Monthly Economic News and Views
at
Lagos Business School
Executive Breakfast Meeting
February 2010
Presented by B.J. Rewane
Financial Derivatives Company Limited
Outline
• Political Update
• Policy Update
• Business Activity review
• Leading Economic Indicators
• Stock Market Analysis
• Outlook
Theme: Perils of uncertainty
haunts the Nigerian Economy
Uncertainty haunts Nigeria
• Olivier Blanchard said crises feeds uncertainty and uncertainty affects behaviour
• Frank Knight, the 20th century economist of the Chicago school said:
– “When subjective uncertainty is higher than objective uncertainty - The economic environment becomes so complex resulting in outright economic paralysis and extreme prudence”
Uncertainty haunts Nigeria
• Markets remain in the tank and investors refuse to commit themselves
• The prolonged absence of the President and the unknown status of his health is heightening speculation
• The bungling of the message and the sloppy handling of the communication is contributing to the drifting image
Risk of Polarization
• There is a risk of polarization in the policy making and political class along the centrifugal lines if the drift continues
• The fear that an involuntary transfer of political
power to the Vice President could be disorderly
in consequence is now prevalent
• The unexpected announcement by MEND, calling
of the ceasefire in the Niger Delta, reinforces the
above concern
• The scepter of a sharp drop in production to the
record lows of 2009 is now haunting the country
• This is the last thing that is needed as most
nations are struggling to recover from the global
recession in 2010
Oil production could be hit
Economic performance resilient
• The official figures released by the NBS and
reiterated by the MPC continues to show an
economy with underlying strength
• In Q4, real GDP is now estimated to have reached
a surprising high of 8.23%
• According to Governor Sanusi, the performance
was largely driven by agriculture, wholesale and
retail trade as well as oil & gas contribution
Economy remains strong
• There is a wide discrepancy between these figures and the consensus of analysts and the proxy data available
• The CBN governor is quoted as expecting double digit growth in 2010
• Based on expectations on improvement in electricity supply and an increase in oil production arising from an extended period of peace in the Niger Delta
Economy remains strong
• Both of these assumptions seem to be tenuous in light of the current political scenario
• Another phenomenon of the Nigerian economic growth story is the low correlation of growth to employment
• Thus, even before the recession this low correlation had increased the probability of a jobless recovery
Economy remains strong
• It also reinforces the view of weak sector linkages in the economy
• And underscores the fear that the proposed fiscal stimulus will have very limited impact on an increase in output employment and investment
Fitch Reaffirms Rating
• Fitch rating agency released a special report in January tagged - A Mixed Bag
• It noted that higher oil production and prices should improve the public finance of Nigeria and its external position in 2010
• It also expects the current banking reform to help restore confidence to the banking system
• However, it is concerned about the impact of the President’s prolonged absence from the country
Identifies Political Vulnerability
• It fears that there will be very little progress on reforms and infrastructure
• It believes there is a potential for rating downgrade in view of oil price and production volatility
• It retained its BB- foreign currency long term issuer default rating
• The IMF team are in Abuja and Lagos to conclude the article IV consultation with the economic management team
Nigeria Economy:
Set for recovery in 2010?
• In 2010, oil production will continue to make positive contribution to growth if current levels are sustained
• Production is now estimated to stay slightly above the 2.1mbpd
• Higher oil prices expected to average above $75pb, 50% above the $50 budget estimate
Nigeria Economy:
Set for recovery in 2010?
• Gas production will expand marginally owing to coming on stream of the GTL project in Escravos, WAGP and gas flaring reduction projects
• Public finance and fiscal deficit though set to burgeon will be moderated by strong oil & gas revenue
• Budget deficit of 4% GDP is expected - this is exceptionally high in the context of recent Nigerian economic experience
Nigeria Economy:
Set for recovery in 2010?
