Africa Emerging Markets

Research
07 May 2020

Nigeria: Lockdown fatigue

Move OW Nigeria Credit; more IFI support to follow
the IMF, but don't expect near-term NGN devaluation

 In response to growing socio-economic pressure the Nigerian government EM, Economic and Policy
eased lockdown measures, starting on Monday May 4th. Relative to the Research
number of confirmed cases, which remain low, possibly due to limited Ayomide O Mejabi AC
testing, the previous lockdown measures were one of the most stringent (44-20) 7134-9399
globally. While the socio-economic pressure to ease measures still exist, the ayomide.mejabi@jpmorgan.com
surge in human traffic this week may prompt a retightening of measures. Emerging Markets Strategy
Mikael Eskenazi AC
 Easing lockdown measures should improve informal economic activity, but (44-20) 7742 9404
curfews and health concerns likely will continue hindering the formal mikael.eskenazi@jpmorgan.com
sector. We still see downside risks to our -2.0%oya growth forecast due to J.P. Morgan Securities plc

possible retightening of measures, or a prolonged period of partial

lockdown.

 We move OW Nigeria in the EMBIGD Model Portfolio with EMBIGD

Nigeria at 935bp as of May 6th 2020. Despite recent spread compression,
Nigeria’s Eurobonds still presents a good retracement trade, given low
external debt due. The main risk to the trade is oil prices remaining at lower
levels for a longer-than-expected period.

 We think recent comments by authorities contemplating further debt

postponement refer to bilateral and multilateral official loans, rather than
Eurobonds.

 Nigeria’s likely 7.5% of GDP fiscal deficit will be funded mostly through a
combination of multilateral and central bank financing, rather than new
Eurobond issuance.

 Support from the IMF, other International Finance Institutions (IFIs) and
official G-20 lenders should help stabilize reserves near-term, and give the
Central Bank of Nigeria (CBN) some breathing room, but FX pressure likely
will persist.

 We expect the foreign exchange market regime to remain broadly

unchanged, as financial support from the IMF does not require FX reform, in
our view. Our USD/NGN forecast at the Investors’ and Exporters’ foreign
exchange (IEFX) window remains 400 by end-June, from 385 currently.

 Once the virus is under control, authorities have an opportunity to

implement structural reforms, but execution risks remain high, in our view.
The central bank has outlined a pro-growth and development post-crisis
response, but uncoordinated and loosely defined government functions will
remain a constraint on Nigeria’s medium-term economic prospects, in our
view.

See page 11 for analyst certification and important disclosures.

www.jpmorganmarkets.com
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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

More tests, easing lockdowns will increase COVID-19 cases

In response to growing socio-economic pressure the Nigerian government eased
lockdown measures, starting on Monday May 4th. In order to slow the COVID-19
outbreak, five weeks ago, authorities imposed stringent lockdown measures on three
of Nigeria's most populated and economically viable states - Lagos, Ogun and the
Federal Capital Territory (which includes Abuja). Most states also independently
imposed varying levels of lockdown measures. Relative to the number of confirmed
cases, those measures were one of the most stringent globally (Figure 1). Although
the number of confirmed cases still appears lower than regional peers, this likely is
due to the limited number of tests administered (Figure 2). Perhaps, still manageable
hospitalization and fatality rates gave authorities some confidence that the health
system could cope with a partial reopening of the economy. However, with massive
increases in human traffic reported this week, there is a risk that authorities tighten
lockdown measures once again (see here). Importantly, as restrictions on passenger
air travel likely remaining in place until testing becomes more available to travelers,
imported cases should be limited to land borders which are more difficult to police.

