United Capital Research

Executive Summary

Global Economy in 2020: A potential recovery in sight?

Away from a synchronized growth story in 2018, global growth reverted to a synchronized slowdown in 2019, as growth in major Advanced Economies (AE) and Emerging Markets (EM) decelerated. In 2020, the IMF forecasts global growth to be stronger, driven largely by recoveries in the EM countries. By our estimates, better trade terms between the US and China, as well as accommodative monetary policy stance by global central banks, supports improvement in the global growth outlook.

On trade, we expect a mild improvement, on the assumption that President Trump may be willing to fast-track negotiations with China as well as other bilateral trade agreements to score political point ahead of his 2nd term bid. Additionally, the prospect of a no-deal BREXIT seemed out of the way as the UK parliament voted to back the Prime Minister’s deal. According to PM Boris Johnson, who won a resounding victory at the Dec-19 polls, the deal “paves the way for an ambitious free trade deal with the EU”. In all, our outlook for the trade remains mildly positive. However, the potential for further escalation, which could slow the pace of recovery remains significant.

Elsewhere, global monetary policy is expected to remain accommodative in 2020 amid concerns around the fragility of global growth. However, the pace of easing will moderate as monetary authorities around the world wait to see the impact of their recent policy actions.

On global crude oil prices, we see reasons to believe that prices will hover around $60.0/b-$65.0/b, supported by recent output cut by Saudi Arabia and OPEC. However, slower growth in key demand markets (China & India) is a cause for concern.

Sub-Saharan Africa: AfCFTA, the real deal?

The economic performance in the Sub-Saharan Africa (SSA) region was soft in 2019, no thanks to faltering momentum in key markets such as Nigeria, South Africa and Angola. However, the countries with the fastest GDP growth were Rwanda, Ivory Coast, Benin, Ghana, Tanzania and Kenya.

Elsewhere, the Africa Continental Free Trade Agreement (AfCFTA) aimed at expanding intra-African trades, gained further ground in 2019. Notably, 54 of the 55 African Union (AU) member states (Eritrea being the only exception) signed the deal while 28, including Egypt, Ghana, Kenya, and South Africa, ratified the deal in 2019. Trading under the AfCFTA framework is slated to start in July 2020, even though regional developments in H2-19 suggests that many African countries are unprepared to implement the commitments of the deal. The re-emergence of xenophobic attacks in South Africa (Services), and the closure of all land borders by the Nigerian government (Goods), just three months after celebrating its signing of the AfCFTA, buttresses this position. Relatedly, the 8 – member francophone West African countries dropped the CFA franc late in Dec-19 and voted to adopt the ECO in 2020.

Looking ahead, the World Bank forecasts growth in the region to improve from 2.6% in 2019 to 3.1% in 2020, driven by stronger growth among non-resource intensive countries and modest expansion in resource-intensive countries. For us, slow recoveries in the larger economies will continue to constrain the pace of growth in the region amid long-delayed reforms.

Nigeria: …in need of a coordinated and coherent policy framework

Momentum in the Nigerian economy remained soft in 2019 despite increased clarity in the political space after the 2019 general elections. In 2020, the outlook for the Nigerian economy hangs on a framework of a well-intended but slightly 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 1^st 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 interest rate (MPR) may be kept unchanged or reduced marginally, we imagine that the CBN will sustain its recent framework of heterodox policy mix until conditions necessitate policy normalization. Hence, interest rates in the fixed income market may remain low, especially in H1-2020.

On the exchange rate and capital flows, we expect the CBN to continue to support the naira at N360-N365/$1 levels, by selling OMO bills to FPIs (Foreign Portfolio Investors) as a strategy to preserve the reserves at decent levels. At the current run rate, this can be sustained for another 7 to 9 months, all things being equal. Nevertheless, we acknowledge the growing concern about an impending devaluation of the naira. In our opinion, while a currency devaluation is unlikely in the immediate-term, there is a possibility for the harmonization of the official rate from N305.5/$1 to something very close to the I&E window rate of N360.0/$1, in the medium term. Hence, the adjustment may not really affect the market rate by more than a spread of 2% to 5% to the official rate. Overall, our outlook for the naira is stable in the near term with a potential harmonization in the medium – to – long term.

On capital flows, no significant change is expected in the current dynamics. More specifically, the CBN is likely to sustain its OMO sale to FPIs in support of the reserves. This may keep FPIs interest dominant in money market funds at the expense of equity flows. Notably, we expect an upsurge in Loans & Other Claims to continue, given the low-interest-rate environment in the international debt market. However, Foreign Direct Investment (FDI) flow may remain broadly muted.

Naira Assets: A different playing field

Notably, a quick sequence of monetary policy actions, particularly those relating to sales of CBN’s OMO bills announced since Jul-19, changed the dynamics in the Nigerian financial market in H2-19. While the currency market remained broadly stable, supported largely by the CBN’s sustained FX intervention, the equities market tumbled 14.6%y/y. Also, the average yield in the fixed income market moderated from 14.5% in Dec-18 to 9.7% in Dec-19

2020 is a different playing field for capital market players. The fixed income market will be a corporate/ private issuer market due to the buoyant level liquidity and the low yield environment. Yields on FGN T-bills are projected to stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in H1-20.  Hence, interest in riskier assets, mostly corporate papers, will increase. 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 dollar outflow in Q1-20 while preserving the stock of reserves above the $30.0bn threshold. Overall, we expect the sovereign yield curve to remain normal in H1-20. However, this may reverse to a hump-shaped curve from Q3-20.

For equities, the continued auction of high yield OMO bills to FPIs may keep foreign interest in local equity market tepid amid fears of a naira devaluation and confidence deficit in the economy. Again, FPIs are likely to continue their flight to safety by swapping/selling equities for low-risk OMO bills. Yet, our outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch. From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity. However, this will not be enough to trigger a major rally in the absence of the demand from FPIs. Overall, our base case scenario, sees equities market return at +5.3% in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity.