Nigeria Outlook H2-2021: Walking a Slippery Slope

Executive Summary

Global Economy: Strong but uneven recovery

2021 was tagged the year of return to normalcy, and we highlighted that growth across countries would remain uneven due to differing wealth of nations. Large swathes of that forecast have proven to be right. The forecast that more affluent countries would recover stronger from the pandemic never appeared more accurate, thanks to the combination of accommodative fiscal and monetary policies. Although the global economy’s outlook appears greener, global expansion remains heavily dependent on successfully overcoming the Covid-19 health crisis, as the virus remains a threat. As of the time of writing, there have been 169,597,415 confirmed cases of COVID-19, including 3,530,582 deaths, as reported by the World Health Organisation (WHO). A 3rd wave of the pandemic, led by a new, more-infectious “Delta” variant, has emerged in various pockets of the globe, prompting the reintroduction of lockdowns. Furthermore, while the vaccination story has been largely positive, vaccination rates remain broadly uneven across regions. Despite 3.6 billion vaccine doses administered globally, only one in ten people in lower-income countries have received at least a dose of the vaccine.

The rebound in global economic activity has triggered discussions of an overheating economy as inflationary pressures intensify. In June, the US inflation estimate printed at 5.4%, the highest pace of increase in 12 years, running ahead of the US Federal Reserve’s (US Fed) average inflation target of 2.0%. However, the US Fed has tagged these inflationary pressures as temporary effects of the economy reopening after pandemic- induced lockdowns. Nevertheless, it has stated it will be open to reviewing its monetary policy should inflation continue to spiral out of control. Notably, inflationary pressures have accelerated monetary policy normalisation in emerging markets like Brazil, Russia, and Turkey. Nonetheless, the sustainability of economic recovery in H2-2021 will largely determine monetary policy direction, which will be a crucial driver of financial market performance.

As countries continue to scale up vaccination programs, global growth is expected to remain robust. The International Monetary Fund (IMF) projects global GDP to expand by 6.4% in 2021, after an estimated contraction of -3.3% in 2020, an improvement on estimates earlier in the year. The global recovery will likely remain divergent as Advanced Economies are forecast to lead at 5.1%, while Emerging Markets and Frontier Markets (except China) are expected to lag, as a result of varying vaccination efforts and capabilities. However, we remain cautiously optimistic that under-vaccinated regions will receive significantly higher vaccine batches in H2-2021 from global initiatives (the most noteworthy of which is COVAX) aimed at addressing the problem of inequitable vaccine access.

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Sub-Saharan Africa: Treading a recovery path

The Sub-Saharan Africa (SSA) region, forecast to be the world’s slowest growing region in 2021, performed in line with expectations in H1-2021 as SSA economies embarked on the path of recovery from the previous year’s pandemic-induced slump. In our outlook report for FY-2021 titled “A Shot at Recovery”, we stated an expectation of a decent but varied recovery for the region in 2021, underpinned by improvement in exports, commodity prices and travel as key growth drivers in line with a recovery in global demand from the synchronized, devastating impact of the Covid-19 pandemic. We also noted that the virus and related economic restrictions will remain a significant threat to full economic recovery due to the region’s limited access to vaccines.

However, the slow-paced rollout of vaccines on the continent remains a downside factor that could potentially derail/prolong the region's recovery. SSA has lagged other regions in terms of vaccinations, although inoculations in some countries, including Angola, Ghana, Kenya, Nigeria, and South Africa, have picked up in the last quarter. Nonetheless, the region is significantly under-vaccinated, with an IMF estimated average of less than 1 vaccinated adult in every 100, compared to about 30 in advanced economies. This is largely a result of heavy reliance on sluggish external donations for the supply of vaccines, a consequence of limited fiscal power across SSA economies, which was further weakened by the pandemic. Besides procurement challenges, the poor and inadequate level of infrastructural development means that African countries also face storage and logistical bottlenecks as well as inefficient supply chains, leaving the region susceptible to new waves of infections and variants of the virus. Notably, the number of daily new Covid-19 cases in SSA spiked in June-2021, led by South Africa and Namibia, foreshadowing a 3rd wave of the pandemic.

Clearly, SSA is on the road to recovery from the pandemic; the problem now lies in clawing back from the economic damage – particularly to individuals and households. The African Development Bank (AfDB) estimates that the pandemic drove c.30.0m Africans into extreme poverty in 2020, with c.39.0m more likely to fall into extreme poverty in 2021. Reversing this will be significantly harder for countries with high fiscal deficits like Ghana (16.0% of GDP), Zambia (13.9% of GDP) Kenya (8.4% of GDP) and Nigeria (5.8% of GDP), where debt must be brought back to more sustainable levels. Nonetheless, our outlook for an economic rebound in the region in 2021 remains intact, although the increased risk of a 3rd wave of Covid-19 infections as well as the region's challenges with vaccination, insecurity, political instability, climate-related shocks, and credit access pose significant downside risks that threaten to elongate the recovery.

Nigeria: Walking a slippery slope

In our January outlook titled “A Shot at Recovery”, we predicted that the economy would recover (by 1.7% to 2.0%) from the previous year's recession in 2021, boosted by full

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economic reopening, increased economic activity, and modest improvements in the oil market. We also expected structural factors such as illiquidity in the foreign exchange market and probable increases in energy prices to keep the overall price level elevated. Interestingly, economic activities began to rebound as of Q4-2020. Over the last 6 months, Nigeria has continued to make solid progress in its fight against Covid-19 outbreak. As of H1-2021, Nigeria received 3.9m of the 16.0m doses of the Oxford/AstraZeneca COVID-19 vaccine pledged by the COVAX facility. In addition, Nigeria also received 100,000 doses from the government of India, bringing total vaccine doses received to 4.0m doses according to the National Primary Health Care Development Agency (NPHCDA). So far, according to NPHCDA, as of June 29, Nigeria has administered 3.4m doses in two rounds of vaccination, of which 2.2m people have received the first dose while 1.2m have received a second dose (0.6% of total population). That said, Nigeria continues to record Covid-19 cases daily with total cases recorded printing at 168,867 cases as of 13-Jul. Nevertheless, unlike events in countries such as India, Nigeria appears to have flattened the curve of the pandemic. This has not only emboldened the authorities to push forward with the reopening of the economy but as also hastened the road to recovery as Q1-2021 GDP came in at 0.5%.

Looking ahead, a myriad of factors will shape the trajectory of the Nigerian economy in H2-2021. First, developments around Covid-19 infections and vaccination rates will determine if economic growth garners pace. Also, the success of the FG’s external debt issuance plans is critical for the FG’s ability to finance its budgetary obligations and for improved USD flows, stronger FX reserves and consequently, the exchange rate. The subsidy program, which is expected to last till Oct-2021 is also key to watch as the rising cost of subsidies (estimated at over N100.0bn/month) continue to weigh on FG’s finances. Furthermore, the Monetary Policy Committee (MPC) will be meeting three times before the end of H2-2021. The committee’s decision on the monetary policy rate at these meetings would be a key factor to watch in the second half of the year.

Overall, we raise our GDP forecast for FY-2021 to 3.1% y/y from our prior forecast of 2.1% y/ y, with rapid economic growth of 7.4% y/y and 4.4% y/y in Q2-2021 and Q3-2021. The upward adjustment to our GDP forecast reflects the faster than expected recovery in economic activities, as well as the low base impact of 2020. Despite continued inflationary pressures, we expect the high base effect of H2-2020 to create an inflection point for consumer prices, causing the headline rate to continue trending downward. Lastly, we expect to see sustained stability in the FX market as oil prices are expected to remain strong while the upcoming Eurobond issuance is expected to support external reserves. Certainly, downside risks abound, mostly tied to the key factors highlighted above, but also due to the rising insecurity bedevilling the country. We express concerns that failure to stem the recent tide of instability could lead to a country-wide breakdown, disruption of economic activities, destruction of oil installations and weakened investor sentiments. Thus, the government’s action or inaction regarding the security situation would be a critical factor to watch. 5 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope

Naira Assets: Yield reversal sets tone for financial markets

True to our expectations, albeit surging faster than initially projected the yield environment reversed higher in H1-2021, setting the tone for financial market performance. Stop rates at primary market auctions in H1-2021 rose sharply through the auctions due to investors’ demand for higher rates and FG’s huge fiscal deficit financing needs amidst tight liquidity in the financial system before moderating following strong investor demand for bills amidst limited offering by the apex bank. At the bond markets, the narrative was similar as average yield across the yield curve climbed 617bps YTD to 11.3% as of Jun-2021, from 5.1% at the end of 2020. Consequently, Nigerian sovereign bonds underperformed peers in emerging markets, as the S&P/FMDQ Nigeria Sovereign Bond index has lost 21.1% YTD, compared to a YTD loss of 2.9% on the JP Morgan EM Government Bond index.

In the equities market. the Nigerian stock market, which kicked off the year with some of the bullish momenta from 2020, gaining 5.3% in Jan-2021, subsequently reversed as various drags, particularly the yield reversal, weighed on sentiments. Accordingly, the equity market has slumped 5.9% YTD, closing at 37,907.28 index points at the end of H1-2021. Although q/q, the NSE ASI shed 8.7% in Q1-2021, the bleeding eased somewhat in Q2- 2021 as the market gained 2.8% q/q.

Following evaluation of the several factors expected to shape the financial markets in H2- 2021, we harmonise these factors and provide our expectations for the equities market and the yield environment as well as our preferred strategies. We expect to see periods of oscillation in the yield environment, albeit with an overall downward bias. Our expectation is built on three key factors; improved system liquidity via instrument maturities, deployment of financial repressive tactics by sovereign debt managers and status quo stance on monetary policy. That said, despite our expectation of a moderation in fixed income yields, we do not see a rate crash similar to that of 2020. As a result, we expect demand for fixed income instruments to remain upbeat particularly among domestic investors, limiting prospects for improved flows to risk assets like equities.

For equities, our prognosis for the Nigerian stock market in 2021 is a lukewarm, sideways movement in the equities market with a bearish bias. We do not expect to see any major negative drag on the equities market in H2-2021. However, we do not see a positive catalyst in the near term. On a balance of factors, we expect developments in the yield environment to outweigh other possible market triggers. Thus, despite positivity from oil price uptrend, economic recovery, and calm on the Covid front, we expect relatively attractive fixed income instruments to capture investors’ focus in H2-2021.

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Analysts

Ayorinde Akinloye [email protected]

Ebitonye Atte [email protected]

Ayooluwa Aseweje [email protected]

Oluwakemi Afolabi [email protected]

Team [email protected] +234-1-631-7892

United Capital Plc

Securities Trading: [email protected] +234-1-631-7874

Investment Banking [email protected] +234-1-631-7883

Asset Management: [email protected] +234-1-631-7875

Trusteeship: [email protected] +234-1-631-7886

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Table of Content Global Economy ······································································································· 9

Strong but uneven recovery ········································································································· 10 US Outlook: Rebound in US activity a boost for global recovery ······················································· 12 Monetary and Fiscal Responses in 2021 ························································································ 16 Global Trade - Trade to recover in 2021, although rebound will be uneven…………………………………...17 Financial markets …………………………………………………………………………………………………………..18 Sub-Saharan Africa ································································································· 22

SSA Macro Overview: Treading a recovery path ············································································ 23 Fiscal and Monetary Policy Response and Outlook ········································································· 24 Growth Outlook: Can the region rise above its challenges? ····························································· 26 Eurobond Market: Business as usual? ······························································································ 28 SSA Equities: Recovering from the pandemic-induced slump ··························································· 29 SSA Currency Market: Divergent realities ······················································································· 30 Domestic Macro and Policies ··················································································· 34

H1-2021 Macroeconomic Review: Walking a slippery slope ······························································ 35 What to watch out for in H2-2021 ·································································································· 37 Output growth: Low base effect to magnify recovery ····································································· 39 Price level: High base effect to drive inflation to inflection point in H2-2021 ······································· 41 Monetary policy: A bias for unorthodox tools to prevail ··································································· 42 Budget Performance: Ambitious but cash-strapped ······································································· 44 Capital flows and Foreign Exchange rate: Rate convergence, a strong possibility in H2-2021 ·············· 46 Financial Markets ···································································································· 49

Fixed Income: Rate reversal on full throttle······················································································ 50 Equities: Nigerian equities not invited to the rally ············································································· 56 Sectors ··················································································································· 66

Agricultural Sector ······················································································································· 67 Banking Sector ··························································································································· 69 Consumer Goods Sector ············································································································· 75 Cement Sector ··························································································································· 78 Oil & Gas Sector ························································································································· 81 Disclosure Appendix ································································································ 88

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Global Economy

Strong but uneven recovery

2021 was tagged the year of return to normalcy, and we highlighted that growth across countries would remain uneven due to differing wealth of nations. Vast pockets of that Despite 3.6 billion forecast have proven to be right. The forecast that more affluent countries would recover vaccine doses stronger from the pandemic never appeared more accurate, thanks to the combination administered globally, of accommodative fiscal and monetary policies. The International Monetary Fund (IMF) only one in ten people projects global GDP to expand by 6.4% in 2021, after an estimated contraction of -2.4% in in lower-income 2020. countries have

received at least a Although the outlook for the global economy looks greener, global expansion is still dose of vaccine, with heavily reliant on successful navigation of the global health crisis, as the threat of the virus the SSA region lagging remains prominent. As of the time of writing, there have been 169,597,415 confirmed severely. cases of COVID-19, including 3,530,582 deaths, as reported by World Health Organisation (WHO). Furthermore, while significant progress continues to be recorded in the production and administration of vaccines, vaccination rates remain broadly uneven across different regions. Despite 3.6 billion vaccine doses administered globally, only one in ten people in lower-income countries have received at least a dose of vaccine, with the SSA region lagging severely. Also, the recent surge in new cases in India and other Southern Asian countries has become a cause for concern.

Figure 1 Global growth expected to be divergent in 2021 Forecasted regional growth in 2021 8.60%

6.40% 6.00% 4.60% 4.40% 4.40% 3.70% 3.40%

Emerging and US Latin America Emerging and Euro Area Middle East SSA developing and developing and Centrla Asia Caribbean Europe Asia

Regions Global

Source: Bloomberg. IMF

Economic recovery, like the vaccine narrative, has been uneven among regions and countries. Wealthier nations have been able to get a substantially greater number of Global growth is doses to inoculate their population, allowing for faster easing of restrictions, while their expected to print at wealth has also enabled massive stimulus to aid recovery. 6.4% y/y, a stark contrast to SSA’s 3.4% That said, our views are in line with the IMF’s projections which forecasts divergent growth y/y growth projection. across regions. For example, global growth is expected to print at 6.4% y/y, a stark contrast to SSA’s 3.4% y/y growth projection.

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Covid-19 vaccination progress: Wealthier nations lead the way

The world has commenced the most widespread mass vaccination effort in history with the rollout of Covid-19 vaccines. Since the outbreak of the pandemic, it has been clear ...slower vaccination that a return to normalcy will be impossible without adequate vaccine administration. Per rollouts could lead to the science, reports have suggested that about 70.0% of the general populace must be further mutations of the vaccinated to reach herd immunity. That figure is now thought to be higher, with some virus which could be sources putting it at 85.0%. Overall, it has become more challenging to pin down the more infectious or vaccination ratio required to achieve herd immunity. However, what is apparent is that more resistant to the slower vaccination rollouts could lead to further mutations of the virus which could be available vaccines. more infectious or more resistant to the available vaccines.

Meanwhile, vaccine distribution has been vastly uneven, with 82.0% of vaccines going to high- and middle-income countries. A report from the United Nations (UN) shows that 75.0% of vaccines have gone to just ten (10) countries. In contrast, the poorer nations of the world have received 0.3% of total vaccines orders with Africa receiving for under 3.0% of its population.

Figure 2 Richer Continents have given out more jabs Share of pop. fully or partly vaccinated against Covid-19 as of Jun-30

North America 42.7

Europe 41.4

South America 29.5

Asia 24.1

Oceania 17.5

Africa 2.5 % of population

Source: Our World In Data, United Capital Research ...inequitable vaccine The UN has provided guidance to the world’s wealthier countries of the potential fallout access could also limit of inequitable vaccine distribution, including mutations of the virus that could global growth and compromise vaccine efficacy and forced extension or reintroduction of pandemic- trade, as certain related restrictions. If the divergence persists, it could also limit global growth and trade, countries will remain as certain countries will remain high-risk. To combat the problem of inequitable vaccine high-risk. distribution, several international attempts have been launched to ensure vaccines get distributed to the most impoverished regions of the globe. The most prominent of these is COVAX, an international partnership led by the Coalition for Epidemic Preparedness Innovations (CEPI), Gavi, the Vaccine Alliance, and the World Health Organisation (WHO). The primary goal of COVAX is to support vaccine development, procurement, and distribution globally, with the initial purpose of procuring and distributing enough

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doses to vaccinate up to 20.0% of the populations in 92 low- and middle-income countries.

Thus far, over 100 countries have started to receive doses through COVAX, with these Despite the advances deliveries set to expand further over the coming months. Despite the advances so far, so far, COVAX faces COVAX faces several challenges to meeting its goal, including a significant funding gap. several challenges to The initiative has received commitments of approximately $8.5bn to date but estimates it meeting its goal, needs at least $11.5bn through 2021 to achieve its goal. including a significant

funding gap. US Outlook: Rebound in US activity a boost for global recovery

The US, benefiting from its wealth and well-established supply chain and infrastructure, has bought enough vaccines to inoculate its entire population twice over. This makes it one of the leaders in global vaccine production and distribution. Unsurprisingly, it has pledged 80.0mn vaccines in-kind to poorer countries across the globe. Thus, the rapidly improving vaccination program continues to support relaxation of pandemic-induced restrictions as well as reopening of the economy.

Domestically, the change of guard in the White House has not affected its strong economic recovery nor the bullish run in its markets. Since the start of the Biden administration, financial markets and commodity markets have continued to remain stable with improved pace of recovery, partly due to rebound in demand and relaxation of restrictions. Unsurprisingly, the US, which accounts for a significant portion of global household demand, has played a considerable part in the global recovery progress.

Although the pandemic forced the US economy to contract by 3.5% y/y in 2020, the continued rollout of fiscal support through stimulus packages coupled with accommodative monetary policy have supported a swift rebound. On fiscal policy, the Biden administration unveiled the American rescue Act of 2021, a headline $1.9tn stimulus package which included $1,400 direct payments including $500 per child.

Overall, the US economy expanded at an annualised rate of 6.4% q/q in Q1-2021, The US, benefiting following an annualized 4.3% q/q expansion in Q4-2020. Providing further perspective, the from its wealth and unemployment rate has declined from the peak of 14.8% in Apr-2020, to 5.9% in Jun-2021, well-established albeit still above pre-pandemic levels. In addition, retail sales have begun to spike, supply chain and growing 18.0% y/y in Jun-2021. infrastructure, has bought enough vaccines to inoculate its entire population twice over.

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Figure 3 Unemployment still remains above pre- Figure 4 Retail sales have continued to spike pandemic levels US retail sales US employment rate 700,000 16.0% 650,000 12.0% 600,000

Hundreds 8.0% 550,000

500,000 4.0% 450,000

0.0%

Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21

Jan-20 400,000

Jan-20

Apr-20

Jul-20

Oct-20

Jan-21 Apr-21

The rebound in US Source: www.census.gov, U.S Bureau of Labor Statistics economic activities The rebound in US economic activities has triggered discussions of an overheating has triggered economy as inflationary pressures intensify. In June, the US inflation estimate printed at discussions of an 5.4%, the highest pace of increase in 12 years, running ahead of the US Federal Reserve’s overheating (US Fed) average inflation target of 2.0%. However, the US Fed has tagged these economy as inflationary pressures as temporary effects of the economy reopening after pandemic- inflationary pressures induced lockdown. Nevertheless, it has stated it will be open to reviewing its monetary intensify. policy should inflation continue to spiral out of control.

One pertinent issue which would still need solving is the US’s external trade policy. In our FY-2021 outlook document titled “A Shot at Recovery”, we highlighted that the Biden and his administration would adopt a more diplomatic approach to trade, differing from his predecessor’s abrasive approach to external trade, particularly with the ongoing trade dispute with China. The United States’ trade deficit with China is at record levels, owing to the pandemic after it softened restrictions on Chinese medical products to allow them to The United States’ come into the US. trade deficit with

China is at record Uncertainty persists regarding the outlook for US-China relationship. Its implications levels, owing to the (positive or negative) could have significant impact on global trade flows and circulation pandemic after it of funds, potentially creating tension and hindering global economic growth, as seen in softened restrictions 2019. In our view, that the relationship between both parties will likely remain frosty in H2- on Chinese medical 2021. Despite the change of guard in the White House, there have been bipartisan efforts products to allow on both sides of the political spectrum to curb China's growing influence. The recently them to come into passed Strategic Competition Act of 2021, which received bipartisan support, looks to the US. counter China’s growing influence globally by allowing the US to exert soft power through the administration of aid and fiscal support to developing countries and developmental projects globally. The US has also placed further sanctions on seven Chinese supercomputing companies and five Chinese telecoms companies, citing national security concerns

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Eurozone Review and Outlook According to data from Eurostat, the eurozone economy shrunk by an estimated 6.9% y/y in 2020. Europe maintained some recovery in Q3-2020, following the relaxation of The Euro Area pandemic-induced lockdowns. In addition, the rebound in economic activities in Asia economy is expected and America, as well as pent-up demand, supported recovery in European exports and to expand by 4.9% in consequently, manufacturing, as shown in H2-2020 PMI estimates. However, the relaxation 2021 and 4.4% in 2022. of restrictions triggered a second wave of Covid-19 infections in Q4-2020, disrupting economic activities, prompting renewed shutdowns in some areas.

Figure 5 Manufacturing PMI in Europe has rebounded faster than Services PMI Manufactuing PMI vs Services PMI in Europe 70.0 60.0 50.0 40.0 30.0 20.0 10.0

0.0

Jul-18 Nov-19 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21

EU Manufacturing PMI EU Services PMI

Source: IHS Markit, United Capital Research

The ECB has hinted that it would maintain an accommodative monetary position to provide support for the Euro Area economy. According to the ECB, the Euro Area economy is expected to expand by 4.9% in 2021 and 4.4% in 2022. It anticipates that the broader EU economy would recover to pre-pandemic levels in Q2-2022, bolstered by continued monetary and fiscal support, swift relaxation of containment measures, improved vaccination rates, improved consumer confidence and robust recovery in foreign demand. Recovery in domestic demand and private consumption would also be a key driver of recovery in the Euro Area.

Emerging Market Review and Outlook

The IMF expects Emerging Markets (EMs) to grow by 6.7% in 2021, after expanding at an estimated 2.0% in 2020. In 2021, growth in the Chinese and United States economies are expected to be significant tailwinds for EMs in 2021. This would drive exports and accelerate fund flows as Central Banks in developed countries continue their fiscal and monetary support. However, the near team for EMs in 2021 remains lukewarm, on the back of rising Covid-19 cases in Russia, India, and South Africa. On monetary policy, EM economies have exhibited slightly divergent stances. This divergence can be attributed to the various degrees of recovery and price increases across their various economies.

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Figure 6 Inflationary pressures have caused some EM countries to tigthen Select Emerging Markets Interest rate changes in 2021 (bps)

South Africa

Russia

India

Turkey

Brazil

0 50 100 150 200 250

Source: Bloomberg, United Capital Research

The need to rein in inflation has brought forward monetary policy normalisation in Russia, where the central bank has raised its policy rate by 125bps to 5.5% and signaled further hikes. Similarly, the Central Bank of Brazil has raised interest rates three times in 2021, citing The need to rein in inflationary pressures. The annual inflation rate came in at 8.1% in May-2021 well above inflation has brought the bank's target range of 2.3% to 5.2%. In Turkey, the central bank hiked rates by 200bps, forward monetary following rising inflation, ailing exports, increased capital outflows and a currency policy normalisation. devaluation. Inflation for May-2021 printed at 16.6%. In contrast, inflation remains within the target band in South Africa. The South African Reserve Bank (SARB) had earlier declared that its outlook for interest rates was upward in its March meeting, following the drop in cases and the positive outlook. However, at its June meeting, that outlook had dampened, following the third wave of infections in Africa’s most industrialized economy. Lastly, in India, the central bank has cited its preference to keep monetary policy accommodative for as long as necessary to support the economic recovery and to help mitigate the negative impact of the pandemic.

In 2020, the pandemic outbreak raised debt sustainability issues as fiscal deficit to GDP expanded to 9.8% in EM economies. This was a result of forgone revenue, ailing tax

Figure 7 Fiscal defict to GDP will improve going forward Emerging Market debt to GDP (%) 2019 2020 2021 2022 2023 2024 2025

-4.7 -5.2 -5.6 -6.1 -6.7 -7.7

-9.8

Source: IMF, United Capital Research 15 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope

receipts and increased fiscal intervention programs. Nevertheless, average fiscal deficit to GDP is expected to return to pre-pandemic levels in 2026. The key downside risk The key downside risk for EMs in 2021 is the rising yield environment in developed markets for EMs in 2021 is the even as the US Fed & ECB have consistently declared that continue monetary easing will rising yield continue until their economies have fully recovered. That said, monetary policy environment in normalisation could lead to narrowing spreads in interest rates, forcing EMs to respond in developed markets order to defend fund flows in 2021. This could be problematic for some EMs defending fiscal imbalances on the back of fragile recoveries.

Figure 8 EM Inflows have improved in 2021 EM Flows- debt and equity in MN USD

100 80 60 40 20 0 -20 -40 -60 -80 -100

Equity Debt EM flows

Source: Institute of International Finance (IIF), United Capital Research

Monetary and Fiscal Responses in 2021 As the global economy gains traction in the post pandemic era, fiscal stimulus appears to be cooling off. However, most central banks have continued to adopt easy monetary policies, as they are wary of the potential downside effects that tightening too early would have on an already fragile recovery. Nevertheless, increased monetary support has caused concern of overheating across markets even as central banks remain less Fiscal support is concerned about the potential of inflationary pressures, which are still being regarded as estimated at 3.3% of a transient phase rather than a structural phenomena in the rhetoric of major central GDP in 2021, with most banks. Moreover, growth remains fragile, and tightening earlier could hamper the fragile schemes expected to recovery. be phased out in 2021

and reversed by 2022 Building on broad-based expansionary monetary policy actions in 2020, we expect the policy stance in major economies to remain dovish as countries recover from the damage caused by the virus. In the US, the Federal Reserve (the Fed) has remained steadfast about its monetary policy, hinting to markets that until its economic objectives, which include full recovery, are achieved, monetary policy will remain accommodative. This is evident in the Fed’s decision to continue its $120.0bn bond-purchasing program. At its April meeting, the Fed made these decisions, despite record inflation in the US, induced by increased consumer spending and rebound in economic activities. The expected inflationary pressures have led to selloffs in the bond market while growth stocks have

16 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Global Economy

suffered bearish sentiments in the wake of rising yields.

In the Euro Area, the European Central Bank (ECB) has maintained a similar posture on its monetary policy stance, highlighting that any change in inflationary pressures will affect The rhetoric amongst the bank’s dovish stance. The ECB also hinted at continuing its €1.9bn bond-buying major central banks program and the Pandemic Emergency Purchase Programme (PEPP), through Mar-2022. continues to toll along However, it would be dependent on how the pandemic and respective vaccination the lines of inflationary programs play out. pressures being a transitory phase The Bank of England (BOE) kept its policy rate at 0.1% at its May-2021 MPC meeting, instead of a structural stating that its accommodating policy stance is required to boost growth in the UK. The phenomenon strength of the recent recovery remains questionable, particularly as inflation remains weak at 0.1%, below its 2.0% target. It also agreed to extend its corporate and government bond purchases of £895.0bn.

In China, the People’s Bank of China (PBOC) has retained its one-year Loan Prime Rate (LPR) at 3.9% for the 13th straight month while leaving the five-year LPR unchanged at 4.7% at its May meeting. The PBOC has asked banks to rein in activity on credit growth in specific sectors, as it has pledged to use other monetary tools to curb the chance of an overheating economy.

Following the pandemic, the IMF estimated that fiscal measures adopted by governments accounted for an estimated 9.0% of the total global GDP in 2020. As a direct response to the lockdowns in Q1-2021, governments have increased fiscal support and packages, as well as additional spending transferred over from the previous year. Fiscal support is estimated at 3.3% of GDP in 2021, with most schemes expected to be phased out in 2021 and reversed by 2022. Notably, in the Euro area, its fiscal support program, its next-generation EU plan will run from 2021-2023, in a bid to repair the damage caused by the pandemic and as well as address already divergent growth within the EU even before the pandemic. The UK government has announced it has delayed its fiscal squeeze, as increased spending and tax cuts are expected to add £407.0bn to the UK economy until 2023.

Global Trade: Trade to recover in 2021, although rebound will be uneven The pandemic's unusual peculiarities ensured that governments' stringent lockdowns as well as demand and supply shocks, saw global trade decline by 9.0% y/y in 2020, according to the United Nations Conference on Trade and Development (UNCTAD). The low base effect from 2020, increased vaccination, and increased demand for Covid- related products led to a rebound in manufacturing activity in the last year., owing to the resilience of East Asian countries who were able to mitigate the effects of Covid-19.

17 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Global Economy

Although global trade has been growing since Q2-2020, trade in goods has risen quicker than trade in services. Trade in services is expected to lag, mainly due to the nature of these activities which are restricted by lingering movement restrictions. Overall, the US trade deficit with UNCTAD estimates that for Q2-2021, taking a cue from Q1-2021, global trade is estimated China is at record to have expanded by 4.0% q/q and 10.0% y/y. levels.

Overall, the outlook for global trade remains positive. However, the prospect remains predicated on certain factors, such as the developments of the US-China relationship, which helps predict and anticipate what we are to expect from both nations in the future. According to the World Bank, the US and China made up 23.0% of total global trade merchandise in 2020.

The United Nations Conference on Trade and Development (UNCTAD) expects the impressive rebound in Q1-2021 will expand into the rest of the year, driven by the continued strong export performance of East Asian economies. Regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) agreement between Asia and Pacific countries, whose early success in pandemic mitigation allowed them to rebound faster and capitalise on booming global demand for COVID-19 related products, is expected to play a key role in global trade recovery.

However, for H2-2021, downside risks remain, which could potentially alter the overall positive outlook. The uneven recovery seen in developing countries will affect total global trade, and ailing demand in these more impoverished regions will affect the aggregate trade balance. On the other hand, uneven vaccine administration could potentially hurt trade in services which continue to lag trade in goods. Amid the uncertainties, outlook for trade recovery remains strong for 2021 with UNCTAD projecting global trade will grow by 16.0% in FY-2021.

Financial Markets Global financial markets in 2021 have been largely bullish, supported by dovish fiscal and In H2-2021, the outlook monetary measures that bolstered liquidity and supported economic recovery, triggering for global stocks positive sentiment for stocks. However, in recent weeks, stocks have seen some selloffs as remains positive amid markets have been cautious of rising yields, induced by inflation concerns. Overall, key reopening of equity markets in the global space have recorded decent upticks in H1-2021. For context, economies, positive the DJIA (+14.2%), S&P 500 (+16.1%), tech-heavy Nasdaq (+14.2%) and STOXX Europe 600 vaccine news and the (12.7%) show the strength of American and European markets in H1-2021. In addition, the rebound in household gains in the MSCI Emerging market index (+5.4%) shows the decent strength of emerging spending market equities during H1-2021. Overall, the MSCI World Index has gained 13.0% reflecting the bullish sentiments across global equities.

In H2-2021, the outlook for global stocks remains positive amid reopening of economies, positive vaccine news and the rebound in household spending, which brightens the outlook for household expenditure. Although we expect government fiscal programs and

18 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope

interventions to be reduced in H2-2021, a dovish monetary stance expected to be sustained throughout 2021 continues to brighten the outlook for stocks.

Figure 9 Stock markets have extended the rally from 2020

1.2 Major stock indcies performance

The IEA and OPEC 1.1 expect that any vaccine-related effects 1.0 will only impact demand in the second 0.9 Jan-21 Feb-21 Mar-21 Apr-21 May-21 half of 2021 MSCI World index MSCI Emerging market Dow Jones Nasdaq S&P FTSE 100 Euro STOXX Shangai 300

Source: Bloomberg United Capital Research

Oil Market Review and Outlook

2021 has been a relatively straightforward year for oil prices, following the effective rollout of vaccines and easing restrictions in OECD. Oil prices have averaged $65.2 p/b in H1- 2021, up 54.6% y/y from $42.4 p/b in H1-2020. OPEC+ members have also met monthly to set output targets to balance the crude oil market. Thus far, the market rebalancing exercise has paid dividends. This, coupled with the sustained economic recovery, has driven optimism in the oil market.

Figure 10 Brent rose higher than $75 per barrel in H1-2021 80.0 Brent vs WTI

60.0

40.0

20.0

Jun-21 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 0.0 Jul-20

Brent WTI

Source: Bloomberg, United Capital PLC,

The current Declaration of Cooperation (DOC) agreement, an agreement between OPEC and Non-OPEC members, has succeeded in maintaining price stability through compliance from its members. Demand for crude and crude products have also been boosted by increased manufacturing, as seen in PMI growth since Q4-2020. The global crude market has also been supported by positive transport data, an uptick in

19 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Global Economy

manufacturing activity and robust vaccination programs. In its May-2021 report, OPEC revised its global crude demand estimate to 96.46mbpd in 2021, from 90.5Mbpd in 2020.

Downside risks to the energy market remain the slowdown in the rollout of vaccinations We expect oil prices to and potential mutations, further tightening by developed central banks, a stronger trade in the range of greenback and a downturn in imports. Also, premature monetary tightening and fiscal $70/b-$75/b in H2-2021 drawback could weigh on economic recovery, leading to potential demand shocks in considering recent the oil markets in H2-2021. Overall, we remain bullish on oil prices as the possibility of these developments in the oil downside risk materialising is muted. However, the potentially discordant tunes between market the OPEC+ coalition, could lead to drop in prices occasioned by the threat of recklessness and cheating on output by members. For international oil markets, OPEC estimates that demand for energy will grow in H2-2021, the Zurich based organisation expects oil demand to grow to an average of 98.96mbpd in H2-2021, up 4.86mbpd or 5.0% from H1-2021 94.02mbpd. We expect prices to trade in the range of $70/b-$75/b in H2-2021 considering recent developments in the oil market.

Figure 11 We expect prices to trade in the $70/b-$75/b range in H2-2021 mb/d World oil balance and oil price US$/b

10.0 140.0

8.0 120.0

6.0 100.0

4.0 80.0

2.0 60.0

0.0 40.0

-2.0 20.0

Q1-08 Q2-09 Q3-10 Q4-11 Q1-13 Q2-14 Q3-15 Q4-16 Q1-18 Q2-19 Q4-21 Q3-20

World Oil Balance Brent Price

Source: OPEC, Bloomberg, United Capital Research

20 www.unitedcapitalplcgroup.com

Sub-Saharan Africa Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

Sub-Saharan Africa (SSA)

SSA Macro Overview: Treading a recovery path

The Sub-Saharan Africa (SSA) region, forecast to be the world’s slowest growing region in 2021, performed in line with expectations in H1-2021 as SSA economies embarked on the path of recovery from the previous year’s pandemic-induced slump. In our outlook report for FY-2021 titled “A Shot at Recovery”, we stated an expectation of a varied, divergent recovery for the region in 2021. This was underpinned by improvement in exports, ...SSA economies commodity prices and travel, in line with a recovery in global demand from the embarked on the path synchronized, devastating impact of the Covid-19 pandemic. We also noted that the of recovery in H1-2021. virus and related economic restrictions will remain a significant threat to full economic recovery due to the region’s limited access to vaccines.

The region saw marked improvement in trade, production, and a recovery in travel as governments across the world rolled back restrictions amid a massive vaccination push. Commodity prices (led by Oil) also built on their rebound in H2-2020, supporting the economic recovery of export-driven and resource-intensive economies. Just as eased restrictions paved the way for tourist flows into the region, global financial realities – low rates and elevated liquidity - remained supportive of capital inflows, including remittances, in line with fast paced recovery observed and expected across developed and emerging markets.

Figure 12 Ex. Gold and Cocoa, prices of SSA's key export items are up YTD YTD performance of SSA key export Items

41%

24% 24% 19%

8% 8% 2% 3%

-2%

-9%

Zinc

Gold

Brent

Wheat

Coffee

Cotton

Cocoa

Copper

P.metals Aluminum

Sources: Bloomberg, United Capital Research

However, the slow-paced rollout of vaccines on the continent remains a downside factor that could potentially prolong the region's recovery. SSA has lagged other regions in terms of vaccinations, although inoculations in some countries, including Angola, Ghana, Kenya, Nigeria, and South Africa, have picked up in the last quarter. Nonetheless, the region is significantly under-vaccinated, with an IMF estimated average of less than 1 vaccinated adult in every 100, compared to 30 in advanced economies. This is largely a result of heavy reliance on sluggish external donations for the supply of vaccines due to

23 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

limited fiscal power across SSA economies, which was further weakened by the pandemic. Besides procurement challenges, the poor and inadequate level of infrastructural development means that African countries also face storage and logistical bottlenecks as well as inefficient supply chains, leaving the region susceptible to new waves of infections and variants of the virus. Notably, the number of daily new Covid-19 cases in SSA spiked in Jun-2021, led by South Africa and Namibia, foreshadowing a 3rd wave of the pandemic. ...slow paced vaccine Figure 13 Africa has lagged severely in the vaccination race rollout in the region Share of pop. fully or partly vaccinated against Covid-19 as of Jun-30 remains a significant

North America 42.7 downside factor.

Europe 41.4

South America 29.5

Asia 24.1

Oceania 17.5

Africa 2.5 % of population

Sources: Our World In Data Amid numerous challenges, regional giants - Nigeria (Real GDP +0.5% y/y, -13.9% q/q)) and South Africa (Real GDP -3.2% y/y, +1.1% q/q) recorded some recovery in Q1-2021, reflective of positive offshoots from improved global economic activity, including higher oil and metal prices, and decent progress in containing Covid-19. Nigeria’s Q1 GDP numbers reflected slower growth relative to Q4-2020, while South Africa saw improved activity in Q1. Kenya, alongside Mauritius, Tanzania, Uganda, Ivory Coast and Ghana is expected to be among the region’s fastest growing economies, supported by improved tourism, policy stability, credit access as well as higher agriculture, manufacturing, and services sector output.

Fiscal and Monetary Policy Response and Outlook

The COVID-19 pandemic highlighted the highly limited fiscal headroom of most SSA nations to stimulate their economies in the event of economic disruptions. In H1-2021, the recovery and progress with vaccinations observed in advanced economies were largely driven by massive fiscal policy support, which is still supportive of high growth projections. In SSA, however, the dire fiscal situation meant that many countries were unable to sustain stimulus measures from the previous year, and more importantly, drive much- needed vaccinations necessary for moving past the pandemic. Governments in the region are anticipated to take on additional debt to aid recovery, even though not all have the sustainable fiscal means to do so. However, fiscal deficits in the region, which expanded significantly in 2020 to a record level of 5.8% of GDP (IMF), exacerbating debt challenges, are likely to shrink in the near to medium term. The IMF estimates a significant 24 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

shrinkage to 4.7% of GDP in 2021.

Figure 14 Fiscal deficits are likely to shrink in the short-to-medium term 5 Fiscal Balance (% of GDP) of SSA economies

0

-5

-10 2020 -15 2021e

-20

Mali

Niger

Benin

Chad

Kenya

Sudan

Nigeria

Ghana

Malawi

Guinea

Zambia

Ethiopia

Senegal

Uganda

Rwanda

Tanzania

Zimbabwe

Cameroon

CongoDRC

SouthAfrica

BurkinaFaso

Côted'Ivoire

SSAAverage

Madagascar

Mozambique CongoBrazaville Sources: IMF, United Capital Research

Clearly, SSA is on the road to recovery from the pandemic; the problem now lies in clawing back from the economic damage – particularly to individuals and households. The African Development Bank (AfDB) estimates that the pandemic drove c.30.0 million Africans into extreme poverty in 2020, with c.39.0 million more likely to fall into extreme poverty in 2021. Reversing this will be significantly harder for countries with high fiscal deficits like Ghana (16.0% of GDP), Zambia (13.9% of GDP), Kenya (8.4% of GDP) and Nigeria (5.8% of GDP), where debt must be brought back to more sustainable levels.

Figure 15 In 2021, IMF expects 21 SSA countries are to remain above its threshold for prudent debt levels Debt to GDP ratio viz. IMF' 60.0% prudent threshold 200.0%

150.0%

100.0%

50.0%

0.0%

Mali

Togo

Niger

Benin

Chad

C.A.R.