Figure 1: Stringency of current restrictions vs confirmed casualties Figure 2: COVID-19 tests conducted and casualties
Total confirmed casualties per milllion Number of tests per 100,000 Number of casualties per mil.
600 500 6
ES Deaths/ mil.
500 400 5
IT
4
400 300
3
300 200
2
200 US 100 1
DE RO PL
100 SA 0 0
CZ RU TU HU NG
IS KE
0
40 50 60 70 GH 80 EG 90 ZA 100
Source: Johns Hopkins, Oxford Government response tracker Stringency level (0-100) Source: Worldometers, UN. As of 05/05/2020

Easing lockdown measures should improve informal economic activity, but

curfews and health concerns likely will continue hindering the formal sector.
Although businesses are now allowed to open between 9am and 6pm, an overnight
curfew is enforced. In addition, concerned about increased community transmission,
the Lagos state government has mandated businesses in the formal sector to extend
work from home arrangements where possible, and will allow only 60% of the
workforce to return to offices. Given the continued steep rise of confirmed COVID-
19 cases, business confidence likely will remain low, potentially resulting in delayed
re-opening. Also, a full lockdown has been imposed on Kano state, which is now the
newest epicenter of the virus outbreak. Still, partial re-opening will have some
positive impact on the informal sector (around 50% of GDP), as non-discretionary
consumption of majority of the population is mostly reliant on daily income.

Easing of lockdown measures will somewhat improve economic activity, but the
risk of potential retightening poses downside risks to our -2.0%oya growth
forecast. However, we are not sure re-introducing strict lockdown measures in
response to increased cases is the right strategy. For instance, an increase in cases
may not only be due to easing lockdown measures, but also a result of increased
testing. In any case, reintroducing the strict lockdown measures will prove
challenging as authorities are now aware of the severe socio-economic impact it has
had on society, including increased vandalism and violence. While in our baseline
forecasts we assumed a further one week lockdown period, we think current partial

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

restrictions will be maintained for an extended period, thus remaining a drag on the
economy. Also, while there are downside risks to our baseline oil price forecast of
US$35/bbl, our macro forecasts actually have incorporated the likely slowdown in oil
production to an average 1.7 mbpd, from 2.1 mbpd previously (Table 1).

Table 1: Selected macroeconomic indicators for Nigeria

2014 2015 2016 2017 2018 2019 2020F 2021F
Real GDP (%oya) 6.3 2.7 -1.6 0.8 1.9 2.3 -2.0 1.8
Nominal GDP (NGN tr) 90.1 95.2 102.6 114.9 129.1 145.6 151.3 174.7
Nominal GDP (US$ bn) 568.5 492.4 404.6 375.7 421.7 475.9 378.4 388.3
GDP per capita (US$) 3,222.7 2,726.3 2,180.3 1,971.8 2,032.9 2,368.1 1,873.1 1,903.4

Headline inflation (%oya, avg.) 8.0 9.0 15.7 16.5 12.1 11.4 12.5 14.0
Headline inflation (%oya, eop) 8.0 9.6 18.5 15.4 11.4 11.8 13.4 14.5

Fiscal balance (% of GDP) -1.3 -2.3 -3.8 -5.4 -4.5 -4.8 -7.5 -6.7
Public debt (% of GDP) 17.5 20.3 23.4 25.3 27.8 30.2 36.7 39.2
External debt (US$ bn) 78.3 96.6 116.0 126.4 129.9 141.5
External debt (% of GDP) 19.4 25.7 27.5 26.6 34.3 36.4

C/A balance (US$ bn) 1.3 -15.4 2.7 10.4 5.3 -17.0 -14.5 -11.3
C/A balance (% of GDP) 0.2 -3.1 0.7 2.8 1.3 -3.6 -3.8 -2.9
Gross FX reserves (US$ bn) 36.7 28.3 27.2 39.6 42.8 39.8 28.8 30.0

Monetary Policy rate (%, eop) 13.0 11.0 14.0 14.0 14.0 13.5 13.5 13.5
USD/NGN (Inter-bank, avg.) 158.6 193.3 253.5 365.1 361.8 361.8 390.0 435.0
USD/NGN (Official, eop) 158.6 193.3 253.5 305.8 306.1 306.0 380.0 400.0
USD/NGN (Parallel market, eop) 188.0 262.0 485.0 362.0 361.0 362.0 470.0 450.0
Source: National statistical agencies, IMF, J.P. Morgan forecasts External debt is both public and private, and is based on residency.

