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Breakfast Report - 18 May, 2020

Last week Thursday, the Federal Executive Council (FEC) approved a revision to the 2020 budget and the Medium-Term Expenditure Framework for 2020 – 2022. Key revisions in the budget include a $25/bbl crude benchmark and a target production rate of 1.94mbpd, in addition to the revision of the exchange rate to ₦360/$. The budget for 2020 was downsized to ₦10.5 trillion, ₦71.5 billion lower than the previously approved budget. The revision of the expenditure plan came with a widening of the anticipated deficit, from ₦2.18 trillion to ₦5.36 trillion. The proposed deficit will be financed by both domestic and foreign borrowing. With crude demand taking a nose-dive on the contraction in global economic activity, Brent crude prices - on which Nigeria’s bonny light crude is benchmarked - have fallen 60% this year to trade at $30/bbl. Unfortunately, Nigeria relies on oil earnings for 90% of its FX revenue. The sharp drop in oil earnings has resulted in macroeconomic imbalances, intensifying recessionary pressures. As the country’s ability to fund critical infrastructure will be hamstrung, debt servicing costs are expected to increase – albeit marginally - as macroeconomic conditions have tightened. Although the government has resorted to concessionary financing to enable it to enjoy some benefits of borrowing in foreign currency, the supply of that is limited and may not cover the projected budget deficit. Consequently, we expect the government to be more aggressive in raising revenue in the domestic market, amid weak tax receipts and as borrowing at the commercial rate in the international market is not economically viable.

Equity: We saw a mixed performance in the equities market last week, as it started on a bearish trend (courtesy of profit-taking on the gains made in the previous weeks) while investors took buy positions at mid-week. With the gradual improvement of economic activities in the country as well as other countries around the world, we likewise expect the domestic market to pick up in a similar proportion, though the persistent Covid-19 remains a major threat.

Stock Watch: On top of the gainers' table was STANBIC which appreciated by 991bps on Friday, closing the week at ₦32.15. The counter traded c.1.94mn units, with most of the trades occurring at the bid side.
Fixed Income: As sentiment in the secondary market remains unchanged due to the overhanging uncertainty in the global economy, we expect the market to continue to trade in a similar mixed pattern at the start of the week.