TABLE OF CONTENT
Executive Summary Page 3
Page 9 Global Economy
Page 32 Domestic Economy
Page 63 The Nigerian Equities Market
Page 84 Fixed Income Market
Alternative Investments Page 97
Page 109 Disclaimer & Important Disclosure
GMB 2020 Review and 2021 Outlook Page|2 Executive Summary
GMB 2020 Review and 2021 Outlook EXECUTIVE SUMMARY
Global Outlook: Pandemic Related Risks Expected to Shape Growth in 2021
Global growth was brought to a screeching halt, as the impact of the unprecedented event dampened growth forecasts, induced financial market shocks, risk aversions and supply-chain disruptions, prompting broad-based monetary and fiscal responses. The coronavirus pandemic which emerged from Wuhan, China spread over 150 countries, claiming over 2.0mn lives so far, with rising numbers of international cases, that necessitated partial or complete lockdowns. Hence, trickling economic data recorded historic fallouts worse than the aftermath of the 2008-09 Global Financial Crisis (GFC), as the International Monetary Fund (IMF) projects a 3.5% downturn in the global economy in 2020, with an expected rebound of 5.5% in 2021.
While the pandemic hit off sharply in Advanced Economies like France, Germany, Italy, United Kingdom and the United States, resulting in severe output declines, the extent and timing of the shock varied across the Emerging and Developing Economies (EMDEs). Owing largely to less equipped health systems, the collapse in oil prices, the lack of extensive fiscal space, pressured currencies, large informal sectors, and daunting debt challenges, the brunt of the pandemic was mainly felt by the EMDEs. Yet, the implementation of lockdowns to curb the virus spread began to yield positive results, as infections grew at a modest pace, and businesses gradually reopened.
These were further buttressed by concerted efforts by fiscal and monetary policy measures alongside other social interventions. By the third quarter, output cornered expansions in the United States (+7.4%), Germany (+8.5%), United Kingdom (+15.5%), France (+18.7%), and others. A similar trend was seen across the EMDEs, given the batch of positive growth in China (+2.7%), Brazil (+7.4%), South Africa (+13.5%), India (+21.9%), amongst others.
Although, much was learned about the virus in the first wave, as countries maintained various social restrictions, a second wave erupted strongly amid the discovery of a new strain of the virus, reaching countries that had successfully curbed the first surge in infections. Nonetheless, positive news on highly effective vaccines at year-end raised expectations and reversed uncertainties around economic recovery, but setbacks caused by logistical challenges and the quantum of vaccines produced, restored partial restrictions and even full lockdowns across different countries.
In view of all these, recovery is likely to be divergent, as countries with access to vaccines, effective policy actions, and slowing COVID-19 cases
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would be front-runners. This should further resuscitate consumption, investment and employment, particularly in EMDEs. Concerns for global growth, however, should border around mounting infections and deaths from the ravaging pandemic, delayed rollouts of vaccinations, debt distress, tighter financing conditions, add on to rising social unrests. All of these could deepen the impact of the already brutal shock.
The outlook for commodity prices remains skewed to the upside, as stronger demand due to a pick-up in economic activities coupled with the low base of the previous year should fuel rising prices for these commodities. Growth in global trade should also move in tandem with the global activities, however, this would be uneven with merchandise volumes recovering faster than services trade. Supply chains heavily disrupted by tensions around trade war uncertainties and further intensified at the onset of the pandemic would have a limited effect on trade activities.
Domestic Growth Should Pan out, Albeit Mildly
Growth in the domestic economy slowed considerably to a low point of 1.87% in the first quarter of 2020, having posted a 12-month uptick, since the oil-induced recession in 2016. However, the historic fall in oil prices (an 18-year low of USD19.33pb) exacerbated by the pandemic shock, led Nigeria’s GDP to contract by 6.10% and 3.62% in the second and third quarters respectively, confirming another economic recession, the second in four (4) years. In addition, other persistent challenges in the form of the upward trending inflation, insecurity challenges, weak aggregate demand, lingering high unemployment rates, deficits building to unprecedented levels and currency volatilities remained in play for the most part of the year 2020.
On the fiscal side, policy responses took the shape of social safety nets to vulnerable persons. The amendment of the 2020 budget, temporary reliefs given to the power and oil sectors, together with pronounced external financing helped stem near term pressures. Notwithstanding, the strength of the country’s macro-economic environment faces significant risks of oil revenue volatility, rising debt service levels, dwindling exchange rate and a low external reserve base. We believe that interesting sets of reforms along the lines of the Economic Sustainability Plan (ESP) and the newly approved 2021 budget (NGN13.6tn), would benefit an economic recovery.
Monetary policy remained quite accommodative in the year, as the Central Bank of Nigeria (CBN) created stimulus packages targeted at the healthcare industry, manufacturing sector, SMEs and households.
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That said, the reduction in the Monetary Policy Rate (MPR) and the increase in Cash Reserve Ratio (CRR) underpinned its pro-growth stance. We opine that risks of higher inflation expectations, depleting external reserves, combined with mounting fiscal risks for 2021, may prompt the CBN to revert its dovish stance and tighten monetary policies towards the end of 2021. Given these considerations, an envisaged upturn in the non-oil sector, a supportive low base, and a moderate pick-up in the oil sector put our 2021 growth rate at 1.1%.
Equities: Gains Expected to Slow, Supports Baseline Forecast of +14.0%
On the equities end, the Nigerian bourse started off 2020 on a bullish note, as the Year-to-Date (YtD) return hit an impressive 10.4% in just eight (8) days of trading. However, the oil price crash and the pandemic shock dampened investor sentiment and sent the year’s return to a low of 23.0% in April 2020. More precisely, foreign investors dumped shares of top counters in the Banking and Consumer Goods sectors, ushering in the historic lows seen on these stocks. Nonetheless, investors’ reactions to better-than-expected earnings reports, subdued fixed income yield, and relatively cheap valuations of top counters returned the market to a tremendous +50.0%, at a closing landmark of 40,270.7pts, and a market capitalisation of NGN21.1tn. Ultimately, the Nigerian Stock Exchange All Share Index (NSE-ASI) emerged the world’s best performing index in 2020, according to a Bloomberg Survey. The predominance of domestic participation over foreign participation (66.4%:33.6%) was a major driver of this return. Similar factors that shaped 2020 are expected to be sustained in 2021, such as the unattractive fixed income environment, favourable dividend yields, sustained control by domestic investors and robust technology platforms. Our base case scenario places the year-to-date return at +14.0% at year-end, on the back of persistent interests by Pension Fund Administrators (PFAs), and an increase in public offerings. It is also worthy to note that our models keep foreign investors out of the picture, as we expect country risks’ emanating from FX challenges and continued oil price volatility would be major concerns for foreign investors.
Fixed Income: Yields to Remain Unattractive, Amid Steady Participation
The narrative was somewhat different in the Fixed Income market, as robust system liquidity compounded by the review of players in the
GMB 2020 Review and 2021 Outlook Page|6 EXECUTIVE SUMMARY
Open Market Operations (OMO) market at the twilight of 2019, and the capital repatriation difficulties pressured yields lower in the secondary market. The Primary Market Auctions (PMA) also followed a similar trend with oversubscriptions being recorded, reflecting the dearth of alternatives in the market. Reality thus stand that real return remains deep in the negative region, given the upward movements in inflation rate, (at 15.75%, December 2020).
Going into 2021, we believe returns will remain low at the fixed income market at an average of 300bps in the treasury bills market. The continued segmentation (NT-bill & OMO-bill) of the bills market portends that the Apex Bank will continue to utilize the OMO-bill window as a conduit to attract foreign flows into the market, while giving the CBN means to hike (ease) rates in one segment of the market. In addition, buoyed system liquidity expected all through 2021 (NGN8.1tn), should drive an influx of corporate debt stock as well as sub-national issuance larger than the NGN100.0bn witnessed in 2020.
We see more corporates taking advantage of low-interest rates to refinance existing debt and/or raise capital to drive business objectives. As a result, investors who seek to increase their return in 2021 will have to increase their risk appetite by venturing into the corporate offerings (commercial papers and corporate bonds) universe in bolstering alpha in their portfolio.
We consider the vaccine a promising sign that the global pandemic would be contained in 2021, though it is our view that it might not be an immediate panacea for the already subdued growth, as the pandemic’s still-uncertain future will likely trigger bursts of uncertainties over the course of the year.
In our view, the pandemic has indeed altered the course of economic growth and disrupted the normal trends seen in the past. Hence, whilst the economic impact of the virus should wane over time, the scars of the pandemic on other facet of lives such as work, public health, globalisation, digitalisation, amongst others will be more permanent. As such, we believe unboxing the new realities is critical to positioning ourselves for the opportunities that will be birthed in 2021 and years to come.
GMB 2020 Review and 2021 Outlook Page|7 GMB Research & Strategy Team
Ayodeji Ebo [email protected]
Akintunde Sulaiman [email protected]
Oreoluwa Odetunde [email protected]
Segun Adams [email protected]
Omotayo Idowu [email protected]
Address Greenwich Merchant Bank Plot 1698A Oyin Jolayemi Victoria Island, Lagos Nigeria
Email Research & Strategy [email protected]
Corporate Banking [email protected]
Investment Banking [email protected]
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Visit us at: www.greenwichbankgroup.com
GMB 2020 Review and 2021 Outlook Page|8 Global Economy
GMB 2020 Review and 2021 Outlook GLOBAL ECONOMY
The World In 2020: Black Swan Upends Optimism
There was no let-up in the headwinds facing the global economy in 2020 as the outbreak of a virulent respiratory disease caused by the pathogen SARS-CoV-2 rocked virtually every facet of human society, slowed globalisation and roiled economies. Against this backdrop, the International Monetary Fund (IMF) projected global growth for the year at -3.5%, set to be the worst on record. The health crisis thus undermined hopes that improving US-Sino relations would provide some respite to the global economy hard-hit by the Trade War and a decelerating growth cycle across Advanced Economies and China.
Coming from a decade-low growth rate of 2.8% in 2019, major themes at the start of the year explored upsides from better clarity on the direction of Brexit, tentative signs heralding better manufacturing activities and a synchronized move towards accommodative monetary policy. All of these painted an optimistic picture for the international trade landscape in 2020, adding to the euphoria around the US-Sino Phase 1 trade deal. We recall that on January 13, 2020, former US President Donald Trump and Chinese Vice Premier Liu He signed an agreement that would increase Beijing’s patronage of select US goods and services by at least USD200.0bn over 2020 and 2021 in exchange for lower US tariffs on Chinese goods.
Throwing economists’ projections out of the window, the sudden outbreak of the Coronavirus disease 2019 (COVID-19) first identified in December 2019 in Wuhan, China forced unprecedented large-scale lockdowns across economies after the World Health Organisation (WHO) classified the disease as a pandemic on March 11, 2020. Although there have been several infectious disease episodes in the 21st century, none of the previous crises were on a global scale like COVID-19. The impact of COVID-19 and associated lockdowns was sudden and severe as the global Aviation sector and the Hospitality industry were virtually grounded, Manufacturing activities shuddered, and around the world, people were required to stay indoors.
The disruption to economic and social activities initially caused major jitters across markets. Risk-off sentiment towards equities intensified, the international debt market froze, commodity prices plunged to multi- year lows. Crude oil prices tanked in the futures market as Brent slipped below USD20.00 per barrel (pb) in April 2020, from nearly USD70.00bp at the start of the year. Low storage spaces amid a massive build-up of oil inventories caused May’s West Texas Intermediate (WTI) crude contracts to trade negative.
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Chart 1.0: Pandemic Poses Common Threat to the World (Cumulative Total Infections in Millions)
Source: WHO, Greenwich Merchant Bank Research Data are as of 30-01–2021
Chart 2.0: Western Hemisphere worst-hit by COVID-19 (Millions)
Source: WHO, Greenwich Merchant Bank Research Data are as of 30-01–2021
Chart 3.0: Deaths Resulting from Infectious Disease Outbreaks in 21st Century
Epidemics & Pandemics Death Time Period Type/Pre-human Host in 21st Century Toll
Swine Flu 2009-2010 H1N1 virus/Pigs 200K Coronavirus/Bats, Civ- SARS 2002-2003 770 ets Ebolavirus, Wild Ani- Ebola 2014-2016 11K mals 2015- Coronavirus/Bats, MERS 850 Present Camels 2019- 2.18M COVID-19 Unknown Present *
Source: Weforum, Greenwich Merchant Bank Research *Data are as of 30-01–2021, K is Thousand, M is Million
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Chart 4.0: Virus Weighs on Global Growth (%)
Global Financial Crisis COVID-19 crisis
Source: IMF, Greenwich Merchant Bank Research
Meanwhile, haven assets and some alternative assets rallied, with Gold crossing USD2,000.00 for the first time ever in August 2020.
On a trade front, the global supply chain took a hit as China (accounting for 13.2% of global merchandise export value in FY:2019) completely locked down some of its Provinces affected by the virus including manufacturing hub Hubei. As a result, global merchandise trade volumes dipped c.10.0% YoY during the peak of the health-turned- economic crisis (Q2:2020), from almost 0% YoY in the comparable period of 2019, based on United Nations Conference on Trade and Development (UNCTAD) estimation. The value of goods exchanged also declined by 18.0% YoY in the period, while the value of global trade in services tanked 21.0% YoY, the steepest fall in at least a decade.
Elsewhere, the International Institute of Finance (IIF) tracked record outflows from Emerging Market (EM) securities (a record USD83.3bn outflow in March) as global investors took flight to safety. UNCTAD also reported a 48.6% slump in FDI inflows across regions in H1:2020, while the World Bank warned that remittances to low- and middle-income countries would fall around 20.0% in FY:2020. In some EM and Developing Economies, the weak external conditions and lower government revenue crystalized into fiscal crisis and weak buffers pressured EM currencies.
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Chart 5.0: Foreign Direct Investment Inflows Stall in H1:2020 (USD ’bn)
Source: UNCTAD, Greenwich Merchant Bank Research
Chart 6.0: EM Securities Recover After Record Outflows in May (USD’bn)
Source: IIF, Greenwich Merchant Bank Research
In the swell of the pandemic, the United States’ economy suffered its worst quarterly contraction in Q2:2020 plunging by -9.0% YoY (-31.4% on a QoQ basis). For China, the epicentre of the pandemic, swift lockdowns mounted pressure on its economy in Q1:2020 (-6.8% YoY), although the drastic measure proved to be effective in slowing the transmission of the virus.
Elsewhere, the Euro Area entered a recession decoloured by broad- based downturns across the region, while in Asia, Japan hit an all-time low growth of -10.3% YoY in Q2:2020 as the pandemic took no prisoners.
Sub-Saharan Africa (SSA) bellwethers felt the heat in Q2:2020 with
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Nigeria (-6.1% YoY) and South Africa (-16.9% YoY) dragging the region into its first recession in 25 years.
With the cautious relaxation of stringent social restrictions towards the end of Q2:2020, economies have been on a recovery path aided by massive pandemic spending and government bailouts, equivalent to 11.9% (USD11.7tn) of the world’s GDP, according to IMF’s estimates as of September 11, 2020. By November 2020, the IHS Markit Purchasing Managers' Index for the World reached 53.7 points, its highest level since February 2018 (53.9 points) on the news of breakthroughs around the COVID-19 vaccines.
Chart 7.0: Fiscal support in response to COVID-19 as a percentage of GDP (%)
Source: IMF, Greenwich Merchant Bank Research
Chart 8.0: Global PMI Confirms Rebound Across Economies (Points)
Source: Bloomberg, Greenwich Merchant Bank Research
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For FY:2020, the IMF projects that global output dipped 3.5%, as stated earlier, reflecting better-than-expected GDP outruns in Advanced Economies, helped by large fiscal packages and accommodative monetary policy environment. Meanwhile, the World Bank in January 2021 put the global GDP growth for FY:2020 at -4.3%.
Global Monetary Condition: Easy Money Aids Recovery
In the wake of COVID-19 threats to the financial system stability and economic growth, central banks relaxed monetary conditions to offset the impact of the pandemic and quicken the pace of economic recovery. Across Developed and Developing Economies, policy measures varied with deep rate cuts, the roll-out of cheap loans, massive asset purchase programs and the provision of forward guidance as options explored to placate investors.
The US Fed trimmed its policy rate by 150bps to a target range of 0% - 0.25% and announced an “unlimited” asset purchase program, as early as March 2020, complementing the government’s fiscal stimulus sized at 14.2% of US GDP. The Powell-led bank also guided that it would pursue an average, instead of a fixed, target of 2.0% inflation rate, creating more room for the sustenance of a low interest rate environment and heating up the economy. The massive Quantitative Easing (QE) of the US Fed ballooned its balance sheet from USD4.2tn, at the start of the year to around USD7.3tn in 2020. Around USD3.0tn worth of securities were purchased to support liquidity in the financial markets.
In Europe, the European Central Bank (ECB) announced a EUR750.0bn asset purchase program in March 2020 and subsequently expanded the program to EUR1.9tn through the Pandemic Emergency Purchase Program (PEPP). In a similar fashion, the Bank of England (BoE) cut its policy rate from 0.9% to 0.1% in March 2020 and raised its Asset Purchase Program by GBP170.0bn in November 2020, raising the total to GBP895.0bn.
Even though the Bank of Japan (BoJ) kept its policy rate unchanged at - 0.1%, in June 2020, the Bank increased its COVID-19 program to JP¥110.0tn, with the aim of encouraging banks to grow their loan books and channel credit to companies.
Its Asian counterpart, the People’s Bank of China (PBOC) tinkered with its Cash Reserve Requirement to free up liquidity for banks, even as it lowered lending rates and embarked on QE. The PBOC injected at least ¥500.0bn (USD71.5bn) into the market in February 2020 alone.
Into the new year, the global economy should be assailed by fewer
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headwinds considering that the COVID-19 vaccines will be providing the much -needed respite, all other things being equal. With less strain on the economy, central banks will have more scope to normalize policy and counteract unintended consequences of measures taken in 2020. We, however, think that there would be a delay in reversing the current dovish stance till at least H2:2021 accounting for the following (i) Inflation targeting by Developed Economies and (ii) central banks in EMDEs maintaining status-quo to allow for a full recovery despite inflationary pressures.
Already, the US Fed and the Bank of Canada have ruled out any policy rate hike in the near to mid-term. The North American banks announced an average inflation targeting of 2.0%, although we think that expected inflationary pressures from fiscal stimulus and anticipated economic growth over 2021 will be upside risks to a dovish policy environment assumption.
The ECB in early January indicated it would extend its easy monetary policy to 2022 and spend more or less than EUR1.9tn earmarked for That said, COVID-19 bonds purchase depending on the update on pandemic in the Eurozone. remains a formidable foe to the World, pending Similarly, the BoE will be constrained by setback in economic recovery the successful trailing an escalation of the pandemic from Q4:2020. The BoE will likely deployment of vaccines. expand QE and could even trim rates further. Hence, central banks will In the East, BoJ (faced with deflationary pressures) will continue with its not be in a haste to QE program and at the same time allow consumer prices to rise. recalibrate their policy, Overall, the bank aims to achieve above 2.0% inflation rate in the near instead, they will likely to mid-term. On the other hand, PBOC will consider the impressive watch developments recovery of the Chinese economy and thus, not have any need to loosen around the rollout of their policy stance. the vaccines...
That said, COVID-19 remains a formidable foe to the World, pending the successful deployment of vaccines. Hence, central banks will not be in a haste to recalibrate their policy, instead, they will likely watch developments around the rollout of the vaccines and trajectory of infections to declare the coast clear.
The World in 2021: Not Yet Out of the Woods
The IMF forecast for FY:2021 is that global GDP will expand by 5.5% from 2.8% and -3.5% in FY:2019 and FY:2020, respectively. The positive outlook is informed by expectations that the partial economic recovery from H2:2020 will gather momentum over 2021, as business activities firm up, international linkages fully re-emerge and governments continue to support their economies. More so, countries
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around the world would have adjusted better to running their economies without risking further spread of the disease.
The major downside risk to this projection is the ongoing COVID-19 pandemic, which in its aggressive second wave is driven by a virus that is mutating. Fortunately, the timely discovery of potent vaccines has raised the sceptre of hope across the world that mass immunisation will help the world achieve herd immunity, effectively slowing the novel coronavirus. Therefore, the scale and speed of governments rolling out mass vaccination will ultimately determine the shape of economic recovery across each region.
