Nigeria H2-2020 Outlook: Up in the Air · 2020-06-30 · Nigeria H2-2020 Outlook: Up in the Air 3 Executive Summary Global Economy in 2020: Up in the Air In January 2020, we estimated

Nigeria H2-2020 Outlook: Up in the Air

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Executive Summary

Global Economy in 2020: Up in the Air

In January 2020, we estimated that better trade terms between the US and China,

improved clarity on the UK-EU economic ties, as well as an accommodative monetary

policy stance by central banks across the world would bolster global growth in 2020.

Against the run of play, the outbreak of the COVID-19 pandemic threw a curve ball at our

forecasts, as global attention was shifted to the public health crisis, at a huge economic

cost.

In H2-2020, global trade is unlikely to return to the pre-COVID-19 level, as economies

around the world continue to grapple with the impact of the pandemic on both global

demand and supply value chains. Clearly, the initial euphoria that greeted the last-

minute US-China Phase-1 trade deal signed in Dec-2019 has fizzled away. No thanks to

COVID-19 which added a new dimension to the brawl between both countries over

China’s transparency and information hoarding on the virus. Overall, we believe a

rebound in global trade volume is hinged on how soon normalcy will be restored and the

pace of economic recovery around the world.

Elsewhere, we expect economic policies to remain broadly expansionary to hasten

recovery. As such, liquidity in the global economy will be enormous, thereby

strengthening risk-on sentiment and the flow of capital in search of alpha. In the absence

of fresh surprises, oil prices are likely to hover from $35.0/b to $45.0/b for the rest of the

year. With no clear green light on a vaccine breakthrough before the end of 2020, we

are of the view that questioning a global recession in 2020 is pointless. The historic

lockdown experienced in H1-2020 has crippled demand and halted supply chains,

hence, the key question to ask is nature of recovery.

Sub-Saharan Africa: By far the most vulnerable

Though the last to be ensnared by the plague, authorities in Sub-Sahara Africa (SSA)

imposed one form of restrictions on the movements and economic activities or the other.

This worsened the already fragile social and economic conditions of most countries within

the region. The informal sector which accounts for over 80.0% of total employment

according to World Bank is clearly the worst hit. Again, while the health crisis exposes the

vulnerable countries with an ageing population and a large number of citizens with

underlying ailments, the economic cost will be felt the most by poor SSA countries which

are most vulnerable economically. As such, GDP growth in SSA is projected to contract by

3.2% in 2020, the lowest level in more than 20 years due to the collapse in commodity

prices.

Looking ahead, we believe the shape, duration, and size of recovery will vary from

country to country, depending heavily on the improvement in the external dynamics and

the timeframe required to bring economic activities back to pre-COVID-19 levels. We

note that recovery will be more strenuous in countries with little to no monetary or fiscal



headroom to provide large bailouts for economic recovery amid rising debt profiles.

However, the rapid financial support and debt forgiveness from the IMF other multilateral

agencies will go a long way to help.

Beyond 2020, we believe the effective implementation of the now postponed Africa

Continental Free Trade Agreement (AfCFTA) will be pivotal to building economic

resilience against future crises. The agreement will help strengthen regional value chains,

reduce vulnerability to external shocks, and advance the digital and technological

transformation required to accelerate development in the region.

Nigeria: Can stimulus packages prevent a recession?

What could have been a flourishing year for the Nigerian economy was caught in the

web of a global public health crisis which grounded domestic and external economic

activities. Already, domestic economic growth in Q1-2020 slowed to 1.87% and the figure

for Q2 2020 is set to come in negative, despite the series of stimulus packages announced

by the authorities aimed at easing the impact of the pandemic on businesses and

households.

Notably, given that the current crisis is supply-side heavy (restriction of movement and

business shutdown), it is clear that the demand-side responses by both the fiscal and

monetary authorities (liquidity injections) would not be enough to prevent an economic

contraction in the short term. However, the palliatives and reforms that are being

announced may reduce the probability of sliding into a deep recession or quicken

recovery once the incidence rate of the pandemic begins to drop and the economy is

fully re-opened.

Overall, the Nigerian economy may enter a technical recession by Q3-2020 (after two

consecutive quarters of contraction in Q2 and Q3-2020), with a chance of early recovery

by Q4-2020 or Q1-2021. Accordingly, we have lowered our real GDP growth forecast for

2020E from 2.3% to -2.69% in 2020. The biggest downside risk to the above projections

remains the possibility of a second round of lockdown, especially if the virus continues to

spread rapidly. Thus, this might delay the possibility of an early recovery or a V-shaped

recovery to a more strenuous U-shaped or W-shaped recovery. By implication, corporate

earnings will be pressured except for sectors such as healthcare, technology, and

household utilities.

Also, our outlook for the headline inflation rate remains biased upward in H2-2020 and we

expect the headline inflation rate to settle at 13.3% y/y in 2020 (Pre-COVID-19 expectation

– 11.9% y/y). On the exchange rate, we believe the odds are in favour of a further naira

adjustment which may take the official rate to N410/$ - N430/$ by year-end. However, we

believe the CBN will continue to defend the value of the local unit for as long as it can.

Thus, concerns around further adjustment are likely to discourage large-sized FPI and FDI

inflows for the rest of the year.



Naira Assets: …still a corporate issuers’ game

The spread of the COVID-19 disease across the world triggered unanticipated global

financial market volatility and Nigeria was not left out. FPIs and local investors flew to

safety amid the collapse in oil prices and currency adjustments. Investors repriced the risk

on naira assets, driving the average yield on OMO bills and domestic bonds from 13.1%

and 10.8% at the end of Dec-2019, to 15.1% and 11.9% respectively as at the end of Mar-

2020. Also, the stock market tumbled by more than 20.0% in Q1-2020.

However, in Q2-2020, the financial market rebounded sharply, as the yield curve

moderated amid optimism in the global and domestic market economy. Also, the equity

market almost recovered to its pre-selloff level largely driven by domestic investors who

took advantage of the market valuation amid a mild recovery in oil prices in the month of

May 2020.

In H2-2020, we maintain that the fixed income space will remain a corporate issuers’

game due to the sustained low yield environment. However, we expect a mild increase in

the yield curve, as the dynamics of demand and supply for debt instruments in H2-2020 is

anticipated to be driven by thinning system liquidity, FPI flows when intervention sales

resume, the CBN’s resolve to defend the naira using unconventional methods and

increased borrowing from the DMO.

Overall, we expect the yield curve to remain normalized, with a marginal upward shift, as

market forces move in favour of demand. For equities, the believe the path remains

gloomy, amid pressure on corporate earnings, concerns about the exchange rate and

the second wave of the pandemic. As a result, we expect the market to remain highly

volatile and ‘short-term gain’ driven.

uncoordinated policy outline. Notably, the recent amendment of the Deep Offshore and

Inland Basin Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews

of the Tax Acts via the finance bill, will support the implementation of the 2020 Budget

and beyond in the face of sharp rising debt profile. Again, the unprecedented early

passage of the 2020 budget by the senate in Dec-19, to return the economy to a January

to December budget cycle, effective 1st of Jan-20, is a positive development. Also, a

lower yield environment, triggered by the CBN’s recent mix of heterodox policy actions,

will not only ease the cost of rolling over government borrowings but also stimulate

domestic private sector investment.

On the back of the above, GDP growth is expected to sustain a gradual uptick in 2020,

anticipated to expand above 2.3%, faster than 2019 but below 3.0%. Also, inflationary

pressure will persist due to supply shortages and the shutdown of the border, given the

direct impact on food prices. Again, increased money supply by the CBN may keep the

core inflation sub-index elevated due to pressure on FX. In all, we expect the headline

inflation rate to average 11.9% in 2020, higher than 11.4% in 2019, in the absence of further

structural changes that may trigger a fresh uptick in m/m inflation. While the benchmark



Analysts

Wale Olusi

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Yinka Ademuwagun

[email protected]

Oluwabusola Jeje

[email protected]

Oluwashina Akinremi

[email protected]

Ayobami Omole

[email protected]

Team

[email protected]

+234-1-631-7898

United Capital Plc

Asset Management:

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Investment Banking

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Table of Content

Global Economy ······································································································· 8

The extra-ordinary 2020 ·················································································································· 9

Coronavirus outbreak: Is the threat still real? ··················································································· 11

Monetary and Fiscal Policies: ‘Helicopter money’ on a rescue mission ·············································· 13

Developed Markets: A cocktail of Healthcare, Economics and Politics ··········································· 15

Emerging Markets: A threat to years of strong growth ····································································· 17

Financial Markets: Taking a V shaped recovery ·············································································· 18

Oil Prices: Is the worst behind us? ·································································································· 19

Sub-Saharan Africa ································································································· 22

Macro Overview: Surviving the virus? ····························································································· 23

Fiscal Policy Response and Debt Sustainability: Striking the right balance··········································· 24

Macro Outlook: A synchronized slowdown and contraction····························································· 27

Eurobond Market: Monetary stimulus spurs market recovery ····························································· 29

Foreign Exchange: A broad base weakness ··················································································· 30

Equity Market: Wheezing from the impact of COVID-19 ··································································· 32

Domestic Macro and Policies ··················································································· 35

Domestic Macroeconomic Overview: Will Nigeria let a good crisis go to waste again? ······················· 36

Fiscal policy: Fiscal Policy Response to COVID-19 ············································································ 36

Monetary Policy: CBN’s Policy Response to COVID-19 ····································································· 42

Domestic Output: Can stimulus packages prevent a recession? ······················································· 47

Inflation rate: COVID-19 outbreak and lockdown, any impact on price? ··········································· 50

Foreign Exchange Rate and Reserves: Any possibility for further naira adjustment? ····························· 52

Funds flow: Q1-2020 is as good as it gets for 2020 ············································································ 54

Financial Markets ··································································································· 57

Fixed Income: The COVID-19 pandemic sparks a reassessment of risk ··············································· 58

Equities: On a slow path to total recovery? ····················································································· 66

Sectors ··················································································································· 74

Agricultural Sector ······················································································································· 75

Banking Sector ··························································································································· 77

Cement Sector ··························································································································· 79

Consumer Goods Sector ············································································································· 81

Oil & Gas Sector ························································································································· 83

Disclosure Appendix ································································································ 86

Global

Economy



Global Economy

The extra-ordinary 2020

As the year 2020 came around the corner, our baseline expectation was that of an

unsynchronized rebound in growth, driven by easy monetary policy, improved trade

relations, supportive fiscal policy, and a recovery in EM economies. However, the year

2020 has proven to be extra-ordinary in every sense. H1-2020 would be recorded in history

as catastrophic, with the unexpected outbreak of the COVID-19 disease. With the degree

of interconnectivity of the global economy, and the inability of healthcare systems to

adequately contain the virus, the global economy was forced into a ‘Great Lockdown’

as described by the IMF. Global economic activity, which has been intricately linked via

trade, travels, tourism, capital flows and human mobility, was almost grounded to a stand

-still amid panic, caution and extreme measures to flatten the curve of virus spread while

avoiding overwhelming the already overstretched healthcare system. As at mid-June

2020, the virus had spread across 213 countries, with 8.1mn confirmed cases, 4.2mn

recoveries and 438k deaths.

The extreme measures implemented by authorities all over the world which disrupted

global supply chains, brought business activities to a halt, resulting in a catastrophic

demand and supply shock! Global equities indexes plunged as investors scampered to

safety. Commodity prices also collapsed; oil prices tumbled to levels last seen in 2002.

Expectedly, Q1-2020 GDP growth numbers across the world printed negative or slower

growth, with global economy heavy weights such as China (-6.8% y/y), USA (-5.0% y/y),

Germany (-1.9%y/y), United Kingdom (-2.0% y/y), and Canada (-0.9% y/y) reporting

negative GDP growth for the period.

The Cost of the Lockdown: A necessary Evil?

With over 80 countries in the world placed under either a lockdown, travel ban, curfew, or

other types of physical distancing measures for at least 6 weeks, the economic cost of the

extreme measures taken to contain the virus outbreak were clearly expected to be

devastating. Notably, the global PMI collapsed to 26.2 pts in April 2020, severely below

...H1-2020 would be

recorded in history as

catastrophic, with the

unexpected outbreak

of the COVID-19

disease

Global Economy

Sources: Worldometer, John Hopkins Hospital, United Capital Research

Figure 1

The economic cost of

the extreme measures

taken to contain the

virus outbreak were

clearly expected to be

devastating



the 50pts threshold. In the US, as in many countries around the world, jobless claims

reached an all-time high of 6.6 million people in April. In terms of sector performance,

Aviation, Tourism, Oil & Gas, Hospitality, and Manufacturing, were the hardest hit.

As H2-2020 sets its course, authorities have begun rolling out plans to reopen economic

activities. Many countries have already eased the lockdown measures. However,

reopening is broadly expected to be gradual and phased. As a result, the IMF forecasts

that the global economy will contract by 4.9% in 2020. In our view, the key themes that

are critical to understanding the trajectory of global growth in H2-2020 include: the

dynamics of the COVID-19 outbreak, Trade relations and Monetary and Fiscal policy

responses.

...the IMF forecasts that

the global economy

will contract by 3.0% in

2020.

Global Economy

Sources: Bloomberg, United Capital Research

10

20

30

40

50

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20

COVID-19 ravages business

performance Trend of Markit Composite PMI

U.S. Germany U.K.EM Eurozone GlobalTurning point

Figure 2

0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2

4.7

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20

Unemployment soars as COVID-19

impacts businessRelative movement of Unemployment

across notable regions

Japan Eurozone Hong KongGermany Sweden ChinaUS

Figure 3

Sources: IMF, United Capital Research

The IMF’s 2020 revised Global Growth forecast by Regions Figure 4



Coronavirus outbreak

Is the threat still real?

Since COVID-19 became a pandemic, the focus of governments, the World Health

Organization, and multilateral agencies, has been the need to “flatten the curve”. With

top pharmaceutical research houses racing to get a vaccine, the only known or proven

public health measures to achieve any meaningful control of the virus remains social and

physical distancing, in a bid to slow the contagion. Looking at the numbers, while

confirmed cases appears to be slowing in Europe and parts of Asia, confirmed cases

continue to rise in the rest of the world especially the Latin America and Africa. What is

clear is the fact that whether the cases are on the rise or slowing, the threat of a second

wave remains real in the absence of a vaccine. Again, the resurgence of the virus

observed in Singapore and Hong Kong lends credence to this view. Unfortunately, the

recent outburst and protest across the developed world, following the death of George

Floyd in the district of Minneapolis in US, resulting in widespread gathering of people,

increases the stake of the second wave. As a result, the trajectory of cases in the next half

of the year is difficult to estimate.

With the benefit of hindsight, we know that the window of social distancing is incredibly

short. Hence, if the world goes through a second wave, this means that some form of

lockdown or curfew will remain in place in many countries, especially the western

economies, for longer, taking more toll on economic activities. The above

notwithstanding, more countries are getting ready to reopen the economy, introduce

international flights, ease restrictions on public gathering and kickstart business operations,

albeit gradually.

Any Vaccine in sight?

In analysing the dynamics of the COVID-19 pandemic, another focal point is the prospect

and early development of a vaccine. Notably, according to widespread medical

opinions, the development of a vaccine is a long and complex process that takes

between 10-15 years. Given the dire situation of the world, researchers and

...whether the cases

are on the rise or

slowing, the threat of a

second wave remains

real in the absence of

a vaccine

Global Economy

(30,000)

-

30,000

60,000

90,000

120,000

150,000

22-J

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29-J

an

5-F

eb

12-F

eb

19-F

eb

26-F

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4-M

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11-M

ar

18-M

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25-M

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1-A

pr

8-A

pr

15-A

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29-A

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6-M

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13-M

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27-M

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Is the threat still real?Global daily new cases of COVID-19

Daily new cases

Figure 5

Sources: Humanitarian Data Exchange, United Capital Research

Despite the COVID-19

outbreak, more

countries are getting

ready to reopen the

economy



pharmaceutical companies are racing to develop a vaccine as soon as possible. Reports

have it that medical researchers have been able to cut the time between exploratory

stage and clinical stage significantly and 123 different possible vaccines are in pre-clinical

stage while 10 are in Clinical stage.

The question remains how soon can we get a vaccine? No doubt, regulators are ready to

speed up the process of a vaccine approval. However, ample time must be given in

conducting clinical tests and human trials to ensure that harmful drugs are not released to

the public. Bearing the above in mind, the most optimistic case is that a vaccine will be

available by June 2021. Notably, Janssen Pharmaceutical Companies, a subsidiary of

Johnson & Johnson, anticipates that the first batches of a COVID-19 vaccine could be

available for emergency use authorization in early 2021.

The Hazy outlook for H2-2020

The realities of 2020 are clearly an unmapped territory, not only in the field of public

health, but also in modern economic policy management. What lies ahead is beyond a

contraction in output level, as noted above, the threat of another wave remains real and

the experience and impact will be different for each economy. Thus, many forecasts will

be anything but accurate. With so many uncertainties about the future, Philipp Carlsson-

Szlezak et al, in an article titled “ Understanding the Economic Shock of Coronavirus”

published in Harvard Business Review, noted that “predicting the path ahead has

become nearly impossible, as multiple dimensions of the crisis are unprecedented and

unknowable.” The article went on to identify the following aspects of uncertainties that

makes the future blurry:

• The virus’ properties are not fully understood and could change.

• The role of asymptomatic patients is still imperfectly understood.

• The true rates of infection and immunity are therefore uncertain, especially where

testing is limited.

• Policy responses will be uneven, often delayed, and there will be missteps.

• The reactions of firms and households are uncertain.

The most optimistic

case is that a

vaccine will be

available by June

2021

Global Economy

Sources: World Health Organization , United Capital Research

A Vaccine on the Horizon? Figure 6

...the threat of

another wave

remains real and the

experience and

impact will be

different for each

economy.



Beyond the above, the question of the time path of economic shock created by the virus

and the ensuing recovery, if recovery will rebound to pre-shock level and the clear

picture of the structural changes that will follow the pandemic, are all still quite blurry.

Trade

U.S-China Phase one deal on a ‘Ventilator’

Compared to 2019, the year 2020 started with fresh optimism from the last-minute US-

China phase-one trade deal that was signed in Dec-2019. However, the signed deal

which once brought clarity to the global trade environment, seems to be on ‘life support’.

First, the COVID-19 outbreak added a new dimension to the brawl between U.S. and

China, over China’s transparency and information hoarding concerning the pandemic. In

addition to that, swords remain drawn between the two power houses over the new

national security law passed in Hong Kong, which sees an increase in China’s economic

and political influence and a possible end to the special status issued by the U.S. to Hong

Kong.

To further aggravate the current tensions, China advised state owned firms to suspend

large-scale purchases of major U.S. farm products, over the Hong Kong dispute. Apart

from the recent halt in imports, another bone of contention is that the Asian giant has not

been meeting its obligations under the phase one deal, and has been sourcing cheap

agricultural and energy imports from Brazil, despite its pledge to significantly rack up

purchases from the U.S. No doubt, the prospect of kickstarting a phase two trade deal in

H2-2020 is weak, with a growing possibility that the phase one deal will be halted.

Elsewhere, as the U.K. heads to the end of the BREXIT transition period, the country has

been making notable strides in securing free trade agreements with its largest trade

partners. Notably, the U.K. published its negotiating objectives for a free trade agreement

with Japan worth £15.0bn, with Australia and New Zealand also in the works.

Apart from trade tensions and talks, countries are also suffering from twin shocks

emanating from the impact of the pandemic on global demand and supply value

chains. According to the World Trade Organization (WTO), all regions will suffer double

digit decline in merchandise export and import. In an optimistic scenario, merchandise

trade volume is expected to decline by 12.9% while a decline of 31.9% in expected in a

pessimistic scenario. Although unquantifiable, services trade is expected to be the most

impacted, due to travel restrictions that have obstructed services such as tourism,

hospitality, education, and other professional services. In all, global trade is looking

melancholic in H2-2020, and is hinged on the pace of economic recovery around the

world.

Monetary and Fiscal Policy

‘Helicopter money’ on a rescue mission

In 2019, monetary policy authorities gradually took a dovish stance, due to the fragility of

The signed U.S/China

Phase one trade deal

which once brought

clarity to the global

trade environment,

seems to be on ‘life

support’

Global Economy

As the end of the

BREXIT transition period

looms, UK goes

shopping for beneficial

free trade agreements

In all, global trade is

looking melancholic in

H2-2020, and is hinged

on the pace of

economic recovery

around the world



global growth and the dilemma with low inflation rates. In 2020, the outbreak of COVID-19

sent global central banks on a tsunami of expansionary monetary policies, ranging from

huge rate cuts to quantitative easing, and less conventional tools like helicopter money.

Notably, the US Federal Reserve (Fed) led the way as it delivered a surprise rate cut of

50bps after an emergency meeting and a subsequent 100bps cut which settled the

Federal Funds rate at 0-0.25% band. Similarly, the Bank of England (BoE) dropped policy

rates to 0.1% vs 0.75% at the beginning of the year. However, with policy rates already in

the negative region, the European Central Bank (ECB) took a more cautious approach,

expanding its asset purchase program by €750.0bn. Also, the Peoples Bank of China (PBC)

injected liquidity amounting to about RMB3.8tn into the banking system and cut interest

rates on reverse repos, medium-term lending facilities and excess reserves. Finally, the size

of liquidity injection was robust, with the Fed pumping $2.3tn, and the EU finance ministers

approving a €500.0bn rescue package.

Also, fiscal authorities employed several measures to curb the spread of the virus by

providing health care services to the affected and deploying funds. In the US, a stimulus

package of $2.0tn was disbursed under the Coronavirus Aid Relief and Economy Security

Act. Also, the Trump administration maxed out the $350.0bn fund available through the

Small Business Administration's Rescue Loan program. Elsewhere, Japan‘s cabinet

approved a new $1.1tn stimulus package, that includes significant direct spending, to

stop the pandemic from pushing the economy deeper into recession. The European

Union was not left out, deploying a $826.0bn stimulus package. In China, an estimated

total of RMB 3.6tn has been announced, while in Canada, $205.0bn CAD (an equivalent

of 9.8% of GDP) has been disbursed through various channels.

Going into H2-2020, we expect the sheer size of the monetary stimulus to support the

global economy, or at least ease the pain. By implication, global monetary policy

authorities will continue to use all possible tools to ensure a speedy economic recovery.

Also, fiscal policies are likely to remain expansionary. However, fiscal authorities will remain

wary of overaccumulation of debt and surging inflation. Overall, while this may not

immediately stall a global economic recession, it means that liquidity in the global

economy will be enormous, thereby strengthening risk-on sentiment and the flow of

capital towards assets with attractive yields.