Move OW Nigeria in the EMBIGD Model Portfolio on

relatively low FX leverage and ample reserve buffers
We move overweight Nigerian bonds in the EMBIGD model portfolio due to
low external debt coming due, and as it still presents a good retracement trade
despite recent spread compression. In our view, Nigeria got oversold by the market
because of its high reliance on oil, but it should be able to go through medium-term
oil weakness thanks to its relatively large FX liquidity buffers and still low and
largely concessional public sector external debt stock. Despite recent comments by
authorities contemplating postponing some debt repayments, we think those
comments refer to bilateral and multilateral official loans, rather than Eurobonds.
Given relatively small coupon repayments left this year, it is unlikely that authorities
will risk shutting themselves out of markets by embarking on a debt restructuring
process that includes private creditors. We move OW Nigeria in the EMBIGD
Model Portfolio with EMBIGD Nigeria at 935bp by end of business on May 6th
2020. Risks to our view include oil prices remaining at lower levels for a longer-
than-expected period of time.

Given Nigeria's heavy reliance on oil revenues, its bond prices have been
particularly hit by the slump in oil prices since COVID-19 emerged. As Africa’s
largest oil producer, Nigeria’s Eurobonds significantly cheapened as global oil prices
dived over the last few months. In our view, an increased risk premium is
understandable, given increased focus on broader emerging market repayment risk

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

concerns (see EM sovereign repayment risks, April 14), and Nigeria’s reliance on oil
- oil accounts for 45% of fiscal revenue. Also, a relatively high external break-even
oil price (US$62/bbl, see here), and production shut-ins, resulting in current account
deterioration (Table 1), remains concerning. Consequently, it is unsurprising that
Nigeria’s Eurobond spreads are highly correlated to Brent prices (Figure 3). That
being said, the potential for a slow recovery in Brent prices, after some bottoming as
lockdown measures ease globally, and Nigeria's low external debt profile suggest
there's room for continued outperformance, given it has underperformed almost all
the SSA complex lately (Figure 4).

Figure 3: In line with the SSA complex, Nigeria has seen an increase in Figure 4: Nigeria has underperformed most of the SSA complex, apart
its spread correlation to oil prices from Zambia and Angola
6m spread correlation (x-axis) and 6m beta (y-axis) to Brent prices Average bond price change post Covid (x-axis) and average bond price (y-axis)
Correlation 100
-97% -97% -96% -96% -95% -95% -94% -94%
-3
Senegal Kenya 95
Ivory Coast Kenya
Ghana

Average bond price

Ethiopia -13 Cameroon
SSA
Ethiopia 90
Cameroon -23 Senegal
Nigeria
Beta

Ivory Coast
Gabon
-33 Nigeria 85

-43 Ghana
Angola 80
Gabon
-53
Zambia
75
-63 -27% -22% -17% -12% -7%
Average bond price change post-Covid
Source: J.P. Morgan.
Source: J.P. Morgan.

Current valuations seem at odds with Nigeria's relatively low government FX

debt, which is still mainly comprised of concessional loans. Nigeria’s government
FX debt stands at a low 7.3% of GDP, and 60% of it is made of multilateral and
bilateral loans. While Eurobonds now account for around 40% of government foreign
currency (FX) denominated debt, concessional financing from international and
regional development banks, as well as official bilateral financing, constitute the
largest part of Nigeria’s external debt profile (Table 2). While we expect government
external debt to rise medium-term, domestic financing via the central bank likely will
be favored in the near-term (see fiscal section on page 7). Meanwhile, the
postponement of US$165m of bilateral debt provides some space (see EM
Repayment Pause: Every Little Helps, 17 April 2020), as efforts to postpone majority
of US$500m due in multilateral loan repayments are ongoing.