Chart 9.0: Economies to Rebound in 2021 (%)
Source: IMF, US Bureau of Economic Analysis, Greenwich Merchant Bank Research
Chart 10.0: China Gets a Grip on Virus as World Struggles to Flatten Curve (Log scale)
Source: Ourworldindata , Greenwich Merchant Bank Research
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Chart 11.0: Second Wave More Aggressive Amid Mutations, Lockdown Ease
Second Wave
Source: Ourworldindata , Greenwich Merchant Bank Research
Chart 12.0: Stages of Vaccine Developments from Clinical Trials (Number of Vaccines)
Source: NYTimes, WHO, Greenwich Merchant Bank Research Data available as of 30-01-2021 NB: some vaccines are simultaneously in more than one stage.
As of January 30, 2021, countries around the world have booked 8.5bn doses of the COVID-19 vaccines, according to Bloomberg’s count, mostly secured through Pre-Purchase Agreements (PPA) with different vaccine manufacturers including promising candidates. That number of vaccines, if available on demand, will only be sufficient to immunize 54.5% of the world’s 7.8bn population, since most of the leading vaccines require two jabs to shield recipients from COVID-19.
But as the world scrambles for the vaccines, low-income countries are taking a back-seat with respect to access, which in our view is inimical to the global economy because the virus could mutate into a more malignant strain that current vaccines may fail to protect against.
In terms of coverage, countries such as Canada (3.3x of population), UK
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(3.0x), New Zealand (2.5x), Australia (2.3x) and Austria (1.8x) have the highest vaccines per capita globally (secured through pre-purchase agreements). This starkly contrasts the 5.0% population coverage in Africa (ex-Egypt) and the Middle East (ex-Israel, Turkey and Pakistan). At the same time, data on actual doses that have already been administered suggests that only one thousand three hundred and seventy (1,370) jabs have been given in Africa (Guinea and Egypt) compared to 90.9mn jabs worldwide as of January 30, 2021.
On the bright side, Gavi, The Vaccine Alliance, a public–private global health partnership launched the COVID-19 Vaccines Advance Market Commitment (COVAX AMC) on June 4, 2020 to make available at least 1.3bn doses of the COVID-19 vaccine to ninety-two (92) eligible low- and middle-income economies in 2021. The COVAX AMC is a financing instrument under a broader vaccine alliance called COVAX, which is co- led by the Coalition for Epidemic Preparedness Innovations (CEPI), Gavi and WHO, and has over 180 participating countries. The COVAX AMC will be financed mainly by Official Development Assistance (ODA), although the countries to benefit will likely pay USD1.6 to USD2.0 for procurement and delivery per vaccine dose. In contrast, higher-income countries will not be able to access the AMC but can secure vaccines for their priority population through the COVAX Facility by paying the market price.
Chart 13.0: Leading COVID-19 Vaccines
Johnson & Developer Pfizer/BioNTech Moderna AstraZeneca/Oxford Novavax Johnson
Uses messenger Uses messen- Modified chimpanzee Adenoviruses How it Works Protein RNA ger RNA adenovirus 26
89(UK Effectiveness (%) 95 95 70 66 Trial) Storage Temperature -70 2-8 2-8 2-8 2-8 (ºC) Planned Production in 1.3 0.5-1 2 NA NA 2021 (unit in billion)
Cost Per Jab (USD) 20 37 4 16 10 Doses Required 2 2 2 2 1 Status Approved Approved Approved Phase 3 Phase 3 Trial Size (thousand 44 30 65 45 70 people)
Source: NYTimes, WHO, Bloomberg, Time, Healthline, Nanovax, Greenwich Merchant Bank Research
So far, COVAX has reached an agreement with Pfizer for up to 40.0mn doses of the Pfizer-BioNTech vaccine candidate and is set to receive its first 100.0mn doses of the AstraZeneca/Oxford University-developed vaccine of which 50.0% will be distributed in Q1:2021. Overall, COVAX
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has access to at least 2.0bn doses of vaccines from promising candidates.
In our view, the COVAX AMC provides some respite to participants, especially in the light of the negative impact of the pandemic on revenue of many lower-income countries. We however note that the 1.3bn doses earmarked for lower-income countries fall short of what is required to vaccinate half of SSA’s estimated 1.1bn population (World Bank, 2019). We understand that SSA countries are not the only eligible participants under the COVAX AMC, given a total of ninety-two (92) economies being considered.
Chart 14.0: Percentage of Population Covered by Vaccines Secured via Contracts
Source: Bloomberg, Greenwich Merchant Bank Research Data are as of 23-01-2021
Chart 15.0: High-Income Countries Lead in Global Vaccination Campaign
Source: Bloomberg, Greenwich Merchant Bank Research Data are as of 30-01-2021
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The implication is that the access to vaccines will remain tilted in favour of countries with deep pockets.
Moving on, lower-income countries, especially in Africa, will need to strengthen their capacity for the mass vaccination of their population ahead of the shipment of their vaccines. A critical challenge will also be the continent’s temperature, which would require additional investment to transport and keep the vaccines at the required low temperature for effective inoculation.
For the world, the proportion of the population that must be vaccinated against COVID-19 to begin inducing herd immunity is not known according to WHO on December 31, 2020. However, herd immunity for infectious diseases like Measles and Polio require 95.0% and 80.0% respectively of a population to be vaccinated. Given that some of the pre-purchase agreements were entered into with vaccine producers still working on their products, not all vaccines in the pipeline might materialize at the end of the day. For example, Bloomberg reports that Novavax secured over USD1.6bn from the US and USD399.0mn from ...Lower-income the Coalition for Epidemic Preparedness without a product in the countries, especially in market. Likewise, AstraZeneca had 3.0bn doses of its vaccines pre- Africa, will need to ordered even before the effectiveness of the vaccines were established. strengthen their capacity for the mass Overall, the earliest we see the global commencement of mass vaccination of their vaccination across the world is in late Q1:2021 to Q2:2021. Considering population ahead of the other factors for the global economy in 2021, we do not envision major shipment of their geopolitical upsets to jeopardise growth. We also see the successful exit vaccines. A critical of Britain from the European Union with a trade deal just before the challenge will also be December 31, 2020 deadline, as a positive for the UK. The agreement the continent’s reached will reduce tension between UK and the EU as they can engage temperature… each other in tariff-free trade going forward, although rigid regulations could become a new concern.
Advanced Economies: Wobbling Back to Growth
The improving prospects in H2:2020 informed the view that Advanced Economies will continue strong in 2021, backed by deep pockets of their fiscal authorities and accommodative central banks. In addition, the capacity of Advanced Economies to finance mass vaccination programs is a tailwind that would pace up recovery. The IMF projects that Advanced Economies will improve by 4.3% over 2021 from the 4.9% contraction it modelled for FY:2020. The forecast is predicated on broad -based acceleration across the economies, led by a 4.2% expansion in the Euro Area, although economic activities will remain below their pre- COVID levels.
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Going into 2021, Advanced Economies have continued to battle with the COVID -19 pandemic forcing major countries across the Euro Area into lockdown and delayed full reopening elsewhere. We therefore opine that the path to recovery in Advanced Economies will be uneven, with stability seen in H2:2021.
United States: Policy Action to Support Economy
In February 2020, the US ended its longest economic expansion since the early 1800s (128 month-long), in a build up to an historic 31.4% slide QoQ in Q2:2020 (-4.8% QoQ in Q1:2020). In a swift response, the US government under Donald Trump on March 27, 2020 signed into law a USD2.2tn Coronavirus Aid, Relief and Economy Security Act (CARES Act) that disbursed USD1,200.0 stimulus cheque per adult (above 18 years old) and USD500.0 per minor (under 18 years old). Also, the package provided stimulus for small businesses.
The overall intervention of the government (up to 14.8% of GDP), and Considering that the gradual restoration of economic activities, secured a comeback President Joe Biden, (+33.4% YoY) in Q3:2020 and forms the basis upon which a sustained Donald Trump’s recovery is anticipated. Thus, the IMF forecasts that the US economy successor, is likely to will expand by 5.1% YoY in FY:2021, from 2.2% and -3.4% YoY in 2019 maintain an expansionary and 2020, respectively. fiscal policy, consumer
Considering that President Joe Biden, Donald Trump’s successor, is spending (two-third of likely to maintain an expansionary fiscal policy, consumer spending (two GDP) should firm up in -third of GDP) should firm up in 2021. The multiplier-effect is positive 2021. for a fuller recovery in firms’ output even as the US Fed’s inflation target of 2.0% average should be supportive of business activities.
We note that President Biden’s proposed USD1.9tn coronavirus relief package includes an additional direct cash transfer of USD1,400.0, a new USD15.0 Federal minimum wage and funds set aside for vaccinations, amongst other things. Elsewhere, we expect that welfare economics driven by social justice should amplify corporate taxes, raise health spending, and open government’s purse to small-and-medium scale businesses, similar to the Obama administration.
Also, the Biden administration’s bid to quell the pandemic and aid a full reopening of the economy should be more effective, given the premium it places on the opinion of medical experts and scientists unlike Trump’s administration.
From a bird’s eye view, we expect the financial markets to mull the impact of wider fiscal deficits from heavy government borrowings to fund palliatives, possibility of higher consumer prices, and tighter
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regulation of businesses on asset prices.
On the external front, we expect to see the US take a more diplomatic approach in resolving geopolitical spates with the possibility of getting Iran back on the 2015 nuclear deal and softening Trump’s hard stance on tariff with China. We note that following his January 20, 2021 inauguration, President Biden immediately returned US to the fold of WHO, reversed US withdrawal from the Paris climate agreement and lifted Trump’s travel bans.
While things are looking up for the US, the quality of recovery observed in H2:2020 has been uneven with unemployment still above pre- pandemic lows (6.7% in December 2020 compared to 3.5% in December 2019), while the dovish monetary policy and massive fiscal stimulus helped the equity markets.
A downside risk is the second wave of COVID-19 infections which have been on the rise since mid-September 2020, worsened by residents’ insistence on family vacations during the holidays. To provide evidence, On the external front, an average of 208,252 people contracted the virus every day in we expect to see the US December. This compared to 125,089 people daily infections in take a more diplomatic Q4:2020, 50,060 in Q3:2020, 26,810 in Q2:2020, and 2,654 in approach in resolving Q1:2020. Given how badly the pandemic has hit the US which now has geopolitical spates with the World’s highest confirmed cases, the spread of a mutated strain into the possibility of getting the country would be devastating especially if the vaccines are Iran back on the 2015 ineffective against the virus. nuclear deal, and softening Trump’s hard
Euro Area: Lockdowns Cast Cloud Over Region stance on tariff with China. The IMF anticipates a pick-up in growth in the Euro Area at 4.2% this year, from a contraction of 7.2% in 2020. However, the stronghold of the pandemic is still obvious in the Euro Area, forcing prolonged tightening of social restrictions across key economies in the region. Based on data from UK-based global travel data provider Official Aviation Guide (OAG), Airline seat capacity across Europe as of January 18, 2021 stood at 5.7mn seats compared to 22.3mn seat capacity in 2020. This variance of 74.4%, the widest of any region, underscores the severity of the pandemic which has not peaked in Europe.
In the UK, “VUI – 202012/01”, a new variant of COVID-19 was identified towards the end of 2020, causing an escalation of the pandemic locally. This turn of event put the economy back in a chokehold, as output fell by 2.6% in November 2020, after varying degrees of restrictions were introduced to curb the disease. We recall that November’s downturn halted six consecutive months of growth from the 18.8% decline in April
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2020.
In 2021, the pandemic will cast a pall over the UK’s economic recovery until sufficient percentage of the population is vaccinated to ensure herd immunity. Due to worries about the new strain of COVID-19, some countries have imposed travel restrictions from the UK which is undergoing its third national lockdown. These restrictions will negatively impact business activities and may not bode well for its H1:2021 output. We however see the possibility of a rebound in H2:2021. On its part, the IMF projects a 4.5% growth in 2021 from 10.0% downturn estimated for 2020.
Likewise, there is also the risk of growth reversal in H1:2021 across Germany, France and Italy due to the extension of lockdown and tight curfews, amidst signs of resurging COVID-19 cases.
Already, the German ifo Business Climate Index which gauges business confidence confirms the worsening business climate in the country. The index fell to 90.1 points (pts) in January 2021 from an upward revision In 2021, the pandemic of 92.2pts in December 2020. The sharpest drop in index points were will cast a pall over the across Trade (0.3 pts to -17.2pts), Construction (-0.8pts to -5.1pts) and UK’s economic recovery Services (9.1pts to 8.8pts) sectors. The Manufacturing index fell by -0.3 until sufficient points to 8.8 points. On the back of an anticipated increase in demand percentage of the from China, Germany’s export activities are expected to prop up. population is vaccinated For France and Italy, the trajectory of the disease will derail recovery in to ensure herd immunity. household consumption and key economic activities like Tourism, Aviation and Exports. Overall, the IMF projects a faster growth of 3.5%, 5.5% and 3.0% in Germany, France, and Italy in 2021 respectively, from -5.4%, -9.0% and -9.2% in 2020.
Japan: Walking on Egg Shells
Japan, the world’s third-largest economy plunged by 2.0% and 10.3% YoY in Q1:2020 and Q2:2020 respectively, hammered by the COVID-19 pandemic, and worsening its pre-existing low growth problem. Remarkably, the Asian giant did not impose strict lockdowns and despite its median population age of 48.4 years, it managed to keep a handle on the virus until rising new infections in late October raised fresh concerns. Japan’s approach has so far favoured keeping the economy open, with Shinzo Abe's successor, Prime Minister Yoshihide Suga, keen on keeping tourism open through the "Go To Travel" subsidy program.
The bravado of the Asian economy dovetailed into a crisis, recording higher daily rate of new infections, which reached a milestone of 7,863 on January 8, 2021. The ugly turn of events forced the government to
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declare an emergency in its capital Tokyo, the host of the Tokyo 2020 Olympic and Paralympic Games scheduled for July 2021. Meanwhile, Japan’s mass vaccinations will delay until February 2021.
Growth in Q3:2020 rose to -5.7% YoY and its forecasted to fall 5.1% in 2020, then slightly recover (+3.1%) by FY:2021. In our view, we expect the pickup in global trade to support Japanese export in H2:2021, hoping that the local spread of the disease would be curtailed in the same period. With this scenario in mind, we expect households and corporate spending to bounce back on track.
Chart 16.0: Airline Capacity for Select Countries (YoY % change in Scheduled Seats)
Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- 20 20 20 20 20 20 20 20 20 20 20 21 - USA 6% -1% -55% -76% -69% 52% -48% -52% -49% -43% -43% -43% - UK 1% -23% -90% -86% -89% 78% -62% -65% -68% -81% -76% -76% - China -50% -41% -46% -31% -22% 17% -9% -4% -1% -4% -4% -3% - Japan 1% -19% -46% -50% -49% 43% -39% -47% -46% -44% -43% -44% - India 10% 1% -66% -54% -69% 57% -62% -55% -48% -44% -37% -31% - Germany -3% -34% -92% -90% -88% 72% -64% -67% -70% -80% -80% -81% - Brazil 2% -7% -91% -92% -86% 78% -71% -60% -51% -44% -38% -35% - France 5% -19% -91% -92% -88% 64% -50% -56% -61% -75% -67% -63% - UAE 2% -26% -88% -85% -86% 75% -69% -69% -67% -66% -63% -60% - South Africa 1% -16% -74% -91% -84% 91% -88% -82% -70% -58% -45% -45% - Singapore -8% -44% -93% -96% -95% 94% -93% -93% -92% -91% -88% -86% - Spain 2% -27% -93% -87% -91% 64% -46% -61% -67% -73% -67% -67%
Source: Official Aviation Guide (OAG), Greenwich Merchant Bank Research
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Chart 17.0: Total Seat Capacity Shows Biggest Decline for Europe in 2021 (Seat in millions)
Source: OAG, Greenwich Merchant Bank Research
EMDEs: Outlook Positive for 2021
For many Emerging and Developing Economies (excluding China), the COVID-19 outbreak coincided with pre-existing fragilities and structural issues that boxed affected countries into a corner on both an economic and a health fronts.
In the absence of a robust healthcare system, many EMDEs were overwhelmed by the spread of the disease, resulting in a spike in cases and fatalities in countries such as Brazil and South Africa. For many, the implementation of widespread lockdowns proved costly due to their large informal sectors and the relatively shallow pockets of their government to provide sufficient palliatives during the period. The collapse of large sectors like Trade, Tourism and Manufacturing across EMDEs tipped several countries into economic turmoil.
Combined with dwindling diaspora remittance inflows and a plunge in commodity prices, countries dependent on exports of primary products for revenue and those with currencies tied to the same suffered severe shocks.
Amid sovereign downgrades and the freezing-up of the international debt market, the Bretton-Woods institutions came to the rescue and helped refinance cash-strapped sovereigns. The World Bank rolled out projects across 100 countries in response to COVID-19. The commitment made across regions follows thus: South Asia (USD1.8bn), Europe and Central Asia (USD1.4bn), Latin America and Caribbean (USD941.7mn), West Africa (USD671.2mn), Middle East and North Africa (USD641.2mn), East Asia and Pacific (USD549.6mn) and East Africa (USD445.6mn).
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Its counterpart, the IMF announced a USD250.0bn funding, which has been most beneficial to African countries with at least eighteen (18) countries on the continent receiving multiple financing.
For 2021, EMDEs will rebound by 6.3% from -2.4%. The growth expectation for 2021 is more positive for Emerging and Developing Asia (8.3%) which was able to manage the spread of the disease than Latin America and the Caribbean (4.1%), Emerging and Developing Europe (4.0%), Sub-Saharan Africa (3.2%), and Middle East and Central Asia (3.0%).
Notably, China’s recovery post COVID-19 pandemic has been impressive; in Q4:2020, the country’s GDP grew 6.5% translating to 2.3% YoY growth for FY:2020 (exceeding IMF’s initial +1.9% forecast). Growth is expected to remain positive with China knocking the US off the top of the global economy league table by 2028, according to the Centre for Economics and Business Research (CEBR). In 2021, China is projected to grow by 8.1%.
Similarly, India’s rebound will yield an 11.5% economic expansion in 2021 from -8.0% in 2020. The economy is showing positive signs of a firm recovery marked by banking credit expansion, pick up in manufacturing activities, improving capital inflows, and an increase in government expenditure in December 2020, according to the Reserve Bank of India.
Chart 18.0: Growth Rate of Emerging Market Regions in 2021 (%)
Source: IMF, Greenwich Merchant Bank Research
SSA: Not in The Clear
Deep downturns in the regional bellwethers; Nigeria, South Africa and Angola as well as broad declines in smaller economies, dragged SSA into its first recession in a quarter-century. Across the region, agricultural commodity exporters (Ivory Coast and Ghana) were dealt a softer blow relative to oil exporters (Nigeria, Angola, Republic of Congo, Equatorial
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Guinea and South Sudan). Overall, the impact was more pronounced on tourism -heavy economies (Cabo Verde, Ethiopia, Mauritius and Seychelles) consistent with trends across the globe.
When compared to other regions, SSA (excluding South Africa) surprised positively with fewer than expected records of infections, which could also be linked to low testing capacity. However, the region was not spared from the economic implications of the pandemic. For 2020, the IMF estimates the SSA economy to have contracted by 2.6% from 2.4% growth in 2019.
Looking ahead, the biggest concern for the shallow-pocketed SSA is the possible delay in accessing and distributing the COVID-19 vaccines. Most of the pre-orders have been made by richer regions who are able to finance bulk purchases. The implication is that recovery in the region might not be even, as tourism-dependent economies still face an uphill. Also, across the board, the region risks renewed lockdowns if social distancing fails to keep the virus at bay amid a second wave. Thus, upside to regional Thus, upside to regional growth will likely come primarily from growth will likely come commodity exporters following the recent recovery in commodity prices primarily from commodity buoyed by firmer demand and in the case of oil, subdued supply. We exporters following the also note that stronger external financing, especially from diaspora recent recovery in remittance will bode well for the region. commodity prices buoyed That said, the increasing debt burden across the region is a downside to by firmer demand and, in economic growth. The World Bank estimates that SSA government debt the case of oil, subdued amounts to an average of c.70.0% of GDP in 2020, from 62.0% in supply. 2019. Although c.66.0% of countries that have benefited from the Debt Service Suspension Initiative (DSSI) are from the SSA region, there are still concerns around debt sustainability and the efficacy of post-COVID budgets to fund development across the region. We also note that the impact of the African Continental Free Trade Area (AfCTFA) which came into effect on January 1, 2021 may be muted by the coronavirus pandemic.
