FBNQuest Capital Nigeria 2021 Research Outlook: Tentative Emergence from the Shadow of COVID-19

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FBNQuest Capital Nigeria 2021 Research Outlook: Tentative Emergence from the Shadow of COVID-19

By FBNQuest Capital

Evolution Not Revolution in FX Thinking

Global recovery via millions and millions of arms

The Federal Reserve has its policy rate at practically zero and will maintain its accommodative stance this year since its employment and inflation objectives are distant following the virus’s impact. The world economy will recover following the development of the vaccine. We believe this process in G7 economies and China will experience the desired impact by the third quarter. With the anticipated recovery in demand, the crude price has increased above USD50/b.

A limited process, in Nigeria’s case

Nigeria’s recovery this year will be smaller than most, as its contraction in 2020 was shallower, due to its large informal sector.  Household consumption has not recovered from the previous recession in 2016 and is experiencing rising unemployment, wage arrears and COVID-19 induced changes to the economy.  With a modest fiscal stimulus and targeted private investment, we expect growth at 2.0% in 2021.

A familiar fiscal challenge

The Federal Government of Nigeria (FGN) has pushed its expansionary budget through with speed for the second year. Its fiscal tasks are to improve revenue collection and accelerate disbursements for capital expenditure.

Adjustments and turbulence, yet fx strategy intact

The Central Bank of Nigeria’s (CBN) strategy is to make small fx adjustments when it has no choice.  Foreign portfolio investors (FPIs) are unlikely to help due to the unexciting returns on offer and the payments pipeline.  A combination of higher oil revenue, multilateral loans and Eurobond sales should underpin reserves this year and allow the CBN to contain NGN exchange-rate depreciation.

Correction in the debt market, potential 20% return for equities

We expect FGN bonds’ supply to rise, due to the financing of a huge deficit.  Therefore, we see yields in the mid-curve back up at 10% to 11% at year-end.  Given that yields are down y/y, we expect demand for equities to remain healthy, driven by domestic investors.  Despite large-cap names skewing the All Share Index’s return, we expect the index to close around 48,325 this year, implying a 20% return from end-2020 levels.