Global Economy

The outbreak of

COVID-19 sent global

central banks on a

tsunami of

expansionary

monetary policies

Sources: Bloomberg , United Capital Research

-1.0

0.0

1.0

2.0

3.0

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

Growth Dillema: Inflation head for sub-zero levelsTrend of CPI y/y in Major Economies

U.S. U.K. E.U Japan Canada Inflation Target

Figure 7

...liquidity in the global

economy will be

enormous, thereby

strengthening risk-on

sentiment and the

flow of capital towards

assets with attractive

yields

Fiscal policy rolled out

massive stimulus

packages, as

governments raced to

savage their

economies



Global Outlook

USA: A cocktail of Healthcare, Economics and Politics

The US is the hardest hit country in terms of the number of confirmed infections,

accounting for about 27% of global confirmed cases as at mid June. The economic

impact has also been monumental, as the country recorded a 4.8% q/q annualized

decline in GDP in Q1-2020, after experiencing the longest growth streak in history.

In addition, unemployment rates surged from an historic low of 3.5% in Sep-2019, to an

historic high of 14.7% in Apr-2020. Clearly disturbed by the rapid decline in growth, the U.S.

government has launched fiscal responses, cumulating to an equivalent of 13.0% of GDP.

For the U.S. economy, going into H2-2020, there are three cogent aspects to keep an eye

on. These include the COVID-19 containment, economic recovery, and the upcoming

presidential elections. According to Bloomberg economists’ consensus, the US economy is

expected to contract by 33.0% q/q annualized in Q2-2020, while a growth of 15.0% q/q

annualized is expected in Q3-2020, summing up to about an 8.0% decline in FY-2020

(according to IMF). The economic progress that the current administration has driven in

the past four years, through huge fiscal stimulus in form of tax cuts, has almost been wiped

out. Elsewhere, the Nov-2020 elections are fast approaching, with current signals not in

totally in favour of a re-election of the Trump Administration. No doubt, there has been

outrage regarding the current administration’s response to the COVID-19 pandemic as

well as its body language towards the protests on racism. However, we expect the

current administration to make a case for re-election by fast tracking economic recovery

through an aggressive expansionary fiscal policy.

For monetary policy, at the early stage of the economic meltdown, the Fed cut rate to 0-

0.25% band. Moving into the next half of the year, we expect the FOMC to continue to

act as appropriate in reviving the economy, in addition to making information-driven

decisions. However, a full recovery is hinged on further fiscal policy and the planned

reopening of the economy. Give or take, the IMF sees the US economy tumbling 5.9% in

2020.

Global Economy

We expect the FOMC

to continue to act as

appropriate in reviving

the economy

Sources: Centre for strategic and International Studies , United Capital Research

Credit

Enhancement ,

$554

Government

Spending , $1,851

Tax Relief , $502

USA government has spent about $2.9tn (13.6% of GDP) as

COVID-19 fiscal response USA government fiscal response ($'bn)

Figure 8

The U.S. economy

recorded a 4.8% q/q

annualized decline in

GDP in Q1-2020, after

experiencing the

longest growth streak in

history

Three cogent aspects

to keep an eye on in

H2-2020: the COVID-19

containment,

economic recovery,

and the upcoming

presidential elections



Euro Area: Entering a period of depressed growth

Hammered by the coronavirus shock, the Eurozone suffered a 3.8% q/q GDP decline in

Q1-2020, which was the sharpest drop in GDP in over a decade. In addition, one of the

regional growth engines, France, entered a technical recession in Q1-2020. In terms of

monetary policy, a conventional rate cut was not used by the ECB since rates are already

in the negative region. Instead, there has been a series of asset repurchase programs,

restriction against payment of dividend by banks and permission for companies to

operate below required capital adequacy.

Going forward, we expect the ECB to double down on efforts to ensure quick economic

recovery. Elsewhere, the European Union finance ministers came together to strike a deal

for a €500bn stimulus plan to be used as a business liquidity fund, bailout fund and stability

mechanism. For the rest of the year, the economic bloc is expected to continue to count

the cost of the health crisis and the lockdown on major sectors such as automotive,

aerospace, aviation and tourism which have been heavily hammered by the restriction

of movement, and city lockdowns globally. In all, the IMF projects the Euro Area GDP to

plunge by 8.0% in 2020.

United Kingdom: Marred by twin worries

The United Kingdom’s initial attempt at herd immunity as a response to the coronavirus

outbreak and its reluctance to impose a lockdown came at a considerable cost. The

country recorded the highest death toll in Europe, as at mid-June at 41.7k deaths.

Although the government has planned an economic reopening, level of activity is

expected to recover very slowly given the high number of cases in the UK and especially

as infection curve does not seem to be at its peak.

Elsewhere, after officially leaving the EU on Jan 31, the UK now has approximately six

months for negotiation, for a UK-EU trade agreement, before concluding the transition

period on Dec 31. Notably, the outcome of recent negotiations has been somewhat

negative, as the U.K. is striving for a free trade agreement with the EU. However, for a free

trade agreement to be in place, the EU is proposing that the UK must continue to follow its

single market rules.

In terms of monetary policy, the Bank of England is deploying quantitative easing tools

and was quick to cut interest rates to 0.1%. Also, the outlook for a negative interest rate

environment in the U.K now looks more possible, following the issuance of a negative

yield bond by the UK DMO in Q2-2020. Overall, the economic activities in the UK will be

marred by the twin concern around a poorly managed public health crisis and the

fragility of the EU-UK trade agreement in H2-2020.

Global Economy

The economic bloc is

expected to continue

to count the cost of the

health crisis and the

lockdown on major

sectors

...the outlook for a

negative interest rate

environment in the U.K

now looks more

possible

UK now has

approximately six

months for negotiation,

for a UK-EU trade

agreement, before

concluding the

transition period on

Dec 31



Emerging Markets: A threat to years of strong growth

Judging by historical trends, we expected global monetary policy easing around the

world would set a precedent for positive fund flows into EM assets in 2020. However,

dwindling exports, capital flow reversals, thinning remittance, lower commodity prices,

collapse in energy demand and currency market crises pushed many emerging and

frontier market economies to the edge in H1-2020. Notably, the IMF sees emerging

markets and developing economies shrinking by 3.0% in 2020 before rebounding by 5.9%

in 2021.

Looking at the constituent economies in the BRICS classification, Brazil comes in second,

on the list of countries with the highest COVID-19 cases at 874.0k people. Based on the

expected economic damage from the pandemic and its related quarantine measures,

the Brazilian government lowered its 2020 economic outlook, forecasting a 9.1%

contraction in GDP for 2020. The Russian economy is also heavily impacted by the

pandemic (third country based on highest confirmed cases), as well as suffering from the

oil demand destruction and declines in exports. However, broad-based expectations are

pointing towards an increased stimulus from the Russian government, given the modest

stimulus package deployed so far, estimated at 2.8% of GDP. Elsewhere, India which was

once the fastest-growing economy among the G-20 countries, experienced a downward

spiral, with growth in Q1-2020 falling to 3.1% y/y vs 5.8% y/y in Q1-2019. Going into H2-2020,

the Asian economy would be challenged with implementing policies that mitigate the

risks of sustained lower growth, amid the continued increase in the government’s fiscal

deficit.

China seems to be ahead of the pack despite being the initial epicenter of the

coronavirus outbreak. Leading indicators such as the PMI and industrial output readings

are flashing positive signs, with the country’s demand for crude oil reported to be back to

pre-pandemic levels, However, the growth outlook remains bleak compared to 2019, as

the country remains exposed to the weaker trade and disruptions in global supply chains.

Therefore, the IMF predicts that the Chinese economy will grow by 1.0% in 2020 compared

to the 6.0%-7.0% historical growth range. In sum, while fiscal and monetary policy

Global Economy

..the IMF sees emerging

markets and

developing economies

shrinking by 1.0% in

2020

Sources: Institute of International finance, Bloomberg, United Capital Research

-60

-10

40

Oc

t-19

No

v-1

9

De

c-1

9

Ja

n-2

0

Feb

-20

Ma

r-20

Ap

r-20

Ma

y-2

0

Emerging markets experienced huge

outflows in March Non resident portfolio flows to EMs

Equity Flows ($bn) Debt Flows ($bn)

Net capital flows ($bn)

Figure 9

-30.0% -20.0% -10.0% 0.0%

Brazilian real

South African Rand

Mexican Peso

Russian Rouble

Indian Rupees

Kazakhstan Tenge

Chinese Yuan (Onshore)

Chinese Yuan (offshore )

Capital flow reversals weaken

currencies across emerging markets YTD Performance of BRICS currency

Figure 10

China’s leading

economic indicators

such as the PMI and

industrial output

readings are flashing

positive signs



responses are important for the recovery, the trajectory of EM markets lies in the recovery

of other developed economies, given the dependence of emerging economies in terms

of foreign fund flows and trade.

Financial Markets

Taking a V shaped recovery

At the height of the pandemic in Mar-2020, stock markets crashed to the levels not seen

since the Global financial Crisis 2008/9, with bond yields crashing, as investors took flight to

relatively safer US treasuries or maintained cash positions. Interestingly, while the

performance of gold has been deemed to be positive in times of economic downturn,

2020 was different, as gold prices dropped significantly to a year low of $1,477.9/ozt in

Mar-2020.

However, we saw a quick rebound through Apr-2020 and May-2020, as investors took

advantage of the cheap valuation and became optimistic of a gradual economic

recovery, especially as monetary and fiscal authorities rolled out expansionary policy

tools. Notably, the MSCI equity world index has recovered partially, with YTD loss at -8.0%

as at Jun 15, vs -32.1% in the heat of Mar-2020. In addition, the yields on U.S. treasuries are

steadily on the rise, as investors’ appetite for riskier assets is becoming stronger.

Looking ahead, we believe that the renewed interests in equities and fixed income might

be sustained to pre-COVID levels. The expansionary monetary policy, low rates in

developed economies and recovery in commodity prices will see funds flow back into

emerging economies as we approach the end of the year. However, the downside risk to

our expectation includes a possible second wave of infection as economies begin to

open, liquidity crunches, insolvency, and subdued demand, as unemployment levels take

time to be restored to pre-COVID-19 levels. Therefore, the key indicators to watch before

making investment decisions include the trajectory of infections across the world,

headways made in finding a vaccine for the virus, unemployment rates and policy

actions.

Global Economy

...while performance of

gold has been deemed

to be positive in times

of economic downturn,

2020 was different


0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20

Stock Markets crashed in March Relative movement of key Global stock indices

world index SSE Index S&P 500 FTSE 100 Nasdaq

Covid 19

Escalates in China

Risk off sentiments decipates,

markets rebound

Economic lockdown at high

intensity around the world

Figure 11

A major downside risk

to global financial

markets is the

possibility of a second

wave



Oil prices

Is the worst behind us?

In H1-2020, the impact of COVID-19, the resultant lockdown, coincidentally, the expiration

of the previous OPEC+ agreement and the breakdown of agreement between Saudi

Arabia, and Russia, fueled a supply glut and plunged oil prices to a record low. As a

result, inventory build-ups and heavy loads of unsold cargoes began to surface, leading

to an extreme drop in Brent oil price, from $66/b in Dec-2019 to $19.3/b in Apr-2020, the

lowest in about 20 years. Also, for the first time in history, the price of WTI crude May

futures dropped into the negative region, as over-utilization of storage units led oil traders

to pay oil buyers to take physical delivery of crude.

However, judging by recent events, the tides have changed in the oil market. First, the

resolution of the oil price war, which gave birth to a historic 9.7mbpd initial supply cut by

OPEC+, and additional cuts by non-OPEC+ members, partially mopped up supply. Also,

the demand prospects improved, with China’s oil consumption (approx. 13.0% of world oil

demand) reported to be back at pre-pandemic levels, and the gradual reopening of

world economies, especially in high-demanding regions like the U.S. and Europe (approx.

20.9% and 14.0% of world oil demand respectively). Bearing all the above in mind, Brent

oil price and WTI recovered from $25.3/b and $18.8/b at the end of Apr-2020 to $39.7/b

and $37.1/b by mid-June 2020, respectively.

As H2-2020 begins to unravel, we believe the world is on a better balance of supply and

demand, which will determine the trajectory of oil prices. On the supply side, OPEC+

decided to extend the 9.7mb/d cuts by one month into July (now 9.6mb/d with exclusion

of Mexico’s 100kb/d), before entering the next phase of production cuts, in which output

will be reduced by 7.7 mb/d. This is as Saudi Arabia announced to cut its production by

an additional 1mb/d in June-2020.

On the other hand, the dynamics on the demand side are dependent on the progression

of the COVID-19 disease and how soon activities can return to normal. With a number of

economies gradually easing process restrictions, as well as stimulus measures by

Global Economy

Brent oil price dropped

from $66.0/b in Dec-

2019 to $19.3/b in Apr-

2020, the lowest in

about 20 years


-50

-30

-10

10

30

50

70

90

Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Shut down of activities across economies caused oil demand to slump Brent and WTI price trend ($/b)

Coronavirus goes out

of control in China

Storage spaces maxed

out as the May WTI Futures

expire

Saudi Arabia

initiate oil price war

with Russia, U.S.

OPEC+

extends

9.7mbpd cut

US airstrike kills top Iranian

military commander

Figure 12

As H2-2020 begins to

unravel, we believe the

world is on a better

balance of supply and

demand, which will

determine the

trajectory of oil price



governments to spur business and industrial activities, demand is likely to trickle higher.

However, given the absence of a vaccine, the level of activities is expected to remain

low throughout 2020 compared to 2019. Notably, the OPEC projects that oil demand will

rebound to about 92.3mbpd in Q3-2020 from 81.3mbpd in Q2-2020, bringing average

demand in 2020 to 90.6mbpd, 10.0% lower than 99.7mbpd from 2019. In all, putting the

two market forces together, we believe that oil prices will hover around $40.0/b to $45.0/

b, as a full recovery in demand remains hinged on the development of a vaccine, and

the non-materialization of a second wave of the pandemic.

Global Economy

Putting the two market

forces together, we

believe that oil prices

will hover around

$40.0/b to $45.0/b

60

70

80

90

100

110

2018 2019 Q1-2020 Q2-2020 Q3-2020 F Q4-2020 F 2020 F

Oil market has gone through the worst time yet World oil demand (Mbpd)

Sources: OPEC MOMR, United Capital Research

Figure 13

Sub-Saharan

Africa



Sub-Saharan Africa

Macro Overview: Surviving the virus?

In Jan-2020, when we published our outlook report for FY-2020 titled “A different playing

field’, we had expected economic activities to pick up in Sub-Saharan Africa (SSA) on the

back of our outlook for strong growth among non resource-intensive countries which we

estimated would bolster the modest expansion among the resource-intensive countries.

However, the global outbreak of the novel Coronavirus in early 2020 precipitated an

economic crisis in the region as the prices of key export commodities (especially crude

oil) of most countries within the region slumped, prompting a panic exit by foreign

portfolio investors and creating a huge external deficit.

Notably, Africa was the last frontier to be hammered by the pandemic partly due to its

relatively lower trade traffic with the rest of the world and the inadequate testing

capacities in most of the countries. However, like most advanced economies, the

incidence of COVID-19 was followed by stringent measures across the region. Notably, all

SSA countries imposed some form of restrictions on the movements of people and

economic activities. These restrictions and lockdowns worsened the already fragile social

and economic conditions of most countries within the region, with the large informal

sector (over 80.0% of total employment according to World Bank) being the worst hit.

We had expected

economic activities to

pick up in SSA, on the

back of our outlook for

strong growth among

non resource-intensive

countries

Sub-Saharan Africa

4% 2%

0%-6% -10% -10% -13% -16% -17% -21%

-26%

-66%

12% 12%

-10% -10% -10%

-28%

-14%-13% -13%

-9%-15%

-40%

Go

ld

P.

me

tals

Wh

ea

t

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ins

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ffe

e

Liv

est

oc

k

Alu

min

um

Zin

c

Co

pp

er

Co

tto

n

Bre

nt

Except for precious metals, prices of SSA's key export items are

down in 2020

YTD Commodity Return in March viz. June

YTD return as at the end of March


Figure 14

Sources: Africa CDC, United Capital Research

Figure 15

...like most advanced

economies, the

incidence of COVID-19

was followed by

stringent measures

across the SSA region

https://www.unitedcapitalplcgroup.com/wp-content/uploads/2020/01/Nigeria-Outlook-2020_A-different-playing-field-3.pdf




Despite the late arrival of the virus and the prompt implementation of social distancing

measures, the virus has spread rapidly across the region. As at the time of writing this

report (16th of June 2020), all 54 African countries have recorded a case of the virus, with

over 251,800 total confirmed cases, more than 114,300 recoveries and more than 6,700

deaths. A country by country analysis showed that the regional giants – South Africa (with

73,553 case), Egypt (with 46,289 cases) and Nigeria (with 16,658 cases) – led the pack on

the highest number of cases within the region. However, the lack of testing capacity in

many countries suggests that these figures most likely understate the true number of

infections.

These developments have prompted both the fiscal and monetary authorities within the

region to unveil large-size stimulus packages to correct the imbalance and reduce the

burden on people and businesses.

Fiscal Policy Response and Debt Sustainability: Striking the right balance

Although the outbreak of COVID-19 left a negative imprint on the revenue profile of most

countries within the region (especially for the crude oil and tourism dependent

economies), the need to cushion the impact of the restrictions implemented to curb the

spread of the virus have spurred government spending across the region. Notably, this

fiscal imbalance has widened the need for governments to borrow in 2020, though not all

the countries within the region have the sustainable fiscal space to do so.

Sub-Saharan Africa

Regional giants – South

Africa, Egypt and

Nigeria – led the pack

in the highest number

of cases within the

region

…this fiscal imbalance

has widened the need

for governments to

borrow in 2020

Sources: Africa CDC, United Capital Research

Figure 16

Sources: World Bank, United Capital Research

-16.0%

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ica

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lles

Except for Eritera all SSA countries have announced some form of fiscal

stimulus to combat COVID-19Fiscal Balance (% of GDP), 2020

Figure 17



As of 2019 (Prior to the outbreak of COVID-19), 19 SSA countries were reported to have

exceeded the 60.0% debt-to-GDP threshold set by the African Monetary Co-operation

Program (AMCP) and IMF for developing economies. Surpassing this threshold means that

these countries are highly vulnerable to economic changes and their governments have

little headroom to provide support to the economy in the event of a recession. Also, debt

sustainability analysis by the IMF in Nov-2019 showed that almost half of all SSA borrowers

were either at risk of, or already in debt distress.

Accordingly, to create more fiscal room for governments across the region to spend on

the critical infrastructures needed to curb the spread of the virus, the World Bank Group

and the IMF have called for debt relief, as well as debt servicing and repayment

suspension, while also unveiling various support packages to assist the region in the fight

against COVID-19. In response to the COVID-19 "call to action" from the World Bank and

the IMF, the G20 and Paris Club announced a debt service suspension initiative on 15

April, supporting an NPV-neutral (to ensure creditors face no losses on the value of the

delayed payments), time-bound suspension of principal and interest payments for the

eligible 73 countries that make a formal request for debt relief from their official bilateral

creditors, and encouraging private creditors to participate on comparable terms.

However, private creditors (Eurobonds, Commercial Banks and others) which account for

the largest portion of SSA’s debt are yet to lend a voice of support to the either of the two

options.

Sub-Saharan Africa

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

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As of 2019, 19 SSA countries had surpassed IMF's threshold for prudent debt levelsDebt to GDP ratio viz. IMF' 60.0% prudent threshold

Debt to GDP ratio, 2019 IMF's prudent threshold

Figure 18


Debt sustainability

analysis by the IMF

showed that almost half

of all SSA borrowers

were either at risk of, or

already in debt distress

Multilateral Agencies

band together to

provide debt relief and

suspension for SSA

economies

59 63 67 74 79 82 88 104 11049 54 53 61 68 73 87

97 10078 86 98111 117 117

123131 138

4354

7376

85 9296

122135

45

78

11 1212

1110

2010 2011 2012 2013 2014 2015 2016 2017 2018

A large portion of SSA' long term external debt is owed to to

private creditorsSSA External Debt Mix

Official Multilateral Official Bilateral Commercial Banks Bonds Other Private Creditors

Figure 19




We note that while many SSA countries were quick to tap the IMF (up to 40 SSA countries

requested for support and 27 have been approved) and World Bank (more than 40

countries have received support) support facilities, many were initially reluctant to seek

debt suspension under the G20 initiatives (less than 10 SSA countries applied and 5 were

approved). This was due to fears of credit-rating downgrades amid concerns that the

debt suspension could include private creditors and limit countries' access to international

capital markets during the debt suspension period. However, more countries (up to 22 in

SSA have applied while 8 have received) are starting to tap the initiative amid the

request by G20 to ratings companies to avoid any action against countries participating

in the initiative.

Clearly, 2020 is the year for concessional borrowings by SSA countries. However, as

economies begin to re-open and external dynamics continue to improve, we might see

some more private commercial borrowing in H2-2020 – a window most countries are

leaving open by not tapping the G-20 debt suspension initiatives.

Monetary Policy Response: At the expense of price stability?

Like their fiscal counterparts, monetary authorities across SSA have announced series of

expansionary policies to cushion the impact of the pandemic on their various economies

and the livelihood of their citizens. These monetary policies include but are not limited to:

rate cuts, targeted liquidity support, loan restructuring, and asset purchase programs.

However, unlike the fiscal side, there seems to be more room in many SSA economies for

monetary authorities to conduct countercyclical policy responses. Notably, only 7 of 46

SSA countries have an above single-digit inflation rate.

While we expect the monetary authorities across the region to maintain their

expansionary policy stance through H2-2020, we note that the impacts are only likely to

be felt when those economies start to reopen. Also, it is important that these policies are

eased as external conditions start to improve, to prevent blowing over the region’s

currently low level of inflation.

Sub-Saharan Africa

-20.0%

0.0%

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SSA economies have room for monetary stimulusInflation Rate viz Global and SSA Average

Inflation Rate Global Average SSA Average

Sources: World Bank, United Capital Research NB: South Sudan and Zimbabwe, with triple digit inflation have been removed from the chart

Figure 11

2020 is clearly the year

for concessional

borrowings by SSA

countries

Figure 20



Macro Outlook: A synchronized slowdown and contraction

The outbreak of COVID-19 compounded by other existing crises in many countries

(including the desert locust emergency, drought, climate change, conflict, and violence)

have changed the overall economic outlook for the SSA region from that of expansion

(earlier expected at the beginning of the year) to a broad-based contraction/slowdown.

Notably, recent PMI figures as well as Q1-2020 GDP report from the region already

confirms the negative impact the pandemic is having on SSA economies.

Again, the World Bank has estimated that the deadly COVID-19 pandemic could cost the

region between $37.0 bn - $79.0 bn in terms of output losses caused by trade disruption.