• Increased govt. spending at the State & Federal Level as election promises get fulfilled
• External position to remain in balance due to stronger than expected oil revenues
• A slow return to credit creation and expansion will keep forex demand moderate
Economic challenges in 2010
• Oil price volatility presents the main potential downside
• Limited progress on reforms and addressing the infrastructure backlog ahead of elections in April 2011
• Even at $75pb average price revenues in 2010 will still be at 25% below the 2008 levels
• The planned deregulation of fuel prices and higher government spending are likely to keep inflation at double‐digit levels
• The fiscal stimulus required to kick-start the economy is being stalled by a decision making slowdown
• The deregulation of the prices of PMS is also being stalled while refineries are not functioning
• FGN expenditure is expected to rise by 32% in 2010 producing a deficit of 4.9% of GDP
Economic challenges in 2010
Policy Update
Privatizing profits and Nationalizing losses
Bank Regulation (going back to the future)
• The CBN like many other global regulatory bodies is intensifying the regulatory regime of the banking system
• Mainly in response to the findings of the stress test and the global trend - it is rewriting some rules
• The US recently proposed to segregate the provision of retail banking and Investment banking
• Essentially restoring the Glass Steagall act and consigning the concept of universal banking to the trash can
• It also seeks to ensure that depositors funds can no longer be used for proprietary trading
• The CBN has limited the tenure of Managing Directors of banks to 2 terms of 5 years each
• Usually the prerogative of shareholders, this is an unorthodox move taken to ensure proper corporate governance
Bank Regulation (going back to the future)
• The question remains – can governance abuse and substantial malpractice still not be accomplished in 6 months
• Thus, to expect that limitation of tenure will reduce governance abuse is a misplaced assumption
• There is no substitute for a robust banking supervision process to protect depositors and shareholders
Bank Regulation (going back to the future)
Aligning of Stakeholders Interest
Stakeholders Objective
Executives Higher Salaries & bonuses
Shareholders Larger Dividends
Regulators High Capital Levels
Borrowers More Lending
Government Tax on the Biggest Banks
Source: Business Week
Policy Update
• The MPC in its first meeting of the year acknowledged improvement in the economy
• It says that real GDP growth of 8.23% was recorded in Q4 of 2009, up from 7.07% in the previous quarter
• Left the MPR unchanged at 6% but observed that mounting inflationary pressure are downside risks to macroeconomic stability
• Expressed serious concern about the contraction in monetary aggregates
Policy Update
• The annualized growth rate of private sector credit was 26.10% - below the indicative benchmark of 45%
• Says the sub optimal monetary growth indicates the need for the continuation of an accommodative monetary policy stance
• MPC extended the guarantee on all interbank transactions up till 31 December 2010
Business Activity & Market
Review
Why everyone is owing everybody and no one can pay
Business Activity Review
• There was a lull in business activities in January after a moderate boost in December
• Political uncertainty caused by the President’s absence is taking a toll on the economy
• Foreign and local Investors are delaying investment decisions amidst political impasse
• Credit freeze, fuel scarcity and banks’ massive lay-offs also had adverse effects on business activity
Business Activity Review
• Value of cheques cleared in Lagos declined to N1.03trn in January from N1.27trn in December
• This could be partly attributed to the effect of the new CBN policy limiting cheque payment to N10m
• Monthly FAAC allocation disbursed in January declined by 2.4% to N370.3bn from N379.4bn in the previous month
Business Activity Review
• Forex sold by the CBN at the WDAS auction in January surged to $1.7bn, up from $837m in December
• Baker Hughes rig count was flat at 8 in December, but onshore rig increased to 4 from 3 in November
• Calm in Niger-Delta has continued to boost on-shore rig count
Oil Rig Count
0
1
2
3
4
5
6
Dec Nov
Un
its
Off-shore Land
Source: Bakers Hughes
Business Activity Review
• NCC recently reviewed downward interconnection rates for new telecom companies
