President Buhari presents proposed 2021 Appropriation Bill to National Assembly

What shaped the past week? Global:

Global markets traded higher last week, as promising developments on a coronavirus vaccine and improving macroeconomic data from major economies, fueled market sentiment. In the U.S., optimism was largely driven by an improvement in economic activity for September, as investors monitor negotiation developments on a fourth COVID relief stimulus package, from the U.S government. The American Institute for Supply and Management (ISM) reported on Monday, economic activity improved for a fourth consecutive month, registering at 57.8% for September, 9bps higher than August report of 56.9%. Over the course of the week, key statements from FED officials fueled sentiment as well. Federal Reserve Bank of St. Louis President James Bullard in a statement to the Wall Street Journal said he was satisfied with the Fed’s current monetary policy and that he expects the United States economy to improve “possibly more rapidly than financial markets currently think.” The S&P500 is currently up 3.38% w/w, with the Dow Jones up 2.68% w/w and the tech-heavy NASDAQ up 2.62% w/w. Meanwhile in Europe, on Tuesday, BioNTech SE and Pfizer Inc. announced that the European Medicines Agency (EMA) will start a rolling review of the companies’ coronavirus vaccine candidate. Adding to the positive sentiment, economic data for U.K. revealed an improvement in economic activity in the country, with GDP climbing 2.1% in August. Markets also reacted positively to the announcement from the European Commission that it has reached another vaccine supply deal with a Johnson & Johnson subsidiary. In addition, German firm CureVac stated it expects to start the Phase III trial for its coronavirus candidate by the end of 2020. For the week, the U.K FTSE 100 gained 1.96% w/w, with the German DAX and French CAC climbing 2.80% and 2.48% respectively. Finally, in Asia, an improvement in economic activity from China and the country joining the COVAX initiative for developing coronavirus vaccines and treatment boosted sentiment in the region for the week. In a release by IHS Markit, the Business Activity Index printed at 54.8, up from 54.0 in August. The improvement in activity suggests that the recovery in China is on an upward trajectory. For the week, the Nikkei 225 gained 2.56% w/w, with the Korean Kospi and Chinese Shanghai Composite climbing 1.68% and 2.75% respectively w/w.

Domestic Economy:

On Thursday, President Muhammadu Buhari presented the proposed 2021 Appropria5.64% tion Bill to the Joint National Assembly. Tagged the Budget of Economic Recovery and Resilience, the proposed budget was based on a benchmark oil price of $40, daily oil production of 1.86mbpd, an exchange rate of N379/$, an inflation rate of 11.95%, and a GDP growth of 3.0%. An aggregate expenditure of N13.08tn has been proposed, which is 21% above the revised 2020 budget of N10.81tn. 43% of the proposed expenditure has been earmarked for nondebt recurrent costs and 24% for debt service, while 29% of the proposed spending goes to capital expenditure. The budget is expected to be funded by a proposed revenue of N7.89tn. Oil and non-oil revenues were projected at N2.01tn and N1.49tn respectively, leaving a primary funding gap of N4.39tn which may be financed from other sources such as MDA independent revenues and recoveries. The proposed budget has revenue targets for MDAs, alongside their expenditure limits as the federal government seeks to encourage the generation of independent revenues. A spending plan of N13.08tn and a revenue proposal of N7.87tn results in a proposed fiscal deficit of N5.2tn proposed to be funded through new borrowings (N4.28trn), privatization proceeds (N205.15bn), bilateral and multilateral loans (N709.69bn). The deficit represents 3.6% of the GDP, above the 3% threshold set in the Fiscal Responsibility Act.

Equities: Fueled by gains across the board, Nigerian stocks closed further in the green last week, as fund managers and retail investors continued to drive the market rally. The NSEASI rose 5.30% w/w to 28,415 pts, closing the week at its highest level since January 20. The banking sector led all gainers, soaring 7.83%, driven by massive gains in FBNH, ACCESS, and ZENITHBANK amongst others. Valuations across the equity space remain attractive to investors, as several stocks remain undervalued by the market. Meanwhile, the Industrial Goods sector closed in the green as well, spurred on again by gains in DANGCEM and WAPCO; the index advanced 2.72% w/w at Friday’s close. The Oil and Gas and Consumer Goods sectors closed higher as well, gaining 2.01% w/w and 2.02% w/w as the positive sentiment filtered into their respective sectors. With the gains made in the market last week, it would not come as a surprise to see some profit-taking activity in the coming week.