However, with the expansionary policies rolled out by both fiscal and monetary authorities

across the region estimated at under $20.0bn, we assume that these policies can only at

best minimize the depth of contraction/slowdown.

Sub-Saharan Africa


30

40

50

60

Ja

n-1

9

Feb

-19

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-19

Au

g-1

9

Se

p-1

9

Oc

t-19

No

v-1

9

De

c-1

9

Ja

n-2

0

Feb

-20

Ma

r-20

Ap

r-20

Ma

y-2

0

SSA economies already contracted in Q2-2020 and are on the

path of recoveryComposite PMI

Nigeria South Africa Kenya Ghana Threshold

Figure 22


...recent PMI figures as

well as Q1-2020 GDP

report from the region

already confirms the

negative impact the

pandemic is having

While we expect SSA

monetary authorities to

maintain their

expansionary policy

stance through H2-2020,

the impact remains

hinged on economies

reopening

Country Rate cut Liquidity support Loan restructuring Assets purchase

Nigeria YES YES YES NO

Angola YES YES YES YES

Kenya YES NO YES NO

Gambia YES YES NO NO

Ghana YES NO NO NO

South Africa YES YES YES YES

Rwanda YES YES YES YES

Senegal NO YES YES NO

Monetary Actions taken by AuthoritiesFigure 21



Notably, we expect economies dependent on crude oil (Nigeria, Angola, Congo, and

Chad) and tourism to be the hardest hit, followed by those with little or no fiscal or

monetary policy space to respond to the outbreak. Also, we expect an underwhelming

economic outcome by East African countries (Ethiopia, Kenya, Djibouti, and Uganda)

battling with the combined negative impact of COVID-19 outbreak, global supply chain

disruption, and locust invasion which has severely disrupted their agricultural production.

Broadly, a combination of low commodity prices, capital outflows (mainly portfolio

investment), reduced tourism activity, and slowdowns in the economies of key trading

partners are expected to weigh heavily on SSA economic activity in 2020.

However, the shape, duration, and size of recovery will vary from country to country,

depending heavily on the improvement in the external dynamics (global supply chain,

commodity prices as well as capital flows) and the length of time required to bring

economic activities back to near pre-COVID-19 levels. We note that recovery will be

more strenuous in countries with little to no monetary or fiscal space to provide large-size

bailouts for economic recovery. The downside risk to our overall outlook remains that the

decline in growth could be deeper and more widespread as outbreaks intensify and

spread more widely across the region.

Beyond 2020, we believe the effective implementation of the now postponed Africa

Continental Free Trade Agreement (AfCFTA) will be pivotal to building economic

Sub-Saharan Africa


3.6%

2.4%3.4% 3.2%

3.9%

-1.6%-2.1%

-0.8%

1.8%

-0.7%

-3.2%-5.1%

-1.1%-2.6% -2.8%

IMF World Bank AU UNECA AfDB

An historic broad-based contraction is now expected2020 GDP growth forecasts

Pre-COVID-19 COVID-19 Base Case COVID-19 Worst Case

Figure 23

We note that recovery

will be more strenuous

in countries with little to

no monetary or fiscal

space to provide large-

size bailouts for

economic recovery

73.2%

54.1% 50.4% 48.3% 46.5%38.9% 35.4%

29.4% 25.8%20.9% 20.2%

Sa

o T

om

e a

nd

Prin

cip

e

Ca

bo

Ve

rde

Co

mo

ros

Ga

mb

ia, Th

e

Eth

iop

ia

Ma

uritiu

s

Se

yc

he

lles

Tan

zan

ia

Rw

an

da

Su

da

n

Ma

da

ga

sca

rCountries dependent on tourism to be badly hit in 2020

SSA Countries International tourism, receipts (% of total exports), 2018

Sources: World Bank, United Capital Research

Figure 24

A combination of low

commodity prices,

capital outflows,

reduced tourism

activity, and economic

slowdowns in key

trading partners will

weigh heavily on SSA

economic activity in

2020



resilience against future crises as it will help to strengthen regional value chains, reduce

vulnerability to external shocks, and advance the digital transition needed for the region’s

developments.

Eurobond Market: Monetary stimulus spurs market recovery

Early in the year, activities at the primary Eurobond market were business as usual for SSA

countries. Gabon opened the year with a $1.0bn issuance in Jan-2020, followed by

Ghana with a $3.0bn issuance in Feb-2020. Both auctions were widely oversubscribed with

subscription rates of 3.5x and 4.7x respectively. Obviously, foreign investors took

advantage of the relatively high yield on offer at both auctions. However, with the

outbreak of COVID-19 and its attendant negative impact on SSA economies, Nigeria,

South Africa, Benin, Ivory Coast and Kenya, all halted plans of re-visiting the Eurobond

market in H1-2020.

At the secondary market, yields on all the outstanding and new SSA notes re-priced

higher in Q1-2020, owing to the synchronized risk-off sentiments fueled by the COVID-19

pandemic and the uncertainties involving the impact that it will have on the economy.

Notably, Zambia (+24.4%) and Angola (+20.2%) recorded the highest increases in

average Eurobond yields amid concerns of a widening fiscal deficit and deteriorating

credit worthiness on the back of high debt levels. However, the large-sized stimulus

package unveiled across the developed market and recent recovery in economic

activities, had since refueled risk-on sentiments by foreign investors, with SSA Eurobond

yields declining from their March-2020 highs.

SSA Eurobond yields

benefit from large-sized

stimulus packages in

developed economies

Sub-Saharan Africa


0.20.8

2.11.6

7.2

5.3

1.9

6.7

5.85.0

3.72.9

5.8

2.4

1.0 1.30.8 1.0 1.0

3.0

4.4

6.0

1.0 0.8

202

0

202

1

202

2

202

3

202

4

202

5

202

6

202

7

202

8

202

9

203

0

203

1

203

2

203

3

203

5

203

8

204

1

204

4

204

6

204

7

204

8

204

9

205

1

206

1

Ghana is the only country with Eurobond maturity in 2020SSA Eurobond Maturity Profile ($'bn)

Figure 25

COVID-19 halted plans

for a number of SSA

economies to return to

the Eurobond market



Looking ahead, we believe there is still room for new Eurobond issuances in H2-2020.

Although this will depend on the level of improvement seen in both the external and

domestic space, our optimism is buttressed by the recent recovery in foreign investors’

appetite for SSA Eurobond at the secondary market. Also, the need for most of the SSA

economies to plug sizable budget deficit as well as refinance existing private debt

obligations further adds to our optimism.

For example, Kenya has refused to tap the G20/G7 debt relief initiative owing to the

initiative’s stringent requirement that may constrain the country from tapping the

Eurobond market during the relief period (April-Dec 2020). Effectively, Kenya is leaving the

door open for a return to the international debt market in 2020. Also, the fact that Egypt

was able to raise a $5.0bn (its largest ever issuance) with a subscription rate of 4.4x and at

a weighted average rate of 7.66% in May-2020, indicates the availability of demand for

Africa’s Eurobond, which some countries would be looking to tap in H2-2020.

At the secondary market, we expect interest to be dictated by the level of recoveries in

the key export items of each countries. Also, our outlook for sustained expansionary

monetary policy conditions in advanced economies (especially in U.S and Europe) should

create a bullish bias for investing in SSA Eurobonds in H2-2020.

Foreign Exchange: A broad-based weakness

Analysis of SSA foreign exchange condition in H1-2020 showed a broad-based weakness

against the US dollar, as the outbreak of COVID-19 triggered sharp capital outflows

(portfolio investments), exposed the fragilities in each country’s external account and

negatively impacted economic activities across the region.

Emerging and Frontier

Market equities to

thrive well come 2020

Sub-Saharan Africa

We believe there is still

room for new Eurobond

issuances in H2-2020

At the secondary

market, we expect

interest to be dictated

by the level of

recoveries in the key

export items of each

country


2.0%

12.0%

22.0%

32.0%

42.0%

S/A

fric

a

Ivo

ry C

oa

st

Se

ne

ga

l

Eth

iop

ia

Be

nin

Ke

nya

Nig

eria

Gh

an

a

Rw

an

da

Co

ng

o

Mo

zam

biq

u

e An

go

la

Za

mb

ia

SSA yields spike in March-2020 as COVID-19 fuels risk-off

sentimentAverage mid-yield to maturity of outstanding SSA countries Eurobond

31/12/2019 31/3/2020 5/15/2020

Figure 26



Notably, the Zambian kwacha and Angolan kwanza were the region’s worst performing

currencies, as foreign confidence in both economies sharply dropped amid steep

declines in the price of key export commodities - copper and crude oil, in both countries,

respectively. Also, the inability of both countries to access external support from the IMF or

World Bank (amid their already high debt levels) added to investors’ concern. Similarly,

regional giants - Nigeria and South Africa saw their respective local currencies, naira, and

rand, weaken against the US dollar. In Nigeria, the central bank adjusted its official and

I&E exchange rate from N306/$ and N360/$ to N360/$ and N385/$ respectively as the

outbreak of COVID-19 revealed the fragilities in the country’s external account.

Meanwhile, the South African rand weakened amid COVID-19-induced capital reversals.

Elsewhere, the CFA franc was the lone gainer against the dollar in H1-2020, supported by

its link to the euro. Meanwhile, a critical milestone was achieved in the transformation of

the West African CFA franc to eco, in H1-2020. This was as the French Council of Ministers

adopted a bill ratifying the end of the CFA franc in the eight francophone countries that

form the West African Economic and Monetary Union (UEMOA). However, no further

progress was made on the implementation of the new currency amid the COVID-19

pandemic.


Market equities to


Sub-Saharan Africa

0.5% 0.0%

-0.1% -0.7% -1.0% -1.6% -2.0% -2.2%-5.2% -6.4% -7.4% -8.4% -9.4% -10.4%-11.8%

-18.5%-19.6%-22.1%

CFA

Fra

nc

S/L

eo

ne

(SLL

)

Ma

law

i (M

WK

)

Tan

zan

ia (

TZS)

Gu

ine

a (

GN

F)

Ug

an

da

(U

GX

)

Rw

an

da

(R

WF)

Gh

an

a (

GH

S)

Ke

nya

(K

ES)

Nig

eria

(N

GN

)

Eth

iop

ia (

ETB

)

Ma

uritiu

s (M

UR

)

Bo

tsw

an

a (

BW

P)

Co

ng

o (

CD

F)

Mo

zam

biq

ue

(M

ZN

)

S/A

fric

an

(ZA

R)

An

go

la (

AO

A)

Za

mb

ia (

ZM

W)

SSA currencies weakened against the dollar amid BoP shocksYTD Performance against the US$

Declines in the price of

key export

commodities exposed

fragility in SSA

currencies

...no further progress

was made on the

implementation of the

new currency amid

COVID-19 pandemic


Figure 27


9.0

6.85.8 5.6 5.4 5.3 5.1 4.9 4.8 4.4 4.1 4.1 3.9 3.6 3.6 3.5 3.4 3.3 3.3 3.2 2.9 2.7 2.6 2.4 2.0 1.8 1.3 0.9 0.4

Bo

tsw

an

a

Co

mo

ros

Nig

eria

Tan

zan

ia

An

go

la

Ma

uritiu

s

Ca

bo

Ve

rde

Lib

eria

S/A

fric

a

Ca

me

roo

n

Ug

an

da

Rw

an

da

Ma

da

ga

sca

r

Ga

mb

ia

Na

mib

ia

Mo

zam

biq

ue

Leso

tho

Ma

urita

nia

Gu

ine

a

Se

yc

he

lles

Ma

law

i

Gh

an

a

Sa

o T

om

e…

Eth

iop

ia

Esw

atin

i

Za

mb

ia

Djib

ou

ti

Bu

run

di

D.R

.C

Most SSA economies have more than the recommended 3-

months import coverFX reserves import cover viz. 3-month threshold (months)

Total reserves in months of imports, 2018 Recommended Threshold

Figure 28



Looking ahead, we expect currencies within the region to strengthen against the USD in

H2-2020, as external (commodity demand and price recovery) and domestic (easing

economic restrictions) dynamics begin to improve and portfolio investments recover.

Also, concessional loans from IMF and World Bank should further support local foreign

exchange conditions, adding to respective countries’ external reserves and making them

more resilient to speculative attacks. However, with lingering uncertainties around the

outlook for COVID-19, we do not expect most of the currencies to recover to pre-COVID-

19 levels. Lastly, we expect the conversation around implementation of the eco to pick-

up in H2-2020 as countries within the region start to re-open for business.

Equity Market: Wheezing from the impact of COVID-19

The performance of equity markets across the world was a tale of two quarters in H1-2020.

This was as the outbreak of the COVID-19 pandemic in Q1-2020 spurred a broad-based

risk-off sentiment while the synchronized injections of fiscal and monetary stimulus spurred

a risk-on sentiment later in Q2-2020. Despite the recovery in Q2-2020, major equity indices

in the global, emerging and frontier markets remain below the water, still wheezing from

the negative impact of COVID-19-induced sell-offs. Notably, all the six bourses under our

coverage in SSA ended H1-2020 in the negative territories.

Looking ahead, we expect the overall interest in SSA equities to strengthen as more

countries begin to ease lockdown policies and businesses begin to re-open. Also, the low

interest rate environment in the developed market, the continued rollout of monetary

and fiscal monetary stimulus and our expectation for currencies within the region to

strengthen as external as well as domestic conditions improve, should spur a renewed

foreign interest in the region.


Market equities to


Sub-Saharan Africa

Concessional loans

from IMF and World

Bank should further

support local foreign

exchange conditions,

adding to respective

countries’ external

reserves

...we expect the overall

interest in SSA equities

to strengthen as more

countries begin to ease

lockdown policies and

businesses begin to re-

open


0%

-21% -21% -22% -24%-21%

-4%

-16%

-28% -28%

-3%-7% -8% -8%

-13% -14% -15% -15%-20%

-24%

Bo

tsw

an

a

Nig

eria

Glo

ba

l Mkt

S/A

fric

a

Em

erg

ing

Mkt

Ke

nya

Gh

an

a

BR

VM

Fro

ntie

r M

kt

Ma

uritiu

s

Equities remain under the water despite recoveries in Q2-2020Equity Market Performance

March- YTD June- YTD

Figure 29

Despite the recovery in

Q2-2020, major equity

indices in the global,

emerging and frontier

markets remain below

the water




Px_Last CHG_PCT_1DCHG_PCT_WTDCHG_PCT_YTDPE_RatioBEST_DIV_YLDPx_to_book_ratio

Macroeconomics | Equities | Fixed Income | Currencies | CommoditiesPx_Last CHG_PCT_1D CHG_PCT_WTDCHG_PCT_YTD PE_Ratio EQY_DVD_YLD_12MPx_to_book_ratio

Equities Level Mcap ($'bn) WTD (local) YTD (local) P/E P/B Div. Yield

BGSMDC IndexBotswana 7,243.2 3.2 -0.4% -3.6% 9.2 1.3 6.3%

ICXCOMP IndexBRVM 135.9 7.1 -2.1% -15.1% 6.7 1.1 8.1%

EGX30 IndexEgypt na - na -21.9% 9.6 1.5 3.2%

GGSECI IndexGhana 1,928.7 7.6 -1.2% -14.8% na 1.6 nm

NSEASI IndexKenya 143.3 20.5 1.8% -13.0% 8.6 1.5 6.2%

SEMDEX IndexMauritius 1,670.5 4.9 -0.6% -23.5% 32.8 0.8 5.4%

MOSENEW IndexMorocco 10,020.3 53.9 -1.3% -14.2% 19.4 2.3 4.2%

NGSEINDX IndexNigeria 24,956.0 33.6 -1.2% -7.4% 8.3 1.2 7.2%

JALSH IndexSouth Africa 52,270.2 794.4 -4.4% -5.6% 16.5 1.7 3.9%

TUSISE IndexTunisia 6,701.0 6.7 1.1% -5.6% 17.8 2.2 1.8%

MXWO IndexGlobal Market 2,171.4 80,192.3 -5.1% -5.9% 21.5 2.5 2.3%

MXFM IndexFrontier Market 471.2 -- -3.0% -18.2% 11.1 1.5 4.3%

MXEF IndexEmerging Market 966.3 -- -4.1% -11.2% 16.2 1.6 2.7%

Dollar Eurobonds Amt Out ($'bn) Average YTM WTD YTD

Angola 8.0 14.1% -0.28% 7.0%

Egypt 30.2 6.8% 0.31% 1.3%

Ghana 11.0 8.0% 0.09% 1.1%

Iv ory Coast 4.6 6.0% -0.04% 0.7%

Kenya 6.1 7.4% 0.03% 1.2%

Morocco 2.3 2.8% 0.02% -0.3%

Nigeria 11.2 7.3% 0.03% 1.1%

Senegal 2.9 6.1% -0.14% 1.6%

GHS BGN CurncySouth Africa 20.0 5.2% 0.20% 0.4%

Zambia 3.0 36.9% 2.60% 18.0%

Currencies (vs. USD) Spot Rate WTD MTD YTD 6M Forward 12M Forward

AOA BGN CurncyAngola AOA: Kwanza 599.2 -1.6% -1.4% -18.8% na na

EGP CurncyEgypt EGP:Pound na -- -2.1% -0.9% 17.0 17.9

GHS BGN CurncyGhana GHS:Cedi 5.8 0.0% 0.0% -1.2% 6.2 6.7

KES BGN CurncyKenya KES: Shilling 106.6 -0.3% 0.5% -4.7% na na

MUR BGN CurncyMauritius MUR: Rupee 40.0 0.2% 0.5% -9.2% na na

MAD BGN CurncyMorocco MAD: Dirham 9.6 0.4% 1.1% -1.2% 9.8 9.8

NGN BGN CurncyNigeria NGN: Naira 387.7 0.2% -0.1% -6.5% 425.4 463.9

ZAR BGN CurncySouth Africa ZAR: Rand 17.1 -2.5% 2.3% -18.4% 17.5 17.8

TND BGN CurncyTunisia TND: Dinar 2.8 -0.2% 0.2% -2.3% na na

XOF BGN CurncyWAMU CFA: Franc 581.1 -0.2% 1.0% 0.1% na naBWP BGN Curncy 5

Commodities Spot Rate WTD MTD YTD 52 Week High 52 Week Low 12M Forward

CO1 ComdtyBrent Crude USD/bbl. 39.7 -2.6% 15.2% -38.3% 72.0 16.0

GC1 COMB ComdtyGold USD/ t oz 1,720.3 1.3% -1.1% 12.8% 1,775.8 1,335.0

HG1 COMB ComdtyCopper USD/lb. 256.7 0.1% 6.3% -7.8% 288.6 206.0

CCH0 ComdtyCocoa USD/MT na -- -- -- 2,998.0 2,188.0

Macro & Fixed Income 10Yr Bnd Yld Inflation Real Return Policy Rate *GDP ($'b) **GDP Growth Reserves ($'b)

Angola 8.8% 2.1% 6.7% 18.0% 105.8 2.5% 16.4

Egypt 13.4% 4.7% 8.7% 10.3% 250.9 5.6% 37.0

Ghana 19.0% 11.3% 7.7% 14.5% 65.6 4.9% 6.5

Kenya 12.1% 5.5% 6.6% 7.0% 87.9 5.5% 9.7

Mauritius 4.3% 2.8% 1.5% 1.9% 14.2 2.8% 6.9

Morocco 2.7% 0.9% 1.8% 1.9% 117.9 1.9% 28.3

Nigeria 10.3% 12.4% -2.1% 12.5% 397.3 1.9% 36.3

South Africa 9.4% 4.1% 5.3% 3.8% 368.3 -0.5% 52.8

Tanzania 12.9% 3.4% 9.5% 12.0% 58.0 6.7% 5.6

Tunisia 9.7% 6.3% 3.4% 6.8% 39.9 0.9% 8.1

Performance Summary

June 15, 2020

Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

Movements in Global Indices vs Africa

MSCI World S&P 500

FTSE 100 MSCI Africa

*GDP ($’b): Annual GDP by World Bank

** GDP Growth: Latest Quarterly y/y GDP Growth

Domestic

Macro and

Policies



Domestic Macroeconomic Overview

…H1-2020 Review

As at Jan-2020, when we published our FY-2020 outlook report titled “A different playing

field,” we estimated that growth in economic activities in Nigeria will remain above 2.0%

levels. Regrettably, we downplayed the possibility that the coronavirus outbreak, which

was brewing in Wuhan city in China at the time of writing the January report, would

become a pandemic, upset the fragile balance in the oil market, and bring global

economic activities to a halt! But no one saw this coming either. The situation was a

double whammy for Nigeria, as the oil market collapse wiped off export earnings and

50.0% of government revenue, while domestic economic activities were grounded in the

key states of Lagos, the FCT and Ogun for five weeks, before a partial restriction was

imposed thereafter.

Certainly, with the global and domestic spread of COVID‑19, the measures required to

contain the virus and its impact on the outlook for key macroeconomic variables, a

broad-based review and update of our domestic economic outlook for the rest of the

year is necessary. One thing is clear from where we stand today, the coronavirus

outbreak will take a huge toll on the Nigerian economy and the earlier the virus is

contained globally, or a vaccine is found, the better for world economy, Nigeria inclusive.

Already, domestic economic growth in Q1-2020 slowed to 1.87% and the figure for Q2

2020 is set to come in negative. However, with concerted effort by global health and

other multi-lateral agencies, we expect economic activities to gradually recover from H2-

2020.

Fiscal Policy

Fiscal Policy Response to COVID-19

Nigeria’s fiscal policy stance for 2020 was predicated on the need to boost government

revenue via the Strategic Revenue Growth Initiative (SRGI), a response to rising recurrent

spending, bloated public debt profile and weaker oil revenue. Standing on the pedestal

of this policy stance, President Buhari signed the Finance Bill, 2019 (now Finance Act) into

law in January 2020, thus, introducing some sweeping changes to Nigeria’s tax laws. It

must be noted that the Finance Act was designed to promote fiscal equity, incentivize

investments in infrastructure & capital markets, support small businesses and raise

revenues for the Government. Unfortunately, what could have been a flourishing fiscal

year for the Nigerian government was caught in the web of a global public health crisis

which grounded economic activities and threatened both oil and non-oil revenue.

Nonetheless, to alleviate the economic impact of the twin shock (outbreak of COVID-19

and crude oil price crash) and palliate the economic impact of the pandemic, the fiscal

authorities announced various interventions, ranging from restriction of movement, the

adjustment of the 2020 budget, announcement of various fiscal stimulus package,

The COVID-19 situation

was a double whammy

for Nigeria, as the oil

market collapsed and

domestic economic

activities were

grounded in the key

states

New Fiscal measures

arose, such as the

establishment of

economic sustainability

teams and stimulus

packages

Domestic Macro Overview

Already, domestic

economic growth in Q1

-2020 slowed to 1.87%

and the figure for Q2

2020 is set to come in

negative



establishment of economic sustainability teams, postponement of the planned increase

in electricity tariffs and the reduction in pump price of petrol.

