SAT, JULY 11 2020-theG&BJournal– This week, reports from the FMDQ suggest that the CBN took a giant leap towards exchange rate unification in Nigeria by allowing the naira, at the official rate, to slide by 5.5% to NGN381.00/USD.
While the apex bank is yet to confirm the preceding, it is understand that the bank has guided bidders at its Secondary Market Intervention Sales (SMIS) window to increase their bidding price to NGN380/USD floor.
For us, the foregoing essentially signals the FGN’s resolve towards complying with the World Bank’s loan conditions of unification of the various exchange rate windows and a more flexible exchange rate regime.
We understand that the World Bank is set to take its final decision on its initial USD1.50 billion loan disbursement to Nigeria, from a package of USD2.50 billion. In terms of immediate impact, we estimate that the 5.5% currency devaluation could deliver up to the tune of NGN90.00 billion in exchange gains from the oil revenue leg.
Meanwhile, incorporating the new USD1.50 billion loan into the CBN’s cashflow, our model suggests that the FX reserves should end the year at USD27.23 billion (previously: USD25.60 billion).
Sentiments remained weak in the domestic equities market, as the All-Share Index declined by 0.1% w/w, to 24,306.36 points. The index was weighed down by NESTLE (-6.5%), BUACEMENT (-2.5%) and DANGCEM (-0.8%). Accordingly, the Month-to-Date and Year-to-Date losses increased to -0.7% and -9.4%, respectively.
Sectoral performances were negative, as all sector indices save for the Banking (+5.8%) index recorded weekly losses. The Consumer Goods (-4.0%) index recorded the biggest loss, followed by the Industrial Goods (-2.1%), Insurance (-0.7%) and Oil & Gas (-0.7%) indices.
Risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.
In all, a total turnover of 901.542 million shares worth N13.453 billion in 18,676 deals were traded this week by investors on the floor of the Exchange, in contrast to a total of 961.833 million shares valued at N9.181 billion that exchanged hands last week in 20,058 deals.
The Financial Services industry (measured by volume) led the activity chart with 629.368 million shares valued at N5.186 billion traded in 9,887 deals; thus contributing 69.81% and 38.55% to the total equity turnover volume and value respectively.
The ICT industry followed with 59.506 million shares worth N5.161 billion in 684 deals. The third place was the Consumer Goods industry, with a turnover of 57.136 million shares worth N1.385 billion in 2,993 deals.
Trading in the top three equities namely Guaranty Trust Bank Plc, Fidelity Bank Plc and Zenith Bank Plc. (measured by volume) accounted for 293.678 million shares worth N4.042 billion in 4,334 deals, contributing 32.58% and 30.05% to the total equity turnover volume and value respectively.
On Index movement, all other indices finished lower with the exception of NSE CG, NSE Premium, NSE Banking, NSE Pension, NSE-AFR Bank Value, NSE AFR Div Yield and NSE MERI Value Indices which appreciated by 2.37%, 0.89%, 5.85%, 1.13%, 5.86%, 4.66% and 4.36% respectively, according to data by the Nigerian Stock Exchange (NSE)
In line with our expectations, the overnight (OVN) rate contracted by 940bps w/w, to 14.1%. Though remaining elevated for the better part of the week, and pushed higher following AMCON charge debits, the OVN declined towards the end of the week following inflows from CRR refunds (NGN300.00 billion) and OMO maturities (NGN92.53 billion).
In the coming week, we expect a compression in the OVN, as a combined NGN113.23 billion comes into the system from OMO maturities (NGN72.55 billion) and FGN bond coupon payments (NGN40.68 billion).
Trading in the Treasury bills secondary market was bearish as average yield across all instruments expanded by 38bps to 4.6%. This was primarily influenced by the subdued activity in the OMO segment (+50bps to 5.7%) following the liquidity fix local banks were in. Similarly, the average yield at the NTB segment expanded slightly by 2bps to 2.1%, as market participants steer clear of the low yields in the space.
With liquidity conditions expected to improve next week, we should see a pick-up in demand for instruments in this space. At the NTB segment, we expect most of the activity at the primary market, as the CBN will roll over instruments worth NGN107.05 billion via auction.
The Treasury bonds secondary market continued to trade with bullish sentiments, amidst a lack of attractive alternative investible assets, as average yield in the market contracted by 17bps to 7.9%. Across the curve, duration aversion drove interest at the short (-73bps) end, as investors demanded the APR-2023 (-135bps) bond. Conversely, yields at the mid (+9bps) and long (+12bps) segments expanded due to sell-offs of the FEB-2028 (+20bps) and JUL-2034 (+38bps) bonds, respectively.
We still expect the Treasury bonds secondary market to remain bullish due to the relatively more attractive yields in the space.
The CBN’s foreign reserves continued to decline as FX outflows outpaced inflows, dipping by USD22.01 million w/w to USD36.13 billion. Nonetheless, the naira weakened against the US dollar by 0.3% WTD to NGN387.00/USD at the I&E window, and by 0.9% to NGN465.00/USD at the parallel market. In the forwards market, the naira weakened against the US dollar across the 1-month (-0.4% to NGN388.64/USD), 3-month (-0.7% to NGN392.20/USD), 6-month (-1.4% to NGN398.22/USD) and 1-year (-1.2% to NGN413.10/USD) contracts.
Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.-With Cordros Research