In the case of South Africa, which suffered SSA’s COVID-19 worst outbreak, the regional industrial hub was already in a fragile state, crippled by an underwhelming power sector. Consequently, real GDP grew by a slight 0.2% in Q1:2020, at the onset of the pandemic. Thereafter, the country posted a 16.9% and 5.6% YoY decline in economic growth in Q2:2020 and Q3:2020 respectively. Yet, the hopes of a rebound are dimmed by a new surge of infections, powered by a more contagious COVID-19 strain which may be resistant to existing vaccines. This has led to renewed lockdowns and travel restrictions imposed on South Africa by some countries.
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Low Borrowing Cost to Springboard EM Eurobond Issuance
For 2021, capital flow into EMs should be aided by the hunt for yield amid ultra-low interest rates and record-high negative yielding bonds in developed markets. With the cost of EMs external sovereign borrowing at record lows of c.2.0% for investment grade, according to IIF, EM governments are likely to tap into the global bond market for their refinancing needs.
Zambia’s default on its USD42.5mn Eurobond coupon payment in 2020, may affect risk premium in SSA countries, however, the peculiarities of individual issuers (for instance, Nigeria’s FX policies and trends in oil market) will play a major role in their borrowing costs. To buttress, Ivory Coast in November 2020, raised USD1.1bn and was 5x oversubscribed at a record low yield of c.5.0%. In view of this, we entertain the possibility of issuances from Nigeria (which shelved a USD3.3bn Eurobonds plan last year), Kenya and South Africa. We note that Ghana is already planning to raise USD5.0bn in 2021 to support public expenditures. Zambia’s default on its USD42.5mn Eurobond
coupon payment in 2020, Global Oil Market: Outlook Positive in Near Term may affect risk premium
Brent crude maintained a recovery path from its near 19-year low in SSA countries, average of USD22.7pb in Q1:2020 (the lowest price since it averaged however, the USD19.9pb in Q4:2001), supported by deep and extended production peculiarities of cuts by the Organisation of Petroleum Exporting Countries (OPEC) and individual issuers (for its allies, otherwise known as OPEC+, and a gradual easing of lockdowns instance, Nigeria’s FX across economies especially China, starting from Q2:2020. policies and trends in oil market) will play a major After a failed attempt at a production cut in March on the heels of a role in their borrowing Saudi and Russia scuffle, OPEC+ voted for its largest ever single output costs. cut of 9.7 million barrels per day (mbpd) for May and June 2020. Subsequently, production cuts were eased to 7.7mbpd in August 2020.
These cuts partly compensated for the estimated fall in demand of 9.8mbpd in 2020 due to the low patronage of the Aviation, Manufacturing and Hospitality sectors, amid a wider suspension of activities that reduced both domestic and commercial consumption. The other catalysts of the rebound in oil prices were the relaxation of strict lockdowns globally and the sooner-than-expected discovery of COVID- 19 vaccines, promising the world a less costly option to slow the pandemic and diminish its influence. As a result, Brent averaged USD54.0pb in Q4:2020, beating forecasts of sub-USD50.0pb before 2021. Year-on-year, Brent crude closed 2020 down 21.5% from USD66.0pb.
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Chart 19.0: Projected Debt Landscape in 2021 (Gross Debt to GDP in %)
Scale
Source: IMF, Greenwich Merchant Bank Research
After slipping below zero, price of the West Texas Intermediate (WTI) in April 2020 staged a recovery from its trough with support from the expansion of economic activities and subdued global supply of crude oil. Overall, WTI averaged USD39.3pb in 2020 from USD57.0pb in 2019.
In 2021, the global demand for oil is projected to grow by 6.6% to 95.9mbpd from 90.0mbpd in 2020 (99.8mbpd in 2019), with India (+13.7%) and China (+8.6%) adding zest to the market. We expect manufacturing activities to continue expanding and for stronger international links to boost jet fuel. In addition, the possibility of reduced public transportation patronage could support car sales particularly in developed economies, increasing demand for fuel.
These positives are moderated by the imposition of fresh lockdowns at the turn of the new year in key economies, especially those in Europe. The virulent COVID-19 mutation could reverse the relaxation of strict lockdowns and reopening of air travel routes, as there are doubts about the efficacy of discovered vaccines on the virus.
On the supply side, OPEC+ settled for a 7.2mbpd output cut from January 2021. Furthermore, de facto cartel leader, Saudi Arabia volunteered 1.0mpbd cut in February and March 2021 to support the oil market. The co-operation within OPEC+ will be critical to buoying oil prices. For WTI, the US Energy Information Administration (EIA) projects that lower oil prices would discourage drilling activities and reduce annual US crude oil production by 0.2mbpd to average 11.1mbpd in 2021.
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In addition to the above, developments around Iran’s revival of nuclear program and the return of Libyan oil could have material impact on the market. We also note the increasing support for the renewable energy industry by corporates and governments in a bid to cut down global carbon footprint. Global tech giant, Google in September 2020 announced that it would rely completely on renewable energy by 2030, while the UK government announced that sales of new petrol and diesel cars would end in the UK by 2030 instead of the previous 2040 deadline. Between November 1 and 12, 2021, world leaders will meet at the 2021 United Nations Climate Change Conference in Glasgow to intensify the fight against global warming. In focus would be the surprise 1.0 degree Celsius (C) rise in global average temperature by FY:2018, barely two years after scores of countries agreed to help ensure global average temperature does not increase more than 1.5 degrees C before 2030.
We believe that shift towards green energy puts additional nail to the coffin of the conventional oil industry but on the flip side, the demand We believe that shift for plastic and similar materials for producing medical equipment, towards green energy protective gears like face mask and gloves and other medical supplies puts additional nail to due to the pandemic will be positive for the petroleum industry. the coffin of the For 2021, the impact of the shift to renewable energy is not expected to conventional oil be very significant on oil prices. We expect Brent to average between industry but on the flip USD50.00 – USD55.00 per barrel in 2021 with improved demand for oil side, the demand for and a cautious OPEC+ as tailwinds. plastic and similar materials for producing
Chart 20.0: Prospect Bright for Brent in Near Term (USDpb) medical equipment... due to the pandemic will be positive for the petroleum industry.
Source: Investing.com, Bloomberg, Greenwich Merchant Bank Research
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GMB 2020 Review and 2021 Outlook DOMESTIC ECONOMY
A Plague of Economic Uncertainty
It was a particularly tough year for the Nigerian economy, as a myriad of issues headlined by the COVID-19 pandemic and the oil price shock drove the economy into a recession, its second in four years. As in other countries, growth declined tremendously on the back of the global pandemic that tipped millions into stringent lockdowns, and in turn, dampened economic activities. While global growth is expected to rebound by 5.5% according to the International Monetary Fund (IMF), we believe the Nigerian economy would take a painful correction before it fully recovers from the impact of the twin shocks.
The country took phased out exits from the COVID-19 restrictions, as lockdowns were gradually eased in each phase. The economic effect of restriction in movements, forced the Government to ease lockdowns. Although the growth in cases started on a drag, with just 135 infections recorded at the start of the phase 1 lockdown, this picked up pace all year round as virus infections crossed the 50,000 mark by October 2020 before reaching c. 90,000 cases by year-end.
A flurry of monetary and fiscal stimulus was, however, introduced to help offset the impact of the virus, such as the commencement of a three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans, the establishment of a target credit facility of NGN50.0bn for affected households and small and medium enterprises, a one-year extension of a moratorium on principal repayments for the Central Bank of Nigeria’s (CBN) intervention facilities and a NGN3.5tn (2.4% of GDP) stimulus package, amongst others.
While we note the fiscal space remains heavily constrained, a broader economic stimulus plan came as the NGN500.0bn COVID-19 intervention fund to support the real sector. Some other stand-out policies were the likes of the Import duty waivers for pharmaceutical firms, the NGN2.3tn stimulus plan, the reduction in regulated fuel prices, revised spending plans in the 2020 budget with an increase of about NGN0.3tn in expenditure and a 30.7% decrease in revenue. Altogether, these policy responses were put at 1.9% of GDP in 2020.
On the monetary end, policy responses like the 200bps cut in the Monetary Policy Rate (MPR), NGN2.0tn to the manufacturing sector and a NGN1.5tn for the real sector, all served as adequate support to cushion the impact of the pandemic.
Notwithstanding these buffers, recurring themes like the upward trending inflation, exchange rate volatility, shrinking job numbers, weak aggregate demand, budding insecurity challenges, amongst others, proved major challenges for the fiscal authorities and as such, resulted
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in social tensions like the #EndSars movement at the later part of the year. The poor performance of the Government's fiscal plan remained in play, thus emphasizing the need to broaden the nation's low revenue base. This, coupled with the rising debt profile are huge challenges that must be addressed to achieve the development plans of the country, as outlined in the Economic Sustainability Plan (ESP).
In spite of these, tensions had begun to fade towards the end of the year, as the discovery of the vaccines and the improved performance of the oil market brought some optimism to the country. However, a continuously weak domestic demand and uncertain economic prospects would continue to weigh on consumer confidence and thus spending. As the focus shifts from curbing the virus to an economic rebound, Nigeria would again have to reconcile its fiscal health with monetary policies to kick-start economic growth.
Proactive So far but Faced with Risks However, a continuously On the back of the weakening macroeconomic conditions worsened by weak domestic demand the global health crisis, along with the collapse in oil prices, the and uncertain economic Monetary Policy Committee (MPC) voted to make drastic changes to its prospects would policy parameters. A cut in its benchmark rate twice in the year (May continue to weigh on and September 2020), an increase in its Cash Reserve Ratio (CRR) and consumer confidence and an adjustment to its Asymmetric Corridor. Consequently, at the close of thus spending...Nigeria the year, MPR settled at 11.5% from 13.5%, CRR edged up to 27.5% would again have to from 22.5%, while the Asymmetric Corridor was pegged at +100/-700 reconcile its fiscal basis points around the MPR from +200/-500bps. The Liquidity Ratio, health with monetary however, was retained at 30.0%. Ultimately, we believe the risks of policies to kick-start higher inflation expectations, depleting external reserves, combined with economic growth. mounting fiscal risks for 2021, may prompt the CBN to revert its dovish stance and tighten towards the end of 2021.
The first meeting of the year started on an active note, as the MPC voted to raise its CRR by 500bps to 27.5%, its first adjustment since March 2016, while it retained other policy parameters. This came on the back of the excess liquidity in the system, which it felt stoked inflationary pressures upward. In essence, funding rates were expected to increase as banks were enjoined to increase their reserves with the CBN. By its second meeting, the coronavirus outbreak and the oil price shock headlined all other events, creating uncertainties across the global and domestic space. As such, the MPC opted to adopt a wait and see approach to better grasp the impact of the unprecedented events. However, it further introduced a stimulus package of c. NGN3.5tn, to support the economy during this tough period.
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The MPC’s third meeting incited a second-rate cut (100bps) in over a year, as the MPR settled at 12.5%. As was seen across the global space, the MPC embraced an accommodative stance in a bid to stimulate output growth through improved credit delivery, backed by the already expanded Loan-to-Deposit Ratio (LDR) of 65.0% and the introduced stimulus package. However, rates remained unchanged at its fourth meeting, as the MPC continued to step up credit growth measures to boost aggregate demand, amid the threatening inflation rate.
Chart 21.0: Easing Monetary Conditions Spur Currency in Circulation (NGN ’tn)
Source: CBN, Greenwich Merchant Bank Research
Interestingly, the meeting held in September heralded a spate of adjustments to some key parameters, with the MPR lowered by 100bps to 11.5%, while the Asymmetric Corridor was adjusted to +100/- 700bps around the MPR. This was also accompanied by the circular aimed at reducing the savings deposit interest rate to a minimum of 10.0% of MPR, from the previous 30.0% threshold. Broadly speaking, both decisions were expected to ease up system liquidity and lower funding costs, an approach that should spur more credit towards growth -boosting sectors in the face of the spiralling inflation. Hence, the need for a growth rebound further took precedence over rising inflationary pressures.
At its final meeting, the MPC decided to unanimously hold its interest rates at current levels. The move was in line with our expectations and marked the third hold in a row, following two rate cuts during the year. The MPC struck a more cautious tone, setting its intent to monitor the progress of its loosened policy measures.
Though the case of further tightening seemed more appealing, as it would help stem inflationary pressures, manage capital outflows and reduce the external reserve pressure, hiking the rate would counter the
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progress already made in the real sector, following the lower borrowings costs and the level of credit flows already achieved. However, stimulating the economic growth took precedence over all others, as the Committee felt a greater need to avert the ongoing recession and achieve medium-term macroeconomic stability.
While it is pertinent to note that the CBN’s prime objective is to maintain price stability, the MPC seemed to have shelved the acceleration in inflation rates, attributing the uptrend to supply-side factors. With inflation currently spiralling out of control, and far beyond the CBN's target range of 6.0-9.0%, we are optimistic this would take precedence in the MPC’s decision this year. However, we opine that the next policy decision in March 2021 should be dictated by the convergence of monetary and fiscal policy accommodation, as the MPC might just leave rates unchanged, to ensure they meet the envisioned threats in the domestic space.
We further expect that the MPC’s stance will tilt hawkish in the face of We further expect that the already pressured external reserves, capital flow reversals, and the the Committee's stance persistent inflationary pressures towards the second half of the year. will tilt hawkish in the Although, we do not rule out the use of its heterodox policies to drive its face of the already objectives, a measure that has so far proven to work. Given these pressured external considerations, we posit a slight increase of 100bps to 12.5% in the reserves, capital flow MPR this year. reversals, and the persistent inflationary pressures towards the Upward Trending Private Sector Credit second half of the year. In the wake of the global pandemic, the Nigerian Government pumped money into the economy at a faster pace, despite the risks of stoking inflation and weakening the currency. During the year, Base money (M1), which measures the currency in circulation, grew at an annual rate of 66.9%, following the upticks seen in bank reserves (+94.1%) and currency in circulation (+12.7%). This was further aided by the CBN's accommodative stance and a LDR of 65.0%, in a move that forced banks to increase lending at a rapid pace. We note that total credit jumped to NGN3.8tn or 20.4% between the end-May 2019 and end-August 2020. Similarly, M2 increased by 19.4% YoY.
Noteworthy was the growth in bank reserves in the concluding part of the year, which averaged 133.3%. This we attribute to the growth in deposits and the advance in CRR at the start of the year.
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Chart 22.0: Private Credit Growth Soars (NGN ‘tn)
Source: CBN, Greenwich Merchant Bank Research
Net domestic credit also increased by 17.7%, on the back of the spikes in credit to Government (+20.3%) and credit to private sector (+16.8%). The rise in the credit to Government can be mainly Credit conditions are attributed to the upticks seen in January 2020 (+69.1%) and February undoubtedly expected to 2020 (+62.9%). Meanwhile, credit to the private sector grew with improve, spurred by the notable uptrends of 24.3% and 22.4% in July and August 2020 CBN's unorthodox policy respectively, resulting from the MPC's aggression to spur credit delivery measures to stimulate to the real sector. economic activity. This Credit conditions are undoubtedly expected to improve, spurred by the may however taper, CBN's unorthodox policy measures to stimulate economic activity. This should a tightening may however taper, should a tightening stance give way by the end of stance give way by the the year. Furthermore, we expect credit to Government to be upscaled end of the year. on the back of the Government’s intent to borrow from domestic sources and support from the Ways and Means Advances, given the enormous size of the 2021 budget and tightened borrowing conditions to fund its budget deficit.
Chart 23.0: Money Supply Growth in 2020 (NGN ‘tn)
G
Source: CBN, Greenwich Merchant Bank Research
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Toughened Oil Supply Weighs on Economic Growth
Before the advent of the COVID-19 pandemic, growth in the Nigerian economy was touted to remain modest on the back of a favourable oil sector and improved credit conditions expected to spur growth in the real sector. However, the downside surprises precipitated by the global health crisis and the oil price shock affected the country's outlook and pushed the economy into a recession (its second in four years). Nevertheless, we expect economic growth to gain some traction in the final quarter of 2020, supported mainly by the rebound in oil prices (USD45.3pb), as production remains constrained by the OPEC+ production quota estimated at 1.3mbpd in Q4:2020. Meanwhile, the non -oil sector should witness some modest recovery, reflecting the firming up of business activities and improved credit delivery, particularly towards the worst-hit sectors like Manufacturing and Services. However, the Trade sector is expected to remain weak due to the supply chain disruptions, inefficiencies from the Apapa port and the country's poor infrastructure base. As a result, our projection for the final quarter, ... As a result, our (Q4:2020) stands at -1.86%. projection for the final quarter, (Q4:2020) Although the economy entered 2020 on a shaky footing, GDP grew by stands at -1.86%. 1.87%, owing to a slowdown in both the oil and non-oil segments. Despite this, the combined oil production of 2.1mbpd (its highest since Q4:2015) and the average oil price of USD50.8pb led the energy sector to grow by 5.1%, amid tensions between the OPEC+ members. The non -oil sector, however, was weighed down by the loss of momentum in the Manufacturing sector and a sharper contraction of the Trade sector brought the overall growth to a weak 1.55%.
Chart 24.0: Trend in GDP growth Chart 25.0: Sectoral Con-
Source: National Bureau of Statistics (NBS), Greenwich Merchant Bank Research
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By the second quarter, the impact of the twin shocks was fully felt, such that output contracted by 6.1% YoY, marking its first decline since Q4:2017 and its worst downturn in over a decade. The broad-based decline in the oil and non-oil sectors drove this downturn. The oil sector reeled from the collapse in oil prices (18-year low: USD19.33pb) in the face of production adjustments made by OPEC+, resulting in a contraction of 6.6% YoY. Meanwhile, lockdown measures introduced to curb the spread of the virus impacted economic activities, particularly for the Trade (-16.6%), Services (-6.8%) and Manufacturing (-8.8%) sectors, even as sectors like the Financial and Insurance (+18.5%), ICT (+18.1%) and Agriculture (+1.6%) held pace in the quarter. We also note that the effect of tighter FX supply contributed to the dampened growth in the real sector.
Turning into the third quarter, output stood firm in the negative territory, owing to the persistent weakness in the oil and non-oil sectors. Though, the decline in the non-oil sector came in milder as the effects of relaxed restrictions supported a partial rebound in domestic activities and a pick-up in sectoral activities such as the Cement (+12.0%) and Construction (+2.8%), alongside the lingering growths in ICT (+14.6%), Financial and Insurance (+3.2%) and Agriculture (+1.4%). Thus, growth stood at -2.5% YoY, 3.5% higher than Q2:2020. In contrast, the oil sector remained pressured by OPEC+ cut commitments and the subdued demand in the oil market, as the sector declined by -13.9% backed by the oil prices pegged at USD43.3pb and production volumes placed at 1.7mbpd.
Chart 26.0 Average Sectoral GDP Performance (Q1:2020-Q3:2020) (%)
Source: NBS, Greenwich Merchant Bank Research
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Agricultural Policies Bolstered Resilience in 2020
The Agricultural sector is the largest economic activity and contributes an impressive 28.4% to GDP as at Q3:2020, as it generates the largest employment and income for over half of the country’s population. We, however, note the sector is plagued with low productivity and inadequate investments, as shown in Chart 27.0 below. In an attempt to diversify the economy from the all-important oil sector, coupled with the need to stimulate a quicker recovery, the Federal Government of Nigeria garnered strength towards the sector, through the use of its protectionist policies like the land border closure, intervention programmes and further FX restrictions on key commodities which maintained growth in the sector in spite of the rather dampened environment. While we laud these policies, we observe that this pressured domestic inventories, and even compiled the already-rising inflation rate.
Chart 27.0 Trends in Banking Credit and GDP growth for Agriculture Sector (%)
Source: NBS, Greenwich Merchant Bank Research
Notably the Agricultural sector reaped some gains off the back of the CBN's supporting policies and other loan facilities, as growth in the first, second, and third quarters came in at 2.2%, 1.6% and 1.4%, respectively. Even so, supply shocks weighed heavily on the sector, accompanied by adverse weather events in food-producing states, budding insecurity challenges, pandemic-related disruptions, infrastructural deficiencies and the rising cost of inputs.
Notwithstanding, positive news on policy fronts such as the Anchors' Borrowers Program which disbursed NGN164.9bn loans to 954,279 beneficiaries and the Agric-Business/Small and Medium Enterprise Investment Scheme (AGSMEIS) that distributed NGN92.9bn to 24,702 beneficiaries. The Agricultural Credit Guarantee Scheme Fund (ACGSF)
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also allocated NGN3.6bn to farmers from January to October 2020. In our view, this supported growth at a milder rate.