This leaves authorities with a manageable US$580m worth of Eurobond

coupons coming due between May and the end of the year. Crucially, Eurobond
repayments do not peak until 2027 and the current schedule does not include more
than one maturity repayment per year (Figure 5), which looks relatively comfortable
in the context of gross FX reserves forecast at US$30.0bn by end-2021. Against this
backdrop, NGERIA bonds still trade at a significant discount and we see EMBIGD
Nigeria spreads around 900bp, as well as average bond prices around 85 (see
Appendix) as overdone versus the government’s external debt service requirements.

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

Table 2: Nigeria’s external debt stock is primarily made of multilateral Figure 5: Eurobond servicing is set to remain moderate over the coming
and bilateral loans, while short-term servicing is light years
$bn NGERIA upcoming coupons and amortizations, $m
May 20 -
Dec 2019 Full 2019 Full 2020 2500
Dec 20
stock service service Coupons Amortizations
service 2,172
Multilateral debt 12.66 0.33 0.51 0.51
IDA 9.69 0.23 0.34 n.a. 2000 1,876

AfDB 1.36 0.06 0.11 n.a.

Others 1.61 0.04 0.07 n.a.
1500 1,323
Bilateral debt 3.85 0.18 0.28 0.165* 1,289

EXIM China 3.18 0.14 n.a. n.a. 1,098

Others 0.67 0.04 n.a. n.a. 1000

Eurobonds 11.17 0.84 0.84 0.58 672
606 575 575
Global Eurobonds 10.87 0.82 0.82 0.56
500
Diaspora bond 0.30 0.02 0.02 0.02
Total ($) 27.68 1.344 1.631 1.09
Total (% of GDP) 7.3% 0.3% 0.4% 0.3% 0
2021 2022 2023 2024 2025 2026 2027 2028 2029
Source: IMF, J.P. Morgan.
Note: * bilateral servicing is omitted in total May-Dec 20 servicing, following the recent G-20 Source: J.P. Morgan.
initiative, external debt on foreign currency basis.

While government FX debt is low, total external debt which includes non-
resident holding of central bank securities has increased in recent years. A
deliberate effort by the central bank to accumulate FX reserves by increasing
issuance of open market operation (OMO) bills which can be bought by foreigners
has contributed to a 14.3%-pt of GDP increase in external debt since 2016 (Figure 6).
Despite this rise, total external debt stock remains low relative to peers, with the
private sector, particularly banks deleveraging in recent years. With the sharp decline
in oil prices and expected associated drop in oil production, Nigeria’s external debt
service as a share of exports has risen substantially relative to its peers (Figure 6).
However, FX reserve buffers appear sufficient in our view to cover the total external
debt service requirements.

Figure 6: External debt Figure 7: External debt service %-pts of

%-pts
% of GDP % of Exports exports
197.5 of GDP
100 40 50 40
2020F change since 2016 (rhs)
2020F change since 2016 (rhs) 30
80 40
30
20
60 30
20 10
40 20
0
10
20 10 -10
0 0 0 -20
SEN NGA GHA CIV GAB MOZ SEN NGA GHA CIV GAB MOZ
Source: J.P. Morgan, National authorities, IMF, External debt is public and private Source: J.P. Morgan, National authorities, IMF

Nigeria’s gross FX reserves are under pressure, but will be enough to meet total
external debt service requirements, as well as goods and services imports, in our
view. In a worst case scenario, assuming no debt rollover, Nigeria's reserves look
stretched, but it remains sufficient to meet gross external financing needs (Figure 8).

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

However, looking at FX reserves coverage of total short-term external debt, Nigeria's

FX reserves seem more sufficient relative to peers in sub-Saharan Africa (Figure 9).
However, with an estimated US$5.0bn of available reserves being swaps and forward
dollar purchases, net FX reserves may come under increased pressure if those
facilities get unwound. That said, the central bank has shown that it is willing to enter
those swap and forward arrangements even at punitive rates, so we expect a
relatively high rollover rate.