1. Restriction of movements: At the end of March-2020, the Nigerian Government

implemented restriction of movement (with exemption of some essential services and

industrial establishments) within Lagos (commercial hub), Ogun (industrial hub) and Abuja

(administrative capital) for an initial period of 2-weeks. This was in a bid to curb the spread

of the virus within the country. Also, in addition to the already closed land border, the

President announced the closure of air and water ways (international airports and

seaports) while permitting only cargos that have been at sea for more than 14 days to

dock at the seaports.

Notably, as more cases of COVID-19 were recorded across the country, the President

banned inter-state travel, as well as extended all restrictions on April 13 (by another 2-

weeks) and on April 27 (by 1-week). However, compelled by the rising cases of social

violence/unrest within states under lockdown (specifically; Lagos and Ogun state), the FG

relaxed some of the domestic restrictions (with extended curfew from 8pm to 6pm every

day) on May 4 (Phase 1) and was further extended by 2-weeks on May 18. The President

eased some of the existing restrictions on June 1st (Phase two) for a period of four weeks,

spanning 2nd – 29th June, 2020. Worthy of note in the phase two announcement was the

relaxation of the restriction on places of worship subject to each state government

policies and the readjustment of curfew to within 10pm - 4am.

2. Amendment of Nigeria’s 2020 budget (Supplementary budget): In April-2020, the

Presidency through the Minister of Finance (MoF), Zainab Ahmed, commenced the

amendment of the approved 2020 Budget and revision of the 2020 – 2022 Medium-Term

Expenditure Framework/Fiscal Strategy Paper (‘MTEF/FSP’) to reflect the new realities in


The Nigerian economy

is currently in phase

two of easing the

lockdown

Source: NCDC, United Capital Research

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

27-F

eb

05-M

ar

12-M

ar

19-M

ar

26-M

ar

02-A

pr

09-A

pr

16-A

pr

23-A

pr

30-A

pr

07-M

ay

14-M

ay

21-M

ay

28-M

ay

04-J

un

11-J

un

FG eased domestic lockdown; even as COVID-19 continues to spreadStatistics of COVID-19 cases in Nigeria

Total confirmed case Total recovery Death

Nigeria

reports its

first case of

COVID-19

Buhari established

Covid-19

Presidential Task

Force

20th

National

Sports

Festival

was

postponed

Suspension

of Visa

issuances

and NYSC

camp

Closure

of

schools

FG released

N10.0bn to Lagos

State and N5.0bn

to NCDC

Lagos, Ogun

and Abuja

Lockdown

Lockdown

extended

by 2-weeks

Lockdown

extended

by 1-week

FG eases

lockdown,

(Phase 1)

FG extends

Phase 1 by

two weeks

FG further

eases

lockdown

(Phase 2)

Figure 30

Revision of budget and

fiscal frameworks

emerged due to the

effect of the pandemic



the macroeconomic environment. Clearly, Nigeria’s actual revenue for 2020 is expected

to underperform initial estimates amid the plunge in crude oil prices which is now well

below the approved budget benchmark of $57.0/b, lower production quota assigned by

OPEC+, and slowdown in economic activities in the wake of COVID-19 outbreak.

Accordingly, the MoF submitted its review of the approved budget at the Federal

Executive Council (FEC) meeting in May-2020. Notably, the council members made some

further adjustment to the reviewed copy for onward submission to the National Assembly.

The net effect of the proposed adjustments is an increase in projected budget deficit

(inclusive of the expenditures funded by project-tied loans) from N2.175tn to N4.95tn. This


Figure 17

Source: World Bank, United Capital Research

Fiscal Items (N'tn) FY-2019 Actual 2020 Initially Approved

Budget 2020 Proposed Revision % Change

Total Expenditure 8.29 10.59 10.51 -0.8%

Total Revenue 4.12 8.42 5.56 -34.0%

Total Budget Deficit 4.17 2.17 4.95 128.0%

Available Breakdown

Deficit to be finance by:

Privatization proceeds 0.25 0.13 -50.0%

Borrowing from FGN Special Accounts 0.00 0.26 n/m

Multi-lateral / Bi-lateral Project-tied Loans 0.33 0.39 18.0%

New Borrowings: 1.59 4.17 161.7%

Domestic Borrowing 0.74 2.19 193.8%

Foreign Borrowing 0.85 1.98 133.5%

Revenue:

Oil Revenue (inclusive of Minerals & Mining) 1.38 2.78 1.01 -63.8%

Non-Oil Revenue 1.23 1.81 1.62 -10.3%

Other Revenue: 1.51 3.83 2.93 -23.5%

Independent Revenue 0.56 0.85 0.93 9.8%

Balances in the Special Accounts/Levies 0.55 0.65 0.65 0.0%

Signature Bonus/renewals 0.35 0.94 0.35 -62.7%

Domestic recoveries, asset & fines 0.06 0.24 0.24 0.0%

Grant and Donor Funding 0.00 0.04 0.09 155.4%

Stamp Duty 0.46 0.20 -56.9%

Net Revenue from GOEs 0.55 0.47 -15.1%

Exchange Rate Differentials 0.13 0.00 -100.0%

Expenditure:

Statutory Transfers 0.43 0.56 0.40 -28.9%

Capital Expenditure (CAPEX) 1.17 2.47 2.23 -9.5%

Other Recurrent Expenditure: 6.70 7.57 7.88 4.1%

Non-Debt (ex. Special Interventions) 4.25 4.49 4.58 1.9%

Special Interventions 0.000 0.35 0.35 0.0%

Sinking Fund 0.005 0.27 0.27 0.0%

Debt Servicing Cost 2.45 2.45 2.68 9.2%

Key Assumptions

Oil Price Benchmark ($/b) 67.20 57.00 25.00 -56.1%

Oil Production Benchmark (mbpd) 1.96 2.18 1.90 -12.8%

Exchange Rate (N/$) 305.00 305.00 360.00 18.0%

Key Ratios

Deficit to GDP 0.03 0.02 0.04 2.0%

Deficit to Revenue 1.01 0.26 0.89 63.3%

Debt Servicing Cost/Revenue 0.59 0.29 0.48 19.1%

CAPEX to Total Expenditure 14.06% 23.28% 21.23% -2.1%

Sources: MoF, BudgIT, United Capital Research

Variances between the Initially Approved and Revised 2020 budget Figure 31



will be financed via privatization proceeds of N126.0bn (down from N252.0bn previously

approved); N263.63bn to be borrowed from FGN Special Accounts; drawdowns on

multilateral/bilateral project-tied loans of N387.3bn; and new borrowings (foreign and

domestic) totaling N4.16tn.

After the FEC meeting in May-2020, the MoF further disclosed that the FG intends to

partially finance the huge budget deficit by taking concessionary loans from the IMF

($3.4bn), World Bank ($2.5bn), AfDB ($0.5bn), IDB ($0.1bn) and AFREXIM Bank ($0.5bn) -

totaling c. $7.0bn (N2.5tn). Also, she noted that the external borrowing would be

complemented by borrowings from the domestic debt capital market where interest

rates appear more attractive when compared to the international debt capital market.

Although, a full draft of the approved budget is yet to be made public, reports from the

official Twitter page of the Nigerian Senate indicated that the upper chamber further

revised the total budget size for 2020 from N10.51tn to N10.81tn. This was as the Senate

members believe there is the need for the nation to spend its way out of looming

recession.

3. IMF Loan: In April-2020, the International Monetary Fund (IMF) approved and

disbursed Nigeria’s request for emergency financial assistance of SDR2.45bn ($3.4bn,

100% of quota) under the Rapid Financing Instrument (RFI), to support the economy

against COVID-19 shock. Notably, the $3.4bn RFI is the country’s first lending arrangement

with the IMF since becoming a member in 1961 and the largest emergency financing

provided by the IMF to any country since the COVID-19 pandemic.


...the $3.4bn RFI is the

country’s first lending

arrangement with the

IMF since becoming a

member in 1961

0.31.2

2.21.3 1.9 2.1

0.3 0.8 1.2

1.21.1

0.9

2.52.3

0.60.3

0.31.3 0.7

1.4

0.7

2.1 2.1

2014 2015 2016 2017 2018 2019 2020

Approved

2020

Revised

2020E

We expect FG's fiscal deficit to widen from 4.8% of real GDP in

2019 to 8.0% in 2020Compositional trend in FG's fiscal deficit (N'tn)

Other Deficit Financing sources* Foreign Borrowing Domestic Borrowing

Sources: Budget Office, United Capital Research

Figure 32

The Upper Chamber of

Nigerian Senate further

revised the total

budget size for 2020

from N10.51tn to

N10.81tn



Prior to the approval of the RFI request, Nigeria has had four Stand-by Arrangements with

the IMF (granted in 1987, 1989, 1991, and 2000), but were never drawn due to opposition

to IMF policies and conditionalities. This time around, the borrowing request faced little

opposition, given the magnitude of the unprecedented COVID-19 shock, and the fact

that the RFI is a non-concessional lending arrangement that comes with little or no

conditionality.

According to the MoF, the facility has a repayment moratorium of 3.25-years, and a

repayment period of 5-years. This implies that Nigeria faces over $4.5bn external debt

obligations between 2024 and 2025 ($3.4bn RFI and $1.1bn Eurobond maturity in 2025). In

the medium term, we believe authorities will be faced with a choice between refinancing

the debt obligations with relatively expensive external commercial debts (Eurobonds), or

switching to a full-fledged IMF program.

4. Economic Sustainability and COVID -19 Response Teams: In addition to the

technocratic Presidential Economic Advisory Council (EAC), which is responsible for

assessing the macroeconomic policy measures needed to ensure economic stability and

reduce poverty, the Nigerian President in March-2020, constituted an Economic

Sustainability Committee (ESC) chaired by Vice President Professor Yemi Osinbajo, to

develop a comprehensive economic plan to respond to the disruptions and dislocations

caused by the COVID-19 pandemic. Accordingly, the ESC submitted a comprehensive

Nigeria faces over

$4.5bn external debt

obligations between

2024 and 2025


Nigeria’s four stand-by

arrangements with the

IMF were never drawn

3.4

2.8

1.41.0

0.7 0.7 0.7 0.6 0.5 0.5

Nigeria Egypt Pakistan Ghana Tunisia Kenya Dominican

Rep.

Ecuador Jamaica Panama

Nigeria's $3.4bn RFI purchase is largest emergency financing

provided by the IMF since the COVID-19 pandemic struckTop-10 emergency loan approved by IMF YTD ($'bn)


Figure 33

0.5 0.3 0.51.1 1.5 1.3 1.0 1.5 1.3 1.5

0.8

3.4

2021 2022 2023 2024 -

2025

2027 2030 2031 2032 2038 2047 2049

Nigeria faces c. $4.5bn external debt obligations between 2024

and 2025Nigeria's Eurobond and RFI maturity profile

Eurobond RFI

Sources: DMO, United Capital Research

Figure 34

The birth of the

Economic Sustainability

Committee (ESC) was

prompted by the

COVID-19 pandemic



plan in June-2020 on strategies to keep the economy working and ensure jobs are not

only retained but that more are generated.

Also, an economic team, headed by the Minister of Finance, Budget and National

Planning was set up to examine the impact of COVID-19 on the economy and

recommend appropriate as well as immediate response strategies. Lastly, the President

established a Presidential Task Force (PTF) on COVID-19, chaired by the Secretary to the

Government of the Federation, to coordinate Nigeria’s multi-sectoral and inter-

governmental approach to COVID-19.

Notably, we observed that since the constitution of the EAC in Sep-2019, the President

has been more willing to sign off on new reforms such as naira devaluation, petrol subsidy

removal, openness to adopt electricity tariff removal, tax adjustments and taking IMF

loans. Thus, this suggests that the President is willing to follow through on policy reforms

during this period. Overall, we believe with this team working together, there will be better

coordination of Nigeria’s fiscal, monetary as well as trade policies, in the difficult days and

months ahead.

5. COVID-19 Relief Packages: Despite the need to cut cost in the face of an

expected weaker revenue, the FG also rolled out series of fiscal palliatives to cushion the

impact of COVID-19 pandemic and the associated lowdown, on states, households and

SMEs.

In addition to the stimulus package announced by President Buhari and the Minister of

Finance, the National Assembly is considering passing an Emergency Economic Stimulus

(EES) bill, to address the general wellbeing of Nigerians pending the eradication of the

pandemic and a return to economic stability. Also, all 43 cabinet ministers were reported


Source: United Capital Research

Figure 35

Since the constitution of

the EAC in Sep-2019,

the President has been

more willing to sign off

on new reforms



to have donated 50.0% of their March-2020 salaries to support the FG’s efforts. Lastly, the

Nigeria Sovereign Investment Authority (NSIA) launched the Nigeria Solidarity Support

Fund (NSSF) to enable Nigerians at home and abroad, as well as other international

donors to directly contribute to Nigeria’s fight against the pandemic.

6 Sub-national Government Support Initiatives: To close the expected shortfall in

FAAC distributions, in the months after May 2020, the FG ordered the disbursement of

$150.0mn from the NSIA to support June-2020 FAAC distribution as well as the suspension

of deductions of loans and bailout funds from states’ monthly allocation for one year.

However, we believe this may not be sufficient to prevent a sub-national fiscal crisis.

Accordingly, more consideration may be required to address this – possibly through a

combination of grants and low interest loans, but with stringent conditions that will support

economic growth across the country.

Monetary policy

CBN’s Policy Response

Prior to the outbreak of COVID-19 in Nigeria, the Central Bank of Nigeria (CBN) had

adopted a largely indirect expansionary monetary policy stance by increasing minimum

LDR (to 60.0% in July-2019 and to 65.0% in Oct-2019) to compel banks to lend to the real

sector and restricting the non-bank domestic investors from investing in the OMO market,

to drive up liquidity in the financial system and promote appetite for riskier assets.

These policies were successful in significantly increasing credit to the private sector as well

as pushing market interest rates downwards. Notably, total gross credit of the banking

system grew by c. N2.3tn, between Jul-2019 (when LDR was first increased) and mid Mar-

2020 (prior to the COVID-19 monetary responses), with the biggest beneficiaries being the

manufacturing, consumer credit, general commerce, information and communication as

well as the agricultural sectors.


77%

69%

43% 41% 38% 38% 35% 35% 34% 33% 32% 30% 28% 26% 24% 24% 23% 22% 21% 20% 20%16% 16% 16% 15% 15% 14% 14% 13% 12% 12% 11% 10% 10% 10% 10%

60%

La

go

s

Og

un

Riv

ers

Osu

n

Kw

ara

Cro

ss R

ive

r

Ka

no

Ka

du

na

En

ug

u

Ed

o

Oyo

An

am

bra

On

do

Pla

tea

u

De

lta

So

ko

to

Ab

ia

Be

nu

e

Za

mfa

ra

Im

o

Ko

gi

Na

sara

wa

Nig

er

Ekiti

Ba

uc

hi

Jig

aw

a

Go

mb

e

Ad

am

aw

a

Eb

on

yi

Ta

rab

a

Akw

a Ib

om

Ka

tsin

a

Bo

rno

Yo

be

Ke

bb

i

Ba

ye

lsa

34 of 36 States do not meet the minimum requirement to raise debt capitalState by State debt sustainability

IGR/Revenue (2017-2019) MoF/SEC's minimum requirement

Sources: NBS, United Capital Research

Figure 36

The FG ordered the

suspension of

deductions of loans

and bailout funds from

states’ monthly

allocation for one year

Notably, total gross

credit of the banking

system grew by c.

N2.3tn, between Jul-

2019 and mid Mar-2020



In response to the negative impact of the twin shocks, the CBN complemented its indirect

expansionary monetary policies with more direct/targeted liquidity injections (intervention

loans) to sectors that have been negatively impacted by the virus. Specifically, the CBN

launched a N3.5tn (or 2.4% of GDP) stimulus program in Mar-2020 to support Nigeria’s

COVID-19 response, including a 400bps interest rate cut on its c. N3.0tn loan book to 5.0%.

Additionally, having previously maintained the status quo at the Mar-2020 meeting in a

bid to avoid exacerbating inflationary pressures, the Monetary Policy Committee (MPC)

further consolidated the CBN’s effort by easing the benchmark monetary policy rate by

100bps to 12.5% at the May-2020 unprecedented one-day meeting. In justifying its

decision, the committee emphasized the need to signal a direction towards economic

recovery, and further stimulate credit expansion to critical sectors, particularly as the

pace of acceleration in inflation rate is still slow.


Sources: CBN, United Capital Research

11

13

15

17

19

May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20

Stringent LDR policies spurs credit growth significantlyTotal Private Sector Credit (N'tn)

Figure 37


Figure 38

...the CBN launched a

N3.5tn (or 2.4% of GDP)

stimulus program in

Mar-2020 to support

Nigeria’s COVID-19

response

A 100bps cut in the

MPR further cemented

the CBN’s

expansionary stance



Notably, the May-2020 MPC meeting communique indicated that total banking sector

credit further grew by c. N600.0bn between the Mar-2020 meeting and the May-2020

meeting. Specifically, the communique showed that the CBN has already disbursed

N10.15bn under the N100.0bn Healthcare Sector Intervention Fund, N93.2bn under the

N1.0tn Real Sector Support Fund, and N4.1bn under the N50bn Targeted Real Sector

Facility for households and SMEs. Put differently, of the N1.15tn available for disbursement

under the three earlier mentioned CBN facilities, only c. 9.34% has been disbursed.

Looking ahead, we expect the apex bank to move to the next stage of its expansionary

policy response as stated in the 27-page report presented by the bank’s governor,

Godwin Emefiele, titled “Turning the COVID-19 tragedy into an opportunity for a new

Nigeria.” This is predicated on our expectation for the economy to be fully reopened in H2

-2020. According to the guideline, the CBN will expand its sectoral interventions, offer long

-term financing for the entire healthcare value chain, promote the establishment of

InfraCo Plc (with combined debt and equity take-off capital of N15.0tn), and prioritize the

provision of FX for the importation of machinery as well as other critical raw materials

needed to drive a self-sufficient Nigerian economy once the COVID-19 transmission curve

flattens and restrictions are eased. This should help create a further boost for economic

recovery in H2-2020.

Notably, we expect the apex bank to sustain its current heterodox policies till the end of


Source: Bloomberg, United Capital Research

...of the N1.15tn

available for

disbursement under the

three earlier mentioned

CBN facilities, only c.

9.34% have been

disbursed

Our expectation for H2-

2020 is for the Apex

bank to move into its

next phase of

expansionary policies

7.0%

11.0%

15.0%

19.0%

May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 Jan-19 Sep-19 May-20

MPC consolidates the CBN's expansionary policy in May-2020Monetary Policy Rate vs. Headline Inflation Rate

Headline Inflation rate MPR

Figure 39

CBN's Intervention Facilities Total size

(N'bn)

Amount disbursed

(N'bn)

% dis-

bursed Beneficiaries

Targeted Real Sector Facility

for households and SMEs 50 4.1 8.2%

5,868 successful benefi-

ciaries

Healthcare Sector Interven-

tion Fund, 100 10.2 10.2% n/a

Real Sector Support Fund 1,000 93.2 9.3% 44 greenfield and

brownfield projects

Total 1,150 107.5 9.3%


Details on the three CBN Intervention Facilities Figure 40



the year. Also, we expect monetary policy stance to remain broadly accommodative

with an intent to spur growth at the cost of further inflationary pressure

Policy reforms: Will Nigeria let a good crisis go to waste again?

The current crisis has presented the Nigerian government and the CBN with the

opportunity to silently implement long-needed but unpopular policy reforms. Unlike in

2016, the government and the CBN seem to be more willing to leverage on the crisis to

implement those reforms.

1. Petroleum Subsidy Removal: In line with lower international crude oil prices, the

Ministry of Petroleum Resources has committed to flexible pricing of petrol and the

elimination of subsidy, which cost the federation N731.0bn in 2018 (0.6% of GDP) and

N405.0bn in H1-2019 (0.6% of GDP). However, time will tell whether the government is

determined to go all the way.

3. Implementation of Oronsaye Report: As the need to block fiscal leakages and cut the

cost of governance in Nigeria continues to bite amid the COVID-19 outbreak, the

Nigerian President appears to be ready to bite the bullet. According to Special

Assistant to the President on Digital & News Media reports, the President has

approved the implementation of the long written and reviewed Oronsaye-led

committee report on reform of government parastatals, commissions, and agencies.

The report which was submitted during the administration of the former President

Goodluck Jonathan, recommends that the FG should abolish 38 agencies,

consolidate 52 agencies, reverse 14 agencies to departments in the relevant

ministries, and discontinue government funding of professional bodies/councils.

However, since the report was submitted in 2012, the previous and current

administration have failed to implement most of the recommendations entrenched in

the report,

4. FX convergence: The sudden plunge in international crude oil prices, which

contributes above 80.0% and 50.0% to Nigeria’s export and FG’s earnings,

exacerbated the overvaluation of the naira and prompted a major shift in policy for

the central bank and government. This was as the CBN weakened its official


Sources: PPPRA, Budgit, IMF , United Capital Research

0.3 0.3

0.60.5

0.7

2.1

1.4 1.31.2

0.7

0.00.1

1.2

0.6

0.1

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E

History of Nigeria’s oil expenditure on petrol import subsidy Fuel Subsidy (N'tn)

Figure 41

The pandemic

prompted the need to

revisit the Oronsaye

Report

The Ministry of

Petroleum Resources

has committed to

flexible pricing of petrol

and the elimination of

subsidy

The government will still

need to get the

National Assembly’s

buy-in to be able to

fully implement the

recommendations



exchange rate (for the first time since mid-2016) for the naira by 15.0% (from N307.0/$

to N361.0/$) and commenced convergence of its various foreign exchange (FX)

windows to the Investors and Exporters (I&E) windows rate.

We agree with the IMF that a unified and more flexible exchange rate (with FX

interventions only limited to smoothing large fluctuations) will be an important shock

absorber, especially in turbulent times. Also, we note that the rationing of FX - such as

occurred in 2015 and Q2-2020 - must be avoided going forward as it would only

hamper trade and investor confidence, hence further delaying the economic

recovery once the current crisis passes.

4. Power sector reforms: In addition to the above reforms, the Ministry of Power has

committed to a more cost-reflective power tariff while working with the German

government and Siemens AG to overhaul Nigeria’s power generation, transmission,

and distribution infrastructure, under the 3-phase Presidential Power Initiative (PPI).

Specifically, the President kicked off the implementation of the phase 1 part of the

deal as he directed the power and finance ministers to commence the pre-

engineering and concessionary financing aspects of the project.