Fixed Income: Yields on Nigerian government bonds closed lower last week as improving oil prices buoyed sentiment in the market. Yields on benchmark bonds eased 57bps w/w, with the yields on the 5-Year and 10-Year Treasury notes settling at

and 7.23% at Friday’s close. Meanwhile, with system liquidity relatively healthy throughout the week, we witnessed persistent interest in the OMO segment, as the yield on OMO bills moderated 64bps w/w, with the 1-Year OMO settling at 2.43% at Friday’s close. Finally, in the NTB space, while interest in the segment remains tepid at best, the segment did witness a day of aggressive buy-side activity; as a result, the yield on NTB bills eased 43bps w/w, with the 90-day and 1-Year Treasury notes settling at 1.07% and 2.14% respectively.

Currency: The Naira closed the week unchanged at I&E FX Window at 386.00 and while appreciating 7.00 to settle at 455.50 against the dollar in the parallel market.

What will shape markets in the coming week? Equity market:

Though profit taking action led the market south in the last three sessions of the week, ending the bullish streak, however, the market was able to post a positive WoW performance as the influx of funds at the beginning of the week were channeled to fundamentally attractive counters. With the bullish momentum cooling off gradually, we expect some level of corrections and stability in the coming week amidst continued profit taking action.

Fixed Income market:

The level of system liquidity should see fund managers extend their current buy-side activity across the market. In addition, oil prices remain stable, with crude prices edging lower on Friday, but steady at $41/bbl. We expect the market to trade in a positive manner on Monday, as fund managers seek to deploy idle funds, while oil prices should open higher amid a hurricane induced shutdown of oil production in the Gulf of Mexico. Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market. Focus for the week SSA Currencies: Stability in diversity

Risk-off sentiments, triggered by COVID-19, pummeled several emerging and frontier currencies in the first half of the year. Petro-currencies, such as the Nigerian Naira and the Angola Kwanza, had to endure even more pain as both currencies have weakened by 6.2% and 30.1% YTD respectively. The pandemic stifled the supply of foreign exchange due to the sharp decline in commodity prices, tourism receipts and remittances. As a result, pent-up demand emerged for haven assets such as gold, providing support for the Ghanaian Cedi. Ghana has experienced relative currency stability as the surge in gold exports - coupled with a lower oil import bill - sustained dollar liquidity in the economy. In contrast, Nigeria witnessed significant outflow of portfolio investment that resulted in a double devaluation of the Naira as oil prices – the main source of FX to the economy - fell due to the twin impact of slow demand and OPEC+ overproduction.

While SSA currencies have been pressured YTD, the Ghanaian cedi has been the most resilient among our coverage countries. The Ghanaian Cedi’s resilience has been supported by the ample supply of foreign exchange, on the back of higher gold & cocoa prices YTD. The price of gold has surged by 25.9% YTD, due to its safe-haven status and low yields in advanced economies. Also, the price of cocoa – another major Ghanaian export – recovered in Q3’20, supported by the recent dollar weakness (since most commodities are priced in dollars), and investors’ looking to commodities as returns dry up elsewhere. The twin recovery in the prices of key Ghanaian commodity exports improved Ghana’s terms of trade, amid the plunge in oil prices and the resulting dollar inflows limited the depreciation of the Cedi to 1.6% YTD.

In contrast to the Cedi, the peg of the Nigerian Naira has been adjusted twice this year, resulting in a c.23% downward adjustment in the official value of the Naira. The official Naira exchange rate was adjusted by 18% to N360 in March while another 5% adjustment to 379 was delivered in July. At the parallel market, however, the Naira continues to trade at a premium to the official rate despite the resumption of FX sales to Bureau de Change (BDC) operators in September. With NAFEX rate and parallel market rate at 385.8/$ and 455/$ respectively, the official Naira exchange rate is currently overvalued by 1.79% and 20.0% respectively.

All eyes on the CBN’s FX unification efforts

We believe the eyes of both domestic and foreign investors will remain on the forex unification efforts of the Central Bank of Nigeria. As highlighted in the short-term Economic Sustainability Plan, we expect further moves by the CBN to reduce arbitrage opportunities in the foreign exchange market. We also look forward to new foreign exchange policies aimed at stalling the slide in reserves and provide support for the Naira peg, barring the possibility of another slump in oil prices amid a budding coronavirus second wave.

We believe the expected inflow of $200m guarantee from the P&ID suit will provide some support to the Naira. However, further delay in other concessional flows may limit the Bank’s ability to respond to new layers of pressure. Express clarity on FX unification efforts could induce portfolio inflows given the relatively low Price-toEarnings ratios in the equities market, although the low yield environment in the fixed income market remains a deterrent.

In our base case scenario, we expect the Naira to close the year at N379/$ and N483/$ in the official window and parallel markets respectively. Our expectation is anchored on a moderate recovery in oil sales, an average oil price of $42/barrel, an inflow of $1.5billion in concessionary loans and the absence of the second wave of the COVID-19 pandemic.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.