June 25, 2019/Coronation Research
As we come to the end the first half of 2019 Nigeria’s monetary authorities can give themselves a pat on the back. FX reserves are high and interest rates are 300bps lower than at the end of the year. However, the entire public sector is small fry compared with the private sector.
The Central Bank of Nigeria’s (CBN) FX reserves are currently reported at (a three-month moving average of) US$45.09bn. Since the beginning of the year US$11.41bn has been injected into the NAFEX market through Foreign Portfolio Investment (FPI) while the CBN’s contribution has been just US$0.56bn. We believe that the current reserve level is sufficient for the CBN to defend the Naira exchange rate through to the end of 2019.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 21bps to 14.55%, and at 3 years declined by 63bps to 13.91% last week. The yield on a 364-day T-bill declined by 12bps to 13.60%. The yield on a T-bill with 3 months to maturity increased by 20bps to 11.16%.
Amidst inflows from maturing open market operation (OMO) bills from the CBN, the liquidity in the system looked strong last week. At the same time the market was aware of both the accommodating stance – if not actual cuts – from the US Federal Reserve and was aware that oil prices were rising again. Some of the risk trade therefore went back onto long-dated bonds. But we think that with the 1-year just 220bps above inflation, the CBN would not mind if 1-year market rates rise slightly.
The price of Brent rose by 5.14% last week to US$65.20/bbl. The average price, year-to-date, is US$66.22/bbl, 7.63% lower than the average of US$71.69/bbl in 2018, but 20.97% higher than the US$54.75/bbl average seen in 2017.
Oil prices spiked as tensions heightened between the US and Iran which shot down a US military drone. The strike came after the US blamed Iran for the attacks on two oil tankers in the Gulf of Oman near the Strait of Hormuz last week.
The Nigerian Stock Exchange (NSE) All-Share Index dipped by 0.65% last week, resulting in a year-to-date return of negative 5.02%. Last week Dangote Sugar (+17.45%), Access Bank (+7.81%) and Lafarge Africa (+7.69%) closed positive while Okomu Oil (-10.0%), International Breweries (-9.97%) and Presco (-9.09%) fell.
Following in MTN Nigeria’s footsteps’, Airtel Africa is set to be listed on the Nigerian Stock exchange on July 4 with an indicative price range of N363-N454 Naira per share. Its listing most likely signals a rebound positive sentiments and an increase market participation.
A nod to private capital?
Nigeria scores low on development indices
Nigeria ranked 152 on the most recent United Nations Education index, covering 187 countries. In 2015, the world average expenditure on education as a percentage of national budget was 15%. Nigeria’s proposed public expenditure on Education as a percentage of the national budget was 12.28% in 2015. In the 2018 budget only 7.14% was earmarked for education.
Nigeria’s reduced proportionate spend on education, health and other social programmes is symptomatic of the fiscal challenges the government faces. Moody’s Investor service opined that
Nigeria’s rapidly growing debt profile and mounting debt service costs are responsible for the squeeze in funding for education and health.
But more fundamentally, government revenues are not growing. Federal government collected revenues for Q1 2019 were 15.7% lower than in Q4 2018. Revenues to GDP have also fallen from 5.4% in 2010 to approximately 2.0% in 2019. The government’s fiscal hurdles are evident in the large fiscal deficits over the last four years, and a weak tax to GDP ratio of 4.1%
Mapping the government’s influence
Under the current fiscal regime, government is expected to take the lead in spending on social projects including capital-intensive endeavors. A different approach would be to engage private capital for development initiatives. For example, remittances by Nigerian nationals reached record levels in 2018. At 6.1% of GDP, or US$24.3bn, it was more than 80% of the federal budget and 132% of the value of total pension funds in Nigeria.
It is our view that, given the relatively small size of the government and the extent of capital investment required to achieve development across social impart areas, attracting private capital is a sustainable approach.