According to the Presidential statement, the project is to be financed by

concessionary loans (up to 3-year moratorium and 12-year repayment at

concessionary interest rates) covered by Germany’s Euler Hermes Group SAS, a large

provider of credit insurance, and the funding will be on-lend as a convertible loan to

the electricity distribution companies. Additionally, Siemens AG will have sole

responsibility for selecting its contractors.

Overall, we note that the crisis also presents the opportunity to look inwards to upgrade

capacity and service provision across several essential areas including health, power,

tech infrastructure, welfare, education, and enhance productivity in the agriculture as

well as manufacturing sector. Also, we believe this is the time to strengthen public trust by

removing all forms of subsidy and applying reform mechanisms such as the unbundling of

NNPC and passage of the Petroleum Industry Bill.


Source: NBS, United Capital Research

We note that the

rationing of FX must be

avoided going forward,

as it would only

hamper trade and

investor confidence

A breakdown of Nigeria’s current FX windows Figure 42

Source: CBN, FMDQ , United Capital Research

Window Participants Pre-COVID (N/$) Current (N/$) Level of liquidity

Official exchange rate Used for all government trans-

actions, oil revenue, 306.5 361.0

Low liquidity, only $100,000 to

banks daily

Investors and Exports Win-

dows (IEFX)

Investors, Exporters and all

market players foreign and

domestic

358-366 380-390 First introduced at N/$380. This

is expected to move with mar-

ket forces.

Retail Secondary Market

Intervention Window,

Local corporates, manufac-

turers

335-360 380-385 $250.0mn sold by the CBN

every two weeks, spots and

forwards

Wholesale Secondary Mar-

ket Intervention window

Mostly large corporates

through banks 335-360 380-385 $100.0mn a week pre-COVID,

no auction

BDCs, invisibles, travel Open to all 358-369 440-460

Sources: FMDQ, CBN, Aboki FX, United Capital Research

...we note that the crisis

also presents the

opportunity to look

inwards to upgrade

capacity and service

provision across

several essential areas



Domestic Output and Price Level

Will the stimulus package be enough to avoid an economic slowdown?

In FY-2019, the Nigerian economy remained on the path of recovery as real GDP

expanded by 2.27% (vs. 1.91% in FY-2018). However, in Q1-2020 the growth in economic

activities slowed to a nine-quarter low of 1.87% y/y from 2.55% y/y in Q4-2019 and 2.12% y/

y in Q1-2019. This was as the impact of the COVID-19 pandemic, decline in crude oil

demand and the social distancing measures announced to curb the spread of the virus,

left a negative imprint on March-2020 performance.

Notably, the CBN’s PMI data for March-2020, which was published before the President

announced a full lockdown of the economy, already showed early signs of contraction in

economic activities, particularly in the non-manufacturing sector. This was as the non-

manufacturing index indicated a contraction in services sector, falling to a 3-year low of

49.2pts amid contraction in new orders, employment level and inventories. Meanwhile,

the Manufacturing PMI showed a slower pace of expansion, with the index settling at

51.1pts - the lowest level since May-2017.

Additionally, the PMI report for May and Jun-2020 signaled a deep contraction in

economic activities during the period as both the manufacturing and non-manufacturing

index came in below the 50.0pts expansionary levels. This reflected the impact of the

implementation of a full economic lockdown through April-2020 and partial lockdown

from May-2020. Accordingly, we expect economic performance to transition from the

broad-based slowdown we saw in Q1-2020 to a broad-based contraction in Q2-2020.

Notably, contrary to the expansion in Q1-2020 of 5.06% y/y, we expect the oil sector to

contract from Q2-2020, due to partial compliance with OPEC+ production cut agreement

and the plunge in average crude oil price in Q2-2020. Under the OPEC+ agreement,

Nigeria’s oil production is capped at 1.41mbpd between May and Jun-2020, and

1.50mbpd between July and Dec-2020. However, with Nigeria’s inability to comply fully

with the agreed quota in May-2020, the country is now required to compensate for such

in the following months and future non-compliance will be followed with a deeper supply



20

35

50

65

Jul-14

Oc

t-14

Ja

n-1

5

Ap

r-15

Jul-15

Oc

t-15

Ja

n-1

6

Ap

r-16

Jul-16

Oc

t-16

Ja

n-1

7

Ap

r-17

Jul-17

Oc

t-17

Ja

n-1

8

Ap

r-18

Jul-18

Oc

t-18

Ja

n-1

9

Ap

r-19

Jul-19

Oc

t-19

Ja

n-2

0

Ap

r-20

Q2-2020 PMI indicates economic activities are contractingTrend in CBN's Manufacturing and Non-Manufacturing PMI

Manufacturing PMI Non-Manufacturing PMI 50 points threshold

Figure 43

...the growth in

economic activities

slowed to a nine-

quarter low of 1.87%

y/y in Q1-2020

We expect economic

performance to

transition from the

broad-based

slowdown in Q1-2020

to a broad-based

contraction in Q2-2020.



cut. Specifically, with the fall in total domestic rig count from a high of 23 in Feb-2020 to 8

in May-2020, we expect a deep contraction in oil sector GDP in Q2-2020. Notably, we

imagine that crude oil production will rebound from Q3-2020 as the global economy

begins to reopen for business. However, we do not expect production or demand to

return to pre-COVID19 levels in 2020. Thus, we have modelled a contraction in oil GDP

from Q2-2020.


Sectors Contribution

to 2019 GDP

5-year

CAGR

Impact of

COVID-19

and Lock-

down

Remark

Agriculture 25.2% 3.0% Moderate Monetary and Fiscal Interventions to support the sector

but supply chain issues will leave a negative imprint

Trade 16.0% -0.6% Negative A highly informal trade sector to be dragged by lock-

down

Information and Communication 13.0% 5.3% Positive To benefit from the implementation of work from home

policy across the formal sector

Manufacturing 9.1% -0.4% Moderate

To be supported by liquidity injections and rise in demand

for necessities like Food, Beverage and Tobacco. Howev-

er, other non-necessities manufacturing will drag the sec-

tor

Crude Oil and Natural Gas 8.8% -1.4% Negative To be dragged by the plunge in global crude price and

demand

Real Estate 6.1% -4.6% Negative Collapse in demand for commercial real estate amid

WFH; rising cases of rent default amid job loss

Construction 3.7% -0.3% Negative

To be dragged by declines in private and govt CAPEX

spending. Bright spot lies in the construction of new

healthcare facilities

Professional, Scientific and Technical

Services 3.6% 0.3% Negative Travel restrictions to leave a negative imprint

Other Services 3.4% 2.8% Negative Services sector highly impacted by social distancing

measures

Financial and Insurance 3.0% 0.3% Moderate

Banks will have to battle with the quadruplet factor of

CBN's squeeze, COVID-19 lockdown, naira devaluation,

and impact of lower oil prices on O&G loans while being

compelled to still create credit

Education 2.1% 0.3% Negative Highly impacted by social distancing measures

Public Administration 2.1% -2.8% Negative Dragged by the impact of FG, State and LGs cut in over-

head and CAPEX spending

Transportation and Storage 1.5% 7.1% Negative Highly impacted by the restriction in movement policies

across the country

Accommodation and Food Services 0.9% -0.6% Moderate Negatively impacted by lockdown

Human Health and Social Services 0.7% -0.5% Positive Buoyed by the rise in healthcare spending

Electricity, Gas, Steam and Air Condi-

tioning Supply 0.4% 0.3% Moderate

The postponement of tariff hike to leave a negative im-

print; and could worsen if the Senate passes the bill pro-

posing a 2-month holiday on payment of electricity bills

Arts, Entertainment And Recreation 0.2% 3.6% Negative Negatively impacted by social distancing measures

Water Supply & Waste Utilities 0.2% 6.5% Moderate Negatively affected by lack of activities in office building

Administrative & Support Services 0.0% 0.4% Negative Negatively impacted by work from home policies

Overall GDP 100% 0.80% Negative Clearly the overall impact of the pandemic on growth

would depend on how long the lockdowns persist


Figure 44 Impact of the COVID-19 Pandemic on GDP Drivers



Elsewhere, we assume the non-oil sector will contract between Q2 and Q3-2020, with

possibility of recovery by Q4-2020. This assumption is predicated on the expectation that

the implementation of social distancing measures, supply chain disruptions, FX scarcity,

and rising unemployment will negatively reflect on the Industrial (ex. Food, Beverage and

Tobacco as well as Oil sector), and Services (ex. ICT and Healthcare) sectors during the

period. Specifically, we believe sectors like ICT, Agriculture, and Food, Beverage and

Tobacco, which contribute c. 40.0% to GDP, will continue to stay resilient during the dark

times in Q2 and Q3-2020.

Though the Federal Government and CBN have announced some stimulus packages

aimed at easing the impact of the pandemic on businesses, the quantum of the stimulus

compared to the size of the Nigerian economy may mean there would only be a

marginal impact. To give perspective, the total amount of monetary support announced

by both the FG and CBN is estimated at c. N5.3tn ($14.6bn), equivalent to 3.7% of GDP.

However, we expect access to intervention funds to be limited to the formal sectors and

big corporates. Thus, leaving the country’s large informal sector (above 60.0% of the

economy) exposed to the vagaries of the COVID-19 pandemic.

Also, using the expenditure approach at measuring GDP, we argue further that the net

impact of recent government and CBN policy actions may not hasten output growth

significantly. The measures adopted to flatten the COVID-19 curve are by design,

deliberately aimed at minimizing social interaction and curtailing economic activity. In

view of this, unemployment, and underemployment rate, which were last reported at

23.1% and 20.1% respectively, are expected to increase further, which could weigh on

household income and consumer spending. Even in advanced economies with targeted

policies to salvage jobs, unemployment rates have crept up to record levels. Again, at

6.0% of GDP, the multiplier effect of higher government spending (G) may not be enough

to bolster GDP, with 25.0% expended on debt servicing relative to 21.0% on capital

spending and 54.0% on recurrent spending.

Additionally, we expect gross investment (16.5% of GDP) to slow considerably in 2020 as

companies (especially those in the sectors that are directly and negatively impacted by

COVID-19) grapple with business survival amid surprising demand destructions. While gross

domestic local investments (Id) may be supported by the CBN’s effort to targeted liquidity

injections, Foreign Direct Investment (FDI) growth is unlikely to improve in the current


…the quantum of the

stimulus compared to

the size of the Nigerian

economy may mean

there would only be a

marginal impact

...we assume the non-

oil sector will contract

between Q2 and Q3-

2020, with possibility of

recovery by Q4-2020

Even in advanced

economies with

targeted policies to

salvage jobs,

unemployment rates

have crept up to

record levels


Figure 45

Pre-recession Slowdown Recession Early Recovery Recovery Recovery

2011 - 2014 2015 2016 2017 2018 2019 Bear Case Base Case Bull Case

Household Consumption 59.0% 4.0% 1.5% -5.7% -0.4% 4.6% -1.5% -3.0% -2.0% -0.1%

Gov ernment Consumption 6.0% -5.3% -11.9% -15.1% -12.4% 39.9% 15.0% -13.0% -8.0% 3.5%

Gross Fixed Capital Formation 15.8% 2.3% -1.3% -5.0% -2.8% 9.7% 8.3% -4.0% -3.5% -1.5%

Inv entory 0.7% 39.7% -5.7% -1.2% 20.5% 3.9% -26.2% -20.0% -15.0% -6.0%

Net Exports 18.5% 29.6% 19.5% 21.8% 9.4% -17.5% 7.6% -2.0% -1.0% 0.5%

Aggregate GDP at Mkt. Price 100.0% 4.7% 2.7% -1.6% 0.8% 1.9% 2.2% -3.7% -2.4% 0.0%

% of 2019 GDPReal Expenditure (y/y)2020 Projections

2020 projections for GDP Growth



environment, especially amid the uncertainty in the FX market. Finally, Net Export (Xn),

accounting for 18.5% of GDP, is expected to deteriorate further as global outbreak of

COVID-19 has resulted in significant fall in the demand for crude oil, which contributes

more than 80.0% to the country’s export earnings. Although we expect import to also

shrink, especially amid lack of FX supply, shutdown in airline and port activities across the

world. However, the need for Nigeria to continue to import medical items in the fight

against COVID-19 should keep the import bill considerably large in 2020.

Lastly, due to the fact that the current crisis is supply-side heavy (restriction of movement

and business shutdown), we doubt that the current demand-side responses from both the

fiscal and monetary authorities (liquidity injections) can prevent a contraction of

economic activities in the short term. However, we believe that the palliatives and reforms

that are being announced will help the country avoid a deep recession and hasten the

recovery process once the incidence rate of the pandemic begins to drop and the

economy is fully re-opened.

Inflation rate

COVID-19 outbreak and lockdown, any impact on price?

In our FY-2020 outlook report published in Jan-2020, we highlighted 6 key upside risks to

consumer prices in 2020 and concluded that the headline inflation rate will climb

northward in H1-2020. Those factors were

• Demand-side impact of full implementation of the new minimum wage;

• VAT rate hike, based on the passage of the Finance Bill 2019;

• Food price increase amid continued closure of land borders with neighboring

countries;

• Transition to a more cost-reflective electricity tariff;

• CBN’s expansionary monetary policy stance;

• Mild possibility of naira adjustment


FDI growth is unlikely to

improve in the current

environment,

especially amid the

uncertainty in the FX

market


6.8%6.2%

6.5%6.2%

5.9%

4.0%

2.4%2.8%

2.1%

-0.7%

-1.5%

-2.3%

-1.7%

-0.9%

0.7%1.2%

2.1% 2.0%1.5%

1.8%

2.4%2.1% 2.1% 2.3%

2.6%

1.9%

-3.6%

-2.6%

-0.5%

Q4

-13

Q1

-14

Q2

-14

Q3

-14

Q4

-14

Q1

-15

Q2

-15

Q3

-15

Q4

-15

Q1

-16

Q2

-16

Q3-1

6

Q4

-16

Q1

-17

Q2

-17

Q3

-17

Q4

-17

Q1

-18

Q2

-18

Q3

-18

Q4

-18

Q1

-19

Q2

-19

Q3

-19

Q4

-19

Q1

-20

Q2

-20

Q3

-20

Q4

-20

Base Case: We expect a "V" shape recovery post-COVID-19

outbreakNigeria's Quarterly GDP growth rate (y/y)

Recession

Slow recovery

Peak

Contraction

Recession

Contraction

V-recovery

Figure 46



True to our projection and expectation, headline inflation maintained an upward trend

up to May-2020, averaging 12.27% (vs. 11.34% in the same period in 2019). Also, as at May

-2020, both the Food and Core inflation sub-index climbed to their 26-month and 22-

month high of 15.04% y/y and 10.12% y/y respectively, driven by the crystallization of the

factors highlighted above (except for the transition to cost-reflective electricity tariff).

The outbreak of COVID-19 and restriction of economic activities had a mixed impact on

the headline number as it fueled a spike in food prices while having a more negligible

impact on the core sub-index. Also, the transmission effect of naira devaluation on the

core-index was muted as importation activities were largely limited in H1-2020 due to

land, port, and airline closure. However, the reduction in the regulated price of PMS

(petrol) by c. 13.8% in March-2020 to N125/litre, and by a further 1.2% in Apr-2020 to

N123.5/litre helped to further lessen the overall pressure on the core index. This was

evident, as inflation rate in the utilities division of the CPI (Housing Water, Electricity, Gas

and Other Fuel) moderated from 7.81% y/y in Feb-2020 to 7.77% y/y in May-2020.

In the month of June-2020, we expect the pressure on the headline inflation rate to persist.

Specifically, we expect pressure food prices to remain despite the ease in lockdown

policies, as restrictions on interstate travel and closure of borders continue to limit the

supply of foods across the country. Also, we expect pressures on the core inflation sub-

index to persist amid increase in prices of health care products, transportations, and other

services.

Further out, our outlook for the headline inflation rate remains biased to the upside in H2-

2020. Although we believe the inflationary pressures from the implementation of the new

minimum wage might now be behind us amid the current fiscal challenges, we note that

as economic activities begin to pick up in Q3-2020, the impact of a higher VAT rate will

continue to be felt till the end of the year. Also, as CBN fully resumes FX intervention sales

and international trading activities re-open globally, we might see an upward pressure on

the core index amid a relatively weak naira valuation. Meanwhile, we note that the

CBN’s targeted liquidity injections are not likely to stoke inflationary pressures as they are

expected to be matched with productive use. Food inflation rate is expected to continue

to track higher as the FG is unlikely to re-open land border until Q4-2020 (our best-case


True to our projection

and expectation,

headline inflation

maintained an upward

trend up to May-2020,

averaging 12.27%

...the reduction in the

regulated price of PMS,

helped to further lessen

the overall pressure on

the core index

Source: NBS, United Capital Research

6.6%

15.2%13.9%

11.7%10.3%

12.0%

7.9% 8.0%9.6%

18.6%

15.4%

11.5% 12.0%13.3%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Inflation oulook remains biased upward in H2-2020End-Period Headline Inflation Rate

Figure 47

Our outlook for the

headline inflation rate

remains biased upward

in H2-2020



scenario). The next harvest season could also be disappointing due to logistical

challenges. Lastly, we expect the Nigerian Electricity Regulatory Commission (NERC) to

proceed with a minor adjustment to tariffs in H2-2020 as fiscal pressures bite. Hence, on a

balance of risk, we believe risks to inflation are biased upward. Overall, we expect

headline inflation rate to settle at 13.3% y/y by Dec-2020 (Pre-COVID-19 expectation –

11.9% y/y).

External Sector

Foreign Exchange Rate and Reserves: Any possibility for further naira

adjustment?

As we had noted earlier in this report, the currency market dynamics worsened in H1-2020

and led to an adjustment in the exchange rate by the CBN. Notably, the CBN adjusted its

official exchange rate by c. 15.0%, amid oil price shocks (down 60.0% ytd in March-2020)

and dwindling foreign interest in central bank bills (down 43.0% ytd in March-2020 to

$7.5bn) that led to decline in FX reserves (down 10.0% ytd in March-2020 to $34.0bn). Thus,

bringing the official rate much closer to the I&E rates.

Also, the various exchange rate windows were broadly unified around the rate in the

investors and exporters (I&E) window, which is considered more market reflective.

However, on the backdrop of the ravaging impact of the COVID-19 global economic

fallouts and the FG’s implementation of lockdown policy at the major economic and

administrative centers of the country (Lagos, Ogun, and Abuja), the CBN suspended most

of its FX intervention sales across various windows. This pushed demand to the parallel

market segment where naira was being quoted as high as N470/$.

Thanks to the gradual recovery in the crude oil market in May-2020 (as most countries

began to ease their lockdown policies) which coincided with disbursement of the IMF’s

$3.4bn emergency loan to Nigeria (boosting the country’s FX reserves which was down to

$33.0bn before increasing to $36.5bn), the CBN gradually resumed its FX intervention sales

during the period. However, the apex bank weakened its offer rate at the derivative

market by c. 14.51% across all the tenors available on the OTC FX futures, to reflect the


The currency market

dynamics worsened in

H1-2020, leading to an

adjustment in the

exchange rate by the

CBN

On the back of the

gradual oil market

recovery and dollar

inflows (from IMF’s

$3.4bn) the CBN

gradually resumed its

FX intervention sales

Sources: Bloomberg, FMDQ, United Capital Research

0.0% 0.0% 0.0% 0.0% -0.2% -1.0% -1.4% -1.6% -2.7% -3.3% -3.9% -4.3% -5.3% -5.7%-7.4%

-10.4%-10.6%-13.8%-13.9%-15.0%

-19.0%-20.8%

U.A

.E. (p

eg

ge

d)

Om

an

(p

eg

ge

d)

Sa

ud

i (p

eg

ge

d)

Ba

hra

in

Aze

rba

ijan

Eq

. G

uin

ea

Ku

wa

it

Ind

on

esi

a

Ga

bo

n

Bru

ne

i

Ca

na

da

Ma

laysi

a

Ka

zakh

sta

n

Nig

eria

(N

AFE

X)

Alg

eria

Co

ng

o

Ru

ssia

Arg

en

tin

a

Me

xic

o

Nig

eria

(O

ffic

ial)

An

go

la

Bra

zil

Oil exporters currencies have weakened against the US$ amid

plunge in crude price and demandYTD Currency Performance of oil producers (Base Currency - $)

Figure 48



higher risk content in the environment.

Despite the initial policy responses by the monetary and fiscal authorities, opinions are

divergent as to if the macroeconomic adjustments are enough to contain the current

external shocks. Although the tacit devaluation by the CBN took the naira towards its fair

value implied by the monthly IMF Real Effective Exchange Rate (REER), we think a much

deeper adjustment will be required to structurally plug the current account shortfall that

has been exacerbated by the COVID-19 outbreak.

Put differently, IMF’s implied naira REER (which tracks the official exchange rate)

indicated that the naira is overvalued by 40.4% since the end of 2016. Thus, the CBN’s

devaluation of the official rate by 15.0% leaves the rate overvalued by 25.4%.

Clearly, Nigeria’s export revenue is set to crash in 2020 amid global crude oil price plunge

and low global demand for crude oil which contributes above 80.0% to the country’s

export. Notably, Nigeria has had two episodes of export crash in the past two decades:

34% y/y decline in 2009, and a 58% contraction between 2016 and 2014. Both episodes

required a large exchange rate adjustment to rebalance the current account: 22% in

2009 and 56% between 2014 and 2017. Thus, considering the magnitude of the current

export shock, and the pre-existing imbalance in the current account, we believe the

c.15.0% devaluation by the CBN might just be the first leg in several adjustments to come.


Sources: CBN, IMF, United Capital Research

50.0

150.0

250.0

350.0

450.0

550.0

Jan

-00

Oc

t-00

Jul-01

Ap

r-02

Jan

-03

Oc

t-03

Jul-04

Ap

r-05

Jan

-06

Oc

t-06

Jul-07

Ap

r-08

Jan

-09

Oc

t-09

Jul-10

Ap

r-11

Jan

-12

Oc

t-12

Jul-13

Ap

r-14

Jan

-15

Oc

t-15

Jul-16

Ap

r-17

Jan

-18

Oc

t-18

Jul-19

Ap

r-20

Despite devaluation, the naira remains overvalued on REER basisHistorical trend of official FX and implied IMF REER rate (N/$)

Official Rate Implied IMF REER Valuation

Figure 49

...the CBN’s

devaluation of the

official rate by 15.0%

leaves the rate

overvalued by 25.4%

Sources: CBN, FMDQ, Aboki FX,, United Capital Research

50.0

150.0

250.0

350.0

450.0

550.0

Jan

-00

Oc

t-0

0

Jul-0

1

Ap

r-0

2

Jan

-03

Oc

t-0

3

Jul-0

4

Ap

r-0

5

Jan

-06

Oc

t-0

6

Jul-0

7

Ap

r-0

8

Jan

-09

Oc

t-0

9

Jul-1

0

Ap

r-1

1

Jan

-12

Oc

t-1

2

Jul-1

3

Ap

r-1

4

Jan

-15

Oc

t-1

5

Jul-1

6

Ap

r-1

7

Jan

-18

Oc

t-1

8

Jul-1

9

Ap

r-2

0

Naira devaluation correlates with export crashesHistorical Naira/$ trend

I&E (NAFEX Rate) Official rate BDC rate SMIS

c. 34.4% export collapse in 2019

was trailed by a 22.0%

devaluation in the offical rate

Due to COVID-19

and the plunge in

crude oil price we

expect export to fall

by at least 50.0% in

2020

Figure 50

...we believe the

c.15.0% devaluation by

the CBN might just be

the first leg in several

adjustments to come



If the past is any indication of the future, we think a c.30% - 40% currency adjustment will

be needed to structurally rebalance the current account by year-end.

