.
In the coming week, we expect inflows of ₦567.7bn from maturing OMO bills to boost system liquidity and pressure yields in the secondary market. However, we believe CBN would resume OMO auctions to keep rates and system liquidity in check.
Bonds Market: Performance Remains Upbeat
The domestic bonds market ended the week positive as average yield declined 23bps w/w to 6.7%. However, yield declined only on Tuesday after rising on Monday and Wednesday while closing flat on other trading sessions. Across tenors, the short-term bond saw the most demand as yield dropped 55bps while yields on medium and long-term bonds also fell 30bps and 12bps w/w respectively.
Across the SSA Eurobonds space, demand remained weak leading to a bearish outing as average yield rose 47bps w/w to 9.5%. The Zambia 2022 and 2024 instruments saw the most sell-offs due to default concerns, thus yield rose 667bps and 304bps w/w respectively. Trailing, yield on the Zambia 2027 and Ghanaian 2022 instruments climbed 237bps and 82bps w/w respectively.
Performance at the African Corporate Eurobonds market under our coverage was negative as average yield increased marginally by 2bps w/w to 6.1% (ex-SIBANYE GOLD 2023 instrument). Yields for SIBANYE GOLD 2023 surged 1028bps as investors continue to exercise the convertible option. Meanwhile, ESKOM HOLDINGS 2021 and SEPLAT 2023 instruments saw low demand following a 90bps and 17bps drop in yield respectively. In the coming week, we expect to see improved demand in the domestic bond market while for the Eurobonds markets, investors' risk-off approach would continue to drag performance.