• Call termination rates for new operators is down to N8.20 from N10.12
• The policy will protect infant operators in the industry and increase their ARPU
• This will likely translate to reduced tariffs for subscribers on their networks
Business Activity Review
• The Telecoms regulatory body has set March 31, 2010 for the commencement of SIM card registration
• It plans to out-source the registration of the SIMs
• Operators have kicked against the stringent requirements for registering SIMs
– Says it will crowd-out some subscribers and reduce their ARPU
Aviation
Aviation Update
• The aviation sector continues to suffer from the squeeze of higher oil prices and a slide in spend rate by passengers
• Recessionary pressures are forcing consumers to make hard choices
• Many are sacrificing premium class seats for economy fares
Aviation Update
• B/A has offered discount fares on the business class from Lagos for the first time
• The new return fare from Lagos to European destinations is now $2958.00 or N449,616
• The Farouk Abdulmutallab saga is having little impact on the traffic between Lagos and Atlanta on Delta airlines
Aviation Update
• Load factors remain very strong for this time of year
• The Lagos – New York traffic on Arik and Abuja –New York loads on Delta are very low
• Houston and Atlanta remain the favourite destination of passengers from Nigeria into the United States
Aviation Update
• NCAA has instructed all foreign airlines to stop selling tickets directly to the public from Feb. 1, 2010
• Tickets can only be bought from travel agents except at the airport
• Coming shortly after the kick-off of the billing and settlement plan, this guideline will boost the fortunes of the travel agents
Aviation Update
• However, it runs contrary to some clauses in the bilateral air service agreements
• Advertising revenue has dropped sharply at the MMA2
• The banks have slashed billboard and finger display ads
• This is one of the side effects of the financial & banking crisis and adjustment
Leading Economic Indicators
Oil Markets &
Production
Oil Price & Production
• Crude oil prices fell by 8% to a one-month low of $71bp
• Decline in crude can be attributed to:– tighter credit policy in China
– a stronger dollar
– concerns over a U.S. proposal to tighten bank trading rules
– expectations that U.S. refiners processed less crude
• Year to date, oil prices averaged $78.9pb
Oil Price & Production
• Oil prices have broken below the 100-day moving average of $75.25, a key indicator of market sentiment
• Prices have fallen by almost $10 a barrel over the last two weeks since hitting a 15-month peak of $83.95 on Jan. 11
• Nigeria’s crude oil output increased to 1.98mbpd in December up from 1.94mbpd in November due to peace in Niger Delta
Oil Price Trend
0
10
20
30
40
50
60
70
80
90
Jan-09Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecJan-10
$p
b
Source: Reuters/Bloomberg
• Oil price has maintained a steady upward trend
Oyo Oilfield Starts Up
• Allied energy and Eni have started production from the Oyo oil field in the Niger Delta deep offshore
• The field will initially produce 25,000bpd from two subsea wells with a water depth of 400m
• The associated gas will be re-injected into Oyo field reservoir by a third well to prevent flaring and to maximize oil recovery
Shell sells stake in 3 Nigerian
oil licenses
• Shell had agreed to sell its stake in 3 onshore oil licenses in Nigeria to a consortium consisting of two local firms and France's Maurel & Prom
• The sale is for OML - 4, 38, 41 located in the northwestern part of the Niger Delta
• It includes 30 wells with a production capacity of around 50,000bpd
Attack on Oil Infrastructure
Resumes
• Hostility in the Niger Delta is returning after 3 months of relative peace
• MEND has called off a three-month-old ceasefire
• Shell has shut down three oil flow stations in Nigeria's Niger Delta after a key crude oil pipeline was sabotaged
• MEND recently launched a fresh attack which has forced Chevron to cut its production by 20,000 b/d
Outlook
• Oil price rally to ease in the short term
– Decline in oil demand as winter abates
– Strengthening of the US dollar
• It is expected to trade between $70pb and $75pb in February
• According to Reuters poll of 29 market analysts, U.S. crude oil is expected to rise to an average of $77.50 a barrel in 2010
Outlook
• Nigeria’s crude-oil output will increase to 2mbpd
in January
• OPEC will likely increase quota of member