The capital account is another source of vulnerability, given the large FPIs ownership of

CBN OMO bills. Despite increased capital outflows in recent months, FPIs still hold a

sizeable portion of OMO bills, estimated at c. $7.5bn in Mar-2020, which translates to 21.4%

of external reserves and 28.7% of outstanding OMO bills. If these maturities are not rolled

over by the FPIs amid the increased global risk aversion and the CBN continues to defend

the current de-facto FX peg after fully lifting the current capital flow restrictions (e.g

stoppage of sales to BDCs), the FX reserves (even after factoring the IMF loan) is likely to

drop below the sacred $30.0bn level before the year ends. Thus, indicating the need for a

further adjustment in the naira to plug the expected current account deficit.

Putting all the above together, we believe the odds are currently in favor of another naira

adjustment which may take the official rate to N410/$ - N430/$ by year end.

Capital Inflows

Q1-2020 is as good as it gets for 2020

According to the capital importation data for Q1-2020 published by the NBS, the total

capital imported into the Nigerian economy declined by 31.2% y/y to $5.85bn in Q1-2020.

The breakdown of the data revealed that inflows from portfolio investments continued to

dominate the gross investment inflows (accounting for 73.6%) followed by other

investment (22.7%) and foreign direct investment (3.7%). Notably, the reduction in foreign

inflows was largely driven by a 39.4% y/y decline in inflows from FPIs owing to lower inflows

to bonds (-59.2% y/y), money market (-41.6% y/y) and equity instruments (-2.5% y/y).

In our view, the decline in portfolio investment was due to investors risk-off sentiment

which was sparked by the outbreak of COVID-19, plunge in crude oil prices and fears as

well as the eventual devaluation of the naira in March-2020. We note that the

underwhelming nature of FDI inflows continues to reflect the inability of the country to

attract the much-needed capital for unlocking its economic potentials amid long-term

uncertainties.


The capital account is

another source of

vulnerability, given the

still large FPIs

ownership of CBN OMO

bills

Sources: CBN, IMF, United Capital Research

32 3237 36 35 34 35 33 34 32 31 34 33 33

27 29 29 27 27 26 25 23 24 26 2329

7 98 11 13 13 12 12 11 10 9

9 9 1015 16 16 17 18 18 17 18 16 13 15 8

De

c-1

7

Jan

-18

Feb

-18

Ma

r-18

Ap

r-18

Ma

y-1

8

Jun

-18

Ju

l-18

Au

g-1

8

Se

p-1

8

Oc

t-18

No

v-1

8

De

c-1

8

Jan

-19

Feb

-19

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun

-19

Ju

l-19

Au

g-1

9

Se

p-1

9

Oc

t-19

No

v-1

9

De

c-1

9

Ma

r-20

Nigeria's FX reserves might fall below $30.0bn if FPIs do not

rollover OMO maturityComponent trend in FX reserves ($'bn)

Reserves (ex-FPIs holding of OMO bills) FPIs holding of OMO Bills

Figure 51

Lower FPI inflows across

all financial instruments

in Q1-2020: Bonds (-

59.2% y/y), Money

market (-41.6% y/y)

and Equity (-2.5% y/y)



Looking ahead, we believe that given the current issues around FX illiquidity (as

highlighted in the FX segment of this report), fears of a further naira devaluation, low

interest rate environment in the OMO market, are likely to discourage large-sized FPI and

FDI inflows for the rest of the year. Accordingly, we expect the overall capital imported in

2020 to underperform that of 2019.



0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2014 2015 2016 2017 2018 2019 2020

We expect 2020 capital importation into Nigeria to underperform

that of 2019Capital importation into Nigeria 2014 to Q1-2020

FPI Equity

FPI Money market

FDIs

Loans & other Claims

Figure 52

Overall, we expect the

total capital imported

in 2020 to underperform

that of 2019

Financial

Markets



Financial Markets Review and Outlook

The COVID-19 pandemic sparks a reassessment of risk

In Jan-2020, we postulated that 2020 will be a private issuer market due to the low yield

environment. This was based on our assessment that yields on FGN T-bills will stay in the

single-digit region in H1-2020 and Bond yields at low double-digit levels. As such, interest in

riskier assets, mostly corporate papers, will increase. With the exclusion of non-bank

corporates & individuals from the OMO bills market in Q4-2019, we also noted that the

rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as

the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit

an impending capital outflow, while preserving the stock of dollar reserves above the

$30.0bn threshold. Overall, we expected the normalization of the sovereign curve in H1-

2020.

While we argue that the basis for our position above were rock solid, 2020 came with its

own pandora’s box, as the spread of the COVID-19 disease across the world triggered an

unanticipated financial market volatility, amid flight to safety by FPIs and local investors.

Crude oil prices took a significant hit, falling from a high of $68.9/b in Jan-2020, to a low of

$19.3/b in Apr-2020. Given the historic positive correlation between the local currency

and oil prices, it was no surprise when the CBN adjusted the value of the local currency

downward. Accounting for all these new shocks, investors repriced the risk of Nigeria’s

debt instruments in Q1-2020, causing average yield on OMO bills and domestic bonds to

increase from 13.1% and 10.8% at the end of Dec-2019, to 15.1% and 11.9% respectively

as at the end of Mar-2020.

However, at the NTB market, the effect of CBN’s decision to bar locals from the OMO

market, as well as the elevated system liquidity, driven by huge OMO, FAAC and bond

coupons etc, depressed average yield at the NTB market to 3.7% as at the end of Mar-

2020, from 4.9% as at the end of Dec-2019.

In Q2-2020, the yield curve experienced a downward shift, as optimism in the global and

domestic market economy partially rebounded. The biggest factors were the mild

Investors repriced the

risk of Nigeria’s debt

instruments in Q1-2020,

causing OMO and

bond yields to track

higher

Financial Markets

1

4

7

10

13

1M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 20Y 30Y

High Volatility in the yield curve amid

COVID-19 pandemicNigerian Soverign Yield Curve (%) - NTB &

Bond

Dec-19 Mar-20 Jun-20

Figure 53

Sources: FMDQ, United Capital Research (Jun-2020 figures as at June

We expected the

normalization of the

sovereign curve in H1-

2020

3

6

9

12

15

1M 3M 6M 9M 1Y

High Volatility in the yield curve amid

COVID-19 pandemicNigerian Soverign Yield Curve (%) - OMO


Figure 54



recovery in oil prices and the higher level of system liquidity in Q2-2020 (averaged

N423.4bn as at June 15) vs N380.6bn in Q1-2020. In addition, with significantly reduced

dollar supply from the CBN from Apr-2020, especially at the I & E window, demand

increased from FPIs with idle funds. On the back of the above-mentioned factors,

average yield at the OMO and Bond market decreased to 4.9% and 10.0% as of June

15th, vs 15.1% and 11.9% as at the end of Mar-2020, respectively. For the NTB market in Q2-

2020, the narrative remained the same, with demand outweighing supply. As a result,

average yield remained depressed at 3.4% as of June 15 vs 3.7% as at the end of Mar-

2020.

Primary Market: DMO makes the best of low yields as FGN guns for N2.3tn local

debt

Elsewhere, in the primary market segment, the DMO, through the CBN, sold 1.2x the

amount of NTBs that matured in H1-2020. Notably, the DMO took advantage of the strong

demand for NTBs, to significantly average down borrowing costs, as average stop rate for

the period was 3.6% (vs. 10.3% in H2-2019). Elsewhere, the CBN mopped up only N3.4tn

(via OMO sales) translating to 63.5% of the c. N5.4tn OMO maturities that hit the system

during H1-2020, at an average stop rate of 10.1% (vs 11.3% and 13.1% in H2-2019 and H1-

2019 respectively). Worthy of note, following the crash in crude oil prices in Mar-2020,

OMO stop rates climbed to 17.0%, with the CBN making no sales during those specific

auctions. Finally, a net total of N691.7bn was freshly borrowed in the domestic sovereign

bonds market at an average stop rate of 11.2%, a 240bps decline from the average rate

in H2-2019.

As a response to the coronavirus shock which worsened Nigeria’s fiscal position, the

House of Representatives, and the Senate, approved the FG’s request to convert

N850.0bn specified for external borrowing in the 2020 Appropriation Act, to local sources.

As a result, starting from the June-2020 bond auction, the upper limit on the amount

offered was reviewed from N60.0bn to N165.0bn. Also, given the relatively lower rate

(compared to other half year periods) at the primary bond and NTB market, the DMO

allotted more funds compared to what was offered, in the month of May and June.

Q2-2020 was a twist

from the prior quarter,

with yields declining on

the back of higher

system liquidity and oil

price recovery

Financial Markets


0

100

200

300

400

500

0.0

2.0

4.0

6.0

8.0

Bill

ion

sStop rates kick up in May, following increased allotmentTrend of NTB Auctions from year to date

Total offered (RHS) Total Sold (RHS) 91-day (LHS)

Jan-2020 Feb-2020 Mar-2020 Apr-2020 May-2020 Jun-2020

Figure 55

Following the drastic

shock to financial

markets in Mar-2020,

stop rates at OMO

auctions climbed as

high as 17.0%



Corporate and Sub-National Issuers: Dangote and Lagos State tap into the bond

market

Elsewhere, as noted in our 2020 outlook report, the year so far has been a corporate issuer

market, driven by buoyant system liquidity and the extremely low yield environment.

According to data from FMDQ, about 14 corporates issued multiple commercial papers,

totaling N445.7bn. Of the commercial paper issuances, MTN Nigeria Communications Plc

recorded a 400.0% oversubscription on its debut N100.0bn CP programme, with its 180-

day and 270-day clearing at effective yields of 4.90% and 5.95% respectively. In the bond

market, Lagos State successfully issued N100.0bn, the third series under the state’s

N500.0bn Bond Issuance Programme. The issuance was oversubscribed by 1.96x, with

average stop rate at 12.25%. Also, Dangote Cement Plc conducted a debut bond

issuance of N100.0bn under its N300.0bn program, with an oversubscription of 1.55x and

12.5% yield. Flourmills of Nigeria also took advantage of the low yield environment to issue

a total of N20.0bn bonds, at an average yield of 10.55%. Elsewhere, United Capital Plc

successfully raised N10.0bn for a 5-year tenor, under its N30.0bn Medium-Term Debt

Programme, at 12.5%. Finally, the FG continued its recent lovefest with alternative debts,

as it offered N150.0bn worth of 7-year Sukuk bond, at a rental yield of 11.2%.

Eurobond Market: At the mercy of external headwinds

Notably, with the continued dovish chorus by global monetary authorities and FPIs rising

interest in high-yielding EM/FM debts, Nigeria positioned for a return to the international

debt market early in Q1-2020, with plans to issue $3.3bn worth of Eurobonds. However,

with the realities of the COVID-19 shock on the global financial and oil markets, Nigeria

opted for loans from multilateral agencies which are concessionary.

Meanwhile, the performance at the secondary Eurobond market mirrored that of the

domestic market in Q1-2020, as average yield on sovereign Eurobonds jumped from

6.25% as at Dec-2019 to 13.3% as at Mar-2020. In the same vein, with average yield on

corporate Eurobonds, which include some tier-one banks (ACCESS, ZENITH and UBA) and

SEPLAT, moved to 11.2% in Mar-2020, from 5.1% in Dec-2019. The sell-off pressures were

further ignited by a rating downgrade by Fitch and S & P (renowned global credit rating

agencies), and a change in outlook by Moody’s and S & P, from stable to negative. Also,

bearing in mind the risks to commercial banks, Moody’s downgraded the banking system

in Nigeria, from stable to negative.

By Q2-2020, the slight rebound in oil prices (above $40.0/b), driven by gradual recovery in

the world economy and OPEC+ extended supply cuts, rekindled interests for Nigeria’s

sovereign Eurobonds. As a result, average yield at the sovereign segment declined to

8.02% as at Jun-15. In the same vein, prospects at the corporate Eurobond segment

improved, as average yield dropped to 9.19% as at Jun-15. We note that the bullish

performance was driven mostly by the improved outlook on economic activities, the

continued dovish actions by global monetary authorities, and the hunt for better EM

yields.

Alternative debt

lovefest continued, as

the FG offered

N150.0bn worth of 7-

year Sukuk bond

Financial Markets

In terms of foreign

borrowing, Nigeria

opted for loans from

multilateral agencies

which are

concessionary

Bullish performance in

the secondary

Eurobond market was

driven mostly by the

improved outlook on

economic activities

and oil performance




H2-2020 Outlook: Riding on a myriad of factors

In H2-2020, we expect the dynamics of demand and supply for debt instruments, to be

driven by global monetary policy easing, the size of domestic system liquidity, increased

sovereign funding needs, the CBN’s resolve to defend the naira and keep reserves

buoyant as well as recent appetite by corporate issuers. As a result, we highlight the

major buy and sell side factors that will determine the overall yield environment.

Buy Side Factors

System liquidity in H2-2020: Thinning out?

For us, a number of factors are pointing towards reduced system liquidity in H2-2020. First,

on the domestic front, net inflows of funds from maturing OMO bills belonging to local

players will begin to wane from Q3-2020. We recall that the decision taken by CBN to stop

OMO sales to locals was taken towards the end of Oct-2019. Judging by the chart below,

from Dec-2019, the amount of OMO bill holdings belonging to local non-bank corporates

has dropped significantly, to N3.9tn as at the end of Apr-2020. This means that from Apr-

2020 to the end of Oct-2020, all holdings in the hand of local non-bank corporates (N3.9tn

as at Apr-2020) is expected to be exhausted. Also, by implication and accounting for

time passage, a larger proportion of portfolio holdings on OMO bills will be in the hands of

FPIs and Banks in Q4-2020, with these set of investors calling the shots at the OMO market.

Financial Markets

The yield environment

in H2:2020 depends on

a mix of both buy-side

and sell-side factors

Sources: FMDQ, Bloomberg, United Capital Research (Jun-2020 figures as at June 15th)

3

5

7

9

11

13

15

17

1Y 2Y 3Y 5Y 7Y 10Y 11Y 12Y 18Y 27Y 29Y

Investors weighed in volatility in crude prices in pricing Nigeria's

EurobondsNigerian Soverign Yield Curve (%) - Eurobond


Yield curve when Oil

price was $66.0/b


price was $39.8/b


price was $22.7/b

Figure 56

Domestic holdings in

OMO bills are

expected to be

exhausted by the end

of Oct-2020



Also, inflows from FAAC are likely to come in lower than the previous year, as the

government’s revenue takes a hit from the lower oil prices. Overall, we expect inflows

from domestic sources to track lower in H2-2020, strengthening the case for a potential

increase in yields compared to H1-2020.

Foreign Portfolio Inflows: Will the market movers be back?

Going into H2-2020, the major factor to spur the need for FPIs to hunt for juicy yields, will

be the policy decisions by global monetary authorities. The expectation remains that

monetary tools will be deployed to bring economies back on the path of growth, such as

cutting key policy rates. As a result, FPIs will continue the carry trade in H2-2020, focused

on emerging and frontier markets. For Nigeria, we believe the current low OMO yield

environment is driven by large foreign net-outflows from OMO maturities, and the

challenges surrounding FX supply, as the CBN is yet to resume intervention sales at the I &

E window. Therefore, depending on when the CBN opens the tap on dollar supply (in form

of intervention sales at the I & E window), we expect a massive outflow of foreign capital

in Q3-2020, as FPIs are displeased with any form of capital restriction or control. However,

given the global low interest rate environment and the positive trajectory of oil prices

since its crash in Apr-2020, we believe a gradual return to the Nigerian OMO market is

highly possible. In all, the return of FPIs to Nigeria’s market in H2-2020 is a tough call, which

Financial Markets

...inflows from FAAC are

likely to come in lower

than the previous year,

as the government’s

revenue takes a hit

from the lower oil

prices

2.4 2.3

0.7 0.7 0.6 0.50.3

0.5

1.2

1.7

0.7

1.8

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

Jan

-20

Feb

-20

Ma

r-20

Ap

r-20

Ma

y-2

0

Jun

-20

Jul-20

Au

g-2

0

Se

p-2

0

Oc

t-20

No

v-2

0

De

c-2

0

A bulk of the H2-2020's OMO maturities are tilted towards Q4-

2020OMO maturities in 2020 (N'tn)

Sources: CBN, FMDQ, United Capital Research

3.94.1

4.5

3.9

Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20

Allocation of CBN Bills across FPIs, Locals and Banks Trend of OMO bill holdings (N'tn)

FPI Holdings Bank Holdings Resident Non-Bank Holdings

CBN's bars local

nonbank players

CBN bills with

locals gradually

decreasing, with

FPIs and Banks

expected to

have a greater

share

Post ban -

Banks

holdings start

increasing

Figure 57


Figure 58

With dovish global

monetary policies, FPIs

will continue the carry

trade in H2-2020,

focused on emerging

and frontier markets



also depends on the CBN’s resolve to preserve FX flows, versus the need to save the

Nigerian economy from an impending recession.

Sell Side Factors

Monetary Policy: What is the end game for the CBN’s OMO market Dichotomy?

No doubt, the dovish rhetoric from the global market is expected to create a more

accommodative CBN in H2-2020, especially as it aims to boost overall economic growth.

However, given the pressure on exchange rate, the need for the CBN to aggressively

attract and keep FPI inflows in H2-2020 is paramount, especially as it resumes intervention

sales. With a bulk of the remaining OMO maturities in 2020 now in the hands of Foreign

Portfolio Investors, we believe the bargaining power of CBN will weaken, albeit at a slower

rate.

Notably, the FG is looking to rake in a total of $5.5bn from multilateral agencies, with

$3.4bn and $0.3bn already received from the IMF and AfDB respectively. However, as at

March-2020, according to IMF’s estimates, the total OMO holding belonging to FPIs was

$7.5bn. Marrying the two points together, should the entire funds from OMO be taken out

of Nigeria, the net reduction from the reserves would be $2.0bn, bringing the reserves to

about $31.0bn (pre-IMF loan). Therefore, we believe the CBN’s strategy will be to return

OMO rates to a relatively attractive level, to preserve the current FPI flows in the financial

system. As a result, rates on OMO bills are likely to track higher from H1-2020’s ending, to

preserve foreign capital. Apart from FPIs, we believe banks will also be looking for higher

rates on OMO bills, to preserve interest income, amid impairment losses due to COVID-19.

Fiscal Policy: Debt to be obtained from the cheapest source!

The 2020 budget which was approved in Dec-19, has gone through several reviews this

year, to reflect the current realities in the oil market and lower budget revenue

projections. Notably, the budget deficit was increased from N2.2tn to N5.4tn, with new

borrowings increasing from N1.6tn to N4.2tn. Looking at the specific allocation between

sources, the FG is planning to source N2.3tn from the domestic market, with N2.0tn from

multilateral organizations. This is as loans from concessionary sources are much cheaper,

than funding from the international market for Eurobonds. Bearing the above in mind, we

expect the FG to capitalize on the relatively lower rates in the domestic market, to rake in

cash to fund the budget.

H2-2020 Yield Analysis & Forecast: Outlook for the yield curve

For H2-2020, we expect the yield curve to remain normalized or upward sloping, with a

possible upward shift, as the bargaining power of the demand-side players improve. Also,

with domestic liquidity expected to thin out in Q4-2020, we note that a more aggressive

DMO will frontload its issuances in Q3-2020. For the shape of the yield curve, we expect

rates at the long end of the curve to rise in a larger proportion than shorter maturities. Our

rationale is that the FG will be looking to lock in funds for a longer period of time, given

Financial Markets

... we expect the FG to

capitalize on the

relatively lower rates in

the domestic market,

to rake in cash to fund

the budget

With a bulk of the

remaining OMO

maturities in 2020 now

in the hands of FPIs, we

believe the bargaining

power of CBN will

weaken, albeit at a

slower rate



the current uncertainty in the short-term, as unfavourable market conditions, revenue

deficits and a potential recession, are near-term factors that can impair borrowing at

more cost effective rates.

As the world scrambles to mitigate the impact of COVID-19 and rebuild strong economic

foundations, we believe FPI’s focus will be fixed on the trajectory of crude oil prices and its

consequences on Nigeria’s macroeconomic picture. Also, developments in the global

monetary policy- space, as well as credit rating decisions by international credit rating

agencies, are sure to influence foreign sentiments towards Nigeria’s yield environment.

Fixed income strategy for H2-2020: Maintaining a short duration

In addition to our expectation for the yield curve to remain upward sloping, as well as an

upward shift in the yield curve, we expect Q4-2020 to be a period of heightened volatility,

as OMO net inflows from locals exhaust and system liquidity tightens significantly. As a

result, we advise bond investors to maintain short durations in H2-2020 (particularly at the

tail end of the period), to reduce their exposure to interest rate risk from the expected

rising-rate environment. Also, given the expectation for increased local borrowings, the

odds are in favour of an upward repricing in high-yielding corporates issuances, expected

to flood the market in H2-2020. As a result, we advise investors playing in the short-term

Financial Markets


1M 3M 6M 9M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Possible movement in the yield curve in H2-2020Nigerian Soverign Yield Curve - NTB & Bond

Jun-20 Dec-20

Figure 59

Factors Probability Yield Impact

Crude Oil Prices Moderate

Global Monetary Policy High

Domestic supply High

Inflation High

CBN Moderate

System Liquidity High

H2-2020 Views

Possible Triggers of Yield Movement in H2-2020

Abov e Inflation rate, fueled by disruption in local food supply

chains, currency dev alution and continued border closure

CBN's resolv e to maintain FPI inflows could lead to stop rates edging

upwards

Decreased system liquidity as FAAC drops, and OMO liqudity

belonging to locals decline

Continued recov ery in oil prices, as demand increases and supply

continues to wane amid OPEC+ cuts

More synchronized accomodativ e policies from global monetary

authorities, aimed at boosting economic growth

Increase in FGN domestic borrowing, to cov er for budget deficit

Figure 60


For the shape of the

yield curve, we expect

rates at the long end of

the curve to rise in a

larger proportion than

shorter maturities



space, to keep a well-diversified fixed income portfolio, consisting of both NTBs and

commercial papers, to increase their average yield. Finally, an outcome to watch is the

possible securitization of FGN’s debts being owed to CBN in H2-2020, which could provide

more investment outlets for local players.

