Budget of Economic Recovery and Resilience… The Silver Bullet Out of Recession?   

Oct 9 (Lagos) - The President yesterday presented the 2021 Appropriation Bill and the performance of the 2020 budget as at July 2020 to a joint session of the National Assembly three (3) months before the end of year. A timely proposal should ramp up the passage of the Bill, limiting room for expenditure rollovers. The spending plan for 2021 was pegged at NGN13.1trn for 2021, 21.3% higher than the NGN10.8trn revised budgeted spend for 2020.

The 2021 estimated spend referred to as the “Budget of Economic Recovery and Resilience” was largely reflective of the damp economic realities and yielded more to economic development, backed by major infrastructural developments and various social investment programmes.

Some of the major assumptions of the budget were; Benchmark oil price at USD40bp, Oil Production at 1.9MMbpd, Exchange Rate of NGN379/USD, GDP Growth projected at 3.0%, with Inflation Rate pegged at 12.0% for the fiscal year of 2021.

On the expenditure front, the recurrent expenditure (both debt and non-debt) remained high at 70% of total expenditure. A further breakdown shows that about 43.2% or N5.7trn of total expenditure was allocated to non-debt recurrent expenditure. We observed the significant increase in capital expenditure (54.0% YoY) to N3.9trn or 29.4% of total expenditure. Debt Service and Statutory transfers also represented 23.9% and 3.7% of the total 2020 budget.

Revenue projection, however, stood at NGN7.9trn, with oil revenue and non-oil revenue estimated at NGN2.0trn and NGN1.5trn, respectively and the balance from Grants & Aid and the MDAs. This leaves a budget deficit of NGN5.2tn or 3.6% of GDP, just above the 3% threshold set by the FRA, 2007. Other notable highlights of the budget include the 157.0% and 65.0% YoY increment in capital allocation to the Health and Education sector.

During his speech, the President also cited several strategic efforts such as the deregulation of petroleum products, the ongoing IPPIS verification exercise, and the implementation of cost-reflective electricity tariffs, all of which are expected to free up resources for other prioritized sectors of the economy.

While we laud the Government’s policy directions so far, risk such as the persistently low oil price, over-supplied crude market, and a projected decline in non-oil revenue (especially revenue from MDAs) amid a global pandemic should exacerbate the deterioration in the fiscal position next year. We also highlight the unsustainable higher cost of governance and debt servicing amidst revenue challenges based on actual performances in previous years.

Global Economy: Sustained Asset Purchasing Programme by the Fed

The U.S. Federal Open Market Committee (FOMC) released its minutes on October 7, 2020 from its meeting held on September 15-16, 2020, in which the Committee held that the Federal Funds Rate be maintained in a target range of 0% to 0.25% until labour market conditions reaches levels consistent with the Committee’s assessment of maximum employment, and inflation had risen to 2.0% and was on a track to run moderately in excess of 2.0% for some time.

One of the considerations for sustaining the interest rate was on the observation that prior monetary policy decision and other fiscal measures have stimulated business investments and improved labour market conditions in recent times.

Furthermore, as asset purchases have over recent months supported economic recovery, it was decided that the Federal Reserve will raise its holdings of treasury securities and agency Mortgage-Backed Securities at the current rate to maintain smooth market functioning and to help foster accommodative financial conditions, thus supporting the flow of credit to households and businesses.

Although FOMC’s decision is an expansionary tool to spur economic growth in the U.S., foreign investors however, will continue to scurry for markets with higher rates in order to be able to optimize their returns.

Fixed Income Market Thrive on Buoyed System Liquidity

The Fixed Income and Money Market closed on an optimistic theme for the week. The NT-bill and OMO-bill market closed bullish buoyed by persistent bids witnessed across the curve. Consequently, average NT-bill yield shrank to 1.44% from 1.85% and average OMO-bill yield plunged to 1.39% from 1.94% at the close of the week. Market players picked on bills with attractive yields following selloffs in the prior week.

The CBN in its scheduled Primary Market Auction (PMA) is expected to sell NGN104.0bn of NGN124.8bn worth of maturing bills across the 91DTM (prev. 1.08%), 182DTM (prev. 1.49%) and 364DTM (prev. 2.80%). We posit that the Apex Bank will continue to depress rates at the head to the belly of the curve, while keeping rates flat at the tail of the curve. Considering the elevated system liquidity, money market rates remained in single digit, the Overnight and Open buy back closed at 4.9% and 4.0% from 1.0% and 1.6% respectively due to CBN’s CRR debit of N462.0bn in the prior week.  

Moving on, average bond yield slid to 6.3% from 6.8% at the end of trading last Friday following continued interest across the bond curve bolstered by a robust system liquidity. We also await the FGN Bond auction calendar for the 4th quarter as this may also influence direction in the bonds market.

Analysts at Greenwich Trust in Victoria Island expect liquidity inflow next week (NGN125bn-NT-bills, NGN370bn-OMO, NGN33bn-FGN18-Apr-37 coupon) to continue to pressure down yields in the market as investors cherry picking securities with attractive yields across the market, although, market players may begin to book profits on the overbought securities.

Market Sustains Upward Trend… as Market Cap Settles at NGN14.9tn

The local bourse enjoyed its third consecutive week of gains, as buying interests on heavily weighted counters pushed the market further into the positive region, despite three (3) successive days of a downturn, settling the All Share Index 5.3% higher WoW at 28,415.3 points. Similarly, market capitalization strengthened (+NGN747.2bn) by the same magnitude to NGN14.9tn, meanwhile on a Year-to-Date basis, the equities market returned +5.9% as of today.

ETERNA topped the gainers’ chart, as the counter gained 32.5% WoW to close at NGN3.60 per unit. However, UAC-PROP recorded the maximum loss of 12.0% WoW to NGN0.80.

On a sectoral basis WoW, the Banking sector led the gainers table, up by 7.8%. In the same vein, the Industrial Goods advanced 2.7%, while the Oil & Gas, Consumer Goods, and Insurance sectors all saw an uptick of 2.0% apiece.

Notwithstanding a three-day bearish tilt, the upsurge witnessed at the start of the week was enough to secure the market in the bull territory. Next week, we expect the market sentiment would remain quite strong as investors anticipate the corporate earnings releases for the third quarter.

reporting for easykobo.com on Friday, Oct 9 2020 from Lagos, Nigeria

Source - analysts at Greenwich Trust Securities in Victoria Island. All opinions, views, forecast and targets expressed in above article are those of analysts at Greenwich Trust. Easykobo does not endorse or oppose any views/opinions expressed in the above article. 
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