countries when it meets on March 17, in Vienna
Inflation
Inflation
• Inflation rate decelerated to 12% in December
from 12.4% in November
• Core inflation component declined to 9.7% from
10.7% in the previous month
• However, food inflation component rose
marginally to 13.6% from 13.5%
Inflation Trend
0
5
10
15
20
25
%
Inflation Core inflation Food inflation
Source: NBS
Outlook
• Inflation is expected to rise in near term due to:
– Deregulation of petroleum products’ prices
– Expansionary fiscal policy
– CBN accommodative monetary policy
– Possible capital inflows to recapitalize the banks
• Headline inflation is expected to rise to 12.5-13% in February
Money Market &
Interest Rates
Money Supply & Interest Rates
• Increased liquidity in the money market in January
• NIBOR rates were unchanged at 2.14% in January due to:– Cash inflows from budgetary allocations of
N370bn
– Repayment of matured treasury bills
– Banks’ freeze on credit to the real sector
• OBB closed flat at 2.25%
• Overnight and call were also unchanged at 2.50%
Money Supply & Interest Rates
• Lending rates remain high due to banks’ freeze on credit to the real sector
• Banks now focus more on debt recovery and pay little attention to lending to the real sector
• Yields on government securities are coming off
• 91 and 182 days Treasury bill declined to 3.19% and 4.7% respectively
Money Supply & Interest Rates
• DMO sold N93.5bn ($631.6 million) worth of sovereign bonds
– N30bn of the 20-year paper
– N25bn of the 10-year instrument and
– N38.50bn of the 3-year bond
• The bonds, which were re-openings of previously issued paper, attracted marginal rates of 8.5% for the 20-year, 8.14% for the 10-year and 6.83% for the 3-year instrument
Interbank Rate Trend
0
2
4
6
8
10
12
14
16
18
7-days 30-days 60-days 90-days
%
Jan 27th Dec 27th
Source: MMAN
Inflation risks of quantitative
easing
• Money supply growth estimated at 25-30%
• M2 growth – GDP growth = Inflation gap
25% - 5% = 20% Inflation gap
• FG injected N620bn into failing banks last year
• Representing approx 6.9% of total money supply
• The impact of Q.E is expected to be felt from Q1
• The fall in headline inflation in Dec. 2009 only attests to the lag in effects of policy
• Nigeria’s high propensity to import makes her prone to imported inflation
• Q.E = ↑M2 = ↑ INFe = ↑ Price levels
• Impact of INFe on Interest Rates
RR + INFe = NR {Fisher’s interest rate equation}
Q.E = ↑M2 = ↑ INFe = ↑NR
Import dependent economy
• Impact of expected inflation on Bond Market
– Q.E = ↑M2 = ↑ INFe = ↑ Price levels = ↓Asset prices = ↑Yield
– Price of bonds are expected to dip in the coming months as risks are repriced
– Increasing sovereign debt and future/expected inflation will make bond more risky
Increase in Price Level
• Impact of INFe on Exchange Rate Market– Q.E will lead to more money supply and increase
in price level
– Hence, there is likely to be a case of more money chasing fewer goods
– And a case of more Naira chasing fewer dollars
– Leading to a possible depreciation of the Naira
– But CBN could supply more dollars to mop-up liquidity but at the cost of building the nation’s foreign reserve
Bond prices will fall
Forex Market
Exchange Rate
• Naira depreciated marginally in the official
market by 0.4% to N148.6/$ in January from
N148.1/$ in the previous month
• In the parallel market it appreciated by 0.9% to
N152.5/$ from N154/$
• Forex demand surged in January to $1.12bn
partly due to closure of WDAS market for Xmas
Exchange Rate
• The CBN met about 69% of forex demand
• The gain in parallel market has been attributed to increase in forex supply from the CBN and oil majors in January
• International oil majors sold about $600 million in their monthly forex sale, thus relieving pressure in the parallel market
• The spread between official and parallel rates narrowed to 2.6% from 3.9% in December
Forex Trend
80
100
120
140
160
180
200
Parallel(N/$) Official(N/$)
Source: CBN, FDC
Outlook
• Accumulation of external reserves will continue to boost CBN support of naira
• This will be supported by increased sale of forex by oil majors
• Naira is expected to trade between N148/$ and N151/$ in February
Stock Market Update
Stock market update
• The Nigerian stock market is looking like a bikini
– What it shows is interesting but what it hides is even more exciting
• The market opened 2010 with a bull run, and a YTD gain of 9.79%
• But is this rally sustainable?
