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Breakfast Report - 09 March, 2020

Last week, international credit rating agency Standard and Poor’s (S&P) downgraded Nigeria’s credit rating from stable to negative, citing the decline in the nation’s foreign exchange reserves. The nation’s foreign-exchange reserve levels have fallen from $45 billion at mid-year 2019 to $38 billion at the end of 2019 and $36.5 billion in February 2020. The recent downgrade follows other downgrades to the nation’s creditworthiness by Fitch and Moody’s. Given that the country is slated to return to the Eurobond market in 2020 to plug its budget deficit, the ratings downgrade could lead investors to demand a higher risk premium for the country’s debt issue – considering that the forward outlook for oil price in the near term is downbeat. The pessimism that has prevailed in the oil market has also caused the FG to consider reviewing its 2020 budget, which had an oil price benchmark of $57/bbl. In Friday’s session Brent traded at levels below $50/bbl in the futures market, lending credence to the pessimistic outlook. In the face of the dicey situation, the FG is faced with the option of cutting back on proposed spending for the year or borrowing more to plug the wider deficit that could be recorded if oil revenue underperforms the budget target. Considering that the current government is largely pro-growth and infrastructure focused, we believe the FG would opt to increase proposed borrowings to finance the deficits. This would come at a higher cost (i.e. higher borrowing cost) as the odds are currently not in our favour.

Equity: We expect the market to sustain Friday’s trading pattern at the beginning of this week amid a fragile macro-economic environment as crude prices continue to slide, coupled with continuous threat posed by the fast spreading Coronavirus across the world.

Stock Watch: 11 PLC (formally MOBIL PLC) topped the gainers table for Friday, closing the day higher at ₦146.50. The positive performance can be linked to the announcement of the company’s plan on the voluntary delisting of the oil making company from the Nigerian Stock Exchange. The announcement sparked up speculations amongst investors as the delisting is expected to be carried out via tender offer to the existing investors.

Fixed Income: This week, we expect the movement of Brent crude price to continue to guide demand in the bond space. Also, the outlook for the OMO and NTB markets remains weak as we do not foresee significant change to system liquidity.