Eritera

Kenya

Liberia

Nigeria

Ghana

Gabon

Malawi

Angola

Burundi

Guinea

Zambia

Lesotho

Eswatini

Ethiopia

Senegal

Uganda

Gambia

Rwanda

Namibia

Mauritius

Tanzania

Comoros

E. E. Guinea

Botswana

Seychelles

Zimbabwe

Cameroon

SaoTome..

Congo,D.R.

SouthAfrica

Rep.Congo

SierraLeone

BurkinaFaso

SouthSudan

CaboVerde

Coted'Ivoire

Madagascar

Mozambique Guinea-Bissau Debt to GDP ratio, 2021 IMF's prudent threshold

Sources: IMF, United Capital Research ...debt must be brought back to more Notably, the G20’s Debt Service Suspension Initiative (D.S.S.I) may ease some of the debt sustainable levels. burdens of countries like Cameroon and Congo Brazzaville, with World Bank estimated savings of 0.7% of GDP and 1.5% of GDP, respectively. Albeit welcome, the initiative will be limited in effectiveness due to the enormity of the problem. Data from the IMF suggests that it expects 21 SSA countries to remain above its threshold for prudent debt levels in 2021. Public debt in Zimbabwe (IMF expects public debt to moderate to 51.4% of

25 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

GDP in 2021 vs 88.9% of GDP in 2020) and Liberia is expected to retreat to prudential levels while the debt-to-GDP ratio in South Africa and Ghana is expected to worsen. In these countries, driving economic recovery necessitates structural improvements coupled with improved expenditure efficiency and revenue mobilisation.

On monetary policy, Central Banks in the region were broadly accommodative in H1- 2021. Notably, Ghana’s MPC cut its policy rate by 100bps to 13.5% in May-2021, on the Central Banks in SSA heels of a 150bps cut in 2020. However, with inflation still galloping in most countries due remained broadly to increasing food and energy prices, it is evident that monetary authorities are running accommodative in H1- out of space. After the broad-based rate cuts in 2020, most nations – notably Nigeria, 2021. South Africa, and Kenya – have held policy rates constant YTD, while Mozambique (+300bps to 13.3%) and Zambia (+50bps to 8.5%) have begun to hike rates. Looking forward, we see a broader shift towards a hawkish tone from more SSA economies in H2- 2021, as macroeconomic realities struggle to justify extended forbearance.

Figure 16 SSA monetary authorities have been broadly accommodative Monetary policy rate decisions across SSA (bps)

Zambia +50 S/Africa Namibia Gambia Mozambique +300 -50 Uganda Nigeria Ghana -100 Mauritius Kenya Malawi Botswana Rwanda Morocco

2021 YTD 2020

Sources: Cbrates, United Capital Research

Growth Outlook Can the region rise above its challenges? Looking ahead into H2-2021, our outlook for economic recovery in the region remains intact. Although the increased risk of a 3rd wave of Covid-19 infections as well as the region's challenges with vaccination, insecurity, political instability, climate-related shocks, and credit access pose significant downside risks that threaten to elongate the recovery. The IMF estimates SSA to rebound from a contraction of 1.9% in 2020 to 3.4% growth in 2021, largely buoyed by spillovers from the stronger-than-expected global recovery in the form of recovering international trade, higher commodity prices, and a recovery in capital inflows and consumption. Our expectations are consistent with those of the IMF, as we anticipate that economic activity in the region will sustain the recovery from the slowdown that occurred in 2020. Notably, recent PMI figures as well as Q1-2021 GDP numbers from the region affirm the state of recovery.

26 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

Figure 17 PMI data shows that economic activity in the region is treading a recovery path Composite PMI 60

50

40

30

Jul-19 Jul-20

Jun-19 Jun-20 Jun-21

Apr-19 Apr-20 Apr-21

Jan-19 Jan-20 Jan-21

Feb-19 Feb-20 Feb-21

Sep-19 Sep-20

Oct-19 Oct-20

Mar-19 Mar-20 Mar-21

Nov-19 Nov-20

Aug-19 Aug-20

Dec-20 Dec-19

May-19 May-20 May-21

Nigeria South Africa Kenya Ghana Threshold

Sources: Bloomberg, United Capital Research

Nonetheless, recovery will be uneven across the region, with robust rebounds from the region's more diverse economies supporting growth while slower recoveries in larger countries such as Nigeria, South Africa, and Angola weigh on overall regional growth. We anticipate a decent rebound in South Africa’s output, owing in part to base effects – the economy contracted by 7.0% in 2020. In addition, we expect sustained recovery in Nigeria and Angola through the year, as both oil-intensive economies bask in the strength of the oil market. On the other hand, we expect the more-diversified economies – Ethiopia, Kenya, Ivory Coast, Tanzania – which were the least affected by the pandemic - to remain among the most resilient as economic activities rebound at strong velocity. Also, with the resumption of international travel, tourism-dependent economies which had the sharpest decline in 2020 are expected to stage strong rebounds in 2021. However, we expect the tailwinds from rising commodity prices to gradually ease off in H2 -2021, as commodities give back some of the recovery-related gains already priced in and supply chain disruptions normalize. SSA recovery will be

Figure 18 IMF growth projections for key SSA countries uneven and vary on a Recovery in sight for 2021 but below pre-COVID 19 era country-by-country 13 basis. 8

3

-2

-7

-12

Cameroon Angola Benin Ethiopia Ghana Guinea Kenya Nigeria Rwanda Senegal South Africa Tanzania Uganda Zambia Zimbabwe

2020 2021e 2022f

Sources: IMF, United Capital Research

27 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

We reiterate that the risks of a repeat wave of Covid-19, unexpected climate-related disasters, heightened insecurity and social tensions, weaker-than-expected tourist activities and remittances are all downside factors that could derail the growth outlook. On the upside, the bulk of vaccine orders from the COVAX facility and pandemic-related funding from the World Bank will be received in the region in H2-2021, suggesting that vaccinations will improve significantly. This could drive a better-than-expected recovery.

Financial Markets Eurobonds: Business as usual? The SSA Eurobond space returned to business-as-usual in H1-2021on the back of improved investor sentiment after the pandemic-induced intermission in external borrowing. In The region’s appetite addition, the region's appetite for foreign-denominated debt has risen in recent times as for foreign- a result of the need to service maturing obligations, finance large-scale infrastructure denominated debt has projects, and support economic recovery from the 2020 downturn. Notably, the latest risen in recent times. issuers in H1-2021 are Benin, Ivory Coast, Ghana, and Kenya.

Benin became the first African sovereign to issue a Euro-denominated Eurobond with its €1.0bn dual-tranche paper in February 2021, with 11.0 years and 31.0 years tenors and coupon rates of 4.9% and 6.9%, respectively. The issue was over-subscribed 3.0x, reflecting strong investor demand. Ivory coast also tapped into the market by reopening a dual tranche Eurobond slated for budget financing that raised $850.0m. The issue had a 3.4x subscription rate. Ghana, and more recently, Kenya also sold Eurobonds in H1-2021, with Ghana securing $3.0bn from an oversubscribed issuance in Q2-2021, despite its fiscal challenges, and Kenya raising $1.0bn. Furthermore, Nigeria is expected to return to the market in H2-2021 for another issuance.

Figure 19 SSA Eurobond yields re-priced lower towards pre-covid average in H1 Yield to maturity of outstanding SSA countries Eurobond

42.0%

32.0%

22.0%

12.0%

2.0%

Kenya

Nigeria

Ghana

Angola

Zambia

S/Africa

Senegal Ivory Coast Ivory

Dec-19 Mar-20 Dec-20 Jun-21

Source: Bloomberg, United Capital Research

At the secondary market, yields on most outstanding and new SSA notes re-priced slightly lower in Q1-2021, owing to the improved risk-on sentiments fueled by the recovery from the pandemic and significant appreciation in the value of key export items of individual 28 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

countries. However, Zambia (+13.5%) recorded a high increase in average Eurobond yields amid concerns of a widening fiscal deficit and deteriorating credit worthiness on the back of high debt levels, making Zambian Eurobonds the worst performing in the region. Notably South African and Ivorian Eurobonds were the best performing, with average yield falling by 0.8% and 0.7% respectively YTD.

Looking ahead, we believe there is still room for new Eurobond issuances in H2-2021. ...attractive valuations Although this is dependent on the sustainability of the improvements seen in both the and improved earnings external and domestic space, our optimism is supported by the improvement in foreign will support a bullish investors’ appetite for SSA Eurobonds at the secondary market. In addition, the global outing for SSA equities. financial system remains awash with liquidity due to the impact of extended accommodative monetary policy. Also, the need for most SSA economies to plug their fiscal deficits as well as refinance existing private debt obligations further buoys our position. However, we believe issuances will lag previous years owing to demand for higher premiums by the international market on EM and SSA papers (as inflation and treasury yields in developed markets continue to tick higher) and competition from cheaper concessional and multilateral financing.

At the secondary market, we have a more cautious outlook. We expect interest to be supported by the sustained strength in the value of key export items of individual countries, and the overall accommodative stance of Central Banks globally. However, the potential headwinds from tighter global financial conditions in form of a stronger US Dollar and higher US treasury yields is a downside risk for SSA Eurobonds in H2-2021.

SSA Equities: Recovering from the pandemic-induced slump In line with our expectation of a broad-based rebound, equities in SSA markets were largely bullish in H1-2021. Major benchmark indices in the region closed in the green, thanks to brighter economic recovery prospects, better-than-expected earnings releases, and strong currency performances. The Ghanaian benchmark index recorded the highest gains, notching a 36.8% return in the half-year, trailed by Zambia and Kenya, which posted sizeable 17.9% and 15.0% returns respectively. Notably, Nigeria’s NSEASI ended the half in bearish territory, down 5.9%, giving back some of the gains from 2020 on the back of rising fixed income yields. ...policy normalisation by systemically Looking ahead, with the global growth momentum still overwhelmingly positive and important monetary Central Banks maintaining accommodative postures, we see attractive valuations and authorities is a key improved company performances being supportive of a bullish outing for SSA equities in downside risk to SSA the second half of the year. However, we note that policy normalisation by systemically financial market important monetary authorities remains a key downside risk to bullish performance for SSA performance in H2- equities. 2021.

29 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

Figure 20 SSA equities saw a broad-based rebound in H1-2021 Equity Market Performance (in local currency terms)

36.3%

14.1% 13.1% 10.1% 11.5% 13.1% 12.2% 6.5%

-3.6% -5.9%

BRVM

Kenya

Nigeria

Ghana

S/Africa

Mauritius

Botswana Global Mkt Global

2020 H1-2021 Mkt Frontier Emerging Mkt Emerging

Source: Bloomberg, United Capital Research

SSA Currency Market: Divergent realities The foreign exchange conditions of SSA economies in H1-2021 showed divergent performances against the US dollar. While the positive performances reflect stronger inflows spurred by higher commodity prices, increased remittances, and tourism, the negatives reflect weakened reserves and persistent dollar shortages in some countries.

Notably, the Mozambican Metical (world’s best performing currency in the half-year) and the Uganda Shilling were among the region’s best performing currencies, appreciating ..SSA foreign 19.0% and 2.7%, respectively, on account of increased dollar liquidity driven by improved exchange commodity prices and production. Conversely, the Zambian Kwacha and the Nigerian circumstances will Naira notably suffered depreciation. In Nigeria, the Central Bank decided to officially improve in H2-2021 as Emerging and Frontier recognize the I&E exchange rate (of c.N411.0/$) as the economy’s official exchange economies recover Market equities to rate, from the prior N379.0/$, as the country finally took a long-anticipated step at unifying and portfolio thrive well come 2020 its exchange rates amid persistent dollar shortages and rising inflation. Meanwhile, low investments return. external reserves and tight liquidity amid high inflation, widening fiscal deficits and unsustainable debt levels continued to weigh on the Zambian Kwacha, as it depreciated 6.5% in the half year.

Figure 21 SSA currencies have shown divergent performances against the dollar YTD Performance against the USD as of 30th June 2021 20.0% 15.0% 10.0% 5.0% 0.0% -5.0%

-10.0%

Egypt

Kenya

Tunisia

Liberia

WAMU

Nigeria

Ghana

Gabon

Angola

Guinea

Zambia

Uganda

Namibia

Mauritius

Tanzania

Morocco

Zimbabwe

Cameroun

South Africa South

Sierra Leone Sierra Mozambique Source: Bloomberg, United Capital Research

30 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sub-Saharan Africa

In H2-2021, we expect broadly positive performances from regional currencies versus the US dollar as external (commodity demand and price recovery) and internal dynamics improve, and portfolio investments return. Concessional loans from the IMF and the World Bank should also help to boost local foreign exchange circumstances and external reserves.

Emerging and Frontier Market equities to thrive well come 2020

31 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope

Pan African Monitor

Macroeconomics | Equities | Fixed Income | Currencies | Commodities June 30, 2021 Px_Last CHG_PCT_1D CHG_PCT_WTDCHG_PCT_YTD PE_Ratio EQY_DVD_YLD_12MPx_to_book_ratio Equities Mcap ($'bn) WTD (local) YTD (local) P/E P/B Div. Yield BGSMDCBotswana Index 6,622.4 3.2 0.0 -3.6% 10.6 1.2 5.4% ICXCOMPBRVM Index 160.1 8.9 10.1% 13.6% 8.7 1.4 6.1% EGX30Egypt Index 10,256.6 23.4 -5.4% -1.8% 10.4 1.5 1.6% GGSECIGhana Index 2,643.7 10.5 36.3% 36.5% 15.7 1.4 nm NSEASIKenya Index 173.5 25.4 14.1% 17.4% 14.2 1.7 2.0% SEMDEXMauritius Index 1,865.2 5.6 13.1% 18.6% na 0.6 1.9% MOSENEWMorocco Index 12,409.2 70.0 9.9% 7.7% 32.5 2.6 3.7% FTN098Namibia Index 1,374.9 131.9 11.6% 7.7% 21.1 1.6 2.6% NGSEINDXNigeria Index 37,907.3 48.2 -5.9% -5.8% 12.8 1.8 5.3% JALSHSouth AfricaIndex 66,248.7 1,119.6 11.5% 9.3% 19.2 1.9 2.6% DARSDSEITanzania Index 1,985.8 11.2 9.3% 9.8% 11.5 1.0 5.1% TUSISETunisia Index 7,245.7 7.0 5.2% 5.9% 24.0 2.4 2.1% UGSINDXUganda Index 1,498.2 NM 14.4% 18.1% na na na LUSEIDXZambia Index 4,611.8 NM 17.9% 18.6% 2.3 0.2 7.7% ZHIALLSHZimbabwe Index 6,194.9 NM 135.0% 147.9% na na na MXWOGlobal Index Market 3,017.2 NM 12.2% 12.4% 29.5 3.2 1.7% MXFMFrontier Index Market 646.5 NM 13.1% 11.2% 16.3 2.2 2.6% MXEFEmerging Index Market 1,374.6 NM 6.5% 3.8% 16.8 1.8 2.0%

Dollar Eurobonds Amt Out ($'bn) Average YTM WTD YTD Movements in Global Indices Vs Africa 1.6 Angola 8.0 7.6% -1.41% 0.5% Egypt 30.2 5.5% 0.43% 0.0% 1.4

Ghana 11.0 7.1% 0.51% -0.2% 1.2 Iv ory Coast 4.6 4.6% 0.14% -0.7% 1.0 Kenya 6.1 5.4% 0.06% -0.8% Morocco 2.3 2.5% -0.14% -0.6% 0.8 Nigeria 11.2 5.7% 0.57% -0.5% 0.6 Senegal 2.9 4.9% 1.22% 0.3% Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 GHSSouth BGN Africa Curncy 20.0 4.0% -0.77% -0.8% MSCI World Frontier Markets Zambia 3.0 33.3% -1.76% 15.0% Emerging Markets MSCI Africa

Currencies (vs. USD) Spot Rate WTD MTD YTD 6M Forward 12M Forward AOAAngola BGN Curncy AOA: Kwanza 653.7 -0.4% 0.6% 0.1% na na XAFCameroun BGN Curncy XAF: Franc 555.1 0.1% -0.3% -3.7% 0.0 0.0 EGPEgypt Curncy EGP:Pound 15.7 0.4% 0.0% 0.5% 16.5 17.3 XAFGabon BGN Curncy XAF: Franc 555.1 0.1% -0.3% -3.7% 0.0 0.0 GHSGhana BGN Curncy GHS:Cedi 5.9 -0.4% -1.1% -1.4% 6.4 6.8 GNFGuinea BGN Curncy GNF: Franc 9,798.7 0.0% 0.2% 1.9% 0.0 0.0 KESKenya BGN Curncy KES: Shilling 107.9 1.2% -0.3% 1.0% na na LRDLiberia CMPN Curncy LRD: Dollar 171.5 0.0% 0.0% -4.2% 0.0 0.0 MURMauritius BGN Curncy MUR: Rupee 42.7 -6.9% -0.1% -7.0% na na MADMorocco BGN Curncy MAD: Dirham 8.9 -0.2% -0.2% -0.4% 9.0 9.1 MZNMozambique BGN Curncy MZN: Metical 63.6 -0.1% 0.4% 17.3% 0.0 0.0 NADNamibia BGN Curncy NAD: Dollar 14.5 -0.3% -1.3% 1.6% 0.0 0.0 NGNNigeria BGN Curncy NGN: Naira 410.5 -3.1% -0.3% -3.4% 442.9 468.5 SLLSierra BGN Leone Curncy SLL: Leone 10,255.8 0.0% 0.1% -1.5% 0.0 0.0 ZARSouth BGN Africa Curncy ZAR: Rand 14.3 2.9% -1.3% 1.6% 14.8 15.2 TZSTanzania BGN Curncy TZS: Shilling 2,317.0 0.1% 0.0% 0.1% 0.0 0.0 TNDTunisia BGN Curncy TND: Dinar 2.8 -3.2% -0.9% -4.0% na na UGXUganda BGN Curncy UGX: Shilling 3,560.0 -0.1% 0.0% 2.7% 0.0 0.0 ZMKZambia BGN Curncy ZMK: Kwacha 22,575.0 0.1% 0.3% -6.2% 0.0 0.0 ZWLZimbabwe CMPN Curncy ZWL: Dollar 85.5 0.0% -0.1% -4.4% 0.0 0.0 XOFWAMU BGN Curncy CFA: Franc 553.2 -3.2% -0.3% -3.5% na na Sources: Bloomberg, United Capital Research *GDP ($’b): Annual GDP by World Bank ** GDP Growth: Latest Quarterly y/y GDP Growth

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Domestic Macro and Policies Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

Domestic Macroeconomic Overview H1-2021 Macroeconomic Review: Walking a slippery slope In our January outlook titled “A Shot at Recovery”, we hinted that in 2021, we expect the economy to rebound (by 1.7% to 2.0%) from the prior year’s recession, buoyed by full economic reopening, increased economic activity and some improvements in the oil market. Also, we anticipated that structural factors such as FX market illiquidity and potential increase in energy prices may keep general price level elevated. Specifically, we projected headline inflation rate to peak at around 18.0% before pulling back from H2 -2021 barring policy backflips, as the high base effect kicks in. Again, we imagined that the CBN would begin to tighten its monetary policy stance, a move projected to result in a potential convergence of exchange rates across market segments and facilitate stability in the currency market. Interestingly, economic activities already began to rebound as of Q4-2020. According to the National Bureau of statistics (NBS), Nigeria’s GDP rebounded marginally from recession in Q4-2020, printing a 0.1% GDP growth.

Figure 22 Nigerian COVID Update Statistics as of Jun-29

Accommodative monetary policy and Source: Our World In Data reduction in new Covid

Over the last 6 months, Nigeria has continued to make solid progress in its fight against -19 infections spurred Covid-19 outbreak. As of H1-2021, Nigeria received 3.9m of the 16.0m doses of the economic recovery in Oxford/AstraZeneca COVID-19 vaccine pledged by the COVAX facility. In addition, H1-2021. Nigeria also received 100,000 doses from the government of India, bringing total vaccine doses received to 4.0m doses according to the National Primary Health Care Development Agency (NPHCDA). So far, according to NPHCDA, as of June 29, Nigeria had administered 3.4m doses in two rounds of vaccination, of which 2.2m people have received the first dose while 1.2m have received a second dose (0.6% of total population). That said, Nigeria continues to record Covid-19 cases daily with total cases recorded printing at 168,867 cases as of 13-Jul. Nevertheless, unlike events in countries such as India, Nigeria appears to have flattened the curve of the pandemic. This has not only emboldened the authorities to push forward with the reopening of the economy but as also hastened the road to recovery as Q1-2021 GDP came in at 0.5%.

35 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

On the contrary, developments in the socio-political landscape have worsened over the same period. While the war against insurgency had been on-going for years, insecurity across the country is now widespread. According to Control Risk (a special risk consultancy) survey, report of security incidents recorded in Nigeria from 26th April to 2nd Nevertheless, the socio of May 2021 alone indicated multiple cases of either killing, kidnapping, banditry, -political landscape shooting, robbery, invasion, clashes and rioting across the six geo-political zones of the remains heated as federation. insecurity concerns Figure 23 Report of security incidents recorded in Nigeria from 26 April – 2 May 2021 spread across the country.

Source: Control Risks

On the price environment, the headline inflation rate rose to a 19-Month high of 18.2% in Mar-2021, well above consensus expectation. The major drivers for galloping inflation rate remained the unabating security concerns, FX illiquidity, and planting season impacts. Relatedly, according to the recent labour force data released by the NBS, Inflation surged to a 19- unemployment rate in Nigeria worsened to 33.3% as of Q4-2020. While unemployment has month high of 18.2% as been steadily rising over the years, the recent Covid-19 pandemic has further food prices, transport exacerbated unemployment levels, with fiscal and monetary measures implemented to cost and health care support the economy inadequate to curb job losses. With headline inflation rate at 18.1% costs surged. and unemployment settling at 33.3%, economic misery in the country seemed to have worsened with misery index estimated at 51.4%. Simply put, this implies that more than 50.0% of the population are either grappling with economic hardship due to joblessness or extreme cost of meeting their daily needs.

36 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

Figure 24

Source: United Capital Research The above notwithstanding, currency market divergence amid liquidity issues remained the elephant in the room. FX reserves slid to $33.3bn as at 29-Jun as the CBN moved to The CBN moved to a meet a backlog of demand from 2020. Parallel market rate continued to be pressured fairer exchange rate amid weak intervention from the CBN. Meanwhile, the CBN moved to harmonise the I&E regime after it window rate and the official market rate to N411.0/$ in a bid to adopting a fairer recognised the I&E exchange rate regime. Clearly, the widening spread between official/I&E and parallel window rate as the market reflects renewed FX liquidity crunch. Accordingly, CBN moved to improve liquidity official exchange rate by introducing a N5 for $1 initiative to incentivize remittance inflow. As such, remittances for the economy. can now be received in cash or paid into domiciliary accounts in Nigeria. So far, the impact of the remittance strategy has been muted, hence, deadline for the initiative is currently indefinite.

What to watch out for in H2-2021

In H2-2021, the following factors will determine the direction of key macroeconomic variables:

Subsidy debate: Following the recent surge in crude prices, the landing cost of petroleum products into the economy has skyrocketed. This implies additional subsidy burden on the

37 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

FG after it announced it had resumed payment of subsidies to keep PMS at N162.0/litre. The subsidy program is expected to last for six months (till Oct-2021). That said, the rising cost of these subsidies (estimated at over N100.0bn/month) continues to weigh on the government's finances. Thus, the FG’s decision on whether to totally remove, partially remove or keep the subsidy payments will be critical to watch out for, given expected impact on inflation and government’s fiscal position.

Interest rate direction: The Monetary Policy Committee (MPC) will be meeting three times before the end of H2-2021. The Committee’s decision on the monetary policy rate at these meetings would be a key factor to watch in the second half of the year. Key economic variables that would influence their decision would include inflation trend and the strength of economic recovery. We expect the direction of the yield environment as well as the performance of the equities market in H2-2021 to be significantly shaped by policy rate direction.

External debt issuance: The Federal Government has indicated plans to explore the external debt market to finance its huge budget deficit. In line with this, the Executive got approval for $1.5bn and €995.0m worth of external debt financing from multilateral bodies. The FG has another pending approval for $6.2bn worth of external debt Interest rate direction, specifically to finance the 2021 budget deficit. The success of these external debt Vaccination progress issuances would be critical for improved USD flows, stronger FX reserves and consequently and Insecurity exchange rate. Lastly, it would also be critical for the fiscal authority's ability to finance its concerns are key budgetary obligations. issues to watch in H2- 2021. Covid-19 & Vaccinations: The evolution of Covid-19 infection and vaccination rates is another major element that will influence macroeconomic dynamics. Although, Nigeria appears to have flattened the curve with infection rates declining significantly, porous travel checks remain a concern, considering several countries continue to struggle with new variants of the virus. In addition, the snail-paced vaccination level remains a concerning factor in the event of renewed outbreaks. Thus, developments on this front must be closely monitored in H2-2021.

Insecurity concerns: The biggest elephant in the room is the security situation in the country. At the time of writing, insecurity concerns in different forms, from farmers/herders crisis in the Middle Belt, IPOB/ESN restiveness in the South East, renewed terrorist attacks in the North East to kidnappings and robberies across the entire country continue to dominate headlines. On the pessimistic side, we express concerns that failure to stem the tide could lead to a country-wide breakdown, disruption of economic activities, destruction of oil installations and weakened investor sentiments. Thus, government’s action or inaction regarding the security situation would be a critical factor to watch.

38 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

Domestic Output and Price Level Outlook Output growth: Low base effect to magnify recovery The Agriculture sector is

Our GDP growth forecast for H2-2021 is shaped by a myriad of factors, with each having expected to remain on differing impacts on several sectors of the economy. We examine these factors and the growth path. provide context on how they affect our outlook for the Nigerian macroeconomic landscape. First, in the agricultural sector, we reckon that the sector has been plagued with severe security challenges which continue to stifle farming activities in the country. Nevertheless, we highlight improved weather conditions in the first half of the year (relative to 2020) as well as sturdy food demand should sustain growth in the agricultural sector in 2021. That said, we think the earlier mentioned incessant insecurity issues could affect the sector’s productivity. Overall, we expect the agricultural sector to sustain growth in H2-2021.

For the services sector, we expect the common theme of low base effect (particularly in Q2-2020 and Q3-2020) to support y/y growth for the rest of 2021. Also, the largest component of the services sector, ICT, is expected to maintain its fast-paced expansion, even though we note the high base effect between Q2-2020 to Q4-2020 may moderate momentum. That said, we note the services sector may begin to develop some underlying weaknesses as key subsectors lose momentum. First, the strong growth momentum in the financial services sector for 2020 may not be sustained in 2021 due to a combination of high base effect from 2020 as well as wearing out effect of policies (such as the loan to deposit ratio) that supported growth in prior quarters. Overall, we expect low base impacts in subsectors like Real Estate, Education, Transport and Accommodation & Food Services to drive sustained recovery in the Services sector.

For the non-oil segment of the industrial sector, we expect the reopening of economic activities to bolster recovery in the key subsectors. For example, removal of movement Non-oil sector is restrictions and reopening of land borders would help improve fortunes of the trade expected to benefit subsector. In addition, the manufacturing and construction subsectors will benefit from reopening of the significantly from a reopened economy and removal of movement restrictions. Also, we economy. note the impact of a low base from 2020 would further magnify growth.

In the oil sector, we expect improved fortunes for FY-2021, hinged on improved oil production after a dip in production levels for 2020. We expect OPEC to sustain the relaxation on its output cap through the year as oil demand recovers. Also, the classification of Agbami oil grade, as condensate, implies Nigeria’s condensate production would improve while giving it further room to pump more crude since Agbami grade will be removed from its quota calculation. In addition, the low base for oil production in Q3-2020 and Q4-2020, following steep production cuts during those periods, will support growth.

39 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

Figure 25

...oil revenue in 2020 came under severe pressure

Overall, we expect the low base impact to Source: National Bureau of Statistics (NBS), United Capital Research magnify the level of economic growth in H2 Overall, we raise our GDP forecast for FY-2021 to 3.1% y/y from our prior forecast of 2.1% y/ -2021. y. The upward adjustment to our GDP forecast reflects faster than excepted recovery in economic activities.

40 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

Figure 26 The covid-induced low base for Low base from Q2-2020 and Q3- real GDP in 2020 is expected to 2020 would spur biased growth in drive accelerated economic Q2-2021 and Q3-2021 recovery Q/Q GDP Growth Y/Y GDP Growth 10.0% 10.0% 5.0% 5.0% 0.0%

0.0% -5.0%

Q1-20 Q1-19 Q2-19 Q3-19 Q4-19 Q2-20 Q3-20 Q4-20 Q1-21

Q2-21f Q3-21f Q4-21f

2012 2013 2014 2015 2016 2017 2018 2019 2020 -5.0% 2011

2021F -10.0%

Sources: NBS, United Capital Research Price level: High base effect to drive inflation to inflection point in H2-2021

In H2-2021, the direction for inflation is expected to take an interesting turn with several factors shaping aggregate price level direction. We highlight several drivers (pushing inflation higher) and drags (pushing inflation lower). Our inflationary drivers include food supply shortages, risk of higher electricity tariffs, and resumption of total deregulation of downstream oil & gas sector. Our inflation drags include high base impact from H2-2020, and muted FX risks. We elaborate on these drivers and drags in subsequent paragraphs.

Although the harvest season comes in the second half of the year (from mid-September), we do not foresee a significant improvement in food supply. Traditionally, m/m food inflation in the second part of the year (particularly during the harvest months of September to December) prints lower than the first part of the year. However, over the High base impact to past two years (2019 & 2020), the narrative has changed with m/m food inflation drive inflation lower in garnering pace during the harvest periods. This has been driven largely by unabating H2-2021 barring major security challenges in the middle belt and food-producing Northern states, reducing shocks. farming population across the states. Interestingly, the security space continues to heat up in 2021 as diverse interest groups clash while banditry continues unabated. Thus, we express concern that food supply during the harvest season may be grossly inadequate creating a concerning food shortage.

Recently, the Nigerian Electricity Regulatory Commission (NERC) announced a minor review of the Multi-Year Tariff Order (MYTO) in line with the Electric Power Sector Reform Act (EPSRA) which requires a minor review every six months and a major review every five years. The review would see key tariff determinants like inflation rate, exchange rate, gas prices etc. reviewed to reflect current economic realities. The review, if conducted, could see a decent increase in electricity tariff.

Furthermore, following the surge in crude oil prices, the landing cost of petrol has risen significantly without any transmission into the pump price of petrol, as the government resumed subsidy payments, a development expected to last for six months (up till Oct-

41 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

2021). However, the subsidy payments have significantly dragged on government revenues, with payments estimated at over N100.0bn every month. Also, recent soundbites, following the submission of the committee set up by the Nigeria Governor’s Forum (NGF), suggest pump price of petrol could print between N380.0/litre and N408.5/ litre. Thus, despite expected opposition from the Nigerian Labour Congress (NLC) and significant public backlash, we expect the FG to move ahead with cutting subsidy payments at least partially. As a result, we expect inflationary pressures from higher energy costs.

Despite the upside risks to inflation, we reckon a high base from 2020 represents the biggest drag on an increase in inflation. We believe the high base impact will create an inflection point for inflation which could see inflation resume a downtrend. Lastly, we expect to see sustained stability in the FX market as oil prices are expected to remain strong while Eurobond issuance would support external reserves accretion. Thus, we do not see any FX-linked pressure on inflation in H2-2021. Overall, we forecast average inflation rate for 2021 to print at 17.3%, higher than the 13.2% recorded in 2020.

Figure 27 The high base effect of H2-2020 is expected to outweigh other inflation drivers, thus supporting a disinflationary trend in H2-2021 Headline Inflation Forecast 21.0%

18.0%

15.0%

12.0%

9.0%

Jul-20 Jul-21

Jun-20 Jun-21

Apr-20 Apr-21

Jan-20 Jan-21

Feb-20 Feb-21

Sep-21 Sep-20

Oct-20 Oct-21

Mar-20 Mar-21

Nov-20 Nov-21

Aug-20 Aug-21

Dec-19 Dec-20 Dec-21

May-20 May-21

Headline Inflation 12-month Moving Average

Sources: NBS, United Capital Research

Domestic Policy Outlook in H2-2021 Monetary policy: A bias for unorthodox tools to prevail Going into H2-2021, the Monetary Policy Committee (MPC) is expected to meet three Bias for unorthodox times (July, September, and November) before the end of the year. At the MPC meetings policy tools to continue for H2-2021, we expect the Committee's attention to be focused largely on price stability, as status quo will be economic recovery, monetary aggregates, and FX stability. Also, we expect them to maintained on MPR keep an eye on policy decisions by monetary policy authorities in developed markets. and other policy rates. First, critical to the CBN is the mandate of price stability. Based on our forecasts, we expect the high base for the CPI in 2020 to drive inflation to an inflection point in H2-2021.

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Thus, despite expected pressures via food supply shortages, possible electricity tariff hike and petrol pump price increase, we expect the high base from 2020 to sustain a disinflationary trend through H2-2021. That said, our average inflation forecast for H2-2021 is 17.1% which the MPC could consider concerning and harmful to economic growth.

Next, we imagine that the economic recovery narrative would be a key focus for the MPC. As evidenced by our forecast for economic growth, we remain very optimistic on the GDP recovery story. We project rapid economic growth of 7.4% y/y and 4.4% y/y in Q2-2021 and Q3-2021 with an overall GDP growth forecast of 3.1% y/y for FY-2021. 3.0% YTD to N39.8tn as of May-2021. We expect the CBN to sustain liquidity control via OMO auctions and periodic CRR debits.

Figure 28 Broad Money Supply Growth While CBN has been broadly accomodative on its policy rate, it has deployed unorthodox means to tighten money supply

35.0% 31.2% 30.0% 25.0% 20.0% 16.4% 15.0% 11.1% 10.0% 4.2% 3.0% 5.0% 2.2% 0.6% 0.0% 2015 2016 2017 2018 2019 2020 2021 YTD

Sources: CBN, United Capital Research

Developments regarding economic recovery and inflation in developed markets will be of critical concern to the MPC. With inflationary pressures expected to be sustained in developed markets, monetary policy normalisation has been touted to begin in Q4-2021, which could trigger another spell of capital flow reversal. This could weigh on stability in the FX market and would put external reserves under renewed pressures. Thus, we expect the MPC to put this in consideration particularly in its Sep-2021 and Nov-2021 meetings.

In view of the discussed factors, we reckon the case for monetary policy easing is almost non-existent as economic recovery is expected to be sustained particularly as the economy is coming from a very low base. In addition, possible policy normalisation by developed economies’ monetary policy authorities in Q4-2021 and high inflationary environment further weakens the case of monetary policy easing. The case for a hawkish policy stance appears stronger given the high inflation argument, as well as exchange rate pressures that could accompany policy normalisation in developed economies. However, we think the CBN will be reluctant to tighten policy rate given the impact it would have on the cost of its liquidity mop-ups (via OMO auctions) as well as cost of

43 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

credit in the debt market and the banking system.

Based on the foregoing, we think the economy is in a similar position to where it was in 2017, coming from a period of high inflation and fragile economic recovery. We think the CBN’s policy bias will follow a similar pathway to what it employed in 2017/18 that coincided with a status quo position on policy rate for 31 months. Thus, we expect the MPC to maintain status quo on its policy tools for the rest of 2021.

Considering this, we think the CBN will opt for its unorthodox measures in achieving its policy objectives. For inflation, we expect the CBN to sustain liquidity controls via OMO mop-ups and CRR debits. Also, we expect sustained interventions in the real sector to boost economic recovery and improve food supply (which could help soften food prices). Lastly, on exchange rate, the CBN would retain comfort in the possibility of Eurobond issuance and improved oil proceeds to bolster its ability to manage the exchange rate.

Budget Performance: Ambitious but cash-strapped In Jul-2021, the Minister of Finance submitted the draft 2022 – 2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) laying out proposed budget estimates for the next three years. However, the document provided insights into the government’s budget implementation performance for the first five months of the year (January to May 2021). We evaluate the budget performance and provide our outlook for the rest of the fiscal year.

Overall, revenue performance printed at a disappointing 67.0% of budgeted revenue, Government revenue the lowest level in three years as total revenue for Jan – May 2021 stood at N1.8tn. performance in Jan— Impressively, Non-oil revenue performance stood at 99.7%. as the government raked in May 2021 was N618.8bn of the total prorated sum of N620.4bn. The decent non-oil revenue disappointing. performance was driven by overcollection on Company Income Tax (CIT) and Value Added Tax (VAT). That said, Oil and Independent/Other revenue segments disappointed significantly, as the government generated 50.1% and 62.5% of its projected revenue numbers.

The disappointing oil revenue performance was largely due to weaker than projected oil production, with crude oil production averaging 1.72mb/d in Q1-2021 (compared to budget benchmark of 1.86mb/d). Although crude oil price benchmark of $40.0/b continues to be outperformed, as average crude price prints at $65.2/b in H1-2021, the impact is not felt on oil revenue as the FG cannot recognize and spend revenue beyond the budget benchmark with the rest being saved for rainy days. In addition, subsidy deductions at the NNPC continues to drag on the oil revenue pool available to be distributed. Overall, the Federal Government’s revenue position remains weak and would require significant improvements in the second half of the year to achieve its ambitious

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targets.

On expenditure, the government continues to perform decently with budget implementation performance of 92.7%. However, the numbers continue to raise concerns around fiscal sustainability. The FG spent N4.9tn between Jan-May 2021 with Capex spend of N978.1bn (56.9% performance), Non-debt recurrent expenditure of N1.9tn (79.5% performance), Statutory transfers of N206.9bn (100.0% performance) and Debt Service cost of N1.8tn (130.1% performance). Clearly, the government’s debt service cost continues to take a toll on its overall finances. To provide perspective, debt-service cost to revenue printed at 97.7% for the period, indicating the FG spent nearly its entire revenue financing existing debt, leaving it to rely on the debt market to finance its capex and recurrent spend.

Figure 29

Slight recovery in government revenue Source: Budget Office, United Capital Research *Inclusive of GOEs revenue expected in H2-2021. Looking ahead, we expect the government’s revenue fortunes to improve slightly in H2- 2021. First, we expect the subsidy debate to be resolved in H2-2021 with the current subsidy term due to expire in Oct-2021 while the Minister of State for Petroleum Resources has stated that subsidy will be finally removed once the president assents to the Petroleum Industry Bill (PIB). In addition, we expect the OPEC+ cartel will gradually ease production cuts later in the year, giving Nigeria more room to raise production. For Non-oil revenue, we expect the sustained recovery in economic activities will continue to support tax collections while the higher VAT rate would provide further support. Meanwhile, we expect the FG to remain ambitious with regards its expenditure. We expect recurrent and capital spend to pick up some pace while debt service cost will remain elevated. All in, we forecast total federal retained revenue of N4.6tn while we expect the FG to spend N12.4tn. Thus, we forecast budget deficit (inclusive of GOEs budget) to print at N7.7tn, which would settle at 5.0% of 2020 nominal GDP. In addition, we see debt service to

45 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview revenue ratio closing at 94.6% for the year, due to slightly improved revenue generation.

Figure 30 FG's Historical Revenue & Expenditure Figure 31 FG's Debt Service to Revenue ratio & Performance Deficit to GDP FG's revenue collection remains FG's fiscal sustainability story unimpressive even as expenditure continues to grow gloomy by the high continues to climb creating a as revenues dip and expenditure widening fiscal deficit surge

120.0% 100.0% 6.0% 100.0% 80.0% 4.0% 80.0% 60.0% 60.0% 40.0% 2.0% 40.0% 20.0% 20.0% 0.0% 0.0% 0.0% 2015A 2016A 2017A 2018A 2019A 2020A 2021F

Revenue Performance (%) Debt Service to Revenue (%) Expenditure Performance (%) Budget Deficit to GDP (%)

Source: Budget Office, United Capital Research

...nevertheless, On the policy front, the Federal Executive Council (FEC) recently approved the National ambitious spending Poverty Reduction with Growth Strategy (NPRGS), a poverty alleviation program would force a higher- developed by the Presidential Economic Advisory Council (PEAC). The NPRGS, designed than-budgeted deficit to achieve the President’s ambitious plan to lift 100m Nigerians out of poverty in 10 years, is built on some key pillars including Macroeconomic stabilisation, Industrialisation for Economic Growth and Transformation, Structural Policies and Institutional Reforms, and

Redistributive Policies and Programmes. The contents of the policy are already being implemented with the gradual unification of the exchange rate windows. Thus, we anticipate further implementation of the underlying policies for each pillar of the policy program. However, we choose to remain pessimistic on the possibility of fulfilling the policy objectives giving the FG’s history of ambitious plans and underwhelming implementation, an acute case of consistently playing to the gallery. A lot depends on the implementation of the Petrol subsidy payments are estimated at an average of c.N100.0bn (or 15.0% of monthly NPRGS policy prorated budgeted revenue) monthly. This represents a significant strain on the FG’s document, otherwise its limited resources. Thus, one of the key policy decisions in H2-2021 would be on the fuel another case of subsidy for PMS. In our opinion, we expect the FG to at least implement a partial removal playing to the gallery. as it seeks to alleviate some of the burden on its resources. Also, we do not rule out the possibility of a graduated removal of fuel subsidy over a defined period.

