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P & ID versus Nigeria… How the markets have responded

As we commence the sojourn into the final quarter of 2019, we muse on what has been an eventful third quarter in Nigeria’s fixed income market.

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CBN, GTBank, CBN disagrees with IMF, says land border closure boosting local production, Border closure: Emefiele says Benin, others must engage Nigeria before borders are reopened , bvn 2.0, CBN reveals banks’ foreign assets rise to N14.19 trillion in 2019

As we commence the sojourn into the final quarter of 2019, we muse on what has
been an eventful third quarter in Nigeria’s fixed income market. The narrative
surrounding the market has been slightly altered in the past couple of months by
emerging headwinds, the most notable being the ongoing battle with Process and
Industrial Developments Ltd. (P&ID), which has impacted investor sentiment in the
fixed income space and poses a dilemma for key policy decision-makers in the
country.

In the months leading up to August, yields in the fixed income space had been
trending downwards, while investor participation at primary market auctions
remained strong.

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In addition, the money market was awash with rising liquidity levels as the CBN reduced the frequency of contractionary OMO auctions, a stance which reinforced the dovish posture of the CBN Governor during his re-election speech.

[READ ALSO: A guide to how Mutual Funds work in Nigeria]

However, in mid-August, a UK Court passed a ruling in favour of P&ID and awarded
a penalty of USD9.6 billion against Nigeria over the country’s failure to live up to its
contractual obligations with the company. This judgment was significant
considering its expected effect on the country’s foreign reserves and the risk of
seizure of its international assets should it fail to pay the penalty.

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Furthermore, the timing of the judgment was ill-fated, as it coincided with the escalation of the U.S-China Trade tensions in August, which kept oil prices below the USD60pb budget
benchmark – a level which negatively impacts Government revenue and threatens
accretion to its foreign reserves. Thus, Nigeria had to contend with a double
whammy of depressed oil prices and a penalty which is equivalent to c.22% of her
foreign reserves.

In response, there was a downturn in the mood in the fixed income space due to
the heightened risk factors, as yields on securities in the market crept upwards.
Between July 31st and September 30th, the average yield in the secondary market
for Treasury bonds rose by 0.92% and settled at 14.11%, having peaked at 14.48%
on the 22nd of August. The same trend was observed in the secondary market for
Treasury bills where the average yield advanced by 2.52%, from 10.93% to 13.45%
over the same period, also reaching a peak of 15.28% on the same date.

Investors started pricing-in the increased risk associated with the country due to the aforementioned factors, despite the downward trend observed in inflation. Meanwhile, investor participation at Primary Market Auctions began to wane, observed in the under-subscription levels recorded in the August Bond auction, while primary market T-bills auctions in August witnessed lower bid-cover ratios. Consequently, we started witnessing declining system liquidity levels as the CBN intensified liquidity mop-ups at higher rates in order to stem capital outflows.

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Nevertheless, Nigeria has received some comforting news in recent times which have allayed concerns regarding the country’s risk profile. First, progress has been made towards overturning the initial court judgment against Nigeria, as the country has been granted permission to appeal the USD9 billion penalty in court.

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[READ MORE: CBN increases LDR to 65%, sets December deadline]

Secondly, oil prices have recovered, staying above the USD60pd benchmark for the
most part of September. Nevertheless, yields across the fixed income markets are
expected to remain slightly elevated for the rest of the year to keep yields sufficiently attractive for investors and to account for other lingering risk factors such as a delayed conclusion of the P&ID case and an unstable oil price environment.

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Business News

Global oil market to re-balance in 2 months’ time

In the meantime, OPEC+ wants to keep the existing production output cuts beyond the June expiry date as part of efforts to rebalance the market. Countries like Saudi Arabia, the United Arab Emirates (UAE) and Iraq, have all reaffirmed their commitment to this effect.

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Crude oil prices, bonny light

With the uncertainty that still prevails in the global oil market due to the prevailing coronavirus pandemic, analysts have been coming up with different forecasts on the future of the market. The latest forecast is that the market will most likely recover by July 2020.

Crude oil prices and oil demand plunged over the past few months as a result of the pandemic. However, with the lifting of global lockdowns and gradual reopening of global economies, oil prices are expected to rebound. Russia’s energy minister, Alexander Novak, said the global oil supply and the oil demand will most likely rebalance by July.

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In the meantime, OPEC+ wants to keep the existing production output cuts beyond the June expiry date as part of efforts to rebalance the market. Countries like Saudi Arabia, the United Arab Emirates (UAE) and Iraq, have all reaffirmed their commitment to this effect.

In his analysis earlier today, OPEC’s Secretary-General, Mohammed Barkindo, urged OPEC+ members not to flout the output cut. According to him, OPEC+ members must remain committed to production cuts despite signs that oil demand is beginning to recover.

(READ MORE: Oil price gains likely to halt over demand uncertainty, as US-China tension intensifies)

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Global oil market to rebalance in 2 months’ time

On its part, Russia had agreed to cut down its oil production to 8.5 million barrels of crude per day in May and June, down from 10.5 million barrels.  There is a possibility that the country could extend the current level of output cut beyond June, a situation that is expected to serve as a major boost in the rebalancing of the oil market.