Figure 8: FX reserves on gross financing needs Figure 9: FX reserves on ST external debt

Ratio 9.7 Ratio
4.0 20.0 18.8
3.3
3.1
16.0
3.0
11.7
1.8 12.0
2.0 1.5 1.5
1.2 1.0 8.0
0.9
1.0 3.7 3.1
4.0 2.8 2.6 2.1 1.6
0.0 0.0
SA ZM KE OM NG TN GH EG BH SA OM NG TN BH ZM GH EG
Source: IMF, J.P. Morgan Source: IMF, J.P. Morgan

Support from the IMF, other International Finance Institutions (IFIs) and
official G-20 lenders should help stabilize reserves near-term, and give the CBN
some breathing room, but FX pressure likely will persist. Given Nigeria’s
relatively large external funding requirements (estimated around US$23.7bn, 5.6% of
GDP), we expect authorities to pursue US$3.5bn in further funding from the World
Bank, African Development Bank (AfDB) and African Export-Import Bank
(Afrexim), in addition to US$3.4bn already secured from the IMF (Table 3). We
expect this support to keep FX reserves stable at current levels for a few months (30-
day moving average was at US$33.9bn as at May 4), but downward pressure likely
will persist in 2H if oil prices remain depressed. While we expect the current account
deficit to reach US$14.5 (3.8% of GDP) this year, from 3.6% last year, a worse than
expected economic contraction and continued restriction of air travel could result in a
narrower deficit.

Table 3: External financing needs and sources (2020, $bn)

Oil price scenarios (per bbl)
$35 $25
Base case Alt. case
Total financing requirement -24.2 -30.2
Current account deficit -14.5 -19.0
Amortization -4.7 -4.7
Portfolio outflows -5.0 -6.5

Available financing 16.3 18.1

Net FDI 2.5 2.0
ST debt rollover 2.9 2.2
IMF 3.4 3.4
World Bank, AfDB, Afrexim 3.5 3.5
Others (e.g Swaps) 4.0 7.0

Balance (- = shortfall) -7.9 -12.1

FX reserves (period end) 28.8 24.6
Source: IMF, Various Finance Ministries, J.P. Morgan

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

CBN fiscal financing is preferred to new Eurobond issuance

Nigeria’s likely 7.5% of GDP fiscal deficit will be funded mostly through a
combination of multilateral and central bank financing. In our view, authorities
will look to fund the deficit using a combination of additional borrowing from the
World Bank, regional development banks, the central bank and to a less extent
private sector financing (Table 4). Given current market conditions, plans to issue a
Eurobond this year are postponed in favor of increased domestic issuance. However,
with NGN7.6tr of open market operation (OMO) bills maturing later this year (over
70% owned by locals), and the inability of domestic non-bank investors to re-invest
in OMOs (see here), demand for government securities should remain strong. By
reprioritizing expenditure, authorities will provide up to NGN500bn (0.3% of GDP)
in COVID-19 related stimulus, but the deficit likely will widen by 3.0%-pts of GDP
relative to the original budget, due to a downward revision of the oil price and
production assumption to US$30/bbl and 1.7 mbpd, from US$57/bbl and 2.3 mbpd
respectively. However, authorities are reportedly working on revising the fiscal
deficit only to 5% of GDP, based on an oil price assumption of US$20/bbl (see here).

Table 4: Fiscal needs and sources (% of GDP)

2018 2019 2020F
Total revenue 8.6 7.9 5.0
Oil 4.6 3.7 1.5
Non-oil 4.0 4.2 3.6
Total expenditure 13.1 12.7 12.5
Federal government 6.4 6.8 7.1
Recurrent 5.1 5.4 5.9
Capital 1.3 1.4 1.1
State and local government 5.4 4.9 5.0
Extra budgetary funds 1.3 1.0 0.5