External Sector Capital flows and Foreign Exchange rate: Rate convergence, a strong possibility in H2- 2021

Following a period of persistent devaluation of the naira as well as the recognition of the NAFEX rate as the official exchange rate for the country, the outlook for the naira

46 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Domestic Macro Overview

appears positive heading into the second half of the year. First, we expect the Federal Government to proceed with the issuance of Eurobonds following the external debt proposal of $6.2bn expected to be approved by the National Assembly. We estimate Eurobond issuances at around $3.0bn, while the balance may be financed by more Eurobond issuance in multilateral borrowings. These USD inflows are expected to supplement inflows from pre- H2-2021 is expected to agreed multilateral borrowings, providing a boost to external reserves. support accretion into

external reserves. Furthermore, crude oil production is expected to improve later in H2-2021. According to data from the National Bureau of Statistics (NBS), average crude oil production in Q1-2021 printed at 1.72mb/d, higher than Q3-2020 and Q4-2020’s 1.67mb/d and 1.56mb/d. In addition, crude oil prices continue to surge higher with average brent crude price printing at $65.2/b in H1-2021, 54.9% higher than H1-2020’s $42.1/bbl. Thus, we expect improved USD inflows from oil proceeds in H2-2021, providing further buffer for external reserves.

Away from the positive drivers, we note the CBN continues to figure out ways to fulfill the existing FX request backlog estimated at c.$2.0bn by the International Monetary Fund (IMF). Thus, should the CBN rely on fulfilling these obligations via its expected inflows, these could create potential pressures on the external reserves.

Evaluating these key drivers, we expect stability in exchange rate for the rest of 2021. In addition, we posit a potential convergence in exchange rate (to N430.0/$ - N440.0/$ level) at the parallel market as improved FX liquidity permeates the different FX windows in H2-2021, thereby reducing demand pressure on the parallel market.

Figure 32 A convergence between parallel market rate and NAFEX rate, similar to the events of 2017 is expected to occur as FX liquidity improves Parallel Market Rate vs. NAFEX Rate vs. Official Rate 550.0 500.0 450.0 While we expect further 400.0 devaluation of the 350.0 300.0 Naira at the I&E 250.0 200.0 window, we expect 150.0 some form of

convergence between

Jul-18 Jul-19 Jul-16 Jul-17 Jul-20

Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Sep-16 Sep-17 Sep-18 Sep-19 Sep-20

Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Nov-16 Nov-17 Nov-18 Nov-19 Nov-20

May-16 May-18 May-19 May-20 May-21 May-17 parallel market and I&E Parallel Market Official Rate NAFEX Rate window rate. Source: Budget Office, United Capital Research

47 www.unitedcapitalplcgroup.com

Financial Markets Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Fixed Income Market Review and Outlook Rate reversal on full throttle The yield environment In our FY-2021 Economic and Financial Outlook report, our projections for the fixed surged higher in H1- income market were hinged on three key factors; expected tighter liquidity, investors’ 2021 as tighter liquidity demand for higher rates and Federal Government’s deficit financing needs. Thus, we and huge deficit highlighted that, although average yield had room to decline further, it would ultimately financing needs for the reverse higher through H1-2021. True to our expectations, the yield environment has Federal government reversed higher, albeit surging faster than initially projected. To give perspective, average drove rates higher. yield across the yield curve climbed 617bps YTD to 11.3% as of Jun-2021, from 5.1% at the end of 2020. Consequently, Nigerian sovereign bonds underperformed peers in emerging markets, as the S&P/FMDQ Nigeria Sovereign Bond index has lost 21.1% YTD, compared to a YTD loss of 2.9% on the JP Morgan EM Government Bond index. We review the critical occurrences in the Nigerian fixed income market and provide our perspectives on the outlook for the market in H2-2021.

Figure 33 Figure 34 Nigerian Sovereign Yield Curve Nigerian Sovereign Bond Index vs. EM Yields on Nigerian sovereign Peers instruments accelerated in H1-2021 Nigerian bonds have underperformed EM peers in H1-2021 15.0% 1.1 10.0% 1.0 0.9 0.8 5.0% 0.7 0.6

0.0% Dec-20 Feb-21 Apr-21 Jun-21

7Y 8Y 1Y 2Y 3Y 4Y 5Y 6Y 9Y

3M 6M

15Y 20Y 30Y 10Y S&P/FMDQ Nigeria Sovereign Bond Index Dec-20 Mar-21 Jun-21 JPM EM Government Bond Index

Sources: FMDQ, United Capital Research Sources: Bloomberg, United Capital Research

Money and Bond Market Review: Investors’ demand for higher yields prevails

In line with our outlook for 2021, stop rates at primary market auctions in H1-2021 rose sharply through the auctions due to investors’ demand for higher rates and huge deficit financing needs amidst tight liquidity in the financial system. For NT-bills primary market Stop rates in the money auction, stop rates on the 91-day, 182-day and 364-day bills rose to peaks of 2.50%, 3.50% market peaked in May & 9.75%, respectively, from 0.04%, 0.5% & 1.21% at the last NT-bills auction in Dec-2020. before moderating in However, the 364-day bill has since moderated by 108bps from its peak to 8.67%, subsequent auctions. following strong investor demand for bills amidst limited offering by the apex bank.

50 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Figure 35

Similarly, marginal rates in the bond market peaked in May before moderating in subsequent auctions. Source: CBN, United Capital Research

At the bonds primary market, the narrative was akin to developments in the NT-bills primary market. Higher bid rates by investors, as well as fiscal pressures supported accelerated reversals in marginal rates at bond auctions. To provide perspective, marginal rates on the short-tenor, mid-tenor, and long-tenor instruments peaked at 13.1%, 14.0% and 14.2% at the May-2021 auction, from 8.0%, 8.7% and 9.0% in Jan-2021 auction. However, the Debt Management Office (DMO) introduced financial repressive tactics to lower its borrowing cost. It employed the re-introduction of new bonds at its auction to create artificial scarcity (primarily on the 2045s and 2049s), spurring demand and driving rates lower. Thus, the final bond auction in Jun-2021 saw marginal rates print lower.

Figure 35 FGN Bond Auction Marginal Rates Marginal rates at bond auctions surged through H1-2021 but tapered in June

15.0%

13.0% 11.0%

9.0%

7.0%

5.0% Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21

Short Tenor Mid Tenor Long Tenor

Source: DMO, United Capital Research

In what was clearly analogous to developments in the primary market, the average yield on sovereign debt instruments accelerated in H1-2021. The average yield on sovereign Similar to bonds surged 579bps YTD to 11.9% in the bonds market at the end of H1-2021. Similarly, in developments in the the NT-bills market, the average yield on government bills climbed 610bps YTD to 6.6%. primary market, yields

in the secondary Eurobond Market: Mild stability in Eurobond market market surged higher. The Eurobond market was driven by several factors (tailwinds and headwinds) in H1-2021. First, the price of brent in the crude oil market has continued to surge, gaining 44.2% YTD

51 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets to print at $74.7/b. In addition, crude oil production has continued to recover as more

Figure 36 Broad Money Supply Growth While CBN has been broadly accomodative on its policy rate, it The Eurobond market has deployed unorthodox means to tighten money supply was stable in H1-2021 35.0% 31.2% even as underlying 30.0% fundamentals 25.0% improved.

20.0% 16.4%

15.0% 11.1% 10.0% 4.2% 5.0% 2.2% 0.6% 3.0%

0.0% 2015 2016 2017 2018 2019 2020 2021 YTD

Source: CBN, United Capital Research robust oil demand has given the OPEC+ cartel room to adjust production cap higher. Furthermore, sentiments around a rebound in economic activities have continued to support Eurobond performance in 2021.

Upward reversal in the On the downside, surging inflation in the US has raised fears of policy normalisation by yield environment systemically important central banks across the globe. Although central bankers continue forced corporate to take the position that inflation is transitory rather than persistent, investors remain issuers out of the nervous that prolonged inflationary pressures could see the return of policy tightening market. faster than anticipated.

On a balance of factors, the Eurobond market traded largely flat YTD with a mild bearish bias as average Eurobond yields rose 10bps YTD to print at 5.8% in H1-2021.

Corporate Issuances: Staying away as yields reverse Following record corporate issuances in 2020, which was driven by the low-yield environment, the resurgence in interest rates in the fixed income market appears to have discouraged corporate issuers from exploring options in the debt market. According to data from FMDQ, total corporate issuances in H1-2021 declined 60.7% y/y to N263.3bn, from N670.4bn in H1-2020. Thus, we think corporate issuers were wary of rising interest rates, dousing their interest in raising new debt capital. That said, we think their resolve will be tested in H2-2021, considering that over N240.8bn worth of commercial papers will be maturing in the second half of the year.

An interesting dynamic: A fragmented fixed income market The fixed income market in H1-2021 took on an interesting posture, in what looked like a fragmented and inverted market. At the short end of the curve, persistent CRR debits by the CBN as well as oversold NT-bills and bond auctions kept financial system liquidity short.

52 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

This was largely part of the CBN’s multi-faceted unorthodox policy approach to achieving conflicting policy objectives. The CBN held money supply tight to reduce risks of money supply-driven inflation and limit room for speculation in FX. To give perspective, broad money supply (M3) grew 3.0% YTD (as of May-2021) to N39.8tn.

Figure 36 Broad Money Supply Growth While CBN has been broadly accomodative on its policy rate, it has deployed unorthodox means to tighten money supply

35.0% 31.2%

30.0%

25.0%

20.0% 16.4%

15.0% 11.1% 10.0% 4.2% 5.0% 2.2% 0.6% 3.0%

0.0% 2015 2016 2017 2018 2019 2020 2021 YTD Tighter money supply Source: CBN, United Capital Research forced FTD rates higher The tight system liquidity kept interbank rates broadly elevated, forcing banks to source in H1-2021. for Fixed Term Deposits (FTDs) at significant premiums. United Capital Research’s survey of banks showed average FTD rates (net return) printed at 13.4% at the end of Jun-2021. The dynamic is more interesting when FTD rates offered by tier-2 banks (average of 14.8% as at Jun-2021) and merchant banks (average of 14.8% as at Jun-2021) are considered. The premium on FTD instruments over similar tenor NT-bills instruments remained as high as 839bps at the end of Jun-2021. Providing further context, the net return on 30-day FTD investment for unlisted banks closed H1-2021 higher than the return on a 29-year bond (13.2% as at Jun-2021).

Figure 37 Average FTD Net Rate (30 - 90 days) Return on fixed deposit investments have become the most attractive segment of the fixed income market

16.0% 14.8% 14.8% 14.0% 12.0% 10.6% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Tier - 1 Banks Tier-2 Banks Merchant Banks

Source: United Capital Treasury, United Capital Research

53 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Figure 37 Yield Curve Incorporating FTD rate Return on FTD investments inverts the yield curve as average return on FTDs is highest on the yield curve

15.0%

13.0%

11.0%

9.0%

7.0%

5.0% 1M* 2M* 3M* 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y

Source: United Capital Treasury, FMDQ, United Capital Research *Average FTD rates on surveyed DMBs and Mer- chant Banks

H2-2021 Outlook

Following the unabating acceleration in fixed income yields in H1-2021, tapering yields towards the end of the period has raised questions regarding the outlook for rates in H2- 2021. This section discusses some of the drivers we expect to shape the outlook for yields and provides our perspective on the direction for yields.

Liquidity story critical for market direction The financial system liquidity situation would be critical for the direction of yields in the fixed income market in H2-2021. First, inflows into the financial system via the bonds market are expected to improve significantly in H2-2021 as bond maturities, and an increase in bond coupon payments could help alleviate some of the pressure. Total bond maturities and minimum coupon inflows expected in H2-2021 prints at N1.4tn, significantly higher than the total sovereign bond inflows in H1-2021. On the other hand, we expect inflow from the NT-bills market and the OMO market to remain limited. The CBN is expected to rollover all maturing NT-bills with a strong possibility of overselling the auctions. Similarly, total OMO inflows expected into the financial system in H2-2021 prints System liquidity level at N1.5tn, 54.0% and 74.9% less than the total sum that matured in H1-2021 and H2-2020 would be key to yield respectively. direction.

That said, we note the CBN’s bias for controlling system liquidity as a tool to control inflation as well as limit room for speculation on FX. In addition, it considers liquidity mop- ups as a punitive measure for erring banks on credit creation. Thus, we expect the CBN to resume persistent CRR debits in the face of rising liquidity.

54 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Figure 38 Figure 39 Monthly OMO Maturities Sovereign Bond Inflows OMO maturities in H2-2021 will be Inflows from the sovereign bond 54.0% lesser than total maturities in market is expected to be H1-2021 and 74.9% lesser than H2- significantly higher than H1-2021 2020 maturities inflows 2,000.0 814.0 1,500.0 1,000.0

500.0 284.7 201.4 0.0 49.9 23.5 -

Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21

Source: FMDQ, CBN, United Capital Research Source: FMDQ, CBN, United Capital Research

CBN’s monetary policy stance not a major risk In H2-2021, we expect the disinflationary trend to continue while we expect the economy to rebound significantly in Q2-2021 and Q3-2021. In addition, the CBN appears to have a Monetary policy is bias for using unorthodox policies to achieve its objectives. Thus, we expect the CBN to expected to have a maintain status quo on its policy rate limiting possible upward pressure on the yield curve. neutral impact on the

fixed income market in Cash-strapped FG would remain reliant on debt market… H2-2021 The recently released draft copy of the 2022-2024 MTEF/FSP for the Federal Government (FG) showed that the FG’s finances are in a precarious position. Total Federal retained revenue in the first five months of the year printed at N1.8tn, representing 67.0% of prorated budgeted revenue of N2.8tn for the period. Despite the disappointing revenue performance, the huge budget deficit of N3.0tn (compared to the prorated sum of N2.3tn) reflects the considerable strain on the government’s resources. However, we expect non-oil revenue to remain sturdy with a possible increase in oil production quota supporting oil revenues. Ultimately, we expect the strain on the government’s revenue to continue in H2-2021 as the improvement in oil revenue could prove insufficient to plug the revenue gap. Cash-strapped FG is

expected to continue As a result, we expect the FG to remain active in the debt market for the rest of the year. to rely on the debt However, we expect that the FG's debt market activity will be concentrated primarily in market albeit with a the foreign debt market, rather than the domestic market. As a result, we anticipate that focus on external domestic debt issuances will be less robust in H1-2021. borrowings.

… albeit with focus on external borrowings In the primary segment of the Eurobond market, we expect the government to be broadly active as it seeks to exploit elevated liquidity levels in the global financial system, as well as lower interest rates enjoyed by SSA external debt issuances in 2021. According to media reports, the President’s request for a N2.3tn external debt approval from the

55 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

National Assembly would soon be discussed and possibly approved in time for the external debt issuance to happen in H2-2021.

In the secondary Eurobond market, we expect developments on monetary policy decisions by systemically important monetary authorities, as well as oil prices to shape developments. We expect oil prices to remain stable, while monetary policy decisions in developed markets are expected to remain accommodative in the near term. In addition, we expect global financial system liquidity to remain elevated in H2-2021, largely feeding on accommodative monetary policy stance across the globe. That said, all key factors point to a bullish H2-2021 for Eurobonds. Thus, we expect Eurobond yields to trend lower in H2-2021. However, we stress that a downside risk to our expectation is the negative perception on Nigeria’s macroeconomic stability and worsening fiscal situation.

Where are yields headed...Not a straight-forward story Following evaluation of the several factors expected to shape the fixed income market in H2-2021, we harmonise these factors and provide our expectations for the yield environment as well as our preferred fixed-income strategy. Clearly, we expect investors’ liquidity to improve in H2-2021, creating stronger demand for fixed income assets in the period. The improved liquidity is also expected to relieve liquidity pressures faced by banks through H1-2021. However, we believe the CBN would resume CRR debits given the While we project the amount of liquidity that is expected to hit the financial system via bond maturities and yield environment will coupon flows. trend lower through H2- 2021, we expect to see Furthermore, we expect the FG’s financing needs to remain elevated, albeit with huge periods of oscillation in dependence on the external debt market. In addition, sovereign debt managers would the yield environment. continue to deploy repressive financial tactics with a view to managing the precarious cost of debt for the Federal government.

Having highlighted these factors, we project interest rates will be volatile in H2-2021 with a lot depending on the timing of heavy liquidity inflows into the financial system. Thus, while we believe the yield environment has peaked and the overall trend of the yield environment points towards a decline, we expect to see periods of oscillation in yields throughout H2-2021.

Given our projections, we believe active portfolio management strategies would have to be employed to maximise returns on fixed income linked portfolios by taking advantage of catalysts expected to shape short-term periodic movements in interest rates.

56 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Equities Market Review & Outlook

Nigerian equities not invited to the rally

In H1-2021, global stock markets rallied, powered by the adoption Figure 37 of accommodative monetary policies, expansionary fiscal stimulus packages and continued success in vaccination rollouts, all of which boosted consumer demand. The Nigerian stock However, the Nigerian market was unable to participate in this rally, as the upward market was unable to reversal in the yield environment and limited market maturities tightened system liquidity, participate in the dampening the positive sentiment around the market. global equity rally

Across emerging and frontier markets, sentiments have been relatively positive. This is reflected in the fact that the MSCI EM and MSCI FM indices gained 6.5% and 13.1%, respectively. However, the Nigerian stock market, which kicked off the year with some of the bullish momenta from 2020, gaining 5.3% in Jan-2021, subsequently reversed as various drags weighed on sentiments. Accordingly, the market slumped 5.9% to close at 37,907.23 index points at the end of H1-2021. Although q/q, the NGX-ASI shed 8.7% in Q1-2021, the bleeding eased somewhat in Q2-2021. Below, we highlight some of the factors that shaped the equities market in H1-2021.

Rising yields sour sentiments for equities As previously noted, the bullish momentum from 2020 was initially carried over into early 2021, as seen in Jan-2021. The market’s early bullish run in Jan-2021 was primarily halted by a slowdown in maturities in the fixed income and treasury markets, which tightened financial system liquidity. At PMAs, stop rates began to reverse, following reduced system liquidity coupled with the growing perception on FG’s aggressive reliance on the domestic debt market to finance its bulging obligations. The upward yield reversal in the fixed income market accelerated faster than anticipated, evidenced by a 617bps increase in average yield across the yield curve, leading to investor sell-offs on equities in H1-2021. Rising yields and

macroeconomic Macroeconomic vulnerabilities and FX illiquidity stall FPI return vulnerabilities n our FY-2021 economic outlook document, we highlighted that the pandemic initially led dampened sentiments foreign investors to adopt a risk-off approach to Nigeria, as a flight to safety dominated for Nigerian equities the market. Despite the seeming recovery in Nigerian equities, international investors have maintained a stand-off approach as the reversal in the yield environment, absence of positive catalysts, and sustained FX illiquidity concerns continue to hinder the market's attractiveness. These factors have deterred FPI flows into the Nigerian equity market. Moreover, investors continue to bet on the possibility of another currency devaluation.

In the I&E window, the official marketplace where foreign investors can execute their FX transactions has remained flat since Q2-2020 and continues to trade way below its pre-

57 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

pandemic levels despite recent improved interventions by the CBN in Jun-2021. In addition, the CBN, has continued to adopt capital flow restriction tools to contain the pressure on external reserves as well as the exchange rate. Although helpful in protecting the currency, these policies have dampened international investor sentiment towards the market.

