Beyond the inadvertent consumer price pressure, the impact of the prolonged land border closure by the Nigerian government is now negatively affecting the country’s exports, especially to neighbouring West African countries. For much of last week, we understand that Nigerian exporters inceasingly counted their losses given their inability to export products through the land border.
For evidence, DANGCEM – largest cement producer in Nigeria – said, during our engagement with management, that it completely halted exportation of cementitious products in August 2019 owing to the land border closure. Furthermore, it was reported that goods exported through the sea ports were boycotted by off-takers across the ECOWAS bloc in retaliation against the FGN’s hard stance on the border.
Considering the fact that Nigeria’s exports to ECOWAS constituted 4.4% of the total exports as of Q2-19, we estimated that the country could potentially lose c.NGN800 billion per annum in export value should the border closure persist.
According to the CBN quarterly economic report, federally collected revenue improved markedly by 18.3% q/q to NGN2.70 trillion in Q3-19. The improvement stemmed from higher oil (+9.9% q/q) and non-oil (+28.0% q/q) revenue. Even as revenue from oil exports (-34.1% q/q) declined, sharper expansion in petroleum profit tax (PPT) and Royalties (+24% q/q) kept gross oil revenue afloat.
In the face of lower average crude oil price (-9.4% q/q), we believe higher production (+3.3% to 1.84mb/d) must have boosted oil companies’ profits, leading to greater royalties and PPT to the government. Meanwhile, the seasonally-induced jump in corporate taxes (+95.1% q/q) supported non-oil revenue. Looking ahead, we see better prospects for the FGN’s fiscal position, which is expected to be largely driven by non-oil revenue.
While we are yet to see the full impact, the Nigerian Customs Service stated that the border closure has been positive for duty collection, generating an additional NGN4 billion/day. That together with higher corporate taxes, which are typically stronger in H2, will support federally collected revenue in Q4-19.
As the effects of the CBN’s recent policies in the fixed income space continue to reverberate across the capital markets, investors flocked to the equities market this week in search of yield and drove the domestic bourse to its largest weekly gain since the week of the 23rd August 2019.
In the holiday-shortened trading week, the All-Share index rose 2.0% w/w to 26,851.68 points, closing in the green on 3 of 4 trading sessions, which reduced the YTD loss to -14.6%. On sectors, the Banking (+6.8%) and Industrial Goods (+3.2%) indices sustained last week’s gains, with the Consumer Goods (+2.6%) index joining the leaders’ list. Conversely, the Oil & Gas (-1.8%) and Insurance (-0.6%) indices closed in the red.
In our view, the performance this week is a reaction to a limited outlet for investments given recent policy directives limiting domestic participation in the market. We expect that the market might continue to benefit over the short-term especially in the face of lower yields in the fixed income market.
The overnight (OVN) rate undulated during the week, before settling higher by 8.6ppts at 14.1%. On the first trading day, the rate settled 0.3ppts higher at 5.8% as system liquidity thinned out. Similarly, by the second trading day, the rate had advanced by 3.2ppts, before then paring by 1.2ppts on the penultimate trading to settle at 7.8% as OMO maturities worth NGN526.78 billion flowed into the system.
In the coming week, OMO maturities (NGN352.00 billion) and Treasury bond coupons (NGN17.87 billion) – 12.49% MAY-2029 (NGN9.37 billion), and 8.50% NOV-2029 (NGN8.50 billion) – are expected, and should keep the rate moderated by the end of the week.
Trading in the Treasury bills market was seemingly bullish as the average yield across instruments pared by 61bps to 12.5%, as demand has remained strong despite market restrictions. The decline was majorly due to trading on NTBs, which was bullish and resulted in the average yield paring by 46bps to 10.9%, relative to the decline of the average OMO bills yield (-3bps to 13.3%).
Also, during the week there was a Treasury bills PMA held for instruments worth NGN125.24 billion, which were fully allotted in line with the offer amounts – 91DTM (Offered: NGN4.38 billion; Bid-to-offer: 13.32x), 182DTM (Offered: NGN12.92 billion; Bid-to-offer: 4.48x) and 364DTM (Offered: NGN107.94 billion; Bid-to-offer: 4.07x), at respective stop rates of 7.7998% (previously 9.4999% auction), 9.0000% (previously 10.4500% auction) and 10.0000% (previously 11.5000%).
We expect trading volumes to start to temper in the NTB market, as the average yield trends towards the single-digit level. However, the average OMO yield is expected to remain around the same level, moderately paring in the coming week. Overall, we expect overall volumes in the market to pare and market participants to take positions in Treasury bonds as has been witnessed over the past few weeks.
Similarly, trading in the Treasury bonds secondary market was bullish as the average yield pared by 67bps to settle at 12.3%. There were yield declines recorded across the market, save for on one instrument – 16.2499% APR-2037. The 15.54 13-FEB-2020 (-462bps) and 16.2884% MAR-2027 (-112bps) instruments recorded the largest declines in yields, while the 16.2499 18-APR-2037 bond recorded a 3bps increase in yield.
Also, the DMO will be holding a PMA Treasury bonds auction on Wednesday the 20th of November for three instruments – 12.75% FGN APR 2023, 14.55% FGN APR 2029, and 14.80% FGN APR 2049 -, which will all be offered through re-openings.
The recent restrictions to trading in the Treasury bills market have continued to drive volumes in the Treasury bonds market, as investors have continued to seek out higher-yielding instruments. We expect this pattern to continue over the coming week, and so expect the average Treasury bonds yield to pare.
Nigeria’s FX reserves continued its descent, declining by USD87.31 million WTD (13 Nov 2019) to USD40.08 billion – the lowest since 19 January 2018. Despite the abscence of the CBN’s interventions, the naira appreciated by 0.1% WTD to NGN362.58/USD at the I&E window but closed flat at NGN360.00/USD at the parallel market.
Elsewhere, total turnover at the I&E window declined by 4.7% WTD to USD1.29 billion, with trades consummated within the NGN310.00 – 363.50/USD band. In the Forwards market, the naira strengthened across all contracts – 1-month (+0.1% to NGN365.89/USD), 3-month (+0.7% to NGN370.73/USD), 6-month (+1.1% to NGN380.50/USD) and 1-year (+3.0% to NGN397.92/USD).
Looking ahead, we expect sustained CBN’s intervention to keep the naira resilient in the short to medium term. Thus, our estimate suggests no naira devaluation in 2019.
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