Despite an envisaged pick-up in Q1:2021, the pandemic remains a major concern as it would take a while for the sector to recover fully. Add on to risks along the lines of delayed implementations, increased insecurity situations and weather-related disruptions. As an offset, other institutional supports, like the Private Sector-led Accelerated Agriculture Development Scheme (P-ADDS), are intended to onboard private investments and engage the youths in Agriculture. Combined with the Economic Sustainability Plan (ESP), which seeks to stimulate the establishment of new farms in collaboration with the State Governments and even improve processes along the agricultural value chain, this would be vital for growth in the sector.
Improved Government Spending Supports Growth Despite an envisaged pick The downturn in 2020 reeled from the negative turn of events with -up in Q1:2021, the broad-based decline in private consumption, net exports and gross fixed pandemic remains a major capital formation, contrasting with the advance in Government concern as it would take consumption and evidenced by the massive spending plans introduced a while for the sector to to lessen the impact of the twin shocks. Private consumption is recover fully. Add on to expected to be suppressed by the health crisis and resurgent risks along the lines of inflationary pressures as shown in the consumers' overall confidence delayed implementations, index, which dipped by -21.2pts from +3.8pts registered in Q3:2019, increased insecurity while growth in government consumption should remain on a stronghold situations, and weather- due to the lingering capital injections. Similarly, commodity exports are related disruptions. expected to be hit hard by restrictive measures, which will weaken the country's external position.
The year 2019 was definitely better for the Nigerian economy, led by the acceleration in Government consumption and an improved external front, even as subdued domestic demand weighed on real household consumption, according to the National Bureau of Statistics (NBS) records. Although, household consumption picked up in the final stages of the year, this was too marginal to overturn the losses posted during the year. Real household consumption contracted by 2.4% YoY as a result, down from +4.6% in 2018. As such, the heightening unemployment and persistent inflationary pressure dampened the flurry of unorthodox measures introduced to stimulate consumer lending.
We anticipate that the economy should recover, albeit at a softer pace, as the pandemic and associated containment measures are expected to slow by the first half of the year. Subsequently, domestic demand would
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strengthen. The combined implementation of the record 2021 Budget of
Economic Recovery, along with the Economic Sustainability Plan (ESP) should foster increased Government spending, and in turn boost output growth. That said, the balance of risks is tilted to the downside, amid lingering currency weakness, elevated inflation and a fragile external position.
2021 GDP Outlook: A Modest Acceleration
Our outlook for growth is premised on a mild recovery in the oil sector, a supportive low base and a stronger pick-up in the non-oil sector. Consequently, we have modelled a conservative growth rate of 1.1% for 2021.
First, we note that there are several supporting themes for growth in oil prices such as the slowdown in oil production amid a resurging demand, the widespread vaccinations, as well as the reduced shale oil Our outlook for growth production. As a result, we expect OPEC+ to roll back some of its is premised on a mild production cuts by the end of the first quarter. This may, however, be recovery in the oil moderated by further lockdown extensions and production swings from sector, a supportive low Russia and Libya. Therefore, our forecasts for oil prices should settle base, and a stronger pick within the range USD55.0pb-USD65.0pb (far above the benchmarked -up in the non-oil sector. USD40.0pb in the 2021 budget). Similarly, production cuts should ease Consequently, we have and Nigeria's compensation for overproduction earlier in 2020 will cease modelled a conservative in March 2021, as we estimate an average of 1.80mbpd in 2021 (vs. growth rate of 1.1% for 1.6mbpd in 2020). Barring any production variabilities caused by the 2021. ever-present supply outages and sabotage attacks on oil pipelines.
We expect downside risks like the tighter FX liquidity, persistent inflationary pressures, and supply chain disruptions would suppress growth in the real sector, as we have failed to see a long-lasting fix to these issues. Leaning in the other direction, we remain encouraged by the ongoing fiscal and monetary responses, that should stimulate growth and support domestic demand (a positive for the Manufacturing sector). We also expect the ICT sector will maintain its upward trend, buttressed by the roll-out of 5G networks and investments in broadband penetration. This, alongside a projected pick-up in the Agricultural sector should support output growth in 2021. Together, these factors point to a modest growth acceleration of 0.95% in the non-oil sector.
A Ballooning Current Account Deficit
Nigeria's current account remained in deficit for the ninth consecutive quarter, amid a deteriorating trade balance, worsened by the global
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pandemic. Trade deficits were however toned down in 2020 compared to the record low figure reached in Q4:2019. Even as financing conditions eased in 2020, the country's limited access to international financial markets remained evident occasioned by foreign exchange risks and capital flow reversals. With import spending far outstripping export growth, the demand for Naira remains subdued and has further fuelled the currency's depreciation. In our expectations, firm foreign demand of crude oil should give credence to higher oil prices and oil production volumes.
Chart 28.0: Current Account Balance (2016-2020) (‘bn)
Source: CBN, Greenwich Merchant Bank Research
The current account balance hit its lowest point in the year in the first quarter of 2020, indicating a marked decline in the trade balance for services, primarily due to the drop in travel services receipts, in the face of the emerging COVID-19 virus and the associated mitigation measures. We acknowledge that the 2.8% YoY marginal rise in current transfers, cushioned the current account deficit, just as sub-components like the trade in goods and income stood in the negative zone at - USD931.0mn and -USD2.2bn.
Amidst a drop in economic activities, the deterioration in current account was a lot less severe in the second quarter compared to the previous, even while the wider trade deficit and a 32.3% decline in current transfers, aided a current account deficit of USD3.6bn. Meanwhile, the deficit in the trade balance for services narrowed by 67.2% to USD2.5bn.
In a similar fashion, deficit lingered in the third quarter, albeit slowly, pressured by the persistent downturn in trade balance for goods and
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countered by an 11.6% QoQ upshoot in current transfers. The current account deficit stood at USD3.3bn, as a result.
In the first nine months, the cumulative figure widened at a rapid pace and reached -USD11.8bn. The continued deterioration of trade balances is due to high crude imports, while the plunge in the services balances can be closely linked to the fallout of the global pandemic. On a balance of factors, we expect continued currency shock amid a largely USD denominated debt stock which will continue to worsen the country's balance of payment crisis. Nonetheless, we remain slightly encouraged by an envisaged upturn in the demand for crude oil as well as the reduction in import spending. This is supported by the Government’s concerted efforts to revitalise modular refineries along with its protectionist measures that should taper the country's import bill. However, we see a need to contain trade deficits, as a currency devaluation may lower exports costs, and at the same time increase the cost of imports - a form of discouragement to local consumers. Thus, creating stronger demand for exports amidst declining imports. On a balance of factors, we expect continued
currency shock amid a Capital Control Measures Dampen Foreign Portfolio largely USD denominated Investments debt stock which will continue to worsen the Investment flows in the domestic economy shuttered, weighed down by country's balance of the COVID-19 pandemic and uncertainties surrounding the country's payment crisis. exchange rate. We observed the outbreak of the global virus incited capital flow reversals, particularly from emerging markets worth c. USD90.0bn towards safer assets. The influx of capital flows picked up pace towards the end of 2020, as optimism was built on vaccine breakthroughs and easing lockdown restrictions. Naira assets, however, received none of these inflows as a host of factors ranging from capital control to foreign exchange volatility as well as the unattractive interest rate environment underwhelmed investors’ sentiment. We note that a quicker economic recovery took precedence over triggering foreign investment inflows, as the Central Bank kept interest rates at its lowest level since November 2015.
In first quarter, foreign inflows raked in USD5.9bn, 31.2% lower than the figure recorded in the corresponding quarter of 2019. This can be attributed to a significant contraction of 39.4% in Portfolio Investments, namely the money market instruments, which contrasted the upsurge seen in Other Investments. The slowdown results from a combination of the lower yield environment, capital control, the restrictions on accessibility to the Open Market Operations (OMO) and investors'
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aversion to riskier assets exacerbated by the pandemic. The tale remained much worse in the second quarter, as investors continually held back Portfolio Investments, which fell by an unsettling 91.1%, resulting in a 78.6% YoY drop in the overall investment inflows. By the third quarter, inflows somewhat improved on the back of an increase in Other Investments (+12.9%) notably in the loan segment, helped by an uptick in Portfolio Investments (+5.7%), thereby settling inflows at USD1.5bn. However, year-over-year, investments dropped by 74.0%. Presently, Other Investments rakes in the larger chunk of investment inflows, a factor we attribute to the increased foreign loans granted to some Nigerian subsidiaries in a bid to mitigate the impact of the COVID- 19 blow. Investors seem to have shelved Portfolio Investments due to the underlying risks inherent in the Nigerian economy. In our view, capital inflows in the coming periods will be tempered by the trajectory of the virus, structural weaknesses, failure to control inflationary pressures and vulnerabilities of financial conditions across the international space. Investments would be continually held back until clarity springs up along the lines of the business environment and the foreign exchange rate management.
Chart 29.0: Investment Inflows into Nigeria (USD’bn)
Source: NBS, Greenwich Merchant Bank Research
Nigeria's Deficit Leaps to NGN6.1tn in 2020
The fallout of the global pandemic and the oil price crash brought about some conservative and emergency changes to the 2020 Appropriation Bill and precipitated the need for a revised budget unveiled in the concluding part of the year. At the turn of events, a major adjustment
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of the fiscal plan was oil price and production benchmarked at USD28.0pb and 1.8mbpd, which placed projected revenue at NGN1.0tn. However, better-than-expected performance of oil prices thanks to the OPEC+ production cut and improved global demand (at the end of the year) pegged the average crude price at USD44.0pb. We note that the country's oil production put at 1.7mbpd in 2020 compared to 2.0mbpd, muted some vandalisations and attacks on the country's key grades.
Chart 30.0: Budgetary Assumptions and Fiscal Deficit (NGN’ tn)
Source: Budget Office, Budgit, Greenwich Merchant Bank Research
Aggregate revenue realized as at year-end stood at NGN3.9tn, a 27.0% shortfall relative to the projected revenue inflow of NGN5.4tn. While receipts from oil revenue settled at NGN1.5tn, a recorded outpace of 157.0%, the non-oil revenue composed mainly of Companies Income Tax, Customs Collections, Value Added Tax, amongst others contributed to an inflow of NGN2.4tn with a variance of 21.0% from the revised inflow. Corporate Income Tax did the best in the non-oil sector category with a NGN673.2bn receipt, representing an 18.0% variance from the NGN821.7bn projected revenue.
The FGN was not deterred by the constrained revenue, as the FGN's expenditure increased by 1.1% to NGN10.1tn, owing primarily to the debt service which rose by 10.6%. Recurrent expense stood at NGN7.9bn, 4.3% higher than the projected figure. In contrast, capital spending remained lower than its target, with actual expenditure marking an 11.0% shortfall due to the limited oil revenues and the delayed disbursements of project funds occasioned by pandemic-related disruptions. The recent extension given till the end of Q1:2021, should provide ample time to fund earmarked projects invariably stimulating
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economic activities and boosting growth.
Given continued spending pressures, Nigeria's fiscal position deteriorated sharply in 2020, as heavy debt burdens and persistent uncertainties surrounding fiscal consolidation continued to cloud the country's fiscal structure and weaken its growth potentials. While fiscal authorities remain committed to return the economy back to a growth path, reduced visibility and predictability of policy developments subdues a projected recovery.
Over the years, the Government’s earnings have continually underperformed expenditure plans, given some overly optimistic assumptions and a lack of clear political articulations on sequencing and prioritisations of projects that could jumpstart inclusive growth. For the 2021 budget, we observe that certain assumptions like oil prices and production appear more realistic than the previous projections, however, these assumptions remain dependent on many factors. We are somewhat more worried about others like the Exchange Rate, GDP and Inflation Rate which could compound the effects of a persistent deficit Though we envisage the and the willingness to deliver the much-needed fiscal stimulus. economy should exit the recession in 2021, at a The exchange rate pegged at NGN379.0/USD seems rather unrealistic in growth rate of 1.1%, the event of a further depreciation of the Naira relative to the this should be driven by greenback. We believe the pegged rate remains unreflective of the a supportive low base, an current economic realities due to the setback caused by the oil price upturn in the oil sector, shock and investors weakened sentiment towards the Nigerian and an improving economy. On balance, we believe the exchange rate volatility will domestic demand. continually weigh on importation, current account balance, as well as foreign debt service costs, thereby increasing projected expenditure.
Similarly, the inflation rate projected at 11.95%, appears too far- fetched, as the ongoing structural inefficiencies are not expected to abate anytime soon. The combination of distorted planting seasons, tightened FX supply, higher transportation costs occasioned by the increase in Petroleum Motor Spirit (PMS) price and temporary production swings heralded by the unprecedented events are expected to keep food prices up.
Though we envisage the economy should exit the recession in 2021, at a growth rate of 1.1%, this should be driven by a supportive low base, an upturn in the oil sector, and an improving domestic demand.
Ultimately, while the 2021 proposal does not appear wildly optimistic, some trickles of inconsistencies are expected to give way to another year marked with deviations from revenue targets. Furthermore, the country’s revenue should pick up on the back of a currency devaluation, even as the downsides remain evident.
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Budget of Economic Recovery Remains Unappealing to Solve
Economic Woes
Chart 31.0: Deficit as a % of GDP
Source: Budget Office, Greenwich Merchant Bank Research
In a similar fashion as the 2020 Appropriation Bill, the 2021 budget was submitted in October 2020, inciting a newly formed trend of passage for the January-December budget cycle. Tagged as the Budget for Economic Recovery and Fiscal Sustainability, the proposal sought to retain the Government's expansionary stance, lending credence to other growth-boosting areas like Infrastructures, Human Capital Development and Security. These key sectors are expected to gulp a total of NGN1.0tn or 7.5% of the expenditure plan. Following an upward review by the National Assembly, the Federal Executive Council (FEC) proposed to spend NGN13.6tn for the 2021 fiscal year, 3.9% higher than the initially proposed estimate of NGN13.1tn, and 25.6% more than the approved figure for 2020 of NGN10.8tn.
Some key assumptions of the budget include:
Oil price pegged at USD40.0pb; Average crude oil production of 1.86mbpd; Exchange rate put at NGN379.0/USD; and GDP growth rate of 3.0%.
The proportion of Government's revenue to be committed into the budget funding stands at NGN8.0tn, 30.0% of which will be funded from oil receipts, while the remaining 70.0% will come from non-oil sources. This leaves a budget deficit of NGN5.6tn, representing 3.9% of GDP and higher than the 3.6% revised deficit of 2020. Debt servicing will constitute 24.4% or NGN3.3tn of the expenditure plan, while 30.3% of the budget will be expended on capital projects and a notable 41.5% on non-debt recurrent expenditure.
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During a virtual address, the Finance Minister further stated that the deficit would be financed by domestic and foreign sources at NGN2.3tn apiece. Another NGN709.7bn is expected from multilateral and bilateral loan drawdowns, while NGN205.2bn will be sourced from privatisation proceeds. Other forms of financing could also come in the form of the sale of Government assets and other non-oil assets along with the sourced funds from unclaimed dividends and dormant accounts.
In our opinion, we laud the new spending plan, as we believe it should provide some level of relief to the most-affected sectors and individuals amid infrastructural developments, but with the country's earnings under marked stress, concerns persist. As the Government seeks out alternatives to upscale its non-oil receipts, it remains stuck towards lifting the subsidies off the Power and the Petroleum sectors. While the country has interesting set of reforms in the pipeline like the above mentioned and the Economic Sustainability Plan, the evolution of the pandemic and social group disruptions could make this challenging. We further expect its intention to utilize funds from dormant accounts and unclaimed dividends would benefit an economic recovery. The amount of new spending will be higher and should deepen the domestic Government debt market, which stands at NGN32.2tn.
Rising Debt Profile Remains Unsettling
Nigeria's debt profile continued to mount, given the steep rise seen in public debt over the years. As of September 2020, the country's debt stock stood at NGN32.2tn, an increase of 22.9% over the NGN26.2tn from 9M:2019. Domestic debt represented 62.2% of the total debt stock at NGN20.0tn while the external debt made up the remainder at NGN12.2tn or 37.8%. Nonetheless, Debt to GDP ratio sits comfortably at 24.1%, which is well within the 25% stipulated by the Fiscal Responsibility Act, 2007 and below the World Bank’s/IMF recommended threshold of 56% for countries in Nigeria’s peer group.
The sharp rise in the country's debt stock gave rise to increased debt service, such that the current debt service stands at NGN3.0tn (NGN1.9tn in Domestic and NGN805.5bn or USD2.3bn, at an exchange rate of NGN356.9/USD). Yet, in the 2021 budget, a total of NGN3.3tn or 24.4% was set aside for debt service given additional borrowings planned to fund the year's budget. We also bear in mind the Debt service to revenue ratio which stands at an unappealing rate of 82.6% as of Q3:2020.
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Chart 32.0: Debt Service to Revenue Chart 33.0: Total Public Debt (NGN ’tn)
Source: Debt Management Office (DMO), Greenwich Merchant Bank Research
In a bid to reflect its higher risks, three rating agencies (Fitch, Moody’s, and Standard & Poor’s) revised their outlooks on the country's long- term growth, this invariably pushes premia demanded by borrowers upwards. Revisions were premised on the increasing exposure to fiscal and external shocks because of the very weak Government finances, constrained by an extremely narrow revenue base that hinders fiscal consolidation.
As a result, Eurobond issuance was downplayed, as the Government turned to the domestic market, borrowing c. NGN2.0tn that further crowded-out the private sector. Another source of borrowing was also the CBN's Ways and Means support of NGN2.9tn, and the remaining NGN1.2tn was accessed from the foreign markets (particularly through bilateral loans).
We agree that funding government expenditure through domestic borrowing has been excessive and urge the Government to seek alternative funding. However, we believe a recourse to foreign borrowing amid a "managed" exchange rate stability and fragile economic growth might be feasible in the short run, but places the economy at a foreign exchange risk and exposes the economy to a persistent external shock in the long run. We believe that exploring the other funding options such as revenue bond places more control with the Federal Government in terms of volatility of borrowing rates and will yield measurable impact in the development of the economy. In addition, other funding sources span across the sale of moribund assets, Public-Private Partnerships (PPP) and increased foreign direct investments.
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Food Index Mounts Inflationary Pressures
Much like the later part of 2019, Inflation rate sustained its upward trend at the start of the year, as pre-existing factors like the impact of the border closure alongside other structural inefficiencies fuelled the headline figure to settle at 12.26% in March 2020, amid the muted effect of an increase in VAT rate and an adjustment of the electricity tariff. Thereafter, the impact of the COVID-19 blow began to take form in supply chains, movement restrictions, oil prices, and FX supply. This was further buttressed by the increase in pharmaceutical products, electricity tariffs and transportation costs, triggered by lockdown restrictions leading the Headline Inflation to 12.34% in April. These factors lingered into May 2020, bringing Inflation rate to 12.40% YoY.
Farther on, the CPI picked up momentum in June 2020 through to August 2020 on the back of an underwhelming harvest season enhanced by adverse weather events and pressuring growth in the Food Index to record respective figures of 15.18%, 15.48% and 16.00% in June, July, and August 2020. Moreover, the upticks in oil prices were felt due to a shift in policy that resulted in a deregulated fuel market, though at a moderate pace.
Hence, we note also that the higher inflation figures were mostly due to the dominant Food Index, a lower base effect and the heightening insecurities as readings came in at 13.71%, 14.23%, 14.89% and 15.75% respectively, in the months of September through to December 2020.
We would like to point out that although the MPR was also significantly lowered during the final months of the year, which should invariably lead to an increase in money supply and at the same time spur consumer spending, this was not the case, as supply bottlenecks outweighed the demand-side pressures, which remained weak.
Core Inflation also quickened its pace, particularly in the month of March-May 2020, and worsened further by the restriction in FX supply. Notably, Core Inflation hit a 34-month high in December 2020 at 11.37%. A downside factor was its low base effect.
More importantly, we highlight cyclical and non-cyclical influences that drove an upsurge in Food Index during the year and how these are not likely to abate any time soon. On accounts of the flood cases that disrupted an estimated 2.0mn tons of rice, further implying a total loss of over 90.0% according to the farmers, had weighed heavily on rice production, majorly in Kebbi state and other states like Jigawa, Nasarawa and Enugu. We view this trend should ultimately stick inflation upwards, as the dependence of the Nigerian farming system on
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rainfall remains to be seen. We expect this would be a recurring strain for food supply and thus leaves risk to our inflation forecasts firmly to the upside.