Financial Markets



Financial Markets

Equities Market Review & Outlook

On a slow path to total recovery?

In Jan-2020, our outlook for stocks in 2020 was anchored on developments in the

domestic and global economy with monetary policy as the biggest factor to watch. We

insisted that from all indications, the only justification for an uptrend in the equities market

was the lower yield environment which was supported by increased local currency

liquidity. Interestingly, the year started out on a very good note as investors threw all

caution to the wind and launched a sector-wide demand for stocks in Jan-2020. Notably,

the Nigerian stock market jumped 10.7% in the first three weeks of the year, to emerge as

the global best performer. However, as the reality of the COVID-19 pandemic hit the

crude oil market from late February and was exacerbated by a breakdown of the

agreement between Saudi Arabia and Russia in March, the Nigerian stock market joined

the rest of the world in a global financial market crash, tumbling more than 20.0% by the

end of Q1-2020.

After two consecutive years of decline, the Nigerian equity market became deeply

undervalued, with dividend yields on top names across sectors for FY-2019 soaring above

double digits. However, market players (majorly FPIs) ignored the attractive dividend

yields, as the outlook for the economy turned negative.

In our 2020 outlook report, we highlighted that based on technical analysis, and

narrowing to a range of 10 years, a realistic support level for the NSE-ASI could be at

22,465pts in 2016. Notably, this was an aftermath of plunging oil prices (which hit a record

low of c.$27.0/b in Jan-2016), elevated currency crisis and poor policy responses. In

present times, history clearly repeated itself, with Brent price falling to a low of $19.3/b,

weakening the naira and Nigeria’s fiscal buffers substantially. As a result, sentiment

towards the equities weakened to record level, with the NSE ASI touching a low of

20,669.4 pts. In addition to the decline in oil prices, the period was also associated with

lockdown and restrictions in Nigeria and globally, hampering the operations of multiple

sectors.

Financial Markets

The Nigerian stock

market joined the rest

of the world in a global

financial market crash

H1-2020 Equity performance across world regions (as at June 15th, 2020) Figure 61


Equities Index Level Mcap ($'bn) YTD Return P/E P/B Div. Yield

Ghana 1,928.7 7.6 -14.6% 7.7 1.6 1.9%

Kenya 143.3 20.2 -13.9% 8.5 1.5 6.3%

Mauritius 1,670.5 5.0 -23.3% 32.9 0.8 5.4%

Morocco 10,020.3 53.0 -17.7% 18.6 2.2 4.4%

Nigeria 24,956.0 34.0 -7.0% 8.3 1.2 7.2%

South Africa 52,319.7 805.2 -8.6% 16.0 1.6 4.0%

MSCI BRIC 305.8 2,859.1 -10.0% 15.4 1.8 2.4%

S & P 500 3,005.3 26,229.7 -7.2% 21.0 3.4 2.0%

UK FTSE 100 6,031.3 2,002.6 -20.2% 21.3 1.4 4.6%

Global Market 2,164.5 79,650.1 -8.2% 20.9 2.4 2.3%

Frontier Market 479.3 286.2 -18.2% 11.1 1.5 4.3%

Emerging Market 987.0 17,049.7 -11.5% 16.0 1.6 2.8%

The NSE benchmark

index hit a low of

20,669.4pts in H1-2020




However, after tumbling by over 20.0% in March 2020, following the outbreak of the

coronavirus pandemic and the ensuing economic lockdown, we note that the stock

market recovered by more than half the initial downturn in the month of May amid

increased demand by local investors. In our opinion, the recovery was driven by the

rebalancing in the oil market after OPEC+ members implemented output cut; increasing

indications that governments around the world will reopen their economies regardless of

the anxiety around COVID-19; cheap market valuation of high quality stocks; attractive

dividend yield and sizable market liquidity. Although, in the month of June, the market

continued on a volatile path. In all, the All Share Index closed H1-2020 (June 15) at

24,954.3pts, with YTD loss pegged at -7.0%.

In terms of market participation, H1-2020 was primarily dominated by domestic players, as

excess liquidity (created by CBN’s OMO restriction), the hunt for double-digit yields and

depressed pricing, rekindled local interests. On the flip side, the Nigerian equity market

was not a top destination for FPIs, given their continued preference for CBN’s OMO bills,

despite the decreased yields. As a result, FPI net flows continued to dwindle, even at a

larger rate compared to 2019.

Elsewhere, in terms of corporate actions, the Nigerian market was treated to a cocktail of

acquisitions, divestments, and notable investments. Notably, FBN Holdings Plc concluded

a sale of its 65.0% stake in FBN Insurance Limited to Sanlam Emerging Markets Limited.

Financial Markets

19,000

29,000

39,000

10

30

50

70

90

Ap

r-15

Au

g-1

5

No

v-1

5

Feb

-16

Ma

y-1

6

Au

g-1

6

De

c-1

6

Ma

r-17

Jun

-17

Se

p-1

7

Jan

-18

Ap

r-18

Jul-18

Oc

t-18

Jan

-19

Ma

y-1

9

Au

g-1

9

No

v-1

9

Feb

-20

Jun

-20

Equity market amid declining crude oil prices and COVID-19

pandemic5 year trend of NSE ASI and Brent Crude Price

Brent Crude Price (RHS) NSE ASI (LHS)

Domestic market plunges as

oil price worry starts

Sources: NSE, Bloomberg, United Capital Research

Figure 62

Sources: NSE, United Capital Research

-20.0%

-10.0%

0.0%

10.0%

-70

-40

-10

20

50

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-19

Au

g-1

9

Se

p-1

9

Oc

t-19

No

v-1

9

De

c-1

9

Jan

-20

Feb

-20

Ma

r-20

Ap

r-20

Foreign investors exit, while domestic investors lock in Trend of Domestic and Foreign Net flows, as well as NSE ASI m/m

change

Domestic Net Flows (N'bn) Foreign Net Flows (N'bn) m/m % of NSE ASI (RHS)

Figure 63

We note that the stock

market recovered by

more than half the

initial downturn in the

month of May amid

increased demand by

local investors

The Nigerian equity

market was not a top

destination for FPIs,

given their continued

preference for CBN’s

OMO bills



Financial Markets

Also, PZ Cussons International Ltd announced an exchange of contracts with

FrieslandCapina WAMCO Nigeria, to sell assets associated with Nutricima Limited.

Elsewhere, Law Union & Rock Insurance Plc, notified the investing public of receiving a

binding offer from Verod Capital Management to acquire all the firm’s issued shares.

Union Bank also announced its planned divestment of its UK subsidiary, in line with its

strategy to geographically streamline its business operations to focus on growth

opportunities in Nigeria. Worthy of note was Access Bank Plc securing approval from the

CBN to acquire Transnational Bank Plc (Kenya), as it seeks to expand its footprints across

Africa. Finally, 11 Plc (Mobil) notified the exchange with its plans to delist and transfer its

real estate business to a new subsidiary, 11 Hospitality Limited.

Sector performance: Any winners and losers during the pandemic?

A breakdown of the performance of the Nigerian bourse by sectors indicated that

sentiments were broadly mixed, as three out of the five major sub-indices we track closed

negative, as of 15th Jun-2020. Notably, some of the most exposed sectors to the pandemic

were the largest losers, as investors weighed in skepticism on future profitability. The

Consumer Goods sector topped the list, losing -28.3% YTD. No doubt, weaker purchasing

power of Nigerian consumers, excise duties and high advertising expenses by brewers,

and other existing vulnerabilities in the Nigerian economy even before the virus outbreak,

capped investors’ interest in the sector. In addition, the Banking sector, which is

considered the most liquid, printed a loss of -17.5% YTD, as investors feared a drop in asset

quality, given the significant exposure to oil & gas and manufacturing sector loans. The Oil

& Gas sector also tumbled -16.7% YTD, as upstream players recorded large impairments in

the value of their assets. This was expected, as the COVID-19 induced decline in oil prices

called for a revaluation. On the flip side, the Industrial sector gained +9.4% YTD, driven by

a very impressive gain in the sector’s most capitalized stock (BUACEMENT). Finally, the

Insurance sector also gained, posting +8.9% YTD. This was as investors are still expectant on

the recapitalization exercise.

Notably, major winners due to the pandemic were domestic Healthcare stocks, for a

number of reasons. The huge deficit of local medical supplies and pharmaceutical

products created investment opportunities for the sector players. Furthermore, a

Access Bank Plc

secured approval from

the CBN to acquire

Transnational Bank Plc

(Kenya)

The Industrial sector

was the biggest gainer,

driven by impressive

gains in BUACEMENT

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

De

c-1

9

Jan

-20

Jan

-20

Feb

-20

Feb

-20

Ma

r-20

Ma

r-20

Ap

r-20

Ap

r-20

Ma

y-2

0

Ma

y-2

0

Jun

-20

A mixed sector performance in H1-2020Relative price movement of the key sectors on the NSE

Banking Industrial Goods Oil & Gas Insurance Consumer Goods

Figure 64




substantial amount of intervention by the CBN to healthcare companies, which included

access to a N100.0bn fund, as well as lower borrowing rates, boosted investor’s interests.

Also, recent policy measures by the FG, as well as fund flows from the private sector to

healthcare, improved the outlook for the performance of the sector.

Outlook: What is the investment case for H2-2020?

Looking into H2-2020, what is clear is that expectations for performance have shifted, with

the rest of the year seeming like a battle to stay afloat, for most equities. As a result, we

ask four key questions for H2-2020.

1. Could the current rally be sustained?

Like every other stock market, the Nigerian equities market has gone through periods of

booms and busts. 2020 is no different, as the health crisis has led to a massive outflow of

foreign capital from Nigeria’s capital market, causing the performance of the local

bourse to dip to levels not seen since the 2015/2016 recession. However, since April-2020,

the tides changed, with the market picking up and local investors making positive moves

on blue-chip stocks. Going into H2-2020, the most important question on the mind of

investors is, could the current positive sentiment causing the market to rally be sustained?

From a technical standpoint, there is a larger possibility that the current rally could be

sustained, as it appears that the market might have finally bottomed out. Looking at the

trend of the general market, the lowest level of the index over the last 10 years can be

traced to 19,732.34 in 2011. This occurred post the Global Financial Crisis, and during the

European sovereign debt crisis and the first sovereign rating downgrade of the United

States. The turnout of the multiple negative events led to a massive decline in global

equity markets. While these are not today’s challenges, global markets dipped in unison,

similar to what occurred in the middle of Q1/Q2-2020. Adopting the lowest point as a

proxy for the market’s support level, we think the potential maximum downtrend at the

end of 2020 is pegged at -26.5% YTD. By the same token, using the period post 2016/2017’s

economic recession and 2017/2018’s rising oil prices as a proxy for recovery, the potential

maximum upside for 2020 comes to a whopping 68.0%. By this metric, it seems the only

way is up for the domestic market.

Financial Markets


The macro outlook must

be attractive to spur

domestic and foreign

portfolio investment

H1-2020 performance of Major Healthcare stocks (as at June 15th, 2020) Figure 65

Healthcare Stocks 2018 YTD 2019 YTD H1-2020 YTD

NEIMETH 4.4% -12.7% 274.2%

MAYBAKER -5.8% -21.2% 63.7%

EKOCORP 0.0% 26.1% 41.2%

UNION -50.0% -12.0% 36.4%

MORISON 3.8% -9.9% 20.0%

GLAXOSMITH -32.9% -57.9% 16.4%

FIDSON 33.8% -37.4% 6.5%

Major winners due to

the pandemic were

domestic Healthcare

stocks

...since April-2020, the

tides changed, with the

market picking up and

local investors making

positive moves on blue

-chip stocks

From a technical point,

it seems the only way is

up for the domestic

equity market



However, the potential for a downside or upside and a sustenance in the current rally,

depends on a number of factors out of the scope of technical analysis. This includes the

trajectory of the COVID-19 pandemic and the possibility of a second wave, the

economic effect on businesses, continued uptick in crude oil prices, Nigeria’s fiscal

conditions and continued pressure on the local currency. As a result, in the next question,

we highlight more of fundamental analysis and what 2020 presents for businesses.

2. Has COVID-19 changed the underlying stock fundamentals?

As a result of over two years of continuous decline in prices, the market valuation for

Nigerian Equities has been a strong bargaining chip to woo investors, who seek both a

dividend and capital appreciation return. Using Price/Earnings Ratio as a proxy, as at

June 15, the local bourse is valued at 8.3 currently, vs 8.5x average in 2019, and

significantly below its 5-year average valuation at 11.9x. Compared to peers, the

attractiveness of the market is further shown, and is trading at a deep discount to EM

equities (14.4x) and FM equities (11.1x).

No doubt, from a valuation standpoint, the equity market seems like the biggest play in

2020 for both local and foreign investors. We also believe the recent downward

adjustment in the naira, gives more incentive to FPIs to lock in gains into cheaper and

fundamentally sound stocks. Although we identify rosy valuations as an opportunity to

Financial Markets


18,000

23,000

28,000

33,000

38,000

43,000

Jun

-10

Jan

-11

Au

g-1

1

Ma

r-12

Oc

t-12

Ma

y-1

3

De

c-1

3

Jul-14

Feb

-15

Se

p-1

5

Ap

r-16

No

v-1

6

Jun

-17

Jan

-18

Au

g-1

8

Ma

r-19

Oc

t-19

Ma

y-2

0

Where is the bottom?Ten year trajectory of the NSE-ASI

2018 Market

Resistance 2011 Market

Support Level

Figure 66

11.9

1.5

8.3

1.2

P/E P/B

Nigerian Equities are still trading below

their 5-year averagesNigerian equity valuation vs. 5-yr valuation

5-Year Average valuation Current valuation

Figure 67

11.9

19.6

14.4

12.3

8.3

20.9

16.0

11.1

Nigeria World EM FM

NSE-ASI trading at a sharp discount to

the worldNigerian equity valuation (PE) vs. 5-yr

5-Year Average valuation Current valuation

Figure 68


...the potential for a

downside or upside

and a sustenance in

the current rally,

depends on a number

of factors out of the

scope of technical

analysis

The local market

remains undervalued

compared to EM and

FM peers



invest for the mid to long term, the effects of the COVID-19 pandemic have clearly shifted

the underlying valuation and elevated more risks in the short term. As a result, we might

see one or two reasons for investors to steer clear of the market, going into H2-2020.

So far, one thing is clear, the strategy for businesses has undergone a complete shift this

year, from seeking growth opportunities to managing cash positions and staying afloat.

Also, with import and export activities under strain, continued layoffs, weaker demand,

lower production, and FX risks, Q2-2020 earnings season might reveal depressed numbers.

As a result, we expect to see reduced interim dividend announcement filter in this year, as

companies try to manage positions and weather the storm of this pandemic. Compared

to the previous year, where primary market activities supported market performance, we

expect none for H2-2020, with a few notable corporate actions. No doubt, these are

unprecedented times. Bearing all the above in mind, we expect P/E for 2020 to come in

at a 5-year low, given our expectation of weaker earnings.

3. FPI Inflows in H2-2020: Any possibility of a change in the narrative?

Despite the somewhat dovish tone across major central banks in the advanced

economies since the beginning of the pandemic, FPI net outflows from the domestic

equity market have continued to widen significantly. We do not expect this narrative to

change in H2-2020. Although the possibility of a global economic rebound and a

recovery in oil prices is imminent, we expect overall FPI inflows into Nigeria’s financial

market to remain underwhelming, with the equity market being the last destination for

any fresh inflows. Notably, we expect the current challenges with dollar supply as well as

the weaker macroeconomic environment caused by the pandemic to cloud FPI

participation in the equities market in H2-2020. In addition, although there has been a

positive shift in policy initiatives so far, lower attractiveness of risk-free securities, and

improving oil prices, FPIs preference for short-term investments will be unchanged, rather

than engage in riskier assets such as equities.

4. Domestic Inflows in H2-2020: Could the current narrative be sustained?

In H1-2020, the trend so far has been domestic players locking into equities at lower

prices, as the market dipped to new lows. However, we believe the renewed interests by

domestic players might come under pressure in H2-2020. Given the negative outlook for

Q2-2020 earnings and weaker macroeconomic conditions, interests will begin to wane,

with gradual decreased inflows into the equities market. Also, with the DMO set to open

the tap on domestic borrowing, we might see some capital outflow from the equities

market to the fixed income market, as dividend plays become unsure and fixed income

yields start appearing more attractive.

Our Projection for H2-2020

Putting the pieces together, our overall outlook for equities is lukewarm in H2-2020, despite

the expansionary monetary policy stance in the global space and the renewed domestic

interests pushing stock prices towards pre-pandemic levels. Although the argument for a

Financial Markets

Q2-2020 earnings

season might reveal

depressed numbers

We believe the current

challenges with dollar

supply will leave FPIs

preference for safe

OMO bills unchanged,

rather than engage in

equities

...renewed interests by

domestic players might

come under pressure in

H2-2020



continued recovery is increasingly compelling from a technical standpoint, we note that

weaker company fundamentals heightened by the COVID-19 pandemic, currency

movement risks and capital control at the I &E window, are key risks that could curtail the

ongoing rebound. As a result, we expect the market to remain highly volatile and ‘short-

term gain’ driven. In all, we peg our base case scenario for the YTD performance of the

NSE ASI in 2020 at -4.1%.

However, we believe these times provide opportunities for long term investors, as stocks

that have stood the test of time are still relatively cheap. While we know the COVID-19

pandemic still remains a challenge for the market, we expect the market to be well

positioned for a sustained rally when the following occur: a significant rebound in oil

prices to pre-pandemic levels, a vaccine is found to cure the disease, and all the world

economies reopen. Although, our positive expectation for a sustained rally could be

capped by the overall weak macroeconomic environment.

Financial Markets

Our Base case

projection is that

equities will decline by

4.1% YTD in 2020

Performance

Upside Factors H1-2020 Bear Base Bull

Low Yield Environment

Strong Huge Liquidity

Muted Oil Prices

Weak Fund Flows (FPIs)

Increased Domestic Participation

Downside Factors H1-2020 Bear Base Bull

Negative Corporate Earnings

COVID-19 Uncertainty

FX Supply Issues

Increased Govt. borrowings

All Share Index 24,954.32 23,871.33 25,746.52 29,628.84

YTD Return -7.0% -11.1% -4.1% 10.4%

Key

H2-2020 Scenerio

Source: NSE, Bloomberg, United Capital Research

H2-2020 projection for the local equities market (as at June 15th, 2020) Figure 69

Sectors



Agricultural Sector

On a slow path to total recovery?

Agric sector output growth further slowed to 2.2% in Q1-2020, well below the 5 years

average of 3.2% and Q4-2019 growth of 2.3%. Dissecting the component of the sector,

crop production which accounted for over 90% of agricultural output slowed to 2.4% in

Q1-2020 (vs. 2.5% in Q4-2019 and 3.3% in Q1 2019), livestock rebounded 0.63% (vs. -0.20%

in Q4-2019 and 0.88% in Q1-2019), forestry rose 1.7% (from 1.3% in Q4-2019 and 2.19% in Q1

-2019), while fishing slowed to 1.5% (from 2.3% in Q4-2019 and 7.09% in Q1-2019).

Similarly, food prices sustained uptrend as the food inflation sub-index rose to 15.03% y/y

as at May-2020 compared to 14.67% in Dec-2019. Mainly, the panic buying that greeted

the Coronavirus lockdown, supply shortages induced by stricter trade policies around

border closure and FX restriction on importation of staple foods are the drivers.

Meanwhile, rising demand and security challenges in food production hot beds of the

country are other concerns. Interestingly, the Poultry Association of Nigeria (PAN)

estimated that local poultry production increased to 7,000metric tons since the border

closure policy took off.

The above notwithstanding, policy stance of the government remained overwhelmingly

in favour of the sector. In January 2020, the Federal Ministry of Agriculture & Rural

Development (FMARD) launched a $1.1bn Agriculture Mechanization Scheme tagged

The Green Imperative Programme (GIP). The GIP is to be funded by the Brazilian

Government through a loan from the Deutsche Bank (DB), Brazilian Exim Bank (BNDES)

and Islamic Development Bank. According to the FMARD, the loan is be repaid at 3.0%

interest rate over a period of 15 years for the BNDESl and 7 years including 2 years

moratorium for the Deutshe Bank. The GIP is designed to benefit 100,000 young

entrepreneurs directly and 5 million indirectly. Also, it will facilitate the acquisition of 10,000

units of tractors and 50,000 units of assorted implement and equipment for assembly in

Nigeria. Beneficiaries would be trained over the course of 10 years across the 780 service

centres that would be established. GIP will hopefully, enhance the mechanization of

Agric sector output

growth further slowed

to 2.2% in Q1-2020

Sectors

3.5%3.0% 3.0%

4.2%

3.0%

1.2%

1.9%

2.5%

3.2%

1.8%2.3% 2.3% 2.2%

Q1-1

7

Q2-1

7

Q3-1

7

Q4-1

7

Q1-1

8

Q2-1

8

Q3-1

8

Q4-1

8

Q1-1

9

Q2-1

9

Q3-1

9

Q4-1

9

Q1-2

0

Covid-19 and planting season to drag

Agriculture sector growth

Agriculture sector, quarterly growth rate

0.6%

1.1%

1.6%

2.1%

12.0%

13.0%

14.0%

15.0%

16.0%

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-19

Au

g-1

9

Se

p-1

9

Oc

t-19

No

v-1

9

De

c-1

9

Jan

-20

Feb

-20

Ma

r-20

Ap

r-20

Ma

y-2

0

Food prices push upward amid

COVID-19 shock

Trend of food inflation (y/y)

Y/Y M/M

Figure 70 Figure 71

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

...policy stance of the

government remained

overwhelmingly in

favour of the sector



agricultural specialized extension services and agro-processing in the 774 local

government areas and the 6 area councils in the FTC.

As a fallout of the outbreak of COVID-19, the CBN announced plans to fund farmers

under its 2020 Wet Planting Season Scheme (WPSS). This is covered under the Anchor

Borrowers Program (ABP) under which a total of N190.0bn has been disbursed since its

inception in 2015. Notably, the farmers who will be considered under the WPSS, are those

who produce; rice, cotton, oil palm, tomato, cassava, poultry, fish, maize, cocoa, and

livestock/dairy. The CBN insisted that the planned loans will aid the cultivation of 1million

hectares of land and produce 8.3m tonnes of the target commodities. The scheme is

proposed to be the largest ever in the history of the ABP with loans worth N432.0bn

expected to be disbursed to 1.1million farmers across the country. In addition to the

above, the CBN announced a reduction in all intervention fund for the Agric sector from

9.0% to 5.0% as well as a moratorium on all Bank of Agriculture loans to players in the Agric

space.

