Sight and sound of Nigerian economy last week ending May 26, 2018, by BHIU
The week in review kicked off with the release of data from the National Bureau of Statistics (NBS), which shows that the domestic economy expanded in the three months to March 2018, with real GDP growing by 1.95% y/y (vs. revised 2.11% y/y in the previous quarter and -0.91% y/y in Q1-2017.
The oil sector grew by 14.77% y/y in Q1-18 while output in the non-oil sector expanded by 0.76% y/y. While it is cheering, on the surface, that the latest data shows expansion in both oil and non-oil sectors, the fact that growth rate in the latter significantly lags the strong double-digit recorded in the former is concerning. Following the broadly in-line GDP out-turn over Q1-18, we retain our 2.63% 2018FY GDP forecast, implying a projection of 2.70% in Q2-18. That position reflects our thought that the economy will witness little or no structural reforms over 2018.
This was followed by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) which held its second meeting of the year during the week.
In line with our expectation and consensus, the MPC again held the line across all its policy variables, retaining the MPR at 14.0%, CRR at 22.5%, liquidity ratio at 30.0%, and the asymmetric corridor around the MPR at +200/-500 bps. The MPC’s main focus remains exchange rate stability and moderating inflation.
More than ever before, the tone of the Committee suggests lower-for-longer status quo. We will continue to monitor external developments and domestic macroeconomic fundamentals and adjust our monetary policy guidance accordingly.
Business Hilights Intelligence Unit (BHIU) gathered that the equities market remained in the negative territory, with the ASI posting a significant decline of 2.84% — the largest weekly loss since mid-March — to 39,323.62 points, amidst still-dampened investor sentiments.
The benchmark index dipped below the 40,000-mark on Thursday, following a significant loss of 1.06% — the highest loss in the month so far – amidst sell offs of high-cap stocks. Year-to-date, returns dropped to 2.83%, while Month-to-Date loss stood at 3.74%. Volume and value of trades were higher during the week by 27.52% and 22.56%, to 1.37 billion units, and NGN16.02 billion, respectively.
IKEJAHOTEL was the best performing stock this week, as it gained 44.94% during the week, following the lift of the suspension imposed on its shares on Monday. Meanwhile ETERNA, with a loss of 22.27%, was the top loser.
The persisting sell-offs and continued sessions of sideways trading suggest a need for cautious trading by investors. However, still-strengthening macroeconomic fundamentals remain supportive of potential gains for patient funds.
On Fixed Income and Money Market, BHIU observed that the overnight lending rate advanced 1,067 bps w/w to 19.67%, against last week’s close of 9.00%.
The rate movement was consistent with significant outflows from FX sales (USD210 million), OMO auctions (NGN150.53 billion), and bond auction (NGN50.45 billion), all of which offset inflows from matured OMO bills (NGN266.95 billion) and bond coupon payments (NGN17.87 billion).
However, this week, analysts say inflows worth NGN930.50 billion — maturing OMO bills (NGN206.37 billion), maturing treasury bills (NGN99.21 billion), bond coupon payments (NGN305.63 billion), and the monthly FAAC disbursement (NGN319.29) — are likely to outweigh outflows; thus, higher liquidity. In effect, a contraction in the overnight lending rate is likely.
Proceedings in the NTB market were mixed within the week under review as bullish sentiments, on the back of relatively healthy liquidity earlier in the week and slight expectations of a rate cut at the MPC meeting, were tapered by the CBN OMO interventions towards the end of the week. As a result, average yield moderated by 5 bps w/w to 13.01%. Demand for the 111DTM (-33 bps) and 300DTM (-84 bps) bills led to yield contraction at the mid (-1 bps) and long (-10 bps) ends of the curve, while yield at the short segment was flat.
Besides, yields are expected to drop in the meantime, supported by expected buoyant system liquidity. At the NTB auction scheduled for next week, the CBN will offer NGN49.61 billion – NGN4.96 billion of the 91-day, NGN24.80 billion of the 182-day, and NGN19.84 billion of the 364-day – worth of bills to the market.
Within the Bond market segment, bearish sentiment persisted in the bond market, driven by (1) lingering fears of continued sell-offs by foreign investors and (2) higher stop-rates at the primary auction. Consequently, average yield rose by 7 bps to 13.34%. Yields expanded at the short (+16 bps) and long (+5 bps) ends of the curve, following selloffs of the JUN-2019 (+101 bps) and APR-2037 (+10 bps) bonds.
Conversely, yield contracted at the mid (-2 bps) segment, with yield on the MAR-2027 (-12 bps) moderating. At Wednesday’s primary auction, the DMO allotted NGN3.50 billion of the APR-2023 (re-opening), NGN8.45 billion of the MAR-2025 (re-opening), and NGN38.50 billion of the FEB-2028 (re-opening) bonds at respective stop rates of 13.50% (vs. 12.75% at the previous auction), 13.5% (vs. 12.85% at the previous auction), and 13.55% (vs. 12.89% at previous auction). The auction was 1.78x oversubscribed.
Whereas experts at Cordros Capital expect yields to remain stable at current levels in the short term, their theme continues to favour lower yields in the long term, reflecting (1) falling inflation rate and (2) the FGN’s new debt management strategy.
On the Foreign Exchange segment, mid last week, the NGN depreciated significantly against the USD to NGN366 – the highest since November 2017 – in the parallel market. The USD/NGN has traded flat at NGN366 since the significant decline on Wednesday (vs. 364 last week). Similarly, the USD/NGN dropped by 0.20% to NGN361.57 in the I&E FX window, against last week’s close of NGN360.85.
Latest data by the CBN (dated 21st May) shows the foreign reserves dipped by 0.09%, from the previous week, to USD47.75 billion, as the naira (as well as other EM currencies) came under pressure, amidst rising US treasury yields. This comes despite the CBN’s continued intervention in the FX market, as it injected USD210 million during the week. Meanwhile, trades in FX forwards showed the USD/NGN was weaker in the 1-month (-0.19%) and 3-month (-0.03%) contracts, while it strengthened in the 6-month (+0.38%) and 1-year (+0.04%) contracts to NGN364.97, NGN372.42, NGN384.78, and NGN404.93 respectively.
While the naira appears pressured by the still-strengthening dollar, and foreign reserves show declines, we believe the apex bank’s intervention in the FX market will remain healthy; supported by rising oil revenue.