Following the gradual shift to a deregulated market which seeks to free up subsidized fuel prices and trim a budget deficit, PMS price is now reflective of the global crude prices and as such, were revised to NGN123.50/litre in April 2020. These adjustments lingered all through the year, in line with the uprise seen in the global energy market. We observe this was also a contributing factor to the surge in food prices, as transportation costs increased. In early December 2020, it was observed that the pass-through effect of the rise in oil prices to retail customers were limited due to a temporary subsidy of NGN5.00/litre, placing the pump price at NGN162.44/litre. Barring any regulatory swings on fuel price increase, we expect this would remain a major pressure point for the food basket given our rather optimistic view of the crude oil market in 2021.
Chart 34.0: CPI Movements and Monetary Policy Rate (MPR) (%)
Overall, our risks of higher inflation stem from the ever-present Source: NBS, Greenwich Merchant Bank Research
Chart 35.0: Headline, Core and Food Inflation (%)
Source: Budget Office, Greenwich Merchant Bank Research
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structural issues, unabating FX strain, transport and electricity price increase. All these put together places our average forecast for 2021 at 15.71%.
Exchange Rate Volatility Expected to Dampen Operating Environment
Nigeria was predominantly affected by the slump in oil prices to a record low of USD19.33pb on the April 21, 2020, weighing deeply on the country's revenue, reserves and the ability of the CBN to defend the Naira. This also birthed the decline in output, as the economy witnessed its worst recession in over a decade. The Naira weakened markedly, as the effect of the twin shocks of the global pandemic and low oil prices, resulted in a steep fall in its value. Consequently, in a bid to dampen external pressures, the interbank rate was devalued by 19.0% to NGN379.0/USD. Meanwhile, the currency depreciated by 11.2% and 22.5% at the Investors' and Exporters' (I&E) window and the Parallel FX market, bringing it down to NGN410.3/USD and NGN465.0/USD respectively, by year-end. In view of FX restrictions, we observed that foreign investors made use of dual-listed stocks like AIRTELAFRI, and SEPLAT to facilitate repatriations, hence a run-up in prices of these stocks.
External Liquidity pressures mainly ascribed to the plunge in crude prices and flow reversals led to the year's first devaluation in March 2020, with the official rate pegged at NGN360.0/USD, reflecting a 14.7% drop. Likewise, the currency depreciated by 4.2% and 9.6% at the I&E window and Parallel FX market, respectively.
While the accompanying impact of an oil price shock and the unprecedented global pandemic incited capital flow reversals, the restrictions adopted by the CBN, barred capital repatriation, at the I&E window and resulted in huge backlogs amounting to c. USD2.0bn as of October 2020, and as such foreign reserves hit a 30-month low of USD33.4bn. Also, within the period of April 2020 the cumulative I&E window turnover dropped by a whopping NGN4.4bn to NGN872.9mn, as tighter FX liquidity stemmed the CBN's interventions. This pressured rates in the Parallel market as well, resulting in the exchange rate settling at USD450.0/USD on April 24, 2020.
However, the IMF's USD3.4bn support brought some form of calm, as reserves staged a comeback to reach a year high of USD36.6bn on May 29, 2020. Though, this retreated on the back of the resumption of FX sales and the dwindling prices of oil.
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The CBN further sought out avenues to increase FX availability in the FX market and ease the difficulties, through the use of temporary fixes that majorly constrained demand-side activities. Supply-side resolutions were to be attained through consistent injection of funds to the currency market through the Wholesale Secondary Market Interventions. Although, this was not an easy feat, as turnover averaged only USD44.4mn in the months from May to July 2020, as against the average turnover of NGN345.1mn in the first quarter. Other forms of resolve also came in like the eradication of third-party involvement in Form-M, barring operators of Payment Service Bank (PSB) from accepting foreign exchange and limiting foreign exchange transactions for both individuals and corporates. This also followed a ban placed on exporters with unrepatriated funds.
Chart 36.0: Exchange Rate (USD/NGN)
Source: FMDQ, AbokiFX, Greenwich Merchant Bank Research
Chart 37.0: Movement in External Reserves (USD ’bn)
Source: CBN, Greenwich Merchant Bank Research
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More recently, its amendment of procedures for receipt of diaspora remittances where foreign currencies are expected to be paid to customers through their domiciliary accounts or in cash, steered several expectations from analysts.
In our view, we understand this should augur well for FX liquidity and even eliminate unnecessary disparity created by middlemen. That said, our findings reveal a limited number of banks have brought this to the fore, a hinderance to the policy’s effectiveness.
It is also pertinent to note that the broad stability in FX reserves was achieved through concessional loans, foreign currency restrictions and capital flow management. Consequently, reserves declined by 8.2% to settle at USD35.4bn at year-end. We expect the foreign exchange reserves to remain relatively buoyant, particularly in the first half of the year (H1:2021), on the back of our projected stability in oil prices, buoyed by anticipations of increased demand in the period as well as the World Bank’s grant of USD1.5bn. We envisage that in the first half of the year, the Naira should hover around the same level (NGN390.00/ USD – NGN395.00/USD at the I&E window and NGN465.00/USD – NGN480.00/USD in the parallel FX market). We expect the CBN will continue its regular interventions at the various windows while simultaneously unifying the various exchange rates.
Following the resolve by the CBN to ensure FX liquidity and stability, the I&E window was established on April 21, 2017. Prior to its establishment, Nigeria had several other windows: The Interbank, the window for transactions with pilgrims, the window for licensed exchange bureaus and the window for foreign travel and school fees. The different windows were established to impede the weight of the official currency rate on the depleting foreign reserves of the country.
The impact of the I&E window cannot be overestimated, as investors saw this as an avenue to buy FX at a market determined price (similar to the flexible exchange rate system). The I&E rate has floated around NGN360.0/USD since inception, with total turnover amounting to USD185.0bn. The total transactions consummated at the market stood at USD36.2bn in 2020, a decline of 44.2% YoY. We note that sectors that are import-dependent have been the worst-hit this year, as the tightened FX supply harmed growth and exacerbated inflationary pressures.
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Furthermore, worsening macroeconomic indicators have deterred investors ’ confidence and occasioned the huge backlogs of FX demand with the aim of repatriation. On another note, the rare FX devaluations that took place in 2020 were a reflection of the daunting challenge faced by the CBN to support the Naira. However, the current state of the crude market and the external reserve position will be the resolve of the bank to continue its defence of the Naira. We expect FX inflows in the form of borrowings, grants, and other infrastructure support from multilateral institutions to boost Chart 38.0: Activities Slow in I&E Window
Source: FMDQ, Greenwich Merchant Bank Research the foreign reserves and ease the pressure on the currency. Though, this does not take away our projections for a devaluation.
Nigeria’s COVID-19 Episode: Between A Rock and A Hard Place
Nigeria’s COVID-19 pandemic escalated in its second wave, with daily new cases averaging above 1,000, amidst the limited hospital capacity in the country. While lockdowns were effective in curbing the spread of the virus over the second and third quarter of 2020, the economic cost was severe on the population with an already low per capita income of USD2,229.9 relative to the World (USD11,441.7) as of 2019 (based on World Bank’s estimates). Importantly, a significant part of the Nigerian population relied on daily or weekly income. For example, over half of the adult population in Lagos and Ogun state (the virus hotspots in the first wave) earns daily or weekly wages, according to Enhancing Financial Innovation and Access (EFInA). Data from the National Bureau of Statistics (NBS) also shows an increase in unemployment rate in Q2:2020 to a record 27.1%, while output shrank sharply by 6.1% YoY. The economic impact on the ability of the government to finance expensive palliatives and the significant slide in economic activities, therefore, made the lockdowns unsustainable.
GMB 2020 Review and 2021 Outlook Page|56 DOMESTIC ECONOMY
Chart 39.0: Nigeria’s COVID-19 trajectory
Source: NCDC Greenwich Merchant Bank Research
Chart 40.0: Snapshot of Nigeria’s COVID-19 pandemic as of February 1 2021
Source: NCDC, Greenwich Merchant Bank Research
In 2021, we expect the government to remain cautious of economic lockdowns and revert to such measures only as a last resort. Already, President Muhammadu Buhari signed regulations to make the use of face masks in public places compulsory and by the end of April 2021, the country is expecting to receive 41.0mn COVID-19 vaccine doses from the African Union (AU). The vaccines will comprise 18.4mn of the Johnson & Johnson (J&J) vaccine, 15.3mn of AstraZeneca vaccine and 7.6mn doses of the Pfizer-BioNTech vaccine, according to media reports.
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Chart 41.0: Nigeria’s Economic Nerve Centres Remain Under Strain (No of confirmed Cases)
Source: NCDC, Greenwich Merchant Bank Research
The 41.0mn batch, if realized, will be sufficient for immunizing nearly 30.0mn residents, given that the J&J vaccine requires one shot unlike the other two (2) vaccines. Therefore, immunisation will cover around 15.0% of the population, pending the procurement of other vaccines.
Ahead of the delivery of anticipated vaccines, Kaduna State Government has partnered with Zipline, a medical product delivery firm, to deploy drones in delivering vaccines at the required temperature and on- demand across the northern state. While we expect some other states to innovate along this line, the concerns around logistics are not assuaged, due to the scale at which immunisation must be rolled out for effective protection of the population. Also, we opine that financing vaccine procurement and the cost of arranging logistics might be telling on the Federal and State Governments limp purses.
That said, a major risk to Nigeria is the discovery of new variants of the COVID-19 virus which might to some extent be resistant to vaccines, as well as be more transmittable.
AfCFTA: Lacklustre Start to Trade Agreement
The African Continental Free Trade Area (AfCFTA) took off on January 1, 2021 with the hopes of boosting Intra-Africa Trade in merchandise and services by progressively eliminating tariff and non-tariff barriers over a wide range of goods and improving customs. In essence, tariffs on 90 percent of goods tariff lines will be removed initially, then another seven (7) percent over a ten (10) to fifteen (15) year period under the agreement. Currently, intra-regional trade in Africa is very low,
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compared with most other regions in the World (see Charts 42.0 and 43.0). Hence, the creation of a market of 1.2bn consumers, across 55 African countries, worth at least USD2.2tn is seen as a positive in boosting trade within the continent.
The free trade agreement took off against the backdrop of the COVID- 19 pandemic that ironically forced countries around the world to shut their borders, ultimately dampening trade activities. Due to the headwinds of the ongoing pandemic and several other impediments like the lack of proper transport infrastructure between African regions, activities of smugglers and politicking, we note that AfCFTA started on a weak footing. Of particular importance is the fact that as of January 15, 2021, only 35 out of 55 members of the African Union had deposited their instrument of ratification of the African Continental Free Trade Area agreement, which means that the benefits of the trade agreement will apply to only those countries that have formally ratified the agreement. Also, negotiations are still ongoing and will continue till the end of 2021 in finalizing some aspects of the Free Trade Area (FTA), especially arrangements related to the Non-tariff barrier (NTB).
Barring the impediments, one of the biggest sectors to gain from the continental trade agreement is the Manufacturing sector. According to the African Trade Policy Centre, tariff on intra-Africa trade of 6.1% on average makes it cheaper to export primary commodities outside of the continent, and this along with critical issues like power, infrastructure and lack of clear industrial policies, weakens the capacity for an industrial take-off. Compared to the rest of the world (average of 50.0%) and within the continent (average of 33.0%), mineral products made up the largest exports from African countries from 2014-2016 according to United Nations Conference on Trade and Development (UNCTAD). With the elimination of the trade barriers and increased investment in intra-Africa infrastructure, there will be an opportunity for creating stronger value chains rather than exporting Africa’s primary commodities to the world.
The Services sector, especially Financial Services, Tourism and ICT, will also benefit from the continental trade agreement. Value-added Services makes up nearly half of the Sub-Saharan Africa output (48.4% in 2019, based on World Bank data). Outside of the region, data on countries like Egypt (50.5%), Morocco (50.9%), Tunisia (61.7%), supports the view that Services sector will form a major part of trade going forward under the trade agreement. We expect the free flow of financial resources and mobility of labour to accelerate progress across different services related activities and enhance low-skilled service- oriented jobs.
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For Nigeria, without fixing the infrastructure needed to enhance the manufacturing sector, the full benefits of the AfCFTA might not be realized. According to a study by the Nigerian Economic Summit Group (NESG), the sectors to benefit under the FTA include health, education, electricity, textile, apparel and footwear and transportation sectors while sectors to be adversely impacted are chemical, chemical products and electrical; wood and wood products; and cement and construction sectors. In our view, Nigeria can assume a leading position in continental trade and avoid becoming a net importer if the country can tap into private capital to fix transport infrastructure, address issues in the power sector, curb insecurity, and create more friendly business policy environment. Considering the factors currently at play in the domestic economy, we tip financial services and ICT as the biggest potential winners.
Chart 42.0: Intra-Regional Exports as a Percentage of Total Exports in 2019 (%)
Source: UNCTAD, Greenwich Merchant Bank Research
Chart 43.0: Intra-Regional Imports as a Percentage of Total Imports in 2019 (%)
Source: UNCTAD, Greenwich Merchant Bank Research
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Chart 44.0: 2021 Economic Projection
Economic Indicators Bear Case Base Case Bull Case
Oil Price USD40-45pb USD50-55pb USD60-65pb
Oil Production 1.5-1.6mpbd 1.6-1.7mbp 1.7-1.8mpbd
MPR 13.5% 12.5% 11.5%
Inflation 17.20% 15.71% 14.50%
GDP 0.50% 1.1% 1.98%
Exchange Rate NGN430/USD NGN420-NGN430/ NGN400/USD (Official) USD
Source: Greenwich Merchant Bank Research
The Focus Sectors in 2021 We expect the terrain to be quite clearer in 2021, as the dual effect of the global pandemic and the oil price shock would be partly faded by H2:2021. As a result, we highlight key sectors with strong potential for growth, backed by the latest wave of populism for better governance. The expected growth is thus dependent on the inflows of funds, chiefly from the government.
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Chart 45.0: Focus Sectors in 2021
Agriculture We believe the zeal shown by the current administration, supported by the ongoing implementation of institutional policies such as the Anchors’ Borrowers Programme, will serve as a base for growth. The development of railway networks adds another layer of optimism and would ease the persistent bottlenecks in the sector. We also consider the Commodity Exchange to be a game-changer, as this will curb short-term pressures on growth and prices. To place in another context, it will help standardize the quality of commodities and contribute to better pricing outlooks.
Asides, we do not think a lot of Agricultural firms are primed for conventional loans given the dominance of subsistence farming, as such other funding sources like Crowdfunding can be explored in line with the current SEC rules.
Construction With the government’s spending plans ticking higher, we remain convinced that this should spur business activities and in turn boost an envisaged rebound from a recession. With capital expenditure pegged at 30% of the budget, we expect to see a significant jump in the implementation of major infrastructure projects. More so, the recent initiation of the procurement process for twelve (12) highway concessions corroborates our thoughts on the sector.
The Housing scheme to build about 300,000 housing units will also be a major boost for this sector. Moreover, we anticipate more private companies will take advantage of the Road Infrastructure Refurbishment and Development Tax Credit scheme to construct more roads across the country supporting further growth in the sector.
Health The notable upheaval of the global pandemic highlights the value of the sector as it is posed to gain traction over the years. Recent policy reforms and CBN’s numerous interventions sets the sector as an area of priority. This, alongside the growing population and an anticipated increase in household spending are factors that should drive progress of the sector.
We believe the sector would continue to be disrupted by technological advances like the adoption of telehealth which enhances accessibility and stands a better chance of delivering personalized care to clients.
Information and We remain optimistic with the heightened demand for voice-related services Communications and data subscriptions, which helped maintain social ties and work from Technology (ICT) home policies at the onset of the global pandemic. This also necessitated the installation of fibre optic cables, thus boosting broad band penetration across the country.
We think the agility to adopt digital services would be upheld in the new normal and should buttress the Ministry’s outlook on “Digital Nigeria”. Existing telecos are more likely to strengthen their distinctive competencies and even test new earning-driving tactics amid the highly competitive environment which we envisage would bring down costs, though at a later stage.
Beyond this, the influx of Fintechs will persist and remain active, as the firms seemingly serve retail clients better through their varied product lines. We expect this will attract foreign investments like the recent acquisition of Nigeria’s Paystack, by the global payment processing firm, Stripe.
Manufacturing The sector remains critical to reposition the country on its path for growth, as well as create job opportunities given the large consumer population. More investments and development of infrastructural facilities would enable the sector ride its tailwinds very quickly, enhancing product sophistication and refining the export base. On another note, Nigerian products would become more competitive than the exports of other African countries, a positive for the AfCTFA deal as opposed to the general notion of the country being a dumping ground.
The low interest rate environment also gives a more compelling story for firms to raise capital and even restructure their overleveraged balance sheets.
Source: Greenwich Merchant Bank Research GMB 2020 Review and 2021 Outlook Page|62 The Nigerian Equities Market
GMB 2020 Review and 2021 Outlook THE NIGERIAN EQUITIES MARKET
Navigating Unchartered Territory in The Wake Of a Global Pandemic The bulls raised the curtains at the start of the year 2020, as investors positioned on the expectation of attractive dividend for FY:2019. Hence, the buying pressures witnessed in the first eight (8) trading days of January drove the Year-to-Date (YtD) return to +10.4% as the market gained NGN2.3tn coming from a negative YtD return of 14.6% in 2019.
February kicked off on a bearish stance, following the Monetary Policy Committee’s (MPC) decision to raise the Cash Reserve Requirement (CRR) by 500bps (from 22.5% to 27.5%) at its maiden meeting for the year on January 24, 2020, with the aim of curbing liquidity surfeit in the banking system. Thus, the All-Share-Index witnessed its longest eight (8) days bearish streak for the year, even while the YtD return remained in the green zone. Upon discovery and announcement of the first COVID-19 case in Nigeria by the Nigeria Centre for Disease Control (NCDC) on February 27, 2020, the YtD return subsequently towed the red zone as it posted a loss of -0.1%. By the end of February, foreign outflow was pegged at NGN52.4bn, as foreign investors sold off their holdings in the Nigerian bourse and across other emerging and frontier markets.
Chart 46.0: NSE-ASI (points) and Market Capitalisation (NGN ‘tn) in 2020
Source: NSE, Greenwich Merchant Bank Research
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Chart 47.0: Volume of Traded Units and Daily Turnover in the Equities Market in 2020
Source: NSE, Greenwich Merchant Bank Research
As the year progressed with the S&P Global Ratings agency downgrading Nigeria from a Stable outlook to Negative; the increasing number of confirmed cases of COVID-19; CBN’s directive to both local and international oil companies to discontinue the sale of dollars to the Nigerian National Petroleum Corporation (NNPC); and the enforcement of a 14-day lockdown in Lagos, Ogun and Abuja which took effect from March 30, 2020 by the Federal Government, exacerbated selloffs across board in the market, as foreign investors in a fast and furious manner pulled out a huge chunk of their funds across emerging and frontier markets worth more than USD100.0bn as reported in the Global Financial Stability Report April, 2020. These occurrences consequently impacted Nigeria as the local bourse lost NGN2.3tn alongside the NSE- ASI which dipped (0.1%) with the YtD return pegged at -20.7% by the end of March. Consequently, the capital flight stroked its highest mark with NGN87.7bn repatriated at the close of the month, traceable to the drastic declines in the Banking (-35.2%) and Consumer Goods (- 45.8%) sectors, which were the favourites of the foreign portfolio investors.
The subsequent quarter launched on a bearish note as the YtD return printed a -23.0% downslide for the year in April as Brent crude hit an 18-year low of USD19.33pb as global oil demand was greatly weakened. Thus, it was no surprise when market capitalisation touched its lowest ebb of NGN10.8tn in April.
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Chart 48.0: Foreign Outflow and Outflow in the Equities Market in 2020 (NGN ’bn)
Source: NSE, Greenwich Merchant Bank Research
Interestingly, based on the very compelling and under-priced valuation (P/E ratio) of the Nigerian equities market of about 8.1x investors (mostly domestic) took positions and as such, the equities market picked up its pace as the Banking (-21.7%) and Consumer Goods (- 25.9%) counters improved. More so, with a view to stimulate economic growth as the economic disruptions caused by the pandemic lingered, the MPC slashed the Monetary Policy Rate (MPR) by 100bps from 13.5% to 12.5% at its third meeting for the year on May 28, 2020. Correspondingly, this signalled a pessimistic forward interest rate to investors, thereby pressuring yields in the fixed income market lower. As a result, this made equities more attractive and the next viable investment destination, as it recorded an improved performance with YtD return pegged at -8.8% by the end of June, from -21.4% recorded at the commencement of the second quarter.