Overall balance -4.5 -4.8 -7.5

Available financing 4.5 4.8 7.1

External 1.4 0.5 1.3
Borrowing 1.6 0.6 1.6
IMF 0.8
WB, AfDB, Afrexim 0.8
Amortization -0.2 -0.1 -0.4
Domestic 3.1 4.3 5.8
Borrowing 3.9 5.3 7.8
Bank financing 2.3 4.6 5.8
CBN 1.5 3.6 5.2
Commercial banks 0.8 1.0 0.7
Nonbank financing 1.6 0.7 2.0
Asset disposal 0.4 0.5 0.1
Amortization -1.2 -1.5 -2.1
Residual 0.0 0.0 -0.4
Source: IMF, Various Finance Ministries, J.P. Morgan

The CBN will remain a key factor in fiscal policy as it directly finances the
government, but also as it indirectly keeps domestic rates low due to changes in
regulation and ad-hoc liquidity sterilizing operations. In a bid to spur domestic
credit growth and investment, we expect the central bank to continue restricting
access of domestic non-bank investors to OMO bills. This restriction has led to the
decline of Treasury bill yields to 2 - 3% from around 12% in 4Q19. Also, we expect
the CBN to maintain the use of ad-hoc stabilizing operations, either via special
OMOs issued below market rates or non-remunerable cash reserve requirements
(CRR) applied above the regulatory 27.5%. In fact, in late April, in an unscheduled
application of the CRR, the central bank debited as much as NGN1.4tr (US$3.7bn)
from commercial banks in order to limit FX pressure. These CRR debits may be a

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

way of financing the government without allowing domestic yields rise, especially as
the CBN remains committed to boosting credit and economic growth.

Will the naira be set afloat? We think not

We expect the foreign exchange market regime to remain broadly unchanged,
as financial support from the IMF does not require FX reform, in our view. In
the letter of intent sent to the IMF, authorities pledged to continue the unification and
flexibility of Nigeria's FX mechanism, with the CBN only intervening in order to
smoothen FX fluctuations. However, unlike some reports which interpret this
statement as a shift towards more FX flexibility, we expect the status quo to persist.
Firstly, the CBN has previously maintained that reducing the spread between the
different FX rates constituted a unification of the windows.1 Second, being the major
source of FX liquidity, the CBN has always intervened in various windows on a
somewhat ad-hoc basis. Third, while the IMF letter of intent suggested a willingness
for market-driven FX price discovery, the willing-buyer-willing-seller FX system
means the FX rate cannot actually move freely during periods of limited liquidity.
Finally, emergency financing via the IMF's Rapid Financing Instrument (RFI) does
not require reform implementation, which potentially contributed to Nigeria's
decision to get financing from the IMF for the first time.

We still expect USD/NGN at the Investors’ and Exporters’ foreign exchange

(IEFX) window to rise marginally to 400 from 385, by end-June. However, given
the current oil price environment, the risk of a larger FX adjustment in 2H is high.
That said, we still expect the onshore naira exchange rate, relative to the US dollar to
remain below the offshore non-deliverable forwards (Figure 10). However, assuming
the central bank continues to exclude Bureau de Change (BDCs) from FX
interventions for as long as air travel restrictions are in place (the CBN sold around
US$13.0bn to BDCs last year), then we expect the exchange rate in the parallel
market to remain under pressure, potentially rising to around 470, from 430
currently. Also, after moving the budget FX rate higher by 17.6% to 360, we expect
authorities to move it higher once again, perhaps to around 380, in order to help
balance the fiscal accounts, given the sharp decline in oil and non-oil revenues. For a
detailed discussion of FX and local market developments, see Nigeria’s section in
April’s EMEA EM Frontier Local Market Compass.

