Q4 2020 GDP and the implications for markets

February 22, 2021/Coronation Report

Q4 2020 GDP was reported last week and it showed Nigeria leaving recession – just. Q4 2020 growth was 0.11% year-on-year (y/y). The non-oil economy reached a respectable level of growth, up 1.69% y/y. The implications for market interest rates are that these can rise if: a) these help get inflation under control (it was 16.47% y/y in January ); b) the growing economy can support rates going higher. By contrast, equities may not be as interesting as they were during 2020.

FX

Last week the exchange rate in the Investors and Exporters Window (I&E Window) weakened by 1.08% to N408.25/US$1. In the parallel, or street market, the Naira appreciated by 1.06% to close last week at N478.00/US$1. In our view, unscheduled crawling-peg devaluations may be the norm this year and could eventually close the gap between the NAFEX and parallel market rates, which are approximately 20% apart.

Bonds & T-bills

Last week, the secondary market yield for an FGN Naira bond with 10 years to maturity rose by 36bps to 10.79% and at 7 years rose by 45bps to 10.45% while at 3 years the yield rose by 15bps to 7.94%. The annualized yield on a 342-day T-bill remained unchanged at 2.07%, while the yield on a 340-day OMO bill rose by 2bps to 9.60%. Last week, the bond market opened on a negative note, following the previous trading day’s bond auction results. Yields weakened across the benchmark curve by c.80bps on average. The 2026 and 2029 bond maturities experienced turnover with bids at 10.20% and 11.00% respectively, while limited offers were observed for mid-tenured securities. In the Treasury Bills (T-bill) market, on the other hand, there was weakened demand for long-dated papers as banks remained wary of taking on duration ahead of an expected auction of open market operation (OMO) bills from the Central Bank of Nigeria (CBN). We expect the market to trade cautiously as participants anticipate upcomingT-bill and OMO auctions. We believe that the overall direction of rates will continue to be upwards over the coming weeks.

Oil

The price of Brent crude fell by 0.62% last week, closing at US$62.91 /bbl, a 21.45% increase year to-date. The average price to year-to-date is US$57.75/bbl, 25.16% higher than the average of US$43.22/bbl in 2020. Last week, as oil prices rose, the United States lost some 40 percent of its oil production because of the arctic cold wave sweeping across the country, and as far south as Texas. Saudi Arabia announced that, considering the recent recovery in prices, it would suspend its voluntary unilateral additional cuts that amount to 1 million barrels per day (bpd) as Russia and Iraq continue to exceed quotas, while Iran is already boosting output. As we noted last week, we are less than two months into the year and oil prices are already well outside the US$45.00/bbl to US$60.00/bbl range we have penciled-in (which is good news for Nigeria, the CBN and the Federal budget). However, we expect friction to increase within the Organization of the Petroleum Exporting Countries (OPEC) and its partner Russia (OPEC+) as the benefits of high oil prices are being shared unequally among them. We therefore expect, with time, that global production will increase and cool the rise in prices.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI) fell by 0.63% last week with a loss of 0.21% year-to-date. Guinness Nigeria(+9.16%) , Ardova Oil (+9.06%) and Oando (+7.72%) closed positive last week, while Stanbic IBTC (-14.00%), Dangote Sugar (-3.65%) and Nigerian Breweries (-3.28%) closed negative. It is noticeable that there are very few price changes among the largest stocks by index weight (Dangote Cement, MTN Nigeria, Airtel African and BUA Cement) but still quite a lot of activity among the mid-cap stocks. Our overall sense is that interest in the market is weak.

The economy exits recession in Q4, just

Last week the National Bureau of Statistics (NBS) reported GDP data for the fourth quarter (Q4) of 2020 and these surprised the market by showing growth, albeit a low level of growth. Q4 2020 GDP grew by a meagre 0.11% year-on-year (y/y) though non-oil growth was a respectable 1.69% y/y. This came after a 3.62% y/y contraction in the economy in Q3, with the non-oil economy contracting by 2.51% y/y at that time. For the full year 2020, GDP fell by 1.92% y/y.

What is going on? It is important to note that registering an economic recovery in Q4 2020 was close to policy makers’ hearts, key to rating the Economic Sustainability Plan (ESP) as a success, and justifying last year’s crashing of market interest rates. (1-year Nigerian Treasury bill rates fell from 5.40% at the beginning of 2020 to 0.15% at the beginning of December, and commercial bank credit expanded.) Against this, the IMF was predicting a 4.3% recession in Nigeria in a report published in the middle of last year, and as recently as January the World Bank estimated that Nigeria’s economy had contracted by 4.1% in 2020. Clearly, the data suggests that Nigeria has done far better than these estimates.

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