Also, a better-than-expected earnings report in the second quarter fuelled the bullish trend witnessed in April and May, despite the 6.1% YoY contraction in the GDP rate recorded in the quarter. On the back of the reopening and gradual easing of restrictions instituted at the peak of the pandemic, we saw an improvement of the Q3:2020 GDP figures from -6.1% to -3.6% YoY. Though this indicated that the Nigerian economy plunged into a recession, it can however be postulated that there is light at the end of the tunnel with the slower contraction recorded in the third quarter. Fitch Ratings in alignment with this position also reviewed Nigeria’s Rating to Stable (‘B’) from the previously graded Negative outlook in April.
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Chart 49.0: Foreign and Domestic Investments into the Equities Market in 2020 (NGN ’bn)
Source: NSE, Greenwich Merchant Bank Research
Further afield, for the second time in the year, the MPC withered down the key policy rate by another 100bps to 11.5% at the September MPC meeting, in order to kindle the contracting economy, despite the anticipatory inflationary impact on the economy. The Committee’s decision further made investors more cynical to the fixed income space as yields plummeted further. This, in turn, pulled traction to the equities market, in addition to the impressive Q3:2020 earnings result particularly, in the Industrial Goods and Consumer Goods sectors.
The final quarter of the year commenced on an impressive note as the Q3:2020 earnings spurred a spree of buying sentiment in the local bourse together with the continued decline of yields below 1.0% in the fixed income arena, which redirected fixed-income maturities and other uninvested funds to equities (as the demand for government backed securities exceeded it supply).
November was the cynosure of this quarter and the year at large as the equities market on Thursday, November 12, 2020 at 12.55pm sparked the NSE to trigger a market-wide circuit breaker which temporarily shut the bourse for thirty (30) minutes as the NSE-ASI soared above +5.0%. This was the first time the circuit breaker was activated since the rule was initiated in 2016.
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Upon resumption of trading activities, the market recorded additional gains of +1.15% which settled the day’s return to an all-year high of +6.23% as the market gained NGN 1.1tn in a day, since its last highest index uptick of 8.30% in April 2015. In the same vein, the YtD return swung upwards to +31.6% and the market capitalisation settled at NGN18.5tn. The spur in the broad index was attributed to buying pressures in some top tickers like DANGCEM, AIRTELAFRI and NESTLE, owing to the unattractive fixed income yield environment as seen at the NT-bills Primary Market Auction (PMA) held the previous day. Ultimately, in November, the total domestic capital inflow into the bourse was NGN250.5bn.
Following this rally, the market began to tread bearish dominated by selling pressures, as investors booked profits on counters that had gained during the rally. In the penultimate week in December, the equities market headed for its best annual run even as the market established a novel all-time high capitalisation of NGN20.3tn and was above the psychological level of 37,000pts for the first time since 2018. The strong performance can be attributed to positive corporate actions, with investors positioning in DANGCEM ahead of the first tranche of its share buy-back programme that commenced on December 30, 2020.
The year in review ended on an impressive note, as the NSE-ASI emerged the world’s best performing index, with a YtD return of +50.0%, a closing landmark index points of 40,270.7 and a market capitalisation of NGN21.1tn.
Top Ten Gainers and Losers in 2020
Chart 50.0: Top 10 Gainers on the Nigerian Stock Exchange
Stock Year Year % Inter-Year Close Open Close SUNUASSUR ₦1.00 ₦0.20 400.0% NEIMETH ₦2.23 ₦0.62 259.7% FTNCOCOA ₦0.66 ₦0.20 230.0% JAPAUL- ₦0.62 ₦0.20 210.0% GOLD AIRTELAFRI ₦851.80 ₦298.90 185.0% LIVESTOCK ₦1.39 ₦0.50 178.0% BUACEMENT ₦77.35 ₦38.45 101.2% UCAP ₦4.71 ₦2.40 96.3% FCMB ₦3.33 ₦1.82 83.0% MAYBAKER ₦3.51 ₦1.93 81.9%
Source: NSE, Greenwich Merchant Bank Research
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Chart 51.0: Top 10 Loser on the Nigerian Stock Exchange
Stock Year Year % Inter-Year Close Open Close ARBICO ₦1.03 ₦3.51 -70.6% OMATEK ₦0.20 ₦0.50 -60.0% NCR ₦1.96 ₦4.50 -56.4% MANSARD ₦1.05 ₦2.00 -47.5% AFROMEDIA ₦0.20 ₦0.34 -41.2% SEPLAT ₦402.30 ₦657.80 -38.8% INTBREW ₦5.95 ₦9.50 -37.4% GUINNESS ₦19.00 ₦30.05 -36.8% UNILEVER ₦13.90 ₦20.70 -32.9% CHAMS ₦0.23 ₦0.34 -32.4%
Source: NSE, Greenwich Merchant Bank Research
Correlation Between the Movement Of NSE-ASI and Brent Crude Oil
Chart 52.0: NSE-ASI vs Brent Crude Oil (Rebased to 100)
Source: Bloomberg, Greenwich Merchant Bank Research
The NSE-ASI over time has been observed to have a positive correlation with the price of global crude oil. The reason for this is not far-fetched, as the proceeds from oil contribute the most to the nation’s revenue. Consequently, when the price of crude oil improves, the nation’s foreign reserves also strengthens. When this occurs, more Foreign Portfolio Investment (FPI) are attracted to its capital market, as the prospects for capital repatriation is made feasible on the back of high foreign exchange reserves. In turn, these foreign inflows then
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positively impact the capital market.
Interestingly, after the Global financial crises in 2007 that led to the great recession and the dramatic slump in the oil prices, foreign investors began to exit the Nigerian equities market as investors’ confidence dwindled due to multifaceted factors. One of which was to compensate for the decline in stock prices in their countries and avoid the value of their investments being eroded by devaluation. This led to the bubble burst and the free fall of stocks in the local bourse as the supply of equities astounded the demand. Hence, the negative correlation between the NSE-ASI and Brent crude oil between 2009 and 2012.
The crash in crude oil prices in 2014 also led to the bearish trend in the NSE-ASI, as foreign investors bolted from the Nigerian capital market due to their gloomy outlook of the Nigerian economy in view of the uncertainty ahead of the 2015 general elections. However, as oil prices bolstered, the equities market also trended up as the establishment of the Investors’ and Exporters’ (I&E) FX Window in 2017 ignited the market rally.
In 2020, when the global oil price depression resulted in the erosion of the nation’s foreign reserves, dual exchange rate adjustments and unorthodox monetary control measures by the Apex Bank, the equities market towed the same path. Likewise, the challenges around capital repatriation by FPIs, caused a reduction in inflows (down 69.5% YoY from NGN419.1bn in 2019 to NGN247.2bn in 2020). In turn, this made room for the asset switch to the equities market, as domestic investors positioned for stocks with attractive dividend yield when compared to the returns on fixed income assets.
Listings and De-Listings in 2020 In the year under review, listings were largely muted as only BUA CEMENT PLC (BUACEMENT) was listed on January 9, 2020 after its merger with CEMENT COMPANY NORTHERN NIGERIA PLC (CCNN) that was previously listed on the exchange. BUACEMENT was listed via an offer for sale at NGN35.00 per share with a market capitalisation of NGN1.2tn. Consequently, CCNN was delisted. Contrastingly, delisting was paramount and were broadly voluntary save for ANINO INTERNATIONAL PLC (ANINO) that was statutorily delisted due to non- compliance with corporate governance and post listing rules.
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Chart 53.0: 2020 Listings and De-listings
Company Date Del- Reason For Delist- isted/Listed ing/Listing Law Union and Rock 5-Nov-20 Voluntary Delist- Insurance Plc ing Anino International 12-Oct-20 Regulatory NSE: Plc Non-compliance with corporate governance and post listing rules Continental Reinsur- 17-Jan-20 Voluntary Delist- ance Plc ing Cement Company of 9-Jan-20 Merged with BUA Northern Nigeria Plc Cement Plc (formerly OBU ce- ment Company Plc) BUA Cement Plc 9-Jan-20 Listing A.G. Leventis 7-Jan-20 Voluntary Delist- (Nigeria) Plc ing
Source: NSE, Greenwich Merchant Bank Research
The Nigerian Stock Major Market Developments in the Nigerian Bourse Exchange’s (NSE)
demutualisation journey; Demutualisation of The Nigerian Stock Exchange conversion from a The Nigerian Stock Exchange’s (NSE) demutualisation journey; company Limited by conversion from a company Limited by Guarantee to a publicly quoted Guarantee to a publicly Company Limited by Shares, commenced with the passing into law the quoted Company Limited Demutualisation Bill that became effective from August 29, 2018. by Shares, commenced Following a court-ordered meeting and extra-ordinary meeting of its with the passing into law members in March 2020, the Federal High Court in May, sanctioned its the Demutualisation Bill demutualisation scheme of arrangement. that became effective
from August 29, 2018. At the 59th Annual General Meeting of the NSE held on November 2020, its members passed a resolution that permits the Nigerian Exchange Limited (NGX), NSE’s securities trading successor under the holding company, Nigerian Exchange Group Plc (NGX Group) to list its shares by introduction. The resolution also allowed for NGX Regulations Limited (NGXREGCO) to act as an independent regulatory body vested with carrying on the regulatory business of the Exchange as licensed by Securities and Exchange Commission (SEC), while the real estate arm, NGX Real Estate Limited (NGXRELCO), will be independently responsible for real estate investment activities for the Group. This feat takes the NGX a step closer to fulfilling its goal of being Africa’s leading exchange hub as the demutualisation process is expected to introduce improved transparency, corporate governance practices and a more efficient management of securities, all of which should consequently adorn it for more foreign investment traction.
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Accordingly, as stated by the CEO, Mr. Oscar Onyema, it is expected that the NGX post demutualisation, will be better equipped to diversify its operations and evolve into a more competitive, robust, and liberalized stock market.
Companies Migrate from the Alternative Securities Market (AseM) to the Growth Board On January 29, 2020, the NSE, with the aim of assisting Small and Medium Scale Enterprises (SMEs) with growth potentials and good corporate governance standards; and looking to raise capital and promote liquidity in the trading of their shares, launched the NSE Growth Board that offers relaxed entry requirement with less stringent pre- and post-listing conditions. Consequently, upon receipt of applications and approval of same, the National Council of the Exchange migrated CHELLARAMS PLC (CHELLARAM), LIVING TRUST MORTGAGE PLC (LIVINGTRUST), MCNICHOLS PLC (MCNICHOLS), and THE INITIATES PLC (INITSPLC) from the Alternative Securities Market (ASeM) to the Growth Board on November 30, 2020.
The NSE expects that the inclusion of these companies on the Growth Board Index, will afford them access to an assortment of value-added services such as institutional services, investors relations, corporate access, analyst coverage, amongst others. This will grant them a competitive edge beyond access to capital and accordingly provide increased visibility to global investors.
Digitalisation of Public Offerings Subscription With the current disruptions resulting from the pandemic and the increased resort to the embrace of technological solutions, the NSE in furthering its commitment to deploying environmentally friendly business practices and promoting paperless public offer subscriptions, on December 21, 2020 launched the ‘X-PO’, the first end to end online self-service platform for the subscription of public offerings in Africa. This platform is intended to provide stakeholders in the public offerings value chain, a more effective way of managing public offers.
Its structure enables investors to conveniently make subscriptions and payments for public offers through the web and mobile (USSD) platforms. Thus, dispensing with the need for and eliminating the challenges associated with the physical submissions of public offering application forms and payments.
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As highlighted by the NSE, the X-PO enhances the efficiency of public offering subscription process and operational workflow in raising capital and the reach of public offerings while promoting financial inclusion and retail investors’ participation in the market. It also wields the potential of boosting investors’ confidence in the capital market by accelerating the reconciliation and allotment process for public offerings alongside reducing the incidence of unclaimed dividends.
MSCI Places the MSCI Nigeria Index on Watch List The 2020 Market Classification Review by Morgan Stanley Capital International (MSCI), a leading provider of research-based indexes and analytics, published on June 23, 2020, identified Nigeria, Lebanon and Bangladesh as equities markets with accessibility issues ranging from immense deterioration of liquidity in the FX market to capital repatriation restrictions, amongst others.
With Nigeria’s huge Narrowing it home, MSCI’s assessment of Nigeria’s foreign exchange exposure to the oil market liberalisation level, highlighted the absence of an offshore market as its dominant currency market and the subsistence of constraints on the onshore source of revenue, the currency market. More so, the manifested delays in currency plunge in global oil conversions for foreign investors further buttressed the liquidity prices have spurred deterioration of its foreign reserves. intense fiscal and
external pressure on the The last time a similar review occurred was on April 29, 2016, when nation’s foreign reserve. MSCI placed the MSCI Nigeria Index under review for potential reclassification to “standalone market” status, due to market accessibility challenges for foreign investors that impeded capital repatriation. The MSCI Nigeria Index was however, eventually retained in the MSCI Frontier Markets Index, courtesy of the policies of the Apex Bank that improved FX liquidity.
The current deteriorating FX liquidity environment can be attributed to the COVID-19 headwind that generated a great deal of uncertainty in the world economy, as global financial stability was ruffled. Most markets, Nigeria inclusive, became very volatile as asset prices plummeted, and global oil prices turned choppy. With Nigeria’s huge exposure to the oil market as its dominant source of revenue, the plunge in global oil prices have spurred intense fiscal and external pressure on the nation’s foreign reserve. Hence the MSCI’s stance of placing the Nigerian equities market on its watchlist, as the absence of an offshore currency market and FX currency shortages have led to its negative assessment.
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Despite the perception that these inaccessibility issues are inherent features of frontier markets, MSCI has decided in response, to place the Nigeria equity market under close monitoring and supervision and will not implement selected changes for any securities classified under the country’s index. Consequently, MSCI has resolved to continue to classify the Nigerian market as a Frontier Market pending further notice, even as it incorporated from May 13, 2020, a special treatment in dealing with Nigeria’s index. This is in a bid to moderate the number of changes in related indexes and replication issues. However, upon the occurrence of further deterioration of Nigeria’s market accessibility, MSCI may reclassify the MSCI Nigeria Index to “standalone market” status upon adequate consultation before implementation.
The impact of the Nigerian equities market being placed under MSCI’s watchlist can be garnered from the waning figures of foreign investment participation in the NSE after June 2020. Foreign inflows into the Nigerian Equities Market has since slipped (-16.3%) from NGN25.3bn in June 2020 to NGN21.1bn as of December 2020.
With the gradual upbeat in oil prices following the news of the emergence and effectiveness of Pfizer and Moderna vaccines, alongside the recent policies by the CBN on improving FX liquidity which border on the receipt and administration of diaspora remittances, we expect that these will positively affect the country’s foreign reserves.
Chart 54.0: Foreign Portfolio Participation in the Equities Market in 2020 (NGN ‘bn)
Source: NSE, Greenwich Merchant Bank Research
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Relative Comparison of NGSE’S P/E Ratio to its Peers and MSCI Frontier Market Index The average performance of Nigeria’s bourse in terms of its Price to Earnings (P/E) ratio over the past five years has been at a temper 12.6x, when compared to most of its African peers with an average P/E of 20.1x (Tunisia), 19.7x (South Africa) and 14.6x (Egypt) over the same period. The bourse recorded its lowest P/E ratios of 7.8x and 8.2x in 2018 and 2019 respectively, indicating a low valuation when compared to its peer average of 14.1x and 13.7x and the MSCI Frontier Market Index of 10.4x and 14.3x all within the same period.
Swinging its course in 2020, the benchmark index appreciated with a valuation of 15.2x, outperforming Kenya’s and Egypt’s ratios of 11.3x and 11.6x accordingly. Also, the bourse traded at a premium to the MSCI Frontier Market Index of 13.3x in 2020 as investors booked value in view of its strong fundamentals.
Chart 55.0: P/E Ratio of NGSE to its Peers and MSCI Frontier Market Index
Source: Bloomberg, Greenwich Merchant Bank Research
NSE Sectorial Performance
The Industrial Goods sector was the best performing market index with a 90.8% YtD return as it outperformed all other sectors and surpassed the benchmark index. The Insurance sector came in second place as it printed 50.6% YtD return, followed by the Banking sector with 10.1%. On the other hand, the Oil & Gas and Consumer Goods sectors recorded a negative YtD return of 13.8% and 3.3% respectively.
Source: NSE, Greenwich Merchant Bank Research
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Chart 56.0: NSE Sectorial Indices (Rebased to 100)
Source: Bloomberg, Greenwich Merchant Bank Research
Chart 57.0: YTD Performance of NSE Market Indices (%)
Source: Bloomberg, Greenwich Merchant Bank Research
Drivers of the Equities Market in 2021
Equity investors bounced off the wall in 2020, with the Nigerian bourse closing as one of the world's best-performing stock markets. Looking ahead into 2021, investors would be keen to ascertain if the positive uptrend last year will be sustained, and if maintained, by what magnitude or perhaps if there will be a major market reversal. Consequently, we have highlighted the major drivers and our expectations of the Nigerian stock market in 2021.
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Sustained Dominance of Domestic Investors
2020 saw increased domestic investors' participation (retail and institutional), attaining an all-time high of 78.8% in November, relative to foreign portfolio investors’ involvement. While we expect continued low involvement from FPIs due to the FX illiquidity and CBN capital controls, the low fixed income yield environment should sustain interest from domestic investors in the Stock market. Against this backdrop, we expect reduced market susceptibility to external shocks in 2021. Besides, we also anticipate more interest from Pension Fund Administrators (PFAs), which will further support domestic participation. Despite increased allocation in equities to 6.4% as at November 2020, the PFAs still have more leeway to raise their investments in equities based on the 10.0% regulatory threshold. We expect the PFAs investment in equities to rise to 8.5% at the end of 2021. We project an average domestic participation of 65.0% in 2021 based on the unattractive fixed income yield.
Chart 58.0: PFAs Investments in Domestic Ordinary Shares
Source: Pencom, Greenwich Merchant Bank Research
Marginal Upside Based on Market Valuation
On a P/E valuation multiple basis, the Nigerian stock market closed at a premium (15.2x) relative to the MSCI Frontier Index (14.3x), which has been the norm in most of the years. Notwithstanding, we expect the market premium will be sustained in 2021, despite the expected growth in earnings as the economy waxes stronger. The market valuation by P/ E still lags the 2016/2017 levels (15.9x).
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Chart 59.0: P/E Valuation of the MSCI Frontier Market Index vs. NSE-ASI (2009-2020)
Source: Bloomberg, Greenwich Merchant Bank Research
Fixed Income Yield Environment
The low yield environment has persuaded domestic investors to increase their risk appetites with the potential for higher returns. On a dividend yield basis, domestic investors are expected to sustain their positive interests in the stock market as long as fixed income yields remain significantly low relative to the average stock market dividend yield. While we expect the CBN to tinker with the MPR in the second half as the economy gradually moves to growth, we opine that the interest rates for money market instruments may remain subdued below average market dividend yield. Any major shift in the CBN’s dovish policy will impact negatively on the stock market.
Robust Technology Platforms
Chart 60.0: 364-days NT-Bills vs. Dividend Yield (%)
Source: FMDQ, Greenwich Merchant Bank Research
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The introduction of online trading platforms has increased transparency and participation in the Nigerian stock market in the past few years. These platforms have provided investors with the ability to take control of their investments, especially the ability to buy and sell shares. We expect the introduction of more intelligent and interactive platforms to prevail in 2021. Moreover, we also envisage more partnerships of stockbroking firms with Financial Technology Companies in 2021. This will further attract domestic investors to equities.
Improvement in E-dividend Process
On the back of the new policy to transfer unclaimed dividends of six (6) years and above to the Federal Government Special Trust Funds, we expect the SEC and the Registrars’ community to fast track and simplify the e-dividend onboarding process. This will boost investor confidence and increase domestic investor participation in the equities market in To further deepen the 2021. The unclaimed dividends have been estimated at over stock market, we NGN160.0bn as of 2020. anticipate the listing of more government-owned entities by the Bureau of Listing of Government-Owned Enterprises Public Enterprise (BPE) To further deepen the stock market, we anticipate the listing of more in 2021. government-owned entities by the Bureau of Public Enterprise (BPE) in 2021. The Director-General of the BPE hinted last year. With the heightened investors’ appetite for equities, the BPE may be more comfortable to list this year. This will reduce the weightings of some of the major stocks in the bourse and ensure a more balanced market. Moreover, this will provide the citizens with a sense of shared ownership of the privatized entity.
Increased Access to Foreign Stocks
As a result of investors’ rising interest to hedge their investments against currency devaluation or depreciation, we anticipate more interest in foreign stocks. We expect more stockbroking firms to partner with foreign brokers or technology companies to provide this option for investors. We do not anticipate that this will affect the domestic activities in the Nigerian equities market.