Figure 10: Onshore and offshore USD/NGN rates

USD/NGN
520 515.5
NDF curve (mid)
468.5
480 JPM forecast

440 425.5
410 420
400 400
400 386.95

360
Spot 1m 2m 3m 6m 9m 12m
Source: J.P. Morgan, Bloomberg, NDF curve is indicative mid-levels as of 6-May-20

1
See Nigeria: Crude need for FX deval, March 10 for a breakdown of the different FX windows

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 Ayomide O Mejabi Africa Emerging Markets Research
(44-20) 7134-9399 Nigeria: Lockdown fatigue
ayomide.mejabi@jpmorgan.com 07 May 2020
Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

Reform plans are plentiful, it’s execution that’s lacking

Once the virus is under control, authorities have an opportunity to implement
structural reforms, but execution risks remain high, in our view. It is
encouraging that policymakers such as the central bank have begun planning for life
post-COVID-19, but like previous reform plans, execution likely will be lacking. In
his paper outlining the central banks vision for Nigeria post COVID-19, Governor
Emefiele itemized the central banks short- and medium-term policy priorities:

 Immediate response during strict lockdown phase (0 – 3 months): The CBN

will look to ensure financial system stability by granting regulatory forbearance
to banks. The central bank will also provide up to NGN1.0tr (0.7% of GDP) in
loans to boost local manufacturing and production across critical sectors. It has
also directed all oil companies to sell FX to the central bank rather than the
Nigerian National Petroleum Corporation (NNPC), in a bid to improve FX
market liquidity.
 Response during partial lockdown phase (0 – 12 months): The CBN plans to
continue prioritizing FX for importation of machinery and critical raw materials
needed to drive domestic production and import substitution. Also, the CBN
plans on embarking on a project to get banks and private equity firms to finance
homegrown and sustainable healthcare services that will help to reverse medical
tourism outflows from Nigeria.
 Response once some normalcy is restored (0 – 3 years): Enable faster recovery
of the economy by targeted measures towards particular sectors (light
manufacturing, affordable housing, renewable energy, and cutting-edge research),
that are able to support mass employment and wealth creation. Support the
financing of environmentally friendly energy production. The CBN also plans to
support innovation and research in every sector, through funding universities,
research institutions, as well as the creative industry.

Uncoordinated and loosely defined government roles and functions will remain
a constraint on Nigeria’s medium-term economic prospects, in our view. Going
by the CBN Governor's post-COVID-19 reform priorities, it is clear that going
forward, the central bank remains focused on boosting economic growth and
development. However, in our view, the CBN is still focused on too many objectives
which also include maintaining FX stability, limiting FX reserve drawdowns, and
ensuring consumer price stability. Perhaps a better strategy would be designing a
comprehensive multi-government reform strategy like the Economic Recovery and
Growth Program (ERGP), where roles are clearly defined. Structural reform should
be focused on improving the oil and gas sector, by fully approving the Petroleum
Industry Bill (PIB), complete removal of fuel subsidies, allowing a market driven FX
regime and improving tax collection through strengthening the social contract
between authorities and tax payers. That said, like most reform programs in Nigeria,
significant execution risks still exist.

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Mikael Eskenazi
(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

Appendix
Table 5: NGERIA bonds still trade at a significant discount
Bond prices and z-spreads
Mid Price Z-spreads
Bond Ccy Size ($mn) First 1y History 6-May-20 Low 1y Range High Current vs low First 1y History 6-May-20 Tight 1y History Wide
NGERIA 6.75 21 USD 500 103.438 97.553 92.563 104.875 4.991 222 997 89 1,572
NGERIA 5.625 22 USD 300 101.250 90.112 85.594 105.250 4.518 288 1,062 185 1,291
NGERIA 6.375 23 USD 500 103.237 90.262 78.641 109.672 11.621 321 969 193 1,432
NGERIA 7.625 25 USD 1,118 107.375 88.622 70.406 114.188 18.216 391 993 327 1,493
NGERIA 6.5 27 USD 1,500 98.938 81.688 65.766 105.391 15.922 428 946 392 1,310
NGERIA 7.143 30 USD 1,250 100.125 81.657 65.313 105.734 16.345 468 951 450 1,271
NGERIA 8.747 31 USD 1,000 110.250 86.200 65.750 115.531 20.450 495 1,033 481 1,469
NGERIA 7.875 32 USD 1,500 103.875 82.061 60.203 108.344 21.858 490 990 481 1,425
NGERIA 7.696 38 USD 1,250 99.006 79.424 60.719 105.625 18.705 527 949 503 1,265
NGERIA 7.625 47 USD 1,500 96.125 79.625 59.766 103.844 19.859 542 900 515 1,208
NGERIA 9.248 49 USD 750 108.938 88.323 63.625 117.484 24.698 588 979 559 1,374
Source: J.P. Morgan.

