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The Market Today - 9 November 2017

Revenue diversification, key to sustainable growth                                      

Moody’s Investors Service downgraded Nigeria’s long-term issuer and senior unsecured debt rating from B1 to B2 (stable outlook), citing the vulnerability of Nigeria’s public finances to developments in the oil sector, a situation it hoped would have changed by now. The Ratings agency expressed the view that Nigeria had failed to sufficiently broaden its non-oil revenue base, leaving the country reliant on oil to fund its budget. Reacting to the downgrade, the Debt Management Office (DMO) disagreed. Speaking on behalf of the Federal Government, the Bureau stressed that the fiscal authority has put several measures in place to improve the non-oil revenues; such as the introduction of a tax amnesty scheme, plugging leakages, and deployment of technology-driven revenue management strategies. We note that the 2018 Budget is projected to be funded largely through non-oil income (63%), in line with the DMO’s stance. However, we have not observed significant improvements in realized non-oil revenues in the preceding years and are bearish on the likelihood of achieving the non-oil revenue (₦4.17 trillion) target set for 2018.                                    

Mixed trading session ends in the green                                               

Following another mixed trading session on the exchange, the NSE All-Share Index gained 34bps yesterday. Noting that the ASI was lifted by last minute advances yesterday (evidenced in the intraday chart below), we believe sentiment on the exchange remains largely varied, and thus foresee another mixed trading session today.                                      

Stock Watch: FCMB has gained 12% over the last five trading sessions. The stock currently trades at ₦1.20, 59% below our Target Price of ₦2.93, and has returned 9% ytd. We note that the Group released a notice of late filing of its 9M’17 financial results amidst an interim audit of the results.                                    

Ratings downgrade spurs bearish session in bond market                                      

The CBN conducted another OMO auction yesterday, offering ₦60 billion and selling ₦36 billion across the 99DTM and 183DTM bills at stop rates of 16.00% and 17.80% (effective yields: 16.73% and 19.54%) respectively. Following a downgrade of Nigeria’s long-term sovereign issuer rating by Moody’s (from B1 to B2), there was notable activity in the fixed income market yesterday. Particularly, selling strengthened from offshore investors with pressure notably weighted on the longer dated instruments. Thus, the bond space was largely bearish with yields on benchmark bonds advancing 7bps on average. On the contrary, demand strengthened in the T-bills space as yields declined 52bps on average. We expect trading in the bond space to remain bearish in today’s session as investors continue to react to the credit rating downgrade news. We however expect the anticipated ₦233.76 billion OMO maturity due today to ease liquidity pressure and support demand in the T-bills space.