Figure 40 Domestic Players will remain dominant Figure 41 NSE classification by participation NSE YTD Market particpation 2021 YTD 2,542.9 2,404.4 1,905.6 1,627.6 1,581.7 1,151.4 933.7

2015 2016 2017 2018 2019 2020 May-21 FPI inflow FPI Outflow Local Retail

Local Institutions Total Transaction Foreign Domestic

Sources: NSE, United Capital Research Sources: NSE, United Capital Research

Unsurprisingly, according to NGX data on Foreign and Domestic Investor participation in the equities market as of May-2021, the segmented breakdown of the market participants in 2021 shows domestic investors have primarily driven the market. Total transactions in the market were split 78.7% vs. 21.2%, in favour of domestic investors. Domestic investors’ trading activities in the market has seen them record transactions worth N735.1bn, as of May-2021, Domestic investors while international investor trading activities printed at N198.5bn. Total foreign inflow was continue to drive the at N91.3bn YTD in May-2021, while outflow settled at N107.2bn. Overall, Net foreign market amid standoff flows as of May-2021 prints at N15.9bn. FPI participation

Thus far, 2021 earnings have been in line with our expectations, with major corporates posting more robust earnings following the return of economic activities. Earnings in the non-banking sectors (consumers, cement, telecoms, and oil & gas) have been impressive as the high inflationary environment has given them room to raise prices in addition to recovery in consumer income following recovery in economic activities, which has supported demand. On the other hand, earnings for the broad banking sector have not been shiny thus far. However, banks with sizeable current and savings deposit have been able to navigate the high interest rate environment to keep Cost of Funds (COF) steady, feeding into stable Net Interest Margin (NIM).

However, corporate actions in H1-2021 have been few and far between. First, the Nigerian Stock Exchange completed the long-running demutualization exercise and listed on the NASD exchange. Following the demutualisation, the new holding company, the Nigerian Exchange Group (NGX), has now be divided into three different companies: Nigeria Exchange (NGX), Nigerian Real estate (NGX RELCO), and a regulatory arm (NGX

58 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

REGCO). NGX Group aims to provide a wide range of services, including listing and trading securities, licensing, market data solutions, ancillary technology, regulation and real estate. The Group is also invested in the financial infrastructure space with investments in NG Clearing Limited, Central Securities and Clearing Systems (CSCS), OTC platforms, and three fintech companies. Corporate actions have been few and far In H1-2021, mergers and acquisitions were limited, as companies focused largely on between ensuring business stability amidst broad-based economic fragility. Nevertheless, Tier-1 lender, Access, completed the acquisition of BancABC Mozambique. The lender also acquired Grobank in South Africa which has since been renamed as Access Bank South Africa Limited. In addition, major petroleum products marketer, Ardova PLC, acquired a 100.0% stake In Enyo, another player in the downstream oil and gas sector. The deal will solidify Ardova’s drive for market share in the downstream oil and gas sector, which usually sees leaders benefiting from the economies of scale derived from increased volumes and sales.

Conclusively, Dangote Cement announced the resumption of its share buyback program in H1-2021as it is looking to purchase about 10.0% of shares in free float. Its previous buyback program saw the company purchase just 0.24% of its total free float.

Outlook: Where is the bourse headed in H2-2021? Clearly, sentiments in the equities market remained dull through H1-2021 due to a lack of key positive catalysts. However, heading into H2-2021, investors seek to understand what direction the market is headed. In this section, we discuss the factors we expect to shape investors’ sentiment and consequently provide guidance on the direction of the equities market. For us, the key themes to watch out for in H2-2021 remain:

• The direction of the yield environment

• Earnings expectations in H2-2021

• Market players and preferences – local and domestic players

What is the direction for yields in H2-2021? Heading into H2-2021, we expect to see periods of oscillation in the yield environment, We expect an overall albeit with an overall downward bias. Our expectation is built on three key factors; downward bias for yield improved system liquidity via instrument maturities, deployment of financial repressive environment in H2-2021 tactics by sovereign debt managers and status quo stance on monetary policy. That said, amid periods of despite our expectation of a moderation in fixed income yields, we do not see a rate oscillation crash similar to that of 2020. As a result, we expect demand for fixed income instruments to remain upbeat particularly among domestic investors, limiting prospects for improved flows to risk assets like equities.

59 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Earnings growth key for sentiments We have a broadly positive outlook for listed Nigerian companies, particularly in the real sector of the economy. The elevated inflationary environment has given consumer and industrial goods companies room to raise prices on their products. In addition, as the economy continues to stage a rebound from the recession in 2020, we expect to see a We have a broadly resurgence in consumer demand although the average consumer continues to remain positive outlook for pressured. That said, we expect to see a significant rise in cost for these companies earnings due to an considering the global rebound in commodity prices, devaluation of the naira and the expected resurgence in high inflationary environment. All in, we expect the impact of revenue growth on bottom consumer demand line to outweigh the drag from increased costs. Thus, we project decent growth in profitability for FMCGs, Brewers, Food Processors and Cement companies. In addition, we have a similar sentiment for Telecoms companies as accelerating broadband penetration would continue to drive data revenue growth, while the resumption of SIM registration would further support subscriber base.

For the Banking sector, we maintain a lukewarm position for their earnings outlook. First, for interest income, we expect a decent improvement considering the fast-paced reversal in the fixed income environment. However, the tighter system liquidity is expected to weigh on their Cost of Funds, given the spike in Fixed deposit rates. Thus, we expect to see pressure on the Net Interest Margin (NIMs) of banks stocks. As a result, growth in Net Interest Income can only be supported by loan book expansion. On Non-interest income, we expect it to be supported by trading income and continued growth in Fee & Commission income Lastly, cost management in this high inflationary environment will be critical for profitability for banking stocks. Thus, we have a less-than-optimistic outlook for banking earnings in H1-2021.

Figure 42 The divergence between earnings growth and ASI return is expected to widen in H2-2021 as stocks rcord faster earnings growth, while equities continue to decline 3.0 EPS Growth vs ASI Return

2.0

1.0 We are less optimistic on bank earnings but 0.0 expect non-interest Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 income to remain EPS Growth ASI Growth resilient

Source: Bloomberg, United Capital Research

Overall, we expect earnings for the broad stock market to sustain growth in H2-2021. The possible growth is likely to expand the divergence between earnings growth and return on the benchmark All Share Index (ASI).

60 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Domestic institutional players expected to remain in risk-free instruments The domestic institutional investor market for equities continues to be dominated by participation from Pension Fund Administrators (PFAs). Clearly, due to the nature of their We expect domestic business, PFAs prefer to play it as safe as possible which has forced a preference for risk- investors to remain risk free assets. That said, PFA allotment to equities is a good indicator of domestic institutional off in H2-2021 fund flows and could act as a market signal for institutional investors' investment direction in the market. Our outlook for domestic institutional flows remains predicated on the direction of the interest environment. However, we still believe that at current levels, PFAs will continue to stay in short-term deposits and fixed income instruments in H2-2021. As we do not expect the repeat of yields tanking to sub-1% levels seen in Q4-2020. Given current market sentiments and the absence of any real catalysts for a market rally, we expect domestic investors to maintain a risk-off approach in H2-2021.

Figure 43 PFA equities particpation has dropped since the reversal in yields % of PFA fund Assets in Equities 8.0% 7.5% 7.0% 7.0% 6.8% 6.7% 7.0% 6.4% 5.8% 6.0% 4.9% 5.1% 4.6% 4.7% 4.6% 4.8% 5.0% 4.3% 4.0%

3.0%

2.0%

1.0%

0.0% Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21

Source: PenCom, United Capital Research

For retail investors, a couple of factors are essential when analysing their interest in the equity market. Notably, they generally prefer to invest for dividend income or alternatively Retail investors will invest their funds in fixed income instruments. The upward reversal in fixed income yields likely remain have seen this class of investors rotate into fixed income linked assets. Thus, while we comfortable with fixed anticipate a decline in the yield environment, we expect retail investors to remain income plays unless comfortable with fixed income plays unless dividend yield on Nigerian stocks become dividend yields very attractive. become highly

Figure 44 attractive FTD rates pose a more attractive return relative to other assets Asset Class comparison 12.50%

7.50% 5.10%

United Capital Money Market FTD Dividend Yield Mutual Fund

Source: United Capital Research 61 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Our analysis above shows the potential market plays available to retail investors at the time of writing. It remains clear that FTD returns will surpass mutual fund and average dividend yield for Nigerian equities. That said, we note retail investors would retain a bias for typical high dividend yield stocks.

Foreign investors will stay away from the Nigerian equity market Other frontier and emerging equities markets have received massive inflows from international markets since the turn of the year, a peculiar feature of the 2020 global ...we expect foreign recovery in the aftermath of the Covid-19 shock. Yet, the flow of foreign funds into investors to maintain a Nigerian equities has remained hugely limited. In the months following the initial price standoff approach to shocks of the pandemic, oil prices slumped to as low as $20.0/b. In 2021, Nigeria’s foreign the Nigerian equities reserves have faced mild pressures as the CBN looked to clear some of the existing FX market. backlog. That said, CBN’s interventions have been limited as it sought to stop the onslaught on foreign exchange reserves by limiting outflows. The weak market interventions dampened investor sentiment in Nigerian equities as they remain wary of the nation’s recurring FX challenges.

In addition, investors project the naira may be further devalued. This sentiment is supported by the CBN’s fair value estimate of N430 – N440/$. Thus, we expect foreign investors to maintain a standoff approach to the Nigerian equities market.

Figure 45 Figure 46 Capital Importation into Equities was I&E window particpation remains flat non-existent from Q2 2020 I&E window market turnover ($'bn) Capital Importation into equities since 1,200.0 2018 ($'m) 25.0 1,000.0 20.0 800.0 600.0 15.0

400.0 10.0 200.0 5.0

0.0

Q12018 Q12019 Q22018 Q32018 Q42018 Q22019 Q32019 Q42019 Q12020 Q22020 Q32020 Q42020 0.0

Source: NBS, United Capital Research Source: FMDQ, CBN, United Capital Research

Technical & Fundamental Analysis: Undervalued market but technically overbought On a technical basis, the medium-term market resistance level for the All-Share Index (ASI) has historically been the 45,000pts index point. Thus far, while the ASI flirted with the resistance level in the early parts of the year, it has since moderated and sometimes formed a trend of lower lows and lower highs, indicating the market may remain in a prolonged downtrend. Examining the ASI on a monthly timeframe, the Relative Strength Index (RSI) of the ASI prints at 60.4%, indicating a larger downside potential than upside probability. Similarly, we do not foresee any possible triggers for a market rally in the 62 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

coming months, as domestic and foreign investors have other alternative outlets as well as other concerns regarding the macroeconomic environment.

Figure 47 Technicals suggests sustained uptrend in the near term 15-Year Trend of NSEASI 68,000.0

58,000.0

48,000.0

38,000.0

28,000.0

18,000.0

Sep-18 Dec-04 Mar-06 Jun-07 Sep-08 Dec-09 Mar-11 Jun-12 Sep-13 Dec-14 Mar-16 Jun-17 Dec-19 Mar-21

NSEASI 45000Pts Line

Source: Bloomberg, United Capital Research

Looking at the valuation of the Nigerian market, the ASI is currently trading higher than its 5-year historical average PE ratio of 12.9x, based on its current PE ratio of 13.3x. However, the recent listing of more efficient and profitable stocks such as MTN and BUACEMENT has improved the general market fundamentals in terms of efficiency ratios such as ROE, gross margins, and profit margins. As a result, comparing the current P/E and P/B ratios to the market's historical P/E and P/B as a gauge of market valuation may be inefficient.

Figure 48 Nigerian equities are currently Figure 49 ASI is trading at a sharp discount to trading below their 5-year averages the world Nigerian equity current vs. 5-year historic Nigerian equity valuation vs. World, EM, 12.9 valuation FM 15 35.00 13.3 29.8 16.8 22.6 25.00 22.0 Figure10 51 13.3 15.4 15.00 16.6 5 12.9 1.7 5.00 1.5 0 -5.00 World Nigeria EM FM P/E P/B 5-year average valuation Current valuation 5-year average valuation Current valuation

Source: Bloomberg, United Capital Research

That said, we note the market is relatively undervalued compared to its peers. MSCI frontier markets and MSCI emerging indices are currently trading at P/E ratios of 16.8x and NGX-ASI is still 22.6x, respectively. Both indices are currently trading higher than their historical averages undervalued relative to of 16.5x and 15.8x for the frontier and emerging markets. This is because many frontier peers markets appear better positioned to receive more inflows due to lesser structural constraints to capital. The MSCI World index is also currently trading at a significant premium to its five-year historical values.

63 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

We doubt that FPIs will return to the Nigerian market in H2-2021 unless specific structural policy measures are implemented to attract these investors. One strategy the CBN could adopt is to devalue the currency further, which in the short term would further dampen the integrity of the market, where a considerable amount of foreign capital remains trapped due to the CBN’s administrative measures. Moreover, a further devaluation would diminish the returns of those in the backlog.

Our Verdict – Not bad, not good but somewhere in between

Overall, our prognosis for the Nigerian stock market in 2021 is a lukewarm, sideways movement in the equities market with a bearish bias. We do not expect to see any major negative drag on the equities market in H2-2021. However, we do not see positive catalysts in the near term. On a balance of factors, we expect developments in the yield environment to outweigh other possible market triggers. Thus, despite positivity from oil price uptrend, economic recovery, and calm on the Covid front, we expect relatively We expect sustained attractive fixed income instruments to capture investors’ focus in H2-2021. sideways movement in the equities market in That said, we expect the performance of the equities market in months where earnings H2-2021 scorecard is announced will show decent gains as investors take positions in stocks expected to deliver solid numbers, raising chances of improved dividend payments.

In all, for our base case, we project an equity market return of 5.5% for 2021. We have shifted our Covid-19 impact to “muted” from “bad” in H1-2021. The effect of the oil market is retained at “muted” as the positive impact of FX inflows may be ignored by FPIs. Despite a potential downward movement in the yield environment, we expect yields to remain attractive enough to keep investors in the fixed income market. Thus, we raise our expected impact to “moderate”. Corporate earnings are also anticipated to have a moderate impact on the market. Nevertheless, we believe the market would ignore higher EPS metrics for the rest of the year as high yield environment and pre-existing structural issues are expected to weigh on sentiments.

Strategy point: Active portfolio management with a bias for non-banking stocks In line with our outlook, while we expect an overall bearish bias in the equities market, we expect periods of bullish momentum driven by positive earnings scorecard and the annual dividend hunt that occurs late Q3/early Q4. As a result, we recommend investors beam their searchlights on companies that have posted decent financial performance in H1-2021 as well as those that suffered significant dips in Revenue and Profit line in 2020 (downstream oil & gas companies, and energy focused firms) following the impact of the great lockdown. In addition, we recommend active portfolio management as we think buying dips on trending stocks and selling into upward momentum represents the best strategy to benefit from the equities market. A buy and hold strategy (save for long term investors) will not be advised in the current market climate.

64 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Financial Markets

Lastly, on stock selection, we have a bias for non-banking stocks for the rest of the year. Sectors such as FMCGs, Cement and Telecoms are expected to ride on the back of a rebound in consumer income which would spur volume growth. A clue on growth from GDP numbers showed real GDP growth for these sectors printed at 7.1%, 7.7% and 11.2%, respectively in Q1-2021. Thus, we expect decent volume growth for listed companies in these sectors. In addition, the high inflationary environment has given FMCGs and Cement companies room to raise prices which we expect to be positive for revenue as well as outweigh cost pressures. Finally, we also have a bias for downstream oil & gas assets as we expect them to deliver strong recovery in volumes following reopening of the economy. .

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Sectors Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

Agricultural Sector Output constrained by unresolved challenges ...sector output growth The agriculture sector remains a key interest sector in Nigeria’s plans to diversify its resilient but economy. Despite increased interventions from policymakers, the sector’s output has underwhelming remained largely underwhelming over the last 3 years, with an average growth rate of 2.2%, owing largely to low mechanization levels, high insecurity in key food-producing states and perennial supply chain bottlenecks. In Q1-2021, the agriculture sector grew by 2.3% y/y, a 7bps rise from Q1-2020 and a 1.1% fall from Q4-2020, against a backdrop of a 2.2% sector expansion in the pandemic-affected 2020 fiscal year, which was largely due to commendable policy support. The growth in Q1-2021 was traceable to resilience in crop production which rose 2.3% in the period, in contrast to 3.7% and 2.4% in Q4-2020 and Q1-2020, respectively, as well as stronger growth in livestock activities (+1.7% y/y vs +0.6% y/y in Q1-2020). Fishing (3.2% y/y) and forestry (+1.3% y/y) activities also grew in the quarter. Notably, Agriculture GDP as a proportion of aggregate GDP improved to 22.4% in Q1-2021 compared to 22.0% in Q1-2020 but declined compared to 27.0% in Q4-2020.

Figure 50 Figure 51 Agriculture sector growth remains Food inflation remains highly underwhelming elevated despite appearing to have Agriculture sector quarterly growth rate peaked 5.0% 24.0% Trend of food m/m inflation 2.5% 4.0% 19.0% 2.0% 3.0% 1.5% 14.0% 2.0% 1.0% 9.0% 0.5% 1.0% 4.0% 0.0%

0.0%

Q1-20 Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 Q1-18 Q3-18 Q1-19 Q3-19 Q3-20 Q1-21

Apr-18 Apr-19 Apr-20 Apr-21

Aug-18 Aug-19 Aug-20

Dec-18 Dec-19 Dec-20

Agric. GDP 5-year average Y/Y M/M

Sources: NBS United Capital Research Sources: NBS, United Capital Research

Among noteworthy developments in H1-2021, lawmakers approved a $1.2bn financing for the Green Imperative Programme (a partnership with the Government of Brazil), which ...insecurity remains a is expected to enhance the mechanisation of agricultural specialised extension services major concern and agro-processing in the 774 LGAs and the 6 area councils in the FCT. The Federal Government also extended the phosphate supply deal between Morocco and Nigeria in Mar-2021, announcing plans to develop a $1.3bn plant to produce Ammonia, phosphoric acid, sulfuric acid, and fertilizers (NPK and DAP). Developments in the fertilizer space have been highly encouraging – the Presidential Fertilizer Initiative (PFI) has resulted in 44 blending facilities (41 revived) as of Q1-2021, up from an initial 4 at the commencement of the initiative in 2016. Alongside the PFI, policy directives, such as Commercial Agriculture Credit Scheme (CACS), CBN’s Agribusiness Small & Medium Enterprises Investment Scheme (AGSMEIS) and the Anchor Borrowers Program (ABP) continued to support the sector in H1-2021 despite underwhelming allocations. However, rising issues of conflict in the food belt remained a major concern during the period.

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Rising food prices: Is the worst over? Macroeconomic conditions remained largely poor, albeit improved, in the half year. The annual inflation rate increased to a peak of 18.2% in March, with food inflation hitting a ...food prices remain nearly 16-year high at 22.9%, before retreating for three consecutive months (Apr-Jun highly elevated 2021) to 21.8% due to high-base effects, driving the headline rate lower to 17.8%. The increase in food inflation continues to reflect the sustained supply-side pressures caused by insecurity concerns in the middle-belt and northern region of the country. Similarly, FX scarcity and Naira depreciation heaped further cost-push pressures on food prices. In addition, pressures from food harvest exhaustion during the planting season began to feed in. Food prices remain highly elevated as existing supply chain disruptions persist, but the impact of the high base effect from H2-2020 will likely become magnified in H2-2021, thus we anticipate steeper disinflation.

Outlook

Sector likely to underperform

We reiterate that, to unlock agricultural expansion and assist the sector in fulfilling its mandate of anchoring export diversification and contributing more significantly to the broader economy, the government must drastically increase its spending on the sector. The sector's allocation in the 2021 budget is at its lowest since and continues to fall significantly short of the 10.0% agreed upon with other African governments in the Maputo Declaration of 2003. Growth in H2-2021 and the medium term is dependent on the continuity of current policy support, notwithstanding the poor budgetary allocation. We expect farmer-herder conflict to be a constraint on the sector's growth in H2-2021. This necessitates increased efforts by the FG to address the rising insecurity plaguing the ...the sector is likely to nation, particularly in key food-producing states. Long-term growth, however, would underperform until necessitate more public expenditure on the industry through subsidies, and significant structural issues are private investment across the whole agro-business value chain, as well as supporting effectively tackled policies for perennial structural bottlenecks.

Summarily, given the positive recovery prospects of the broader economy in 2021, we expect the agriculture sector to expand. However, the structural problems that continue to stymie the sector's growth must be addressed. Aggressive investment in farmer education and R&D, as well as storage and transportation infrastructure will go in long way in boosting industry yield and easing route-to-market bottlenecks. Increased mechanisation is also key. As such, we believe that effective execution of the Green Imperative Plan (GIP) can provide some impetus to the process of addressing the sector's low mechanization levels. In the medium term, we expect policy directives to be sustained and continue to support the sector. For 2021e we retain our expectation of an annual growth of 2.5%, lower than the 5-year average growth rate of 2.8% due to persistent instability in the key food-producing states.