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Resuscitation of Capital Market Offers
With the improved valuations of the listed companies on the Nigerian bourse as well as investor appetite, we expect companies to re- commence the use of rights issues and public offers to support their businesses. The Nigerian Stock Exchange launched the X-PO online platform for the subscription of public offerings last year, this process will ensure the quick conclusion of the offer process upon allotment. This will be a major game-changer in the capital market and invariably increase investors' participation.
Equity Market Projection For 2021: A Year of Two Halves
Our projections for 2021 have been premised on the above market drivers and expectations. Amidst the uncertainties around the second wave of the COVID-19 pandemic in Nigeria, we believe that the stock market will still be a good investment alternative for investors given the The Nigerian Stock vagaries of the fixed income environment. Exchange launched the X- PO online platform for
the subscription of Bull Case Scenario (15.0% probability) public offerings last The NSE-ASI is projected to settle around 51,388.78 points translating year, this process will to a return of 27.6% in our bull case scenario. The forecast was ensure the quick informed with the expectation that the fixed income yield environment conclusion of the offer will moderate lower than 2020, hence prompting the PFAs and process upon allotment. Institutional Investors to be more aggressive in stocks given the This will be a major game approximately 3.0%-4.0% allowance to breach the regulatory threshold -changer in the capital of 10.0%. Moreover, the PFAs may play passive (buy and hold) given market... limited investment options, thereby keeping the market stable. Also, we project that the CBN will keep the MPR at 11.5% or below in 2021 as well as improve on its FX policy which may attract FPIs in Q4:2021. Furthermore, we assume that the Federal Government will list government-owned firms on the Nigerian bourse while the SEC would also accelerate the E-dividend onboarding process to boost investors participation. This scenario forecasts a market P/E of 13.0x with a projected growth rate of 9.5% in Earnings Per Share (EPS), given the expected positive GDP growth from the 2nd quarter of 2021.
Base Case Scenario (50.0% probability)
This position projects a stronger first half with the fixed income market rates expected to remain unattractive. However, this scenario
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anticipates that the CBN may raise the MPR in the second half to 12.5%. This may reduce interest in the equities market, albeit, still below the average market dividend yield. We anticipate an EPS growth of 6.0% and a market P/E of 12.0x. While we also anticipate strong interest from PFAs, the limitation in the number of ‘value stocks’ may reduce their ability to increase allocation in equity to 8.5% in 2021. Notwithstanding, we also anticipate at least the listing of one government-owned enterprise on the NSE as well as an increase in public offerings in 2021. Consequently, we project a market return of 14.0% at the end of 2021, with the NSE-ASI settling at 45,919.58 points.
Bear Case Scenario (35.0% probability)
This scenario projects a negative market return of 14.8% based on a 5.0% decline in EPS of the listed companies. This position anticipates a significant improvement in fixed income yields in 2021, reducing interest in equity as the CBN may raise the MPR to reduce investors' negative real return. Additionally, the increase in interest rate may lead to higher finance costs for the companies, which may impact the quoted companies' earnings, thereby prompting selloffs across the market. We also envisage the BPE may decide to shelve its plan of listing any government-owned enterprise. Also, the continued delay in the onboarding process for e-dividend may weaken investor sentiment.
Overall, with a 50.0% probability of incidence for our base case scenario, we expect the NSE-ASI to close in the green (+14.0%) in 2021, building on the impressive gains in 2020.
Chart 61.0: Outlook Scenarios for 2021
Bear Case Base Case Bull Case
Earnings Per Share (NGN) 3,429.53 3,826.63 3,952.98 Projected EPS Growth -5.0% 6.0% 9.5% Projected Market P/E (x) 10.0 12.0 13.0
All Share Index (points) 34,295.29 45,919.58 51,388.78
2020 All Share Index (points) 40,270.72 40,270.72 40,270.72
All Share Index Forecast 34,295.29 45,919.58 51,388.78 Overall NSE-ASI Return -14.8% 14.0% 27.6%
Probability of Incidence 35.0% 50.0% 15.0%
Source: NSE, Bloomberg, Greenwich Merchant Bank Research
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Equity Investment Strategy
Based on our expectations of the stock market direction in 2021, we have crafted three major portfolios for investors. Portfolio selection should be based on the investor’s risk appetite, investment objective, and investment horizon.
Aggressive Portfolio
This portfolio has been calved particularly for investors with high-risk appetite and an investment horizon of six (6) to nine (9) months. This will also involve active portfolio management as these stocks are volatile, hence presenting arbitrage opportunities within the period. Investors are expected to exit their positions, with the plan to re-enter the stocks at intervals. An upside threshold of 10.0%-15.0% has been estimated at each cycle as the holding period of most of the stocks has been observed to be short except in a generally strong market rally. In selecting the stocks, we also considered the potential to pay full-year dividend based on their nine (9) months scorecards and with an above 5.0% dividend yield. We project an average total portfolio return above 30.0% at the end of 2021.
Passive Portfolio
This portfolio has been structured for investors with a low-mid risk appetite for stocks and a minimum investment horizon of twelve (12) months. Passive portfolio management is also recommended as these stocks are less volatile but present strong upside potential based on their most recent financials. Despite the strong rally in some of these stocks, we still expect a decent upside within the next twelve (12) months, as their industry mostly deals in essential commodities, and the demand for their goods and services are inelastic. In addition to the modest projected price appreciation, we also estimate a dividend yield of above 4.0% based on their latest financial performance. We project an average total portfolio return of above 20.0% at the end of 2021.
High Dividend Portfolio
This portfolio was constructed for both active and passive investors. The focus was to identify stocks with the potential of dividend yield of above 6.0% based on their latest financial statements and above market average dividend yield of 5.0%. These companies have also declared final dividend at least three (3) out of five (5) years. Investors can have six (6)-twelve (12) months investment horizon, which implies that there is also potential for capital gains, which will boost the portfolio's expected total return. We project an average total portfolio return of above 25.0% at the end of 2021.
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Chart 62.0: Recommended Equity Portfolios for 2021
Aggressive Passive High Dividend UCAP OKOMUOIL UCAP FCMB PRESCO ZENITHBANK AFRIPRUD MTNN DANGCEM HONYFLOUR NESTLE DANGSUGAR MANSARD FLOURMILL GUARANTY TRANSCORP BUACEMENT MAYBAKER NB STANBIC UBA FBN DANGCEM CUSTODIAN WAPCO SEPLAT
Source: Bloomberg, Greenwich Merchant Bank Research
GMB 2020 Review and 2021 Outlook Page|83 Fixed Income Market
GMB 2020 Review and 2021 Outlook FIXED INCOME MARKET
Global Treasury Market
A Rising Debt at the Heart of the Globe
In the wake of the COVID-19 pandemic, the global debt stock spiked 331.0% of GDP to USD258.0tn (Q3:2020), according to data obtained from the Institute of International Finance (IIF). Economies across the globe stood still in a bid to curb the spread of the virus, consequently resulting in a steep in global production level. At the same time, outstanding debt galloped, as governments borrowed their way out of a looming health-induced economic crisis. In response to the systematic global slowdown, sentiments of the Central Banks across economies became dovish, easing benchmark rates to stimulate funding across sectors of the economy. Lowering rates in the fixed income market boosted asset prices as investors scurried to purchase the high yielding securities available in the market. Nevertheless, this did not buoy spending through the wealth effect following flusters across markets, in the light of uncertainties and heightened volatility. Overall, the global debt stock hit a record, above Following the need for government to stimulate growth in the economy USD270.0tn as at third coupled with low-yield environment, the pace of global debt issuances quarter 2020, compared by sovereigns, corporations, financial institutions, and households have to USD255.0tn recorded quickened since March 2020. Overall, the global debt stock hit a record, in the corresponding above USD270.0tn as at third quarter 2020, compared to USD255.0tn quarter of 2019. recorded in the corresponding quarter of 2019. The government being the biggest borrower, raised a total of USD71.4tn followed by financial institutions (USD14.6tn), thus begging the question of debt sustainability. Northern and Southern America (USD39.5tn) led the pack of borrowers and was closely trailed by the Pacific Rim (USD32.6tn).
Chart 63.0: Regional Debt as of Q3:2020 (USD ‘tn)
Source: Bloomberg, Greenwich Merchant Bank Research
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Chart 64.0: Sector Lending in Africa as of Q3:2020 (USD ‘tn)
Source: Bloomberg, Greenwich Merchant Bank Research
The evolution of the pandemic and the ensuing reality of a second wave will likely continue to drive macro conditions. In most countries, borrowing will be required to boost the economy. We expect the rise in We expect the rise in global debt to continue its upward stride, albeit slower than seen in the global debt to continue first wave. Borrowing will ameliorate the sting of the pandemic in the its upward stride, albeit short term; however, the longer-term effect of additional fiscal fragility slower than seen in the and increasing debt may have an impact on growth rates for years. In first wave. Borrowing 2020, we witnessed the highest number of defaults across the globe will ameliorate the sting than seen in over a decade. Six countries (Argentina, Belize, Ecuador, of the pandemic in the Suriname, Lebanon, and Zambia) have defaulted on their bond short term; however, the obligations thus far, raising the question of fiscal sustainability of many longer-term effect of economies. additional fiscal fragility and increasing
debt may have an impact Domestic Fixed Income Market on growth rates...
Buoyant Liquidity Pressures Yields Lower
System liquidity spurred following the dearth of investible assets to absorb inflows from maturing securities and coupon payments. Recollect that in October 2019, the Central Bank of Nigeria (CBN) segmented the bills market by restricting domestic investors (retail and institutional) from the Open Market Operations bill (OMO-bill) market, which constituted 86.0% of short-term assets in the market at the time. The average daily liquidity level in 2020 stood at NGN396.7bn, representing a growth of 51.4% YoY and the highest level seen in the past decade.
Thanks to the heightened system liquidity, bid-to-cover ratios rose to an average of 2.2x across all Primary Market Auctions (PMA) for the Nigerian Treasury bill (NT-bill), 2.3x at the OMO-bill and 2.4x at the
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Bond market. Consequently, stop rates at the NT-bill PMA pressured southward sub-1.0%, declining by 2.9%pts (YtD) for the 91-Day To Maturity (DTM) (average PMA stop rate: 1.6%), 3.5%pts (YtD) for the 182-DTM (average PMA stop rate: 2.1%) and 3.9%pts (YtD) for the 364 -DTM (average PMA stop rate: 3.4%). Similarly, stop rates at the OMO- bill market declined by 10.3%pts for the short maturity (average PMA stop rate: 5.4%), 5.6%pts for the medium maturity (average PMA stop rate: 7.3%) and 4.3%pts for the long maturity (average PMA stop rate: 9.9%).
Chart 65.0: Average System Liquidity (NGN ‘bn) & Growth Rate (2016-2020)
Source: CBN, Greenwich Merchant Bank Research
Chart 66.0: NT-Bill PMA Stop Rates in 2020
Source: Bloomberg, Greenwich Merchant Bank Research
The Bond market was not spared from the downturn, as average marginal rates eased by 0.8%pts, 5.1%pts, 5.6%pts, 2.8%pts, and 3.6%pts across the 5-Year To Maturity (YTM) (average PMA marginal rate: 9.3%), 10-YTM (average PMA marginal rate: 8.1%), 15-YTM (average PMA marginal rate: 9.5%), 25-YTM (average PMA marginal
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rate: 8.2%) and 30-YTM (average PMA marginal rate: 11.6%) respectively at PMAs conducted by the Debt Management Office (DMO).
Chart 67.0: Bond PMA Marginal Rates in 2020
Source: FMDQ, Greenwich Merchant Bank Research
Dearth of Investible Assets Compel Investors to Remain in Low Yielding Securities Sub-Inflation
Against the backdrop of an accelerating inflation rate and a plodding decline in yields, investors earned steep negative real return in the fixed income market. The decision of the CBN’s Monetary Policy Committee (MPC) to cut Monetary Policy Rate (MPR) by 200bps from 13.5% to 11.5% further depressed yields, as investors were faced with limited investment options. Moreover, the strict investment policies guiding portfolio managers’ investment decisions also limited their options, as we observed significant private debt offers in the market but were not within the investment criteria of the funds. Consequently, the average yield across the Bills and Bond Markets closed sub-inflation monthly (except in January and March when average OMO-yield closed aloft inflation). The average yield in the Bond market declined by 471bps to settle at 806bps (avg. inflation: 13.2%) at the close of the year, following a significant decline in the volume of bonds allotted at PMAs compounded by robust system liquidity.
Further afield in the bills secondary market, the NT-bill closed at an average yield of 2.2% (avg. inflation: 13.2%), sliding 4.2%pts from the start of the year. Investors were, however, not deterred by the strides of inflation or yields plummeting below 1.0% as they sought for securities to absorb lingering liquidity. On the other hand, yields in the OMO-bill market plunged deeper by 12.5%pts YtD to settle at an average of 5.9% (avg. inflation: 13.2%). In the course of the year, the foreign investors became wary of the uncertainty around the liquidity of
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the OMO-bills (following the CBN’s restriction of local retail and corporate investors in late 2019), weakening economic environment, and the volatile prices of Brent. Concerns were further exacerbated by the widespread of COVID-19, which led to huge sell-offs across the market and a drastic reduction (70.0%) in OMO market turnover.
Chart 68.0: Secondary Market Yield vs Inflation in 2020 (%)
Source: NBS, CBN, Greenwich Merchant Bank Research
Chart 69.0: Volume Traded in Fixed Income Market (2020)
Source: FMDQ, Greenwich Merchant Bank Research
Albeit, following measures to curtail the spread of COVID-19 and the country's gradual reopening, investors trotted into the fixed income market, despite the declining yields and relatively uncertain economic environment. Liquidity being at an all-time high and the dearth of alternative assets left the fixed income (especially the bond) investors’ favourite.
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Chart 70.0: Monthly Avg. FGN Bond Yield vs Avg. Inflation in 2020 (%)
Source: FMDQ, NBS, Greenwich Merchant Bank Research
Chart 71.0: Annual Avg. FGN Bond Yield vs Avg. Inflation (2010- 2020) (%)
Source: FMDQ, NBS, IMF, Greenwich Merchant Bank Research
CBN Solidifies its Pro-Growth Stance, Sustained Segmentation
Pre-COVID-19, the CBN’s MPC in its first sitting of the year hiked Cash Reserve Ratio (CRR) by 500bps to 27.5% from 22.5%, in a bid to stem down the inflationary impact of lingering liquidity in the system birthed by the segmentation policy of the Bills market introduced at the tail of 2019. At the advent of COVID-19, the leitmotif of the CBN swerved to curtail the sting of the virus by stimulating growth in the economy. Thereby, the MPC in two expansionary actions, cut the benchmark rate by 100bps apiece in May and September to keep the Monetary Policy Rate (MPR) at 11.5% at the close of the year. This further bolstered the CBN’s pro-growth stance and signalled a pessimistic forward rate to the market. The Apex Bank aiming at stimulating credit to the real sector by dissuading market players from plugging funds into gilt-edged securities, consequently, steadily lowered rates across various PMAs.
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Chart 72.0: CRR Debit vs Bank Liquidity Level in 2020 (NGN ‘bn)
Source: CBN, Greenwich Merchant Bank Research
In a move to persuade Deposit Money Banks (DMBs) to lend to the real sector, the CBN beginning from April, wedged its sword by sterilizing vaults of DMBs with various CRR debits estimated to be around NGN4.4tn in 2020. This impacted significantly on the liquidity ratios of ...We should see further the banks, as sterilized funds with the CBN do not qualify as liquid debt stock spike, coupled assets for the banks. To resolve this, the CBN introduced and issued a with the newly 91-day tenor special bill at 0.5% worth NGN4.1tn at the end of last year introduced scheme of to replace most of the excess CRR. The special bills are tradable and utilizing unclaimed qualify as liquid assets for the banks, giving them more flexibility over dividends, dormant the funds. account balances and securitizing Ways and Persistent Spike in Debt Stock Means Advances.
Considering an increasing global debt stock following larger-than- expected impact of the COVID-19 across economies and its subsequent contagion, the heightened uncertainty across the globe which halted industrialisation across economies coupled with fresh waves of infections, could intensify the need for greater fiscal measures and rapidly tighten financial conditions, triggering debt distress.
Nigeria was not isolated from the global headwinds; debt has increased drastically in the past five years, as of June 2015, Nigeria’s public debt stood at NGN12.1tn (USD63.8bn), composed of NGN10.1tn of domestic debt and USD10.3bn of foreign debt. Data published by the DMO puts the debt stock at NGN32.2tn (USD84.6bn) as of September 2020, split into NGN12.2tn (USD32.0bn) of foreign debt and NGN20.0tn (USD52.6bn) in domestic debt which reflects a 166.1% rise in the country’s debt stock over the past five years.
In view of the FGN’s plan to bridge its budget deficit by borrowing NGN5.7tn from both domestic and foreign market, we should see
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further debt stock spike, coupled with the newly introduced scheme of utilizing unclaimed dividends, dormant account balances and securitizing Ways and Means Advances. Thus, it is expected that Nigeria’s debt profile will be northward of NGN40.0tn at the end of 2021. Whilst the debt-to-GDP ratio (24.1%) remains within the acceptable threshold (World Bank/IMF: 56.0%), the spiking government deficit is becoming more troubling, with an unsustainable debt service costs (FY:2020 debt service-to-revenue: 82.6%). Also, the FGN is in a dilemma of pursuing an expansionary fiscal policy to spur the economy at the detriment of long-term fiscal sustainability, considering the revenue crunch ravaging most commodity-driven economies like Nigeria.
The CBN continues to support the FGN by extending Ways and Means Advances to bridge revenue shortfalls. The CBN in 2020 supported the FGN with NGN2.9tn via Ways and Means Advances, putting the total value of support from the Apex Bank in the past 5 years at NGN12.5tn. According to the Minister of Finance, the FGN is working on a framework With the CBN more to securitise the funding, while we do not yet have adequate information inclined to stimulating regarding the structure, this will further raise government debt, while growth than curbing constraining revenue available to execute capital projects as debt inflation, we do not service continues to climb. anticipate that the steady spike in inflation will catalyse a drastic Outlook: An Issuer’s Playing Field shift in the path of the Considering the Apex Bank’s dovish leitmotif and the robust system MPR. liquidity, the Nigerian capital market remains a playing field for issuers. Going into 2021, investors are faced with low-interest rates that should remain low at an average of 300bps in the treasury bills market.
We expect the CBN to keep rates depressed at current levels in order to drive growth and lending to the real sector. Average annual credit to the private sector improved in 2020 (+16.1%) and we opine that the CBN will continue to device unorthodox methodologies in channelling funds to the real sector. In an already low-interest rate environment, the likelihood of a further cut to the MPR is slim, as such, we expect the CBN to hike rates by 100bps in H2:2021. In addition, we anticipate the CBN to persuade DMBs to lend using other monetary tools such as hiking the Loan to Deposit Ratio (LDR) and Cash Reserve Ratio (CRR).
The continued segmentation (NT-bill & OMO-bill) of the bills market portends that the Apex Bank will continue to utilize the OMO-bill window as a conduit to attract foreign flows into the market, while giving the CBN means to hike (ease) rates in one segment of the market. We expect that the lending margin between the NT-bill and OMO-bill
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markets (currently 307bps) will widen going into the second half of the year, as the CBN will seek to attract more foreign flows via the OMO-bill window to keep the external reserves above USD35.0bn and meet its Eurobond obligations in 2021; [USD1.3bn- maturity (28 Jan 2021: USD500.0mn) and coupon payments (USD840.0mn)].
With the CBN more inclined to stimulating growth than curbing inflation, we do not anticipate that the steady spike in inflation will catalyse a drastic shift in the path of the MPR. Examining the factors that drove inflation for 2020, seldom can liquidity be a major factor, although we expect the system to remain well-buffered with liquidity as a whopping NGN8.1tn (Naira denominated assets) in maturities and coupon payments will impact the system all through 2021. This represents 1.4x of the 2021 fiscal deficit, and 3.4x of projected domestic borrowing for the year. Going by our forecast, we expect the CBN to roll over all maturing NT-bills in the year worth NGN2.2tn and the DMO to issue between NGN1.4tn-NGN1.8tn in 2021 (NGN360.0bn-NGN450.0bn/ quarter) putting the total borrowing from the domestic market using the NT-bill and Bond securities at a minimum-case scenario at NGN3.6tn, and NGN4.0tn at the maximum-case scenario. Our minimum- and maximum-case scenario represents 1.5x and 1.7x of projected domestic borrowing for the year, respectively. The expected liquidity portends that, despite the expansion in the fiscal deficit compared with previous years, the domestic market will remain awash with liquidity in the year, save any changes to the borrowing schedule in the 2021 fiscal budget.
