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Breakfast Report - 03 February 2020

The VAT increase is one of the few changes that have been made to the country’s finance bill to primarily help the Federal Government raise additional revenues for it to meet its 2020 budget targets. The federal government’s share of the VAT pool is 15% - the balance goes to the 36 states, some of whom are in dire need of the additional revenue to be able to meet the obligations of the minimum wage. While the upward review of the VAT could help the government reduce deficit spending and fund the new minimum wage, it will result in higher production costs which will be passed on to consumers. To reduce the tax burden on vulnerable segments, the VAT exemptions have been expanded to include more items under the basic food items, pharmaceuticals and education categories.  Basic food items generally refer to unprocessed and aqua-based staple foods and include bread, cereals, fruits & vegetables among other items. In addition, locally manufactured sanitary items and services provided by microfinance banks have been included in the exemption list. Tuition paid for nursery, primary and secondary education have also been classified as VAT exempt. Consumers will unfortunately have to pay more in power charges due to higher VAT charges on meter costs and electricity tariffs. Investors in the stock market will also have to bear the increase in transaction costs as VAT charged on commissions applicable to capital market transactions will increase.  Under the current law, companies with a turnover below the ₦25 million threshold are not liable to file VAT returns. However, this also disqualifies them from reclaiming input VAT incurred on their purchases especially those involved in the supply of products that attract VAT.The VAT increase is one of the few changes that have been made to the country’s finance bill to primarily help the Federal Government raise additional revenues for it to meet its 2020 budget targets. The federal government’s share of the VAT pool is 15% - the balance goes to the 36 states, some of whom are in dire need of the additional revenue to be able to meet the obligations of the minimum wage. While the upward review of the VAT could help the government reduce deficit spending and fund the new minimum wage, it will result in higher production costs which will be passed on to consumers. To reduce the tax burden on vulnerable segments, the VAT exemptions have been expanded to include more items under the basic food items, pharmaceuticals and education categories.  Basic food items generally refer to unprocessed and aqua-based staple foods and include bread, cereals, fruits & vegetables among other items. In addition, locally manufactured sanitary items and services provided by microfinance banks have been included in the exemption list. Tuition paid for nursery, primary and secondary education have also been classified as VAT exempt. Consumers will unfortunately have to pay more in power charges due to higher VAT charges on meter costs and electricity tariffs. Investors in the stock market will also have to bear the increase in transaction costs as VAT charged on commissions applicable to capital market transactions will increase.  Under the current law, companies with a turnover below the ₦25 million threshold are not liable to file VAT returns. However, this also disqualifies them from reclaiming input VAT incurred on their purchases especially those involved in the supply of products that attract VAT.

Equity: The ASI fell below 29,000bps in Friday's session due to persistent sell offs experienced during last week. With more FY'19 earnings results expected to roll in this week, we expect a mixed reaction at the local bourse at week start.

Stock Watch: JAIZBANK trailed COURTVILLE (+952bps) as the second best performer on Friday, rallying 909bps to close at ₦0.72. The bank released its FY'19 result where its revenue and PAT increased by 70.11% (from ₦8.74 billion to ₦14.71 billion) and 113.43% (from ₦0.83 billion to ₦1.79bn) respectively.

Fixed Income: With system liquidity currently constrained, we expect trading activity in the Fixed Income space to be tepid at the start of this week