69 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

Banking Sector Review and Outlook

Financial Performance: Revenue, Efficiency Ratios and Profitability

The performance of Nigerian banks' in H1-2021 was broadly lukewarm, primarily due to ...performance of the muted loan book expansion (average of 2.2%q/q within our coverage firms in Q1- Nigerian banks in H1- 2021) and the lower yield environment (although yields began to reverse higher, they 2021 was broadly remained very low) in the period under review. As such, Gross Earnings (GE) across lukeworm banking stocks within our coverage universe moderated, down 5.6% y/y in Q1-2021. Across our universe coverage, ACCESS recorded the highest increase in Gross Earnings (GE) with 5.9%, while STANBIC was the hardest hit, with a 25.5% y/y decline. Nevertheless, the lower interest environment in Q1-2021 proved to be a double-edged sword as banks raked in lower deposits, which supported decline in Interest expense and evidently supported a 7.1% y/y growth in Net interest Income despite the pressured Interest income.

Unsurprisingly, Non-Interest Income, which has been the primary driver of banking earnings for the last four years remained resilient, recording an average growth of 3.2% within our coverage universe. It was driven mainly by trading income, E-business and Electronic Fees and Commissions. GUARANTY and FIDELITY were the outliers in this regard, growing by 80.1% and 16.1%, respectively.

In Q1-2021, Banking sector profitability was mixed, as STANBIC, FBNH, and GUARANTY reported 45.0% y/y, 39.3% y/y and 9.0% y/y declines in after-tax profit, respectively. At the same time, ACCESS, UBA and ZENITH recorded positive after-tax profit growth in Q1-2021, with PAT growth printing at 28.4% y/y, 26.8% y/y, and 5.0% y/y.

Notably, the average Cost to Income Ratio (CIR) for banks within our coverage settled at 59.3% as of Q1-2021, lower than FY-2020 and Q1-2020 average, suggesting improved efficiency across the sector. Also, Net Interest Margin (NIM) slipped to 6.1% despite moderation in Cost of Funds (CoF) as the low interest rate environment weighed in asset yield. NPL was down marginally to 4.7% within our coverage universe, on the industry average. We expect banks to retain the current trend of cautious loan portfolios in H2- 2021. As the economy continues its search for direction, we envisage banks will continue to play in the treasury space and limit loans to the consumer credit and retail sectors due to the increased risk and high NPLs in this segment. Loan growth printed at Weak loan growth as banks focus on asset quality a measly 2.2% q/q in In Q1-2021, loan growth across our coverage banking universe printed at a measly 2.2% Q1-2021 q/q, as banks cautiously grew their loan book in the face of tepid economic recovery and lingering real economy concerns. The focus on asset quality yielded decent results as non-performing loan ratio for our coverage banks printed at 4.7% in Q1-2021, below the CBN’s 5.0% benchmark.

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In addition, average Capital Adequacy Ratio for coverage banks stood at 20.5%, comfortably above the CBN’s 16.0% minimum for banks with international license or 15.0% benchmark for Systemically Important Banks (SIBs). Furthermore, none of our coverage banks has breached the CBN’s minimum CAR requirement for their operations category.

Figure 52 Q1-2021 Financials Access FBNH UBA ZENITH GTBANK FIDELITY STANBIC FCMB Gross Earnings 222,141 136,575 155,446 157,309 106,166 55,122 45,726 43,190 GE growth - 9M- 19 5.9% -14.5% 5.6% -5.7% -5.9% 7.7% -25.5% -12.2% Interest Income 143,798 78,357 108,590 101,176 60,309 43,062 21,014 33,029 Interest Expense (49,839) (25,564) (34,209) (18,008) (7,874) (14,265) (5,154) (11,801) Net Interest Income 93,959 52,793 74,381 83,168 52,434 28,797 15,860 21,228 Impairment Loss (12,535) (13,175) (1,182) (3,855) (1,860) (1,266) 155 (1,794) Non-Interest Income 78,343 52,618 32,267 51,201 42,892 10,229 23,083 8,161 Non-Interest Income Growth 1% 6% 13% 10% 17% 80% -29% -5% Operating Expenses (91,496) (73,331) (64,454) (69,492) (39,783) (28,892) (26,956) (23,369) Profit/Loss Before Tax 60,051 18,905 40,581 61,022 53,683 10,134 12,142 4,226 Taxation (7,503) (3,285) (2,426) (7,962) (8,137) (543) (886) (654) Profit/Loss After Tax 52,547 15,620 38,155 53,060 45,546 9,591 11,256 3,572 Balance Sheet Cash and Balances with Banks 1,121,289 1,684,605 1,902,655 1,278,458 709,478 714,318 651,281 343,169 Net Loans and Advances to Customers 3,645,229 3,149,999 2,754,181 3,402,176 1,638,733 1,641,329 737,044 886,087 Investment Securities 1,778,393 1,939,230 2,655,282 595,675 1,014,352 431,636 981,669 287,426 Total Assets 9,054,204 7,835,799 7,892,338 7,127,917 4,992,637 2,893,205 2,569,454 2,146,693 Deposits from customers 6,841,700 6,101,652 6,169,350 5,674,519 3,717,350 1,751,337 1,310,165 1,435,614 Net Assets 793,075 755,671 762,373 1,091,827 837,235 264,424 383,527 229,142 Ratios Cost to Income ratio 55.8% 69.6% 60.4% 51.7% 42.6% 46.0% 69.2% 79.5% Gross Loan to Total Deposits 53.3% 51.6% 44.6% 60.0% 44.1% 44.1% 56.3% 61.7% Trailing 12M ROAE 15.2% 10.8% 16.4% 21.0% 23.8% 23.8% Net Margin 23.7% 11.4% 24.5% 33.7% 42.9% 17.4% 24.6% 8.3% Other Ratios NIM 6.4% 4.6% 5.4% 6.0% 9.3% 6.3% 3.5% 7.1% COF 3.3% 1.6% 2.0% 1.1% 1.2% 2.5% 2.9% ROA 1.3% 0.8% 1.7% 2.5% 4.3% 1.1% 1.7% 0.7% CAR 22.2% 16.6% 22.4% 21.1% 26.1% 18.4% 21.0% 16.5% LDR 53.3% 46.9% 44.6% 52.6% 49.4% 63.2% 68.6% 67.8% NPL Ratio 4.0% 7.9% 4.7% 4.2% 6.1% 3.6% 3.6% 3.2% COR 1.8% 2.3% 0.9% 0.5% 0.1% 0.4% 1.6% 1.1%

Source: Company Reports, United Capital Research Bold figures are as of FY-2020

H1-2021: Not so shiny but not too bad Tighter system liquidity represents upside risk for funding cost In H1-2021, the Central Bank of Nigeria (CBN) maintained an apparent bias for tight money supply as part of a basket of policies and interventions aimed at curtailing surge in The CBN maintained inflation as well as limit opportunities for speculation in the FX market. As a result, we saw liquidity control the CBN sustain and introduce several unorthodox policies designed to keep system measures in H1-2021 liquidity under control in H1-2021. These policies include frequent Cash Reserve Requirements (CRR) debits, sustained OMO mop-ups coupled with overselling NT-bill auctions.

First, the CBN continued to rollover the maturing securitised excess CRR debits worth N1.4tn, indicating an unwillingness to refund banks with the actual cash debited from their positions. In addition, the apex bank continued to debit banks during periods of perceived excess liquidity within the financial system. That said, the CBN continued to maintain the position that the debits were implemented on banks erring with respect to minimum guidelines on credit creation. However, banks have also maintained these

71 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

debits have been broadly arbitrary without a defined framework. In our opinion, we think the CBN continues to deploy the CRR debits as a means of controlling system liquidity.

Furthermore, the CBN has continued to conduct frequent OMO mop-ups through H1-2021 with total OMO mop-ups in H1-2021 printing at N1.7tn. Similarly, CBN appeared to develop consistency in overselling its bi-weekly NT-bills auctions from Feb-2021 to Jun- 2021, despite opportunities to sell lesser and drive rates lower at a faster pace. Thus, while the CBN used the NT-bill auctions as a tool to raise more debt financing for the federal government, it also deployed it to tighten system liquidity. CBN’s sold N1.4tn worth of bills in 11 auctions between Feb-2021 and Jun-2021, compared to total offerings worth N1.3tn. CBN’s position on money supply is reflected in the 3.0% YTD growth in total broad money supply (M3) as at May-2021, compared to five year-average (2016-2020) of 12.7%. Following CBN’s sustained attempts at straining system liquidity, interbank rates continue ...Open Buy-Back to remain elevated, with average Open Buy-Back (OBB) rate and Overnight Rate (OVN) (OBB) rate and of 11.8% and 12.3%, respectively in H1-2021, compared to 7.5% and 8.3% in H1-2020. The Overnight Rate (OVN) elevated cost of borrowing in the interbank window pushed several banks to explore averaged 11.8% and options in the Standing Lending Facility (SLF) window where they could borrow at 1.0% 12.3%, respectively in plus MPR of 11.5% (implying cost of borrowing of 12.5%). Unsurprisingly, activity level at the H1-2021. SLF window spiked. This prompted the CBN to warn banks from accessing the window too frequently as they risk sanctions from the apex bank. As a result, banks opted to rely on fixed deposits to alleviated liquidity pressures. This triggered a spike in fixed deposit rates with some banks offering as high as 15.0% net interest to attract deposits.

Given the aforementioned, banks are expected to face elevated Cost of Funds (CoF) in H1-2021, particularly those with low CASA deposits in their total deposit mix. As a result, we expect banks with high current and savings deposit in their funding mix will navigate the high interest cost environment better than others, thus protecting Net Interest Margins (NIMs).

Interest Income: Tighter system liquidity, challenging regulatory environment will moderate net interest income Despite the seemingly disappointing performance of Interest income in Q1- 2021, the sustained reversal in the yield environment (albeit peaking in recent times) is expected to ...sustained reversal in provide support for interest income across the banking sector. Specifically, while we the yield environment expect slight moderation in yields in H2-2021, we expect yields to remain comfortably (albeit peaking in higher than in H2-2020, ensuring Interest income close the year with upward momentum. recent times) is Also, we observed that banks in 2021 had been allowed to partake in CBN OMO auctions expected to provide and bought higher-yielding bills, unlike last year, where the CBN restricted sales to OMO support for interest bills. This further provides scope for faster growth in Interest income in H2-2021. income

However, on the downside, the tightened system liquidity and increased regulatory debits will continue to constrain funding for banks in 2021. The CBN continues to restrict the

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banking sectors liquidity and has rolled over special bills worth N1.4tn twice in 2021. This artificial liquidity squeeze has seen pricing power regarding placement rate ebb away from banks and towards customers, spiking banks' cost of funds and interest expense. This is estimated to moderate the net interest margin in H2-2021, and consequently, Net Interest Income. That said, as highlighted earlier, banks with high percentage of current and savings deposits are expect to weather the storm better.

Non-interest income could be pressured in H2-2021 Looking forward, we expect Non-Interest Income (NII) for banks to remain fairly pressured. First, we project trading income for banks to be broadly underwhelming in 2021. The ...expect Non-Interest upward reversal in the yield environment would force dealers to exit any long position in Income (NII) for banks the fixed income market, resulting into booking mark-to-market losses compared to profits to remain fairly booked in 2020. Nevertheless, we note dealers who may have short the fixed income pressured market would benefit from the current market conditions.

Also, Fee & Commission income, a major component of NII, may come under further pressure largely due to weakness in e-banking income. E-banking transaction volume growth is expected to moderate as the economy reopens fully resulting from pockets of abandonment of the cashless culture. In addition, we note that prior regulatory cuts to transaction fees would continue to weigh on growth. Overall, we expect NII to become a pressure point for banks in 2021.

Entrant of fintechs and PSBs: Threat or silver lining? In the past five years, the trend in the banking sector has seen non-interest income become the primary driver of growth in the banking sector. The growing reach of these digital services has been supported by the Nigeria’s favourable population demography, its population/market size, broadband affordability, and the influx of cheaper smartphones into the Nigerian market. However, due to the lower barrier to entry into the digital financial services space, a new market segment has formed, growing rapidly, as fintechs, agency bankers and payment service banks storm the digital scene.

There has been a general perception that these new entrants could potentially shrink the pie and halt the growth in banks' non-interest digital/electronic fees. Contrary to popular opinion, the rise of Payment Services Banks, digital services, and agency banking across the country, especially in less accessible areas, will continue to support the non-interest income for banks in 2021 and beyond.

We expect non-interest income will be supported by increased partnerships between banks and other fintechs and telecommunication operators, with banks benefiting from the increased reach of fintechs and PSBs relying on mobile operators. The regulatory framework also plays in the hands of banks, as it limits the scale of activities in which most digital services (fintech, PSBs,) can offer. This implies that banks should benefit in the long run as these customers move up the financial ladder and demand more sophisticated

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financial products, such as insurance services, foreign remittances. The evidence ...non-interest income gathered by a 2019 GSMA report showed that increased mobile money adoption in will be supported by Kenya and Ghana did not affect bank profits in those countries. increased partnerships Furthermore, the guidelines limit how much PSBs can leverage the resources of their between banks and parent telcos. Under the current guidelines, if a telco provides a particular service to its other fintechs and PSB subsidiary, it must do the same to competing PSBs. This undercuts a significant telecommunication advantage of telcos coming into the financial space, as mobile operators cannot operators. discriminate against non-subsidiary market players limiting their allure regarding banking transfers, which has been the major competitive advantage they held in other countries markets like Ghana and Kenya.

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Consumer Goods Sector

H1-2021 review: Reopening of economy spurs recovery in consumer demand In H1-2021, reopening of the economy Following the reopening of the economy in H1-2021, business activities began to garner spurred job creation pace giving employers room to reemploy laid-off workers and resume timely payment of and resumption of full salaries. Workers in sectors like Aviation, Quick Service Restaurants (QSR), Hospitality, salary payments, Education and Transportation were key beneficiaries of this recovery. To give perspective, support recovery in the National Bureau of Statistics’ (NBS) Covid-19 impact monitoring survey showed that consumer demand. 69.6% of respondents were working as at Feb-2021, compared to 43.0% in May-2020, the peak of the pandemic. As a result, consumer income improved, creating stronger demand for consumer household items.

Similarly, the CBN’s Consumer Expectation Survey (CES) continues to show sustained improvement, albeit still in negative territory. The Consumer Confidence Index (CCI) printed at -14.8% at the end of Q4-2020, a decent improvement from -29.2% at the end of Q2-2020. While the CBN is yet to publish the CES report for Q1-2021, we reckon the Q4- 2020 report stated consumers were broadly optimistic about their finances in subsequent quarters. We saw this optimism permeate through the market as demand for household goods recovered.

Figure 53 Food, Beverage & Tobacco recovery outpaces broad economy recovery Food, Beverage & Tobacco GDP

10.0%

5.0%

0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 -5.0% 15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 18 19 19 19 19 20 20 20 20 21

-10.0% 2015 2016 2017 2018 2019 2020 2021

-15.0%

Food, Beverage & Tobacco GDP Growth

Source: NBS, United Capital Research

That said, consumers were not without their challenges in H1-2021. From elevated energy That said, consumers costs to a steep rise in the cost of food items, consumers faced a steep jump in their cost were not without their of living. According to the NBS Selected Food Watch data, food prices have increased by challenges as elevated an average of 7.4% YTD as at May-2021, while y/y change prints at an average of 18.0%. price environment In addition, the cost of other basic amenities such as energy, health, transportation, and weighed. education rose significantly, evidenced by the elevated inflationary environment.

75 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

Nevertheless, the positives outweighed the negatives as the Food, Beverage, and Tobacco sector expanded 7.1% y/y in Q1-2021, ahead of overall economic growth of 0.5% in the same period. The quarterly growth posted in Q1-2021 represents a thirteen month-high, evidencing the strength of recovery for the Nigerian consumer. We also note that there was no low base in Q1-2021, considering the economy was fully opened through most of Q1-2020.

FMCGs: Revenue growth neutralizes cost pressures Decent recovery in Following a tepid 2020 where Nigerian FMCGs battled weaker consumer disposable consumer demand and income, increased competition from cheaper or unbranded alternatives to product upwar price offerings, H1-2021 brought with it improved fortunes for these companies. Deliberate adjustments supported innovation (via product resizing and development) to service the widening mass market Revenue and profit has supported volume growth for FMCG firms. In addition, recovery in consumer income growth in FMCGs. also supported demand recovery in H1-2021. Also, the reopening of the economy implied key B2C buyers like QSRs for bouillon cubes and Hotels for Home & Personal Care (HPC) products etc., whose demand has suffered due to restrictions have now improved their demand. Furthermore, the high inflationary environment supported price increments across product categories. Unsurprisingly, revenue for our key FMCG coverage companies has improved. For example, NESTLE (+24.1% y/y to N87.3bn) and UNILEVER (+45.7% y/y to N19.4bn) all grew their revenues in Q1-2021 (Jan – Mar 2021).

Nevertheless, devaluation of the naira and recovery in commodity prices has placed renewed cost pressures on these companies and, in some cases, eroded margins. To provide perspective, our FMCG coverage companies saw gross margins shrink by an average of 393bps y/y in Q1-2021. Nevertheless, the revenue growth has outpaced the cost impact and consequently supported profit growth. For example, NESTLE (+10.8% y/y to N12.4bn) saw an improved Net Profit position in Q1-2021. Re-opening of on-trade Brewers: Reopening of on-trade channels support recovery channels and In H1-2021, removing restrictions on social gatherings and reopening of key on-trade relaxation of restriction channels like bars, clubs, and restaurants spurred a recovery in demand for alcoholic on social gatherings beverages. In addition, brewers started to enjoy the full impact of price increases spurred beer demand implemented few months before the pandemic struck following volume recovery and the recovery. conclusion of the graduated increase in the ad-valorem excise regime. Given these factors, we saw a significant rebound in revenue of our coverage brewery companies. For example, NB (+27.0% y/y to N105.7bn), Guinness (+53.9% y/y to N42.6bn), and INTBREW (+10.2% y/y to N38.9bn) recorded significant growth in revenue in Q1-2021 (Jan – Mar 2021).

Nevertheless, similar to FMCGs, brewers had to contend with elevated cost pressures as commodity prices (Wheat and Barley), naira devaluation, and FX illiquidity weighed on

76 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

costs. Thus, we observed a significant surge in Cost of Sales for brewery companies in Q1- 2021 while Gross margins weakened during the period, reflected in; NB (down 438bps y/ y), GUINNESS (down 706bps y/y) and INTBREW (down 82bps y/y). Overall, industry coverage Net income grew by an average of 1,509.3% (skewed by Guinness’ low base Food processors impact) in Q1-2021. continue to record

sturdy growth despite Food Processors: Positive trajectory maintained border reopening. Similar to the broad consumer goods sector narrative, food processors benefitted from the ability to raise prices due to the high inflationary environment amidst elevated cost pressures. In addition, despite the reopening of the border, smuggling of low-priced competing products have remained under control, thus sustaining volume growth. Lastly, CBN’s sector friendly policies, particularly in credit extension and industry protection, benefitted companies within the food processing space in H1-2021. For perspective, Dangote Sugar recorded a 41.5% y/y increase in Revenue to N67.4bn in Q1-2021 from N47.6bn in Q1-2020. In addition, Flour Mills of Nigeria (FMN) recorded Revenue growth of 43.9% y/y to N216.3bn between Jan – Mar 2021.

A price-driven positive outlook Looking ahead to H2-2021, the terrain for an average Nigerian consumer does not appear to be any rosy. First, the current fuel subsidy regime is due to expire in Oct-2021, with a considerable probability that the Federal Government (FG) may fully deregulate Upward price the downstream sector. As a result, the pump price for PMS is expected to spike adjustment would be significantly, causing a ripple effect on the general price environment. Similarly, a minor key in driving review of the MYTO framework is expected before the year runs out to reflect current profitability of economic realities regarding inflation and exchange rate. This is expected to cause a consumer goods firms. decent increase in the cost of electricity.

In addition, we expect food prices to remain pressured even as we approach the harvest season considering planting activities have been significantly impacted by security concerns in the Middle-Belt and Northern food-producing states. Thus, we expect food supply to be affected, causing prices to remain elevated. Nevertheless, we expect our coverage consumer names to continue to deliver solid revenue and profit numbers, riding on the back of product price increases which we expect to outweigh cost pressures.

77 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

Cement Sector

Demand momentum persists

The cement sub-sector sustained recovery in H1-2021, registering solid growth as demand for the binder remained strong, following an impressive H2-2020 recovery from the The sub-sector pandemic's initial impact in H1-2020. According to GDP growth estimates from Q1-2021, registered impressive the cement sub-sector grew by 11.2% y/y (compared to 1.7% y/y in Q1-2020), with the growth as demand construction (+1.4% y/y) and real estate (+1.8% y/y) sectors supporting growth. The three remained strong. largest companies in the industry, which together account for c.98.0% of the market, also reported volume growth. The continued impetus in local cement demand, in our opinion, remains driven by the private sector, which has propelled industry players' capacity expansion plans despite existing underutilised capacity, while exports have taken a backseat. Also, retail prices of cement remained high, as distributors continued to pass on higher transport prices to consumers amid increased fuel prices.

Figure 54

Source: NBS, United Capital Research

Performance review: Compelling growth Aligned with our expectations, Q1-2021 unaudited numbers of the cement players under our coverage were robust. DANGCEM (+18.7% y/y to 7.5Mt) and BUACEMENT (+7.7% y/y to 1.4Mt) recorded impressive growth in sales volume while WAPCO remained relatively flat at 1.4Mt. In terms of sales, average sales growth across the three companies was a strong 19.7% y/y, as DANGCEM grew sales by 33.5% y/y, WAPCO by 12.2% y/y and Cement players BUACEMENT by 13.4% y/y. recorded robust volume and sales In terms of costs, all three firms saw persistent cost pressures, mostly related to raw growth. materials and energy, amid the highly inflationary environment and Naira devaluation during the period. However, DANGCEM and BUACEMENT saw gross margin expand by 3.4% and 3.2% to 61.5% and 47.6%, respectively, as revenue outpaced costs, while WAPCO gross margin contracted by 96bps to 26.7%. On finance costs, WAPCO saw a further decline in net finance cost (-21.4% y/y) due to further balance sheet deleveraging

78 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

and BUACEMENT saw a modest 2.8% y/y decline. On the other hand, due to FX losses, net finance cost for DANGCEM surged 481.6% y/y to N21.6bn from N3.7bn. The absence of Pioneer Tax benefits in the quarter weighed on the bottom line for all three companies, however, PAT growth still came out solid as DANGCEM recorded 48.1% y/y, WAPCO 13.3% y/y and BUACEMENT 13.0% y/y in Q1-2021.

Additional capacity set to grace the stage A total of 9.0Mt The cement market will see new capacity introduced in H2-2021, led by DANGCEM and additional capacity is BUACEMENT. At first glance, considering the existing c.54.0% capacity utilisation rate, this set to be may raise some eyebrows, but increased local demand, combined with export ambitions, commissioned in H2- has fueled the expansion drive. Notably, DANGCEM and BUACEMENT are set to increase 2021 capacity by 6.0Mt and 3.0Mt, respectively, in H2-2021, bringing total capacity to 53.8Mt and individual capacity to 45.3Mt and 11.0Mt, respectively. This portends intensified competition among the 3 companies as BUACEMENT is set to overtake WAPCO (10.5Mt) and DANGCEM is set to entrench its dominance in the sector with c.67.8% share of total capacity.

Outlook Demand to remain upbeat in the medium term

Looking ahead, we expect the sector to maintain its growth momentum in H2-2021, albeit less aggressively than in H2-2020 given high-base effects. On the one hand, our expectation is hinged on private sector demand, which is likely to continue strong throughout the year. In terms of public demand, government infrastructure investment still underpins the industry’s growth outlook. The FG achieved 88.8% capex implementation in 2020 and increased the capex budget by 57.0% for 2021. Despite CAPEX implementation underperforming between Jan-2021 and May-2021, CAPEX spending is set to surpass that of 2020. We reiterate that the Nigerian cement market has lush expansion potential given the low consumption per capita (estimated at 97.0kg per capita by CemNet vs 130.0kg per capita SSA average).

Cement makers' fortunes could be boosted further if measures to supercharge Nigeria’s infrastructure through Public-Private Partnerships start to yield results. Notably, the Growth momentum will Presidency approved the development of infrastructure company, InfraCo, with an initial likely be maintained capital of N1.0tn in Feb-2021. Meanwhile, existing projects such as the Lagos-Ibadan and through H2-2021, albeit Lagos-Calabar rail projects and the 300,000-housing unit project under the Economic at a slower pace given Sustainability Plan will drive demand for cement. H2-2020’s high base

We are also optimistic about the performance of the three key manufacturers for H2- 2021, as we expect the demand factors and fundamentals highlighted above to drive volume growth in the second half of the year. However, a key downside risk is the possibility of increased rainfall in Q3-2021, which is unique to the period.

79 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

Fuel costs to remain pressured in H2-2021

On the cost arm, cost pressures are unlikely to abate in H2-2021. The FG’s move to devalue the Naira further pressured energy costs for industry players. As a result, we expect continued pressure on gross margins. Despite this, industry players have consistently reaffirmed their commitment to maintaining steady ex-factory prices; yet, given the circumstances, we believe they may be obliged to upwardly adjust prices. Also, inflationary pressures will likely persist in H2-2021, albeit at a slower pace (given the high base in H2-2020), keeping operating cost lines under pressure.

.

80 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

Oil & Gas Industry

H1-2021 review H1-2021 provided some respite for the Oil and gas sector. However, the industry elevated prices have continued to decline on a year-on-year basis. On the other hand, although improving, oil not translated into an GDP remained in the contraction region, following negative growth of 2.2% in Q1-2021. increased rig count. This was a decent improvement compared to the previous three quarters (Q2-2020 to Q4- 2020), where oil GDP contracted by an average of -13.4%.

For a mid to longer-term outlook, the Nigerian oil and gas sector is in dire need of reforms to match other developments such as the tightening of the border to regulate illicit exports of petroleum products and the upcoming 650,000bpd Dangote refinery in 2022. In H2-2021, we expect to see both downstream and upstream firms post positive year-on- year growth. The oil and gas sector contributed 9.2% of Nigeria’s GDP in Q1-2021, an improvement from 8.2% and 5.9% estimated in the two preceding quarters, which we attributed to lower oil prices and lower crude exports.

Upstream : Slight recovery but not out of the woods yet Regarding the upstream sub-sector, the return of economic activity globally has bolstered recovery thus far in 2021. Oil prices averaged $65.2/b in H1-2021, up 54.6% y/y from $42.4/ b in H1-2020. Oil prices continued to be sustained by OPEC+ rebalancing exercise in the market. Reviewing OPEC rig data, elevated prices have not translated into an increased rig count. OPEC reported Nigeria’s rig count at 5 in June 2021, which is way below pre- pandemic levels of 23. The slow recovery in the rig count highlights the reluctance of international oil companies and other upstream players to resume operations in Nigeria due to its slow policy reform and high cost of drilling. Additionally, OPEC+ continued output caps played a role in the slower path to recovery in the upstream sector.

Figure 55 Rig count remians underwhelming and below pre-pandemic levels Nigeria oil rig count

25 23

20

15

10 6 5 OPEC+ continued 0

output caps played a

Jul-18 Jul-19 Jul-20

Jan-18 Jan-19 Jan-20 Jan-21

Sep-18 Sep-19 Sep-20

Mar-18 Mar-19 Mar-20 Mar-21

Nov-18 Nov-19 Nov-20

May-19 May-20 May-21 May-18 role in the slower path to recovery in the Sources: Bloomberg, OPEC, Bake Hughes, United Capital Research upstream sector.

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Downstream: Sector hindered by policy backflip and shortsighted deregulation move

The long-term progress of the downstream sector hinges on policy reforms. Earlier, in our FY-2021 outlook document, “A Shot at Recovery”, we applauded the government’s efforts to shift towards a cost-reflective petrol pricing market framework. We noted the downside risk of a potential policy backflip in the event of a strong recovery in oil prices. In Q1-2021, that risk crystallised when the government announced it had returned to its subsidy regime, citing its concerns about the socio-economic effects of higher energy prices, coupled with the backlash from organised labour. If sustained, the return to the subsidy regime would dampen our mid to long term outlook of firms within our coverage and hamper the NNPC’s ability to remit to the federation account.

Data from NNPC monthly FAAC report shows the government spent c.N276.0bn in H1- 2021 under the NNPC’s under-recovery program, compared with N8.5bn in H2-2020. The NNPC shortfall coverage expense (or under-recovery cost) as a percentage of the total gross NNPC revenue was 40.2% and 39.8% in Apr-2021 and May-2021, respectively. The The long-term progress expensive subsidy regime substantially affects the NNPC’s ability to remit to the of the downstream government’s coffers. Remittances into the federation account were a net zero in May- sector hinges on policy 2021, mainly due to the financing of the expensive program, which continues to derail the reforms. downstream sector. Increased refinery cost (rising crude costs) amplified the NNPC’s shortfall expenses in its attempt to cover the differential between the landing price and ex-coastal price of PMS

Figure 56 The rebound in oil prices has translated into increased import cost of PMS NNPC Shortfall expense as a % of a total NNPC revenue 50.0% 39.8% 80.0 40.2% 40.0% 60.0 30.0% 27.4% 40.0 20.0% 13.2% 20.0 10.0% 2.4% 0.0% 0.0% 1.8% 0.0% 1.0% 0.0% 0.0% 0.0%

0.0% 0.0

Jul-20

Jun-20 Jun-21

Apr-21

Jan-21

Feb-21

Sep-20

Oct-20

Mar-21

Nov-20

Aug-20

Dec-20 May-21 NNPC shortfall expense % of total NNPC revenue Average Brent price

Sources: NNPC, United Capital Research

The reluctance to implement deregulation makes it largely unprofitable for significant oil marketers to import PMS by sourcing FX in the parallel market. The current price cap does not allow marketers to recover their initial costs. This discourages market players from engaging in wholesaler activity and relying on NNPC, which remains the sole importer of PMS, meaning all other marketers earn retailers' margins. As such, the profitability of oil

82 www.unitedcapitalplcgroup.com Nigeria Outlook H2-2021: Walking a Slippery Slope Sectors

marketers continues to be hampered by the issues around deregulation in the sector and FX scarcity. Nevertheless, profitability for downstream marketers has improved thus far in 2021 compared to 2020 due to the resumption of economic activities.

Lastly, in H1-2021, the Nigerian Liquified Natural Gas (NLNG) company disclosed that it had signed Sales and Purchase Agreements with off-takers to supply the domestic market with 1.1million tonners per annum (MTPA) of Liquiefied Natural Gas (LNG). Increased LNG Royalties also vary to domestic suppliers aims to plug in the supply vacuum of natural gas, which continues across the type of to be a significant hindrance to the Nigeria Electricity Supply Industry (NESI). project, output, and PIB: At long last? current market prices, as opposed to the In the last quarter, the Petroleum Industry Bill (PIB) passed its third reading in the Senate. current royalty charges The bill has now been passed in the Senate after a joint committee preceded over the bill in the industry, which before presidential assent. However, there remains conflicting reports on the final are mostly flat harmonisation of the bill and its passage of the bill with media reports pointing that regardless of output protocol was not followed, as the bill was not on the point of order when it was passed, levels. other reports cite that deliberation on the bill will resume after the Senate recess in September.

Under the Senate and House versions of the bill, there are critical changes from the previous version passed in Q4-2020. The new bill retained some notable highlights such as the creation of new bodies, including an upstream regulator, as well as a midstream and downstream regulator. The bill also retains plans to incorporate the NNPC into NNPC Limited. The NNPC Limited’s primary responsibility would be to handle Joint Ventures (JVs) and Products Sharing Contracts (PSCs) on behalf of the FGN. The bill also proposes creating a midstream gas infrastructure fund, which would be primarily funded by levies The bill also allows for on downstream petroleum product sales. voluntary conversion of Operating Petrol Leases The bill aims to get quick and early revenue for the government by charging early (OPL) and Oil Mining royalties. Royalties also vary across the type of project, output, and current market prices, Leases (OML). as opposed to the current royalty charges in the industry, which are mostly flat regardless of output levels. This will encourage drilling even at lower costs and varying production output. A potential sweetener for International Oil Companies (IOCs) and Exploration and Production (E&P) firms is the reduction of company income tax paid to the government. The bill repeals the Petroleum profit tax and introduces a new Hydrocarbon tax.

The bill also allows for voluntary conversion of Operating Petrol Leases (OPL) and Oil Mining Leases (OML). Converted PSCs will have a cost limit of 60.0%, whilst those who wait for current agreements with the government before renewing would operate under less favourable terms, with a higher cost limit of 70.0%. Also, under the reviewed PSC terms, current holders will be entitled to gas and are not obligated to share any of their gas proceeds with the government.

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Regarding full cost recovery in the downstream sector, the house version of the bill deleted the repeal of the Petroleum Equalisation Fund (PEF), which is the body responsible for ensuring petrol price uniformity across the country. The PIB upholds the repeal of the Petroleum Products Pricing Regulatory Agency (PPPRA). The bill posits that price of PMS would no longer be set through the government’s pricing template but demand and supply mechanics and free-market competition. However, it allows for government intervention in cases of anti-competitive behavior. Notably, the bill also reviews the baseline price for domestic gas suppliers upward.

Outlook for the industry

Our outlook for the upstream sector remains moderate. Already elevated prices, as well as sustained adherence to the OPEC+ quota, which is slated to persist through Apr-2022, corroborate our stance. OPEC+ preference for caution will likely see agreements held until Apr-2022, moderating our expectation of improved quotas for the NNPC and its JV partners. The most recent budget implementation document showed that oil revenue underperformed, amounting to 50.1% of total budgeted oil revenue in H1-2021. Rising oil prices have supported the government's revenue in Q2-2021, but output caps continue to limit the velocity of revenue growth. However, as we highlighted earlier, OPEC+ recent discord between members means that we could see increased production output in the market, leading to downward pressures on oil prices. Regarding quoted upstream firms within our coverage, we expect SEPLAT to continue enjoying improved margins, especially when compared to the lower prices in H2-2020. We also expect its cost reduction drive to support PAT in 2021.

In the downstream sector, the absence of true price liberalisation continues to hinder the In the downstream industry. However, we believe that the low base effect from 2020 will benefit downstream sector, the absence of firms due to increased sales volumes in 2021. On the downside, the prospect of full price true price liberalisation discovery for Premium Motor Spirit (PMS) remains hindered by policy backflips by the FGN continues to hinder the and NNPC. In addition, the persistent FX challenges make NNPC the largest importer in industry the market. Inability to import PMS by major marketers means that distributors only earn a distributors’ margin and cannot capitalise on the wholesaler’s margins.

For gas processors and distributors, the outlook is also dependent on the shift towards cost -reflective tariffs expected to kick in from H2-2021, as cost-reflective tariffs coupled with increased metering will ease the liquidity shortage in the value chain in the NESI.

84 www.unitedcapitalplcgroup.com

Stock Recommendations

Year-end Sho Mkt Price Mcap Up/Down- Trailing Div. 14 Day Sectors TP (N) (bn'N) (N) (bn'N) Side Rating 12M EPS BVPS P/E P/B DPS Yield RSI Banking ACCESS 8.6 35.5 8.3 327.0 4.2% HOLD 3.3 22.6 2.5x 0.4x 0.8 9.7% 65.2 FBNH 7.1 35.9 7.3 262.0 -2.1% HOLD 1.9 21.1 3.9x 0.3x 0.5 6.2% 48.5 FCMB 3.0 19.8 3.1 59.2 -1.0% HOLD 0.9 NA 3.3x NA 0.2 4.9% 42.6 FIDELITYBK 2.7 29.0 2.3 69.5 17.6% BUY 1.0 9.1 2.3x 0.2x 0.2 9.7% 71.2 GTCO 39.9 29.4 28.0 865.3 42.5% BUY 6.9 27.9 4.0x 1.0x 3.0 10.7% 51.9 ZENITHBANK 30.4 31.4 23.0 767.6 32.2% BUY 7.4 34.7 3.1x 0.7x 3.0 13.0% 59.3 STANBIC 51.9 13.0 39.4 531.2 31.6% BUY 5.6 29.0 7.0x 1.4x 3.4 8.7% 62.6 Consumer Goods DANGSUGAR 19.6 12.1 17.2 212.0 14.2% BUY 2.4 10.3 7.0x 1.7x 1.5 8.7% 40.2 INTBREW 5.9 26.9 5.7 143.7 3.2% HOLD (0.4) 5.6 NM 1.0x 0.0 0.0% 50.1 NESTLE 1,322.9 0.8 1,400.0 1,220.7 -5.5% HOLD 49.5 37.0 28.3x 37.9x 60.5 4.3% 96.3 UNILEVER 11.5 5.7 12.0 75.0 -4.5% HOLD (0.7) 10.8 NM #N/A1.1x Field Not Applicable 56.8 FLOURMILL 46.6 4.1 28.0 122.4 66.4% BUY NA 38.8 NM 0.7x 1.7 5.9% 54.6 NB 39.7 8.0 58.5 463.8 -32.1% SELL 0.9 20.1 63.4x 2.9x 0.9 1.6% 29.8 GUINNESS 18.4 2.2 29.0 63.5 -36.6% SELL (6.5) 33.2 NM 0.9x NA 52.3 PZ UR 4.0 5.3 23.0 NA UR 0.8 NA 7.1x #N/ANA Field Not Applicable 54.8 UACN UR 2.9 11.0 28.8 NA UR 0.7 18.4 15.9x 0.6x 0.7 5.9% 58.3 Indutrial Goods DANGCEM 253.7 17.0 212.5 3,919.3 19.4% BUY 17.8 56.1 11.9x 3.8x 16.0 7.5% 64.5 WAPCO 27.7 16.1 21.5 348.7 29.1% BUY 2.0 22.9 10.8x 0.9x 1.0 4.7% 60.4 BUACEMENT 42.2 33.9 72.0 2,404.4 -41.4% SELL 2.1 11.0 34.6x #N/A6.5x Field Not Applicable 31.7 Agric OKOMUOIL 91.3 1.0 96.5 104.9 -5.4% HOLD 8.2 36.3 11.7x 2.7x NA 67.8 PRESCO 80.6 1.0 75.9 68.0 6.2% HOLD 5.3 31.1 14.4x 2.4x 2.0 2.6% 24.7 Oil & Gas TOTAL 167.4 0.3 145.0 57.0 15.4% BUY 6.1 NA 23.8x NA 6.1 4.2% 99.6 SEPLAT 636.4 0.6 688.0 453.1 -7.5% HOLD 0.0 3.0 NA 230.9x 0.1 0.0% 90.3 OANDO UR 12.4 3.0 40.9 NA UR 2.3 16.8 1.3x 0.2x 0.0 0.0% 61.4 ARDOVA 17.6 1.3 15.0 20.2 17.5% BUY 1.4 13.8 10.6x 1.1x 0.0 0.0% 78.7 Note: TP=Year end Target Price, Sho= Share Outstanding, Mcap= Market Capitalization, EPS= Earnings Per Share, BVPS= Book Value Per Share, P/E =Price to Earnings Ratio, P/B= Price to Book Value Ratio, DPS=Div idend Per Share, Div Yield= Div idend Yield, Up/Down-side= potential return, Mkt Price= Current Market Price, UR = Under Rev iew

Source: Company filings, NSE, United Capital Research, UR= “Under Review” Prices as at Friday 16th July, 2021 Disclosure Appendix Nigeria Outlook H2-2021: Walking a Slippery Slope

Disclosure Appendix

Investment Rating Criteria and Disclosure

United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;

Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity. Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero. NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.

Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable conflicts of interest that may arise in the course of its business relationships.

Risk Rating

Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk. Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets. Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification. These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest, government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc. United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem applicable the company of focus. The ratings are defined below; High: High probability of an imminent systematic risk or/and unsystematic risk Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk Low: Low probability of an imminent systematic risk or/and unsystematic risk

Analyst Certification

The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report. 2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report. Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report are disclosed: • UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report

Company Disclosure Dangote Cement Plc g Fidelity Bank Plc d Flour Mills of Nigeria Plc j Forte Oil Plc g

Stanbic IBTC Plc g, j Zenith Nigeria Plc a FBNH Plc a Access Bank Plc a, j Lafarge Africa Plc a UBA j Dangote Sugar Plc a Ardova Plc g

Disclosure keys a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence on the company’s operating decision directly or through proxy arrangements c. UCAP is a market maker in the publicly traded equities of the Company d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company e. UCAP beneficially own 1% or more of the equity securities of the Company f. UCAP holds a major interest in the debt of the Company g. UCAP has received compensation for investment banking activities from the Company within the last 12 months h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution j. The Company is a client of UCAP k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP) nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact United Capital Plc, 3rd & 4th Floor, Afriland Towers, 97/105 Broad Street, Lagos. ©United Capital Plc 2018.*

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