Table 6: NGERIA total servicing schedule

NGERIA upcoming coupons and amortizations, $m
Amt. May- Jun- Jul- Aug- Sep- Oct- Nov- Dec-
# ISIN Description Ccy 2021 2022 2023 2024 2025 2026 2027 2028 2029
Out. 20 2020 2020 20 2020 2020 2020 2020
1 XS0584435142 NGERIA 6.75 21 USD 500 - - 17 - - - - - 517 - - - - - - - -
2 US65412AEK43 NGERIA 5.625 22 USD 300 - 8 - - - - - 8 17 308 - - - - - - -
3 XS0944707222 NGERIA 6.375 23 USD 500 - - 16 - - - - - 32 32 532 - - - - - -
4 XS1910826996 NGERIA 7.625 25 USD 1,118 43 - - - - - 43 - 85 85 85 85 1204 - - - -
5 XS1717011982 NGERIA 6.5 27 USD 1,500 49 - - - - - 49 - 98 98 98 98 98 98 1598 - -
6 XS1777972511 NGERIA 7.143 30 USD 1,250 - - - 45 - - - - 89 89 89 45 89 89 89 89 89
7 XS1910827887 NGERIA 8.747 31 USD 1,000 - - 44 - - - - - 87 87 87 87 87 87 87 87 87
8 XS1566179039 NGERIA 7.875 32 USD 1,500 - - - 59 - - - - 118 118 118 59 118 118 118 118 118
9 XS1777972941 NGERIA 7.696 38 USD 1,250 - - - 48 - - - - 96 96 96 48 96 96 96 96 96
10 XS1717013095 NGERIA 7.625 47 USD 1,500 57 - - - - - 57 - 114 114 114 114 114 114 114 114 114
11 XS1910828182 NGERIA 9.248 49 USD 750 - - 35 - - - - - 69 69 69 69 69 69 69 69 69
Total
149 8 111 152 - - 149 8 1,323 1,098 1,289 606 1,876 672 2,172 575 575
service
Source: J.P. Morgan.

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Disclosures

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Nigeria - J.P. Morgan Sovereign Research Opinion History
Date Rating
07 Jan 19 Overweight
25 Mar 19 Marketweight

The table(s) above show the recommendation changes made by J.P. Morgan Sovereign Research Analysts in the instruments listed over the past three years (or, if no
recommendation changes were made during that period, the most recent change). Please see the Explanation of Sovereign Research Ratings below for the definitions.

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Ratings System: J.P. Morgan uses the following issuer portfolio weightings for Emerging Markets sovereign credit strategy: Overweight
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eligible bonds at the same level for the issuer. When we change the issuer-level rating, we are changing the rating for all of the issues
covered, unless otherwise specified. Ratings for quasi-sovereign issuers in the EMBIG may differ from the ratings provided in EM
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EMBIGD index over the next three months. Our view of an issuer’s fundamentals includes our opinion of whether the issuer is becoming

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(44-20) 7742 9404
mikael.eskenazi@jpmorgan.com

more or less able to service its debt obligations when they become due and payable, as well as whether its willingness to service debt
obligations is increasing or decreasing.

J.P. Morgan Sovereign Research Ratings Distribution, as of April 4, 2020

Overweight Marketweight Underweight

Global Sovereign Research Universe 13% 71% 16%
IB clients* 71% 46% 67%

*Percentage of subject issuers within each of the "buy, "hold" and "sell" categories for which J.P. Morgan has provided investment banking services within the previous 12
months. Please note that the percentages might not add to 100% because of rounding.
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