– Prices not responding to earnings results
– Stock prices are still being manipulated
– Sources of new investments in the market is uncertain
• Current Market Cap: 5.51trn
• ASI Index: 22,865
• Average volume and value traded in Jan was 402mn and 2.3trn, respectively; average PE ratio of 13.4x
19,500.00
20,000.00
20,500.00
21,000.00
21,500.00
22,000.00
22,500.00
23,000.00
4,700.00
4,800.00
4,900.00
5,000.00
5,100.00
5,200.00
5,300.00
5,400.00
5,500.00
1/4/2010
1/5/2010
1/6/2010
1/7/2010
1/8/2010
1/9/2010
1/10/2010
1/11/2010
1/12/2010
1/13/2010
1/14/2010
1/15/2010
1/16/2010
1/17/2010
1/18/2010
1/19/2010
1/20/2010
1/21/2010
1/22/2010
1/23/2010
1/24/2010
1/25/2010
1/26/2010
1/27/2010
1/28/2010
1/29/2010
ASI-MARKET CAP CHART
Year to date
Market Capitalisation NSE All-Share Index
Source: FDC
Recent Earnings Announcements
• Shows that share prices do not reflect earnings positions
– Costain share price has appreciated since it released a loss
– Conversely, Beco which showed earnings growth of more than 60% saw share price decline afterwards
Company Date of Result
Earnings
Growth
ASI Value as
at release of
earnings
% Chg in ASI
since result
release
Price growth
Pre-results
Price growth
Post result
Price growth
YTD
7 UP 04-Jan 6.63% 20,838.90 8.43 0 4.08% 4.08%
Beco 13-Jan 69.61% 22,252.38 1.54 -4.54% -13.69% -17.79%
Fidson 14-Jan 126.66% 21,944.94 2.96 11.80% 5.03% 17.42%
Unic Insurance 18-Jan 1.94% 22,183.80 1.85 -27.27% -7.50% -32.73%
PZ Cussons 29-Jan 8.78% 22,594.90 0.00 4.00% 0.00% 4.00%
Costain 21-Jan -62.83% 22,114.93 2.17 -2.89% 32.25% 28.42%
Wema Bank 20-Jan 55.82% 22,241.18 1.59 16.13% 4.36% 21.51%
Afromedia 05-Jan -22.29% 20,956.68 7.82 0.00% -20.00% -20.00%
Aiico Insurance 25-Jan 62.92% 22,254.56 1.53 20.25% -1.05% 18.99%
Effect of Change in Bank MDs
on stock price
• Overall effect of the new appointments has been positive
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
18.00
31
-Dec
-09
1-J
an-1
0
2-J
an-1
0
3-J
an-1
0
4-J
an-1
0
5-J
an-1
0
6-J
an-1
0
7-J
an-1
0
8-J
an-1
0
9-J
an-1
0
10
-Jan
-10
11
-Jan
-10
12
-Jan
-10
13
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-10
14
-Jan
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15
-Jan
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16
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17
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18
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19
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27
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28
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29
-Jan
-10
U B A PLC ZENITH BANK PLC
Source: FDC
PFAs still sitting on the sidelines
• Total assets estimated at N1.2trn before diminution
• Portfolio is grossly underweight on equities
– Less than 3% of assets are currently invested in the stock market
Bonds and Tbills, 14.29% Equities, 2.84%
Fixed Deposits & Bankers'
Acceptances, 82.83%
Mutual Funds, 0.04%
Breakdown of PFA Assets in Dec 2009
Bonds and Tbills
Equities
Fixed Deposits & Bankers' Acceptances
Mutual Funds
Source: FDC
Awaiting the AMC – a crisis of false
expectations
• Push-back on AMC law from stockbrokers who believe it may unfairly favor the banking sector
• Regulators stress its necessity– Enhance their capacity to handle the loan assets of the
failed banks presently under liquidation
– The strong influence of the banking sector on the Nigerian stock market
• Ownership structure in dispute– CBN and Federal Ministry of Finance or
– Include regulatory agencies (SEC) and the private sector to increase credibility
Outlook
• Fundamentally, the stock market has the potential to continue the positive trend
• Resolution of key outstanding issues is pertinent
– AMC and distressed banks
– Policy stance of regulators especially the CBN
• Political risks still a deterrent for major institutional and foreign investors who may be considering re-entering the market
Outlook
• Corporate actions to drive market performance
• FCMG, Banking, Building and Construction and Breweries sectors show potential for appreciation
– Strong fundamentals will continue to drive growth in FCMG sector
– Buying opportunities in some undervalued banks e.g. Sterling Bank
Outlook for February
• Political uncertainty will continue in February
• A resolution of the political issues likely or expect some form of conflict
• Anambra state election may erupt
• Stock market volatility will continue but to the upside
• AMC bill will pass into law in March
• The impact of quantitative easing and excess liquidity on price level
– 100-150bps spike in headline inflation expected
• It is better to live rich than to die rich. -
Samuel Johnson
• He who wishes to be rich in a day will be
hanged in a year. - Leonardo-da-vinci
• Nothing is politically right which is morally
wrong. - David O. Connell
• What is moral is what you feel good after and
what is immoral is what you feel bad after. -
Ernest Hemingway
Corporate Humour
• Live and let live is not enough; live and help live is not too much. - Orion E. Madison
• Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity –Martin Luther King
Corporate Humour
Thank you for listening