Last week, the International Energy Agency (IEA) said that it had seen signs that the oil market would rebalance quicker than originally expected after the United States and OPEC implemented the agreed output cut. The development came as a big relief to Nigeria because the rebound of oil prices and the rebalancing forecast will help reduce the country’s fiscal pressure and boost its revenue.

Note that the Brent crude and Bonny light crude sold for about $36 per barrel and over $33 per barrel respectively. These are above the revised budget oil benchmark of $25 per barrel for the 2020 budget.

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Business

LIRS further extends deadline for filing annual tax returns by one month

“We constantly debated what other measures could be taken as an organization to support individuals and businesses at this time, hence, the additional one-month extension from June 1, to June 30, 2020.” – Ayodele Subair

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LIRS further extends deadline for filing annual return by one month

The Lagos State Internal Revenue Service (LIRS) has again extended the deadline for filing of Annual Tax Returns from May 31 2020 to June 30, 2020.

This is part of the state government’s effort to provide relief to taxpayers in light of the economic impact of the Covid-19 pandemic. With this development, annual returns for individuals, both employees and self-employed persons, can be filed anytime before June 30, 2020.

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In a press release signed by Monsurat Amasa, the head of LIRS’ Corporate Communications Department, the agency urged taxpayers to take advantage of the magnanimity of the government and file their returns. The LIRS’ Executive Chairman, Mr. Ayodele Subair, explained the extension thus:

“As the Lagos State Government keeps abreast of global best practices in containing the Covid-19 pandemic and eases the effects of an economic downturn on taxpayers and residents of the State, LIRS had initially extended the deadline for filing annual tax returns for two months, from the statutory March 31st of every fiscal year to May 31, 2020.  

“We constantly debated what other measures could be taken as an organization to support individuals and businesses at this time, hence, the additional one-month extension from June 1, to June 30, 2020.”

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(READ MORE: COVID-19: Lagos issues new guidelines, considers full reopening of economy)

He further explained that taxpayers can file the annual returns from the comfort of their homes and offices using the LIRS eTax platforms. They can also generate assessment and payment schedule, and other tax administration matters on the same platform. Updates on business operations and alternative payment platforms are to be found on the verified handles, and the LIRS website.

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Business News

UPDATED: Nigeria received $5.85 billion capital inflows in Q1 2020 –NBS

Nigeria received $5.85 billion capital importation (inflows) in the first quarter (Q1) of 2020, compared to $8.51 billion in Q1 2019.

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capital, Foreign Reserves Rise by $295m in One month

Nigeria received $5.85 billion capital importation (inflows) in the first quarter (Q1) of 2020, as against $8.51 billion in Q1 2019. This is according to the latest capital importation report released by the National Bureau of Statistics (NBS).

According to the NBS, the $5.85 billion worth of capital importation in Q1 2020 represents an increase of 53.97% when compared to how much was received in Q4 2019.

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However, when compared to the corresponding first quarter period of 2019, the figure indicates a 31.19% decline.

READ ALSO: Nestle releases Q1 2020 result, administrative and distribution expenses drive down profits

Capital Inflow by type

In the first quarter of 2020, the largest amount of capital importation was received through portfolio investment, which accounted for 73.61% ($4.31 billion) of the total capital importation.

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Under the portfolio category, investment in money market instruments remains the largest recipient of capital inflows with a total of $3.44 billion, followed by $639.72 million in equity, while investment in bonds stood at $231.22 million.

Foreign Direct Investment (FDI): FDI constituted only 3.66% ($214.25 million) to the total capital inflows. A decline of 16.72% compared to $257.25 million received in Q4 2019 and 13.39% reduction compared to the corresponding quarter of 2019.

READ ALSO: Hike in VAT rate buoys VAT Revenue in Q1 2020

FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.

Other Investments: other investments, which was broken down into four categories contributed 22.73% ($1.33 billion) to the total capital importation in the first quarter of 2020. The inflows through other investments reduced by 19.92% when compared to $1.66 billion received in Q4 2019.

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Investment through trade credits in the first quarter of 2020 was $50,000, Loans ($559.79 million), Currency deposits ($820,000) while other claims scooped the highest share of $769.99 million.

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READ MORE: Full text of President Muhammadu Buhari’s Letter to Nigerians

Capital inflows by Sectors

A further look into the report shows that the banking sector received the largest portion of capital importation as it constituted 51.08% ($2.99 billion) to the total capital inflows, followed by Financing, which received $1.33 billion (22.77%) in Q1 2020.

Shares followed with $817.38 billion (13.96%), Production $273.97 billion (4.68%) while Telecoms received $157.48 billion (2.69%).

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Capital inflows by origin

The United Kingdom remains the biggest source of capital investment in Nigeria. In Q1 2020, investment from the U.K amounted to $2.91 billion, up from $1.19 billion received in Q4 2019 and decline compared to $4.48 billion in Q1 2019.

The top five countries that accounted for the biggest capital inflows in Nigeria within the quarter include U.K ($2.91 billion), South Africa ($692.63 million), UAE ($532.89 million), Netherlands (441.79 million), and U.S ($389.1 million).

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