While a concerted effort by both the fiscal and the monetary policy authorities must be

commended, published data by the National bureau of Statistics continue to point to

weaker output and faltering growth. As noted above, output growth continued to slow,

from a record high of 4.5% in Q2-2016 to a low 2.2% in Q1-2020. Shockingly, a total of

N622.99bn has been disbursed via the Commercial Agricultural Credit Scheme since

inception aside other intervention programs. Accordingly, outlook for the sector for the

rest of the year is muted, as we do not see the impact of the intervention fund halting the

observed quarter on quarter slowdown.

Clearly, throwing huge amount of intervention fund at the sector does not seem to be

helping much except the structural and strategic challenges confronting the sector are

resolved. In our view, Nigeria must invest in training and education of farmers, storage

facilities, transportation network to facilitate movement of crops from farm to market, as

well as R&D to boost Agricultural yield. A more coordinated policy framework must be

developed for herders, grazing and livestock farming. Finally, to boost agricultural export,

create jobs and attract skilled manpower to sector, Nigeria must take the implementation

of The Green Imperative Programme seriously and identify select or strategic food and

cash crops/livestock to focus on with practical emphasis on the mechanization.

...the CBN announced

a reduction in all

intervention fund for the

Agric sector from 9.0%

to 5.0% as well as a

moratorium on all Bank

of Agriculture loans to

players in the Agric

space

Sectors

...Nigeria must take the

implementation of The

Green

Imperative Programme

seriously



Banking Sector Review and Outlook

A test of the avowed resilience

Coming into 2020, our outlook for the Nigerian banking sector was that interest and non-

interest income will be further pressured. We imagined that loan growth will be modest

amid concerns about asset quality. In all, we anticipated that margins will be strained,

and profitability will be slightly impaired. However, beyond regulatory pressure which

continue to eat-up asset yields, the banking sector was served a cocktail of woes in H1-

2020 as the outbreak of COVID 19 triggered currency devaluation, oil market crash,

halted business activities and worsened asset quality.

Sector Outlook

Loan Growth, Asset Quality, and Impairment losses

The impact of the COVID-19 pandemic and the control measures put in place were felt

across all sectors of the economy, some more than others. This economic slowdown

across various sectors does do not provide a favourable landscape for more loan

disbursement. Therefore, loan growth is expected to be muted as banks are conscious in

their risk management.

In terms of asset quality, we expect NPLs to increase significantly due to substantial

exposure to some the hardest hit sectors, especially oil & gas, manufacturing, and trade &

general commerce. Also, in the consumer lending space, we expect a significant level of

defaults as unemployment levels rise and salary cuts have become the order of the day.

By implication, impairment losses are also anticipated to surge on the back of guidelines

prescribed by IFRS 9. The key import of IFRS 9 is the introduction of a forward-looking

“expected loss” impairment standard that requires banks to provide more timely

recognition of expected credit losses (ECL), based on future expectations, in place of the

“incurred loss” model. As such, we expect banks to take higher impairment losses as a

reflection of weaker macroeconomic realities in 2020 as we know it.

...the banking sector

was served a cocktail

of woes in H1-2020

Sectors

...impairment losses are

also anticipated to

surge on the back of

guidelines prescribed

by IFRS 9

Impact analysis of COVID-19 on the banks’ loan book Figure 72

Source: CBN, United Capital Research

SectorsBanking Sector loan

exposure Impact of COVID-19

Oil and Gas (Upstream) 19.90% High

Manufacturing 15.30% High

Finance, Insurance and Capital market 7.40% Moderate

Trade and General Commerce 7.30% High

Oil and Gas (Downstream) 6.80% Moderate

Information and communication 5.10% Low

Agriculture 4.50% Moderate

Construction 4.20% High

Real Estate 3.50% High

...loan growth is

expected to be muted

as banks are conscious

in their risk

management



Interest Income: Lower yield, challenging macro environment and default rate

In terms of revenue, we expect that the interest income component of banks’ revenue

will be the most pressured. Firstly, banks have been forced to lower interest rates earlier in

a bid to meet the LDR requirement. Secondly, as part of the CBN’s expansionary

measures to support the economy in the COVID-19 era, MPR was reduced by 100bps to

12.5%. Also, banks have announced various types of relief programmes and made

provisions for restructuring of loans, that involve payment holidays. The summary of the

factors highlighted above means that the interest income on loans is expected to

reduce. Furthermore, the low interest rate environment and declining rates on fixed

income securities (T-bills, OMO and bonds) as well as the increase in the regulatory cash

reserve ratio from 22.5% to 27.5% means that overall asset yield will reduce.

That said, the cost of funds is also expected to reduce across board due to a drastic

reduction in the fixed deposit rates amid the low interest rate environment. This is

estimated to support net interest margin significantly and moderate pressure on earnings

yield.

Non-interest income: A mixed performance

On a brighter note, the lockdown and other social distancing measures might have

supported growth in volumes of online and mobile transactions. However, the 30-70%

multi-tiered cut on banking fees by the CBN towards the end of 2019 may counter-

balance the growth in Non-interest income in 2020. Notably, the E-business income

component which has been the fastest growing revenue component before now, might

remain flat this time around. This is as fees have been slashed, and some businesses (e.g.

Airline, Sport betting, Restaurants, Hotels and Cinemas) which generate high volumes

have not been so active. However, we expect an increase in trading income given the

level of market volatility that was experienced and is most likely to continue till the end of

the year.

It is not all negative

Overall, we think that 2020 will once again test the resilience of the Nigerian banking

sector. However, we note that the capacity of the banks to weather the storm is peculiar

for each of the banks. Banks that have the holding company structure such as Stanbic

IBTC, FCMB and FBNH are better positioned due to the multiplicity of their revenue

streams. In the same vain, banks that have a net dollar long position such as Zenith Bank

and Guaranty Trust bank are at an advantage, due to the devaluation and possible

further devaluation of the naira. In terms of asset quality, some banks have short term

hedges for a large percentage of their oil and gas loans, shielding them from the huge

blow of the oil price crashed witnessed in H1-2020.

...we expect that the

interest income

component of banks’

revenue will be the

most pressured

Sectors

Overall, we think that

2020 will once again

test the resilience of the

Nigerian banking

sector

On a brighter note, the

lockdown and other

social distancing

measures might have

supported growth in

volumes of online and

mobile transactions



Cement Sector

Victim of circumstance

In our 2020 Outlook report titled ‘’A different playing field’’ we expected the cement

industry to be on the path of growth, this growth was to be fueled by huge deficit in the

infrastructure space across the continent, renewed commitment of the Federal

Government of Nigeria (FGN) to invest heavily in transport (including road, rail, and ports)

and housing infrastructure, and coupled with low cement consumption per capita in

Nigeria which stands at 150kg compared to global average of 561kg . However, the

outbreak of covid-19 changed the narrative and made the cement Industry a victim of

circumstance as oil market crash led to a 9.5% downward review of Capital expenditure

in the 2020 budget.

Looking ahead, our optimism about Nigeria’s cement industry is damped as we believe

that the industry may be in for a difficult H2-2020 due to COVID-19 pandemic. Notably,

the health crisis forced the government to lockdown economic activities on three key

construction hubs in the country (Lagos, Abuja and Ogun States). However, the recently

submitted Economic Sustainability Plan (ESP) by Vice President led committee on

economic sustainability, raise some hope for the cement industry if implemented within

the time frame stipulated. Based on the ESP report, the FG plans to shift attention to the

usage of locally available materials like limestone, cement, and granite for road

construction in a bid to save cost from the importation of bitumen. FG also plans to

construct about 300,000 homes in the next 12-months coupled with renewed

commitment toward the construction and maintenance of federal highways, roads and

bridges, road interventions within federal tertiary institutions across the country. The

unrelenting effort of the FG toward infrastructural development in the country appears

like a plus for the cement industry. However, history has shown that the percentage of

implementation of capital expenditure in Nigeria average c.52.7% in the last 7years which

supports our views of not being overly optimistic about growth in the sector. Bearing the

above in mind, we expect performance of operators in the sector to weaken in 2020

The outbreak of COVID

-19 changed the

narrative in the cement

sector

Sectors

-4.0

-2.0

0.0

2.0

4.0

-10.0

-7.0

-4.0

-1.0

2.0

5.0

8.0

Q1-1

6

Q2-1

6

Q3-1

6

Q4-1

6

Q1-1

7

Q2-1

7

Q3-1

7

Q4-1

7

Q1-1

8

Q2-1

8

Q3-1

8

Q4-1

8

Q1-1

9

Q2-1

9

Q3-1

9

Q4-1

9

Q1-2

0

Recovery in sight?Construction and Cement Sector GDP vs

Aggregrate GDP (%)

Cement Construction Aggregrate GDP (RHS)

Figure 74

5.0%

25.0%

45.0%

65.0%

85.0%

50.0

550.0

1,050.0

1,550.0

2,050.0

2,550.0

2012 2013 2014 2015 2016 2017 2018 2019

Trend of FGN capital expenditure (N'bn)Performance Percentage

Budget Actual Performance

Figure 75

Sources: NBS, United Capital Research Sources: Budget Office, United Capital Research

Our initial optimism

about Nigeria’s cement

industry in 2020 is now

dampened by the

outbreak of COVID-19




Speaking briefly about the key players, DANGCEM appears to be the hardest hit, aside

COVID-19 induced disruption in supply chain, its bottom-line will most likely be under

pressure due to greater income tax deductions as the pioneer tax grants on Ibese Lines 3

& 4 and Obajana Line 4 expired in February 2020. We see BUACEMENT exploiting the

consolidation of CCNN and Obu cement to deliver an inorganic growth come FY-2020,

While WAPCO management has guided that it is preparing for a revenue shortfall in the

second quarter of 2020 due to subdued activity in the construction sector despite 10.0%

growth in Q1-2020 revenue. However, we expect to see a mild increase in FY-2020 y/y

performance fueled by significant reduction in finance cost.

We expect a mild

improvement in

WAPCO’s H2-2020

performance fueled by

significant reduction in

finance cost

Sectors



Consumer Goods Industry

Riding the tide of challenges

In our FY-2020 outlook released in Jan-2020, we had forecasted a tough year for the listed

consumer goods players and estimated that much of the growth we are likely to see in

2020 will be driven by higher prices, rather than higher consumer demand. True to our

projections, many of our coverage companies increased prices in the face of the Value

Added Tax (VAT) increment and new minimum wage implementations. Also, some of the

sector players that had been struggling with competition from smuggled goods,

benefited from the positive impact of the closure of land borders. Clearly, the reduction in

the activities of smugglers allowed operators to push more volumes within the domestic

market in Q1-2020.

However, the outbreak of the COVID-19 disease added a new layer of concern for most

of the industry players as lockdown in key revenue generating and industrial states (Lagos,

Abuja, and Ogun States) as well as the ban on inter-state movement depressed

performance. Also, the disruption in global supply chains, naira adjustment, and FX

market illiquidity throughout Q2-2020, added more concerns for companies with sizable

import needs (specifically, brewery players and PZ).

Specifically, we believe industry players with low portfolio concentration in products that

are considered essential (food, beverages, agro-allied and home & personal care) as

well as those with high factory location concentration in the first three states that were

placed on lockdown (Lagos, Abuja, Ogun state), would have suffered the most as a result

of the restrictions implemented in Q2-2020. Thus, we expect a largely underwhelming top

line performance from GUINNESS, INTBREW, PZ and UNILEVER in Q2-2020. Meanwhile, we

expect the topline performance of NESTLE, DANGSUGAR and FLOURMIL to further improve

in Q2-2020, reflecting consumers panic purchase of essential items ahead of and during

the lockdown periods.

Looking beyond Q2-2020, we have a moderate outlook for topline performance across

the sector in H2-2020. This is as we expect economic activities to pick up from Q2-2020’s

low. Also, predicated on our assumption that the government would not be implementing

another round of lockdown in H2-2020 and with earnings of most consumers under

True to our projections,

many of our coverage

companies increased

prices early in 2020

Sectors

Looking beyond Q2-

2020, we have a

moderate outlook for

top-line performance

across the sector in H2-

2020

Overview of Coverage Companies: Figure 73

Source: NSE, FMDQ, Company Filings, United Capital Research

S/N Company Category Factory Location in NigeriaFinancial Market

Activities2020 Outlook

1 DANGSUGAR Food Processing Lagos State (Apapa) N/A Positive

2 FLOURMIL Food Processing, Agro-Allied Lagos, Kano, Cross River, Niger, Oyo, Ogun and Kwara States CP and Bond Positive

3 GUINNESS Brewery Lagos, Abia and Edo States CP Negative

4 INTBREW Brewery Ogun, Osun, Rivers and Anambra States Rights Negative

5 NB Brewery Lagos, Abia, Anambra, Benue, Enugu, Imo, Kaduna, Ogun and Oyo States CP Moderate

6 NESTLE Food and Beverages Ogun State (Agbara and Flowergate) N/A Positive

7 PZ Food & Nutrition, Electricals, HPC Lagos State N/A Negative

8 UACN Food Processing, Agro-Allied, Paints, Real Estate Footprint in more than 28 States Rights Moderate

9 UNILEVER Food Processing, HPC Lagos and Ogun States N/A Negative

The outbreak of the

COVID-19 disease

added a new layer of

concern for most of the

industry players



pressure, we estimate a moderate growth in demand for essential and non-essential

items.

Our expectation for cost components across the sector is also moderate. Notably, we

expect the reduction in commodity prices, interest rates, domestic petrol prices, as well as

the lay-offs of some non-essential staff and downward adjustment in staff renumeration

within some of our coverage companies, to constrain growth in overall cost components,

across the sector in Q2-2020. Beyond Q2-2020, we note that weaker naira will have a

significantly negative impact on the input cost of brewers as they resume import of key

raw materials. Also, we expect the possible upward adjustment in electricity tariffs to spur

costs higher across the sector.

Overall, our best picks in the sector remain NESTLE buttressed by their solid balance sheet

position, product innovations and brand durability. Also, we remain positive on FLOURMIL

and DANGSUGAR amid the dominant nature of their product portfolios in essential items.

For the brewers, we believe sales will be affected by the closure of bars, as well as the

ongoing implementation of social distancing measures and late-night curfews. However,

of the three major players in the brewery space, we believe NB is in the best position to

ride the tide, given its efficient distribution system and its wide factory footprints across the

country. Elsewhere, we believe the deliberate decision by the management of UNILEVER

to tighten credit terms in H2-2019, will have a negative impact on their overall

performance in 2020.

Overall, our best picks

in the sector remain

NESTLE buttressed by

their solid balance

sheet position, product

innovations and brand

durability

Sectors

We remain positive on

FLOURMIL and

DANGSUGAR amid the

dominant nature of

their product portfolios

in essential items



Oil and Gas Industry

A Fall from Grace

The oil & gas sector was certainly one of the hardest hit sectors by the COVID-19

pandemic, as global economic lockdowns crippled the demand for crude oil. Notably,

the impact of the pandemic was felt across the value chain. The upstream sector was the

worst hit, given the unfavourable pricing of Nigeria’s Official Selling Prices (OSP) for its

crude grades, relative to higher production costs incurred by operators. These dynamics

forced upstream operators to cut back on production activities, evident by the decline in

rig count to 8 in May 2020, the lowest in 2 years. Also, due to demand shortfall for energy,

there were declines in refinery runs and shutdowns in major refining centres across Europe

and Asia. In response to the harsh operating climate, planned CAPEX programmes for the

year were cut by major IOCs and local players, and there was also deferment on major

projects.

For the downstream sector, the decline in crude oil prices gave the FG the opportunity to

somewhat remove the controversial fuel subsidy regime, as the NNPC reported over-

recovery. Accordingly, the Petroleum Product Pricing Regulatory Agency (PPPRA)

implemented a monthly market-based pricing regime, to provide prices reflective to

market reality for Oil Marketing Companies (OMCs). However, this was met with huge

difficulty, as monthly prices were reduced (from a high of N145/litre pre-market regime to

N121.5/litre for Jun-2020 sales), with OMCs still carrying inventory bought at higher prices.

Sector Outlook

For the rest of the year, while we note that the global crude oil market is on a better

balance of supply and demand, the return to pre-pandemic profitability for Nigeria’s oil

and gas players remains bleak. For the upstream sector, given the non-compliance of

Nigeria to the OPEC+ quota in May-2020 (produced 1.59mbpd vs 1.41mbpd quota), the

country is required to compensate for the excess production, and future non-compliance

The oil & gas sector

was certainly one of

the hardest hit sectors

by the COVID-19

pandemic

Sectors

...the return to pre-

pandemic profitability

for Nigeria’s oil and gas

players remains bleak.

1.3

2.5 2.31.7

-3.3-4.0

-1.1

1.5

2.7 2.41.9

-3.1-3.9

-1.1

De

c-1

9

Jan

-20

Feb

-20

Ma

r-20

Ap

r-2

0

Ma

y-2

0

Jun

-20

Given the oil demand destruction,

Nigeria sold at a discount Trend of Nigeria's crude grades at a

Premium/Discount to Brent

West Africa Bonny Light Crude OSP West Africa Qua Iboe Crude OSP

Figure 76

145.3 145.4 145.4 145.4

130.8129.7

De

c-1

9

Jan

-20

Feb

-20

Ma

r-20

Ap

r-20

Ma

y-2

0

Following the price modulation by

PPPRA, average PMS price has been

decliningMonthly Average PMS in Nigeria

Figure 77

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



will be followed by deeper supply cuts. As such, the NNPC is expected to allocate

different levels of cuts to partners (mostly JV), while some producers have already willingly

shut down operations due to higher production costs. Also, given the unprecedented

level of shock to oil prices caused by the pandemic, we expect H2-2020 to be a period of

achieving reduced costs, production efficiency and conserving cash in the upstream

sector. Notably, the NNPC is targeting a unit operating cost among all oil producers at

$10.0/b, with costs for both JV and PSC operators in Nigeria estimated around $25.0/b

and $17.7/b respectively. For SEPLAT, the only upstream player under our coverage, the

outlook for the year remains negative, on the back of relatively lower prices and

negatively affected production.

Elsewhere, the Department of Petroleum Resources (DPR), announced the

commencement of the 2020 marginal field bid round exercise, looking to auction off a

total of 57 fields. Although the current challenges in the oil market are significant, we

expect domestic players to bid with a forward-looking perspective, and position for

production when the oil market fully recovers. However, our concern remains how

potential output from these marginal fields will be accounted for, amid an expectation

for sustained OPEC+ supply cuts beyond 2020. Finally, a bone of contention going into H2-

2020 is the long-awaited passage of the Petroleum Industry Bill or at least the Petroleum

Industry Governance Bill. Although we have noticed a general optimism during this

pandemic period, as the government seems to be attempting to pass various reforms in

different sectors, the little or no traction seen on the passage of the PIGB means that 2020

might end with the current regulatory environment being maintained.

For the downstream segment, the reactivation of the monthly market-based price regime

is laudable, however, the concern remains around policy backflip which is quite

common in Nigeria. Hence, the possibility of the FG backtracking the market-based price

regime once oil prices start tracking higher and pressure on consumer wallets begin to

mount remains in the offing. Nonetheless, we expect oil marketers to continue to diversify

into lubricants, diesel, and other unregulated product mixes. Bearing the above in mind,

we still expect margins of major industry players such as TOTAL, ARDOVA and MOBIL to

remain constrained, as the NNPC remains the sole importer of PMS in H2-2020. Hence,

profitability will boil down to operational efficiency across our coverage companies.

Elsewhere, the proposed completion date of the 650,000 bpd Dangote Oil Refinery

officially remains the end of 2020, with the complex expected to be operational by early

2021. However, given the negative impact of the pandemic on operations, we are of the

view that the proposed date is overly optimistic.

Finally, with Nigeria’s abundant gas reserves, the pandemic offers an opportunity for

Nigeria to increase its focus on gas by diversifying its crude oil portfolio. However, the

global market for gas has also been affected by the general weakness in energy

demand. For Nigeria, the key challenges remains the lack of adequate gas infrastructure.

The outlook for the year

remains negative for

SEPLAT, on the back of

relatively lower crude

oil prices and

negatively affected

production

Sectors

The pandemic offers an

opportunity for Nigeria

to increase its focus on

gas by diversifying its

crude oil portfolio

...the little or no traction

seen on the passage of

the PIGB means that

2020 might end with the

current regulatory

environment being

maintained

The concern for the

downstream segment

remains around policy

backflip which is quite

common in Nigeria

Disclosure

Appendix



Investment Rating Criteria and Disclosure

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

Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR

of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor

around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).

Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.

NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking

relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.

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

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in

activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition,

research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s

Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published

research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable

conflicts of interest that may arise in the course of its business relationships.

Risk Rating

Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in

significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk.

Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from

government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets.

Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.

These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest,

government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.

United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem

applicable the company of focus. The ratings are defined below;

High: High probability of an imminent systematic risk or/and unsystematic risk

Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk

Low: Low probability of an imminent systematic risk or/and unsystematic risk

Analyst Certification

The research analysts who prepared this report certify as follows:

1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this

report.

2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in

this report.

Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,

potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report

are disclosed:

• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report

Disclosure keys

a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report

b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence

on the company’s operating decision directly or through proxy arrangements

c. UCAP is a market maker in the publicly traded equities of the Company

d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company

e. UCAP beneficially own 1% or more of the equity securities of the Company

f. UCAP holds a major interest in the debt of the Company

g. UCAP has received compensation for investment banking activities from the Company within the last 12 months

h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months

i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution

j. The Company is a client of UCAP

k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer

United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets

and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)

nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell

securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is

registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact

United Capital Plc, Afriland Towers (3rd Floor), 97/105, Broad Street, Lagos. ©United Capital Plc 2019.

Disclosure Appendix

Company Disclosure

Dangote Cement Plc a,h

Fidelity Bank Plc h

Flour Mills of Nigeria Plc h

Forte Oil Plc g

International Breweries Plc a,h

Nigerian Breweries Plc h

PZ Nigeria Plc h

Stanbic IBTC Plc g

Total Nigeria Plc h

UAC of Nigeria Plc h

Zenith Nigeria Plc a

Documents

Nigeria H2-2020 Outlook: Up in the Air · 2020-06-30 · Nigeria H2-2020 Outlook: Up in the Air 3 Executive Summary Global Economy in 2020: Up in the Air In January 2020, we estimated