Chart 73-.0: Fixed Income Obligations in 2021
Source: FMDQ, Greenwich Merchant Bank Research *(NGN bn) Savings Bond (4.3), FGN Bond (561.0) Sub-National Bond (6.5), Corporate Bond (79.6) Supra-National Bond (1.6) ** (NGN bn) FGN Bond (1,438.7), Sub-National (42.6), Corporate Bond (79.0), Sukuk Bond (50.4), Green Bond (7.27) *** (USD mn) FGN Eurobond (500.0), Corporate Eurobond (300.0) **** (USD mn) FGN Eurobond Coupon (806.1mn), Corporate Eurobond Coupon (123.5)
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The Sub-Saharan African sovereigns will return to international debt markets in flux in 2021, motivated by a sticky low-yields environment, as Central Banks remain expansionary and a well-nourished investors’ appetite. Ivory Coast and Egypt were the only African nations to tap into the international debt markets since the onset of the pandemic. Nigeria’s aim of raising NGN2.3tn worth of securities in the international market may be thwarted by the recent scepticism created by the Zambia default, exacerbated by fragile domestic macro-economic conditions and the possibility of a rate hike in the global market. Thereby, investors may demand a higher-than-expected premium to compensate for heightened uncertainty, thus deepening debt sustainability concerns. We anticipate that the FGN may not raise the total amount allotted to the foreign borrowings in the fiscal budget, hence we see the FGN seeking alternative means of raising debt by obtaining larger-than-expected multi-lateral loans, tapping deeper into the domestic market by issuing exotic papers such as infrastructure backed securities and/or a fourth tranche of Sukuk, following the NGN150.0bn successful issuance in 2020.
The FGN in a move to shore up its revenue and optimally utilize funds within the domestic market, passed a law in the Finance Bill 2020 which permits it to set-up a Special Trust Fund for the transfer and disbursement of unclaimed dividends and balances in dormant accounts within the last six years, as a loan to the FGN at a prevailing yield payable to the owner of the funds at the point of claim. While this will help the government bolster its revenue, we contend that it is not a sustainable revenue flow. Furthermore, this brings to the fore debt sustainability issues in a time of revenue crunch, and escalating debt service to revenue concerns.
Chart 74.0: FGN Borrowings from 2016 – 2021F (NGN ‘tn)
Source: Budget Office, Greenwich Merchant Bank Research
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Considering the buoyed system liquidity expected all through 2021 (NGN8.1tn), we expect an influx of corporate debt stock in 2021. In recent years, Corporate Bonds and Commercial Papers have been heavily sought after by investors, despite fears of weakening debt-to- earnings ratio across the market, following shrinking consumer wallets, and increasing operating costs. Corporates in 2021 will throve into the market to refinance existing debt or raise capital by taking advantage of the low-yield environment. We expect corporates to issue Commercial Papers and Bonds worth more than the NGN762.1bn issued in 2020, according to data obtained from FMDQ. Also, we expect Sub-National issuance larger than NGN100.0bn witnessed in 2020 early in the year, as many Sub-Nationals are in the process of tapping into the liquidity to shore up slowing government allocation and Internally Generated Revenues (IGRs). Our position is hinged on the expected buoyed system liquidity, relatively low-interest rate environment, and the dearth of alternative investible securities.
Strategy: Venturing into a New Wave in Search of Alpha
Going into 2021, investors are faced with low-interest rates that should remain low for a while, and consequently resulting in a negative real return. While waiting for rates to rise may simply be a safe strategy to avoid risk, it would not be an optimal strategy for 2021. Investors who seek more return will have to increase their risk profile by venturing into new markets, exotic papers, and/or the corporate bond universe.
Venturing into New Markets
Although rates have been pressured lower across various markets, some seem to be relatively superior to others. Looking at rates offered across Africa in 2020, a 364-day treasury bill offered at the PMA is hovering between 2.0% - 3.0% in Nigeria, while its peers are offering; Ghana (17.0%), Egypt (13.0%), Kenya (8.4%), and South-Africa (4.5%). Investors seeking superior returns may start venturing into these markets, to cushion low rates in the domestic market and diversify their portfolios, while considering the exchange rate risks and economic peculiarities of these countries.
Investing in Exotic Papers
Investing in exotic papers such as Mortgage-Backed Securities (MBS), Asset-Backed Securities (ABS), or Fixed-Term ETFs will offer superior returns to buffer the total returns in a portfolio compared to depressed returns from the traditional fixed income assets. Depending on the
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drivers of the securities, they can also yield diversification benefits to their returns.
Buying into Corporates Issues
In recent years, we have seen an influx of corporate debt papers in the form of Commercial Papers and Bonds infiltrate the market, as corporates seek to shore up capital for operational and investment purposes. We expect corporates to take advantage of low-interest rates to refinance existing debt and/or raise capital to drive business goals. Despite the relatively low yields, corporate papers are relatively more attractive than gilt-edged securities, thereby investors who seek to increase their return in 2021 will have to increase their risk appetite by venturing into the Corporate Bonds universe in bolstering alpha in their portfolio. As of the last trading session of 2020, the yield on a 6-year FGN bond closed at 6.4%, while an average investment-grade Corporate Bond for similar tenor closed at 9.0%. This sort of margins will cushion the portfolios from the earth low yields offered by plain vanilla sovereign issued papers.
We are very certain that in 2021 investors who seek to make alpha in the year will have to be a lot more active in their play in the various segments of the market.
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GMB 2020 Review and 2021 Outlook ALTERNATIVE INVESTMENTS
A New Look to Alternative Assets
The recent market volatility as a result of the COVID-19 pandemic, has ruffled the stability of global markets and catalysed the demand for a shift from the conventional investment options such as stocks, bonds, and cash, towards alternative and non-conventional investments that provides diversification, hedging, steady returns, and liquidity. The demand for a renewed focus towards these alternative asset classes, is further heightened by the consequential actions that central banks across the globe adopted in response to the unfolding effect of this pandemic. These measures including the significant easing of monetary policy stance via the lowering of interest rates and expanding fiscal policy measures to provide liquidity and stimulate economic activities, have brought about low yields in government securities, soaring inflation rates, high system liquidity and currency volatility in some climes.
In Nigeria, the Monetary Policy Committee (MPC) of the Central Bank of In other words, as Nigeria (CBN) with the aim of boosting lending to the real sector, cut inflation erodes the the Monetary Policy Rate (MPR) by 200 basis points (bps) to 11.5% incentive of purchasing from 13.5% in 2020. This measure together with the liquidity glut in the government fixed income system, pressured low stop rates at the Primary Market Auctions (PMA) assets with declining for government-issued securities as well as the secondary market. interest rates, there is Furthermore, the upbeat in inflation stroked a 37-month high in an increased demand for December to settle at 15.75%, even as the stop rates on the 364-day an investment pool with NT-bills plunged to an average of 1.17%, resulting in a negative real an attractive return and return of 12.07% when compared to the 12-month average inflation a cultured risk. rate of 13.25%.
All of these are relevant indicators that raises the appeal for investments in alternative assets even as investments in the traditional assets class seems to be unyielding, as the lingering effects of the pandemic have been observed to have a dimming long-term impact on interest rate; yields on government securities; currency devaluation; and inflation. The consequences of these impacts are reflected on investors’ negative real rate of return from holding government issued securities and saving cash in banks. Consequently, there is a continued supply constraint of traditional investment options, as the redirection to the equities market may not be sufficient to carter for the huge chunk of demand arising from uninvested funds. In other words, as inflation erodes the incentive of purchasing government fixed income assets with declining interest rates, there is an increased demand for an investment pool with an attractive return and a cultured risk.
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Thus, in the light of the pandemic and evolving investment exigencies, we make our case for the diversification of investments into alternative asset classes such as Exchange Traded Funds (ETFs), Private Equity Funds, Real Estate, Structured Funds, Derivatives Contracts and Commodities, that guarantee optimal return and serves as a hedge against inflation, currency volatility and its associated effects.
Chart 75.0: Average 364-Day T-Bills Stop Rate vs. 12-Month Average Inflation Rate (%)
Source: Bloomberg, Greenwich Merchant Bank Research
The Burgeoning Regime of ETFs
There are currently twelve (12) ETFs listed on The Nigerian Stock Exchange (NSE), with most of them tracking NSE market indices while the others track the S&P Nigerian Sovereign Bond Index and the Spot price of gold. The performance of these equity based alternative securities such as the Greenwich Alpha ETF, Stanbic ETF 30 and Vetiva Griffin ETF 30, amongst others, naturally followed the vacillating tides of the plunging market to lows of 23.0% in the course of the year as the COVID-19 pandemic had its field day of impacting the local bourse, but eventually closed the year on a sublime note with a YtD return of 50.0%.
Chart 76.0: Equity Based ETFs and NSE-ASI YtD Return in 2020
Source: Bloomberg, Greenwich Merchant Bank Research
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Chart 77.0: January - November 2020 ETFs Investment Outlet (NGN)
Source: SEC, Greenwich Merchant Bank Research
Subsequently, as the investment outflows of ETFs across this glum traditional investment landscape tapered down during that period with interest rates across money markets and yields on bond instruments also downsizing, investors began to scurry for non-conventional ETFs that serve as a safe haven. Hence, the remarkable traction towards gold and gold-based securities. It was on this premise that the NewGold ETF in June 2020 began its best year run, when investors injected about NGN7.1tn into this gold derivative which surged the unit price from NGN6,800.00 in March 2020 to NGN8,000.00 in June 2020.
The attraction to the New Gold ETF continued even in the second half of the year, such that the number of total unit holders as reported by SEC in its monthly ETF report, increased from one (1) in June 2020 to ninety -nine (99) in September and was pegged at one hundred and thirteen (113) as of November 2020.
Also, the market capitalisation and unit price of the New Gold ETF flung up by 1,619.5% and 72.7% respectively from NGN796.5mn and NGN5,270.00 on December 27, 2019 to NGN13.2bn and NGN9,100.00 on December 31, 2020 accordingly.
The reason alluded for this upsurge in the NewGold ETF other than the safe haven notion is that foreign investors are leveraging on the dual listing of the gold derivative on the NSE and the Johannesburg Stock Exchange (JSE) to exit the Nigerian capital market amidst the illiquidity of the greenback and the dread of further devaluation. The dual listing of gold backed asset portends the opportunity for an investor to transfer holdings from one market at which the security is listed to the fund’s primary listing in South Africa, where there is the availability of dollars
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to exit the market. In addition, it has also been observed that when Nigeria experiences FX challenges as experienced in 2016, 2017 (before the advent of the Investors‘ and Exporters’ Window) and in the year under consideration, there is always a corresponding significant uplift in the return of the NewGold ETF.
It is anticipated that the buying interest spree in the NewGold ETF may be sustained in the long run as the dollar shortage for capital exportation persists and the underlying asset, gold, provides a hedge against inflation, currency fluctuation and affords investors a safe heaven.
Chart 78.0: YtD Price Performance of NEWGOLD ETF vs. Gold Spot (%)
Source: Bloomberg, Greenwich Merchant Bank Research
Chart 79.0: Net Asset Value of Selected ETFs in 2020 (NGN)
Source: SEC, Greenwich Merchant Bank Research
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Overall, the ETFs market recorded a 182.7% YoY upsurge in its total NAV from NGN5.0bn recorded in November 2019, to NGN14.2bn as of November 2020. This uprise was largely driven by the corresponding increase in NAV of the NewGold ETF. Total ETF market capitalisation also improved by 272.3% from NGN6.6bn in 2019 to NGN24.5tn in 2020 even as the volume of trades surged by 218.23% from 4.15mn units in 2019 to 13.20mn units in 2020.
Chart 80.0: Jan. -Nov. 2020 ETFs Total Net Asset Value (NGN ‘bn)
Source: SEC, Greenwich Merchant Bank Research
Chart 81.0: ETFs 2020 YtD Price Performance vs. Selected Market Indices (%)
Source: Bloomberg, Greenwich Merchant Bank Research
Structured Products, a Linchpin to Sustainable Economic Growth
One of the salient issues that have stymied Nigeria’s economic growth and competitiveness is the huge infrastructural deficit which is evidenced by the inadequate power supply, poor conditions of roads and huge housing deficits amongst others. In a recent report issued by Moody’s, it was highlighted that to bridge Nigeria’s infrastructural deficit, about USD3.0tn will be required over the space of thirty (30) years. Hence the need for a fund tailored towards infrastructural development to help bridge this deficit, as the government by itself
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cannot solely fix this lacuna.
One of such funds, is the Nigeria Infrastructure Debt Fund (NIDF) with a target size of USD200.0bn, which serves as a double-edged structured product that avails investors attractive and predictable returns alongside, contributing to the transformation of the nation’s infrastructure and long term sustainable economic growth via a coordinated investment in electricity projects, transportation, social infrastructure, amongst others.
According to the issuer’s publication, total returns for the two-and-a-half -year period ended December 2019 were 69.2% (assuming distributions were reinvested), as the Fund targets a gross return of 300bps to 450bps over and above the benchmark FGN 10year bond yield.
Also, the NIDF in March completed its Series 6 fund raising where it raised about USD58.0mn with oversubscribed offers from PFAs, insurance companies, asset management firms, amongst other domestic investors. Hence the 89.0% increase in the value of its Net Asset Value (NAV) to NGN58.6tn as of December 31, 2020 from NGN31.0tn on December 27, 2019. Furthermore, with plans on commencing a Series 7 fund raising involving the participation of the African Development Bank, and the current low yield environment, the NIDF fund indeed presents a fascinating investment prospect to investors.
Chart 82.0: PFAs Investment in Infrastructure Fund in 2020 (NGN ‘bn)
Source: Pencom, Greenwich Merchant Bank Research
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Real Estate and Real Estate Investment Trust Funds (REITs)
The opportunities that remain rooted in the real estate sector with a housing deficit of about 17.0mn and a projected population of 402.0mn by 2050, creates a niche for investment either directly through the purchase or dealings in real estate assets either for residential or commercial purposes using crowdfunding schemes; or via the indirect route using REITs.
The performance of the REITs in the year under review remain gloomy with existing REITs delivering sub-inflation yields. This is in the light of the fact that the NAV for the SFS Real Estate Investment Trust Fund (SFS) and UPDC Real Estate Investment Fund (UPDC) printed a decline of 4.2% and 11.2% respectively from NGN2.4tn and 34.0tn on December 27, 2019 to NGN2.3tn, and NGN30.2tn as of December 31, 2021, save for the Union Homes REIT that printed a paltry 1.0% rise in NAV from NGN9.8tn in December 2019 to NGN9.9tn at the close of the year. Notwithstanding, the YtD price performance of UPDC REITs at 29.4% surpassed that of Union Homes and SFS REITs that posted a dip of 0.1% and 18.9% respectively.
However, the prospect for growth in addition to the rise in population, infrastructural deficit and rural-urban migration, is riddled on the back of the Finance Act 2019 that provides a favourable tax regime for REITs with the amendment of the Companies Income Tax Act by providing that dividends and rental income received by Real Estate Investment Company (REICs) on behalf of its shareholders are exempted from Companies Income Tax, provided that a minimum of 75.0% of same is distributed within twelve (12) months from the end of the financial year where the income was earned. This tax exemption reduces the prior disincentive to invest in REITs and will foster capital inflow to the real estate sector and REIT schemes.
Chart 83.0: Trend Line Price Performance of REITs (Rebased to 100)
Source: Bloomberg, Greenwich Merchant Bank Research
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Chart 84.0: Three (3) years YtD Price Performance of REITs (%)
Source: Bloomberg, Greenwich Merchant Bank Research
Deepening Traction Towards Alternative Investments The need to diversify from traditional investments to exotic investments options is paramount, as the tides are changing, volatility of risks is on the high and uncertainty riddles across the globe. The premise for the increased swing towards alternative assets rides on the benefits of diversification. It is our expectation that the hunt for safe haven securities and optimal portfolios with cultured volatility, that will enable investors to maximise returns will further increase in the long term even as business financial complexities arise. Highlighted below are some of the prospects for increased traction towards alternative assets in the near term.
Unwavering Low MPR and Yields Terrain
With the second wave of the COVID-19 pandemic that staged a comeback across most countries with its new variant that has been confirmed to be about 70.0% transmittable, the hope that MPR will generally remain low is sustained in H1:2021, as the government will want to maintain its expansionary monetary and fiscal measures to stimulate growth in the economy despite the probable rise in inflation. In the short term, we do not expect the yields to change tides.
Further Devaluation of the Naira
In view of the clamour for a unified exchange rate which is also one of the preconditions for the disbursement of the USD1.5bn loan sought from the World Bank, the Central Bank of Nigeria on August 6, 2020 for
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the second time in the review year, adjusted the official exchange rate to NGN379.0/USD from NGN360.0/USD.
Despite the prospects of increased FX from oil revenue on the back of warmer global oil prices, there is high propensity of another round of devaluation, as the exchange rate unification is yet to be fully attained with the parallel market rate ranging wide from the official window rate at NGN465.0/USD, and on the I&E Window, pegged at NGN410.0/USD, as of December 31, 2020. Consequently, we anticipate that the propensity of a devaluation occurring will necessitate a convergence point for both the official and parallel rate and will further spark the traction towards alternative asset instruments.
Increased Listings
Towards the tail end of 2020, we saw the introduction of a twin ETF product in the market; the Meristem Growth ETF and Meristem Value ETF, that led to the increase in the total number of listed ETFs in Nigeria to twelve (12). Furthermore, the ETF market also witnessed supplementary listing of 687,142 units of the NewGold ETF. In view of this, we posit that there will be more listings of ETFs particularly as the onus on asset/wealth managers to provide more creative and innovative products for their clients aside the conventional security class will increase. More so, we expect to see an uptick in more National Pension Commission (PENCOM) compliant products particularly as percentage of PFA allocation to infrastructural fund was broadly on the rise in 2020.
Launch of the Exchange Traded Derivatives Product Early 2021
The NSE is drawing closer to its goal of establishing Nigeria’s premier Central Counterparty Clearing House, following the receipt of an approval-in-principle from SEC for NG Central Limited to launch the clearing and settlement of exchange traded derivative products in 2021. We posit that upon the commencement, the trading of these products will appeal to investors and fund managers as it serves as a great tool for portfolio diversification and hedging. Furthermore, the introduction of the Netting provisions in sections 718 to 721 of the Companies and Allied Matters Act (CAMA) 2020 will further promote derivatives trading.
Growing Crowdfunding Platforms on the Back of Technology
In Nigeria, crowdfunding in recent times has improved private sector
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participation in addressing access to credits for businesses operating particularly in the agricultural and real estate spheres, by allowing for peer-to-peer lending and risk sharing schemes. The proliferation of crowdfunding platforms for the trading of various commodities including agricultural and real estate products, backed by the use of technology has necessitated the SEC to provide a regulation governing this space. Accordingly, on January 21, 2021, the SEC issued its Rule on Crowdfunding, that provides the regulatory framework for conducting all crowdfunding businesses including Commodities Investment Platforms (CIPs); which connects investors to specific agricultural or commodities projects for sponsorship in exchange for returns.
This regulation is expected to improve investors’ confidence, as it reduces the risks associated with the conduct of such business for prospective investors, by prohibiting the use of agricultural/commodity CIP for other funding or marketing purposes. In addition, we estimate that the due diligence and full disclosure obligations on all entities facilitating transactions involving the offer; sale of securities; or investment instruments, through crowdfunding portals (Crowdfunding Intermediaries) will lessen the incidences of fraud and scam that existed prior to the advent of this regulation.
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GMB 2020 Review and 2021 Outlook DISCLAIMER AND IMPORTANT DISCLOSURES
This publication is for general information only and is not intended to be relied upon as a forecast, research or investment advice, a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
The opinions expressed in this article represent the current, good-faith views of the analyst(s) at the time of publication. The information and opinions contained in this material are derived from proprietary and non -proprietary sources deemed by Greenwich Merchant Bank to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy, completeness or otherwise. Opinions expressed are our own unless otherwise stated.
Past performance is no guarantee of future results. The inclusion of past performance figures is for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This is not in any sense a solicitation or offer of the purchase or sale of securities. Neither Greenwich Merchant Bank nor any of its officers or employees accept any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. Investments in general and, equities, in particular, involve numerous risks, including, amongst others, market risk, counterparty default risk and liquidity risk.
This material has been issued by Greenwich Merchant Bank. Further information on any security mentioned herein may be obtained by emailing: [email protected]
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