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NIGERIATHE ROAD AHEAD
October 2009Macroeconomic Update
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Contents
Executive Summary 2
Introduction: The Road To Global Recovery 3There Is Optimism In The Air 3
America And China: Playing A BIG Role 4
Uptrend Promising, But Absolute Recovery May Be Premature 5
Global Commodities Recovering 7
Sustaining Growth Beyond 2010 7
Nigeria: Polity, A Stable Terrain? 8
What Policy Direction? 8
Niger Delta Amnesty Deal: Solution Proffered 8
Power: Not On All Phases 9
Petroleum Products Subsidy: Phasing Out? 10
The Economy: Resilient, But Challenges Abound 11
Dwindling Revenue 11
Expenditure: Closer To Budget... 12
...But Overall Fiscal Position May Deteriorate in H2 2009 12
Output Growth: Strong, Against All Odds 13
Inflation: Upward Pressure Looms 14
Currency: Downside Risk Prevalent 14
External Reserves: Stable Outflows, Slower Inflows 14
The Financial Sector: Questions Asked 17
Banking Sector: Major Shake Up 17
Capital Markets: Equities Out...Bonds In 19
Markets Outlook 20
Money & Currency Markets: Sustained Stability Desired 20
Real Estate: Deleveraging Throws Up Opportunities 21
Stock Market: Uncertainty Lingers, But Value Remains 22
Bond Market: Long Maturities Drive Stellar Performance 23
Disclaimer 24
Contacts 25
Nigeria: The Road Ahead
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The first half of 2009 was challenging and full of uncertainties for the world economy. Nevertheless, the upshot was
mixed and interesting on both the domestic and global scenes. After a depressing Q1 2009 - a carryover from the slump
in the previous year, the global economy saw a deceleration in its rate of decline in Q2. Hopes of recovery appear
brighter across the board, and thus, raise questions as to whether a sustainable recovery is in sight. Economic indicators
showed improvements in production and trade levels, while stock markets rallied on new optimism of a global recovery
Global demand appears to have responded positively to expansionary fiscal and monetary policies, especially stimulus
actions by America and China, leading to a recovery in global commodity prices. Many advanced economies
experienced baseline growth, while others, a slowdown in their rate of decline. Amid this optimism, the IMF still expects
the global economy to contract by 1.4% on an annualised rate in 2009, and anticipates growth by 2.5% in 2010, it
believes the recovery process will be slow, uneven and subject to the particular characteristics of each countrys
economy.
Consensus projections indicate that the effect of the global crisis on emerging and developing countries will be less
severe, and their recovery, faster, given the low level of their integration with the global economy. However, it is
interesting to observe mixed results in the economies of sub-Saharan Africas two largest economies. South Africa and
Nigeria, which together make up about 56% of the regions economic output, tell slightly different stories. While South
Africa, the more-developed of the two economies, experienced a marked decline, Nigeria, against all odds, continues to
report output growth well above the 6% the country has averaged in the last five years. This compelling growth however,
has not been void of noticeable shortcomings.
In 2009, Nigerias revenue continued on its downward trend from previous years, owing mainly to petroleum production
declines caused by militant activities in the Niger Delta region. Total federally collected revenue dropped 44% between
Q2 2008 and Q2 2009 amid the critical need to develop infrastructure. Overall, the economys output continues to
improve as Q2 GDP rose 6.73% compared to 5.56% during the corresponding period of the previous year. The non-oisector was responsible for the significant growth in GDP through the contributions of agriculture, wholesale and retai
trade. Given the negative contributions of the oil sector towards GDP growth, Access Investments & Securities (AIS)
Research expects GDP growth for 2009 to decline to about 4.5%, a less impressive figure relative to the official
projection of 5.3%.
While Nigerias output level continues to appear favourable, harmonising the countrys fiscal and monetary policies
towards shaping a more robust economy becomes the ultimate challenge. The lingering effects of the bold decisions that
has rattled the banking industry, the looming inflationary pressure resulting from the federal governments proposed
removal of the petroleum subsidy, and exchange rate stability in the face of fast depleting external reserves, are issues
that the Central Bank of Nigeria (CBN) has to grapple with. New developments relating to corporate governance and riskmanagement in Nigerias banking system following failures in capital market and downstream oil and gas portfolios, are
charting a new direction for Nigerias financial sector. While we perceive heightened risks in the short term, our outlook
for Nigeria and prospects for investments remain positive.
Executive Summary
Nigeria: The Road Ahead
2 October 2009
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-7.0
-4.5
-2.0
0.5
3.0
5.5
8.0
10.5
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09
%
Unite d States United Kingdom GermanyFrance Japan ChinaIndia
Source: IMF
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
2007 2008 2009 2010 (f)
%
World output Advanced economies
Euro area Emerging economies
Africa Sub-Sahara
There Is Optimism In The Air
After the depressing performance in the fourth quarter (Q4) of 2008 extended into Q1 2009, the
global economy appears to be on the path to a recovery. Although there were improvements inthe world economy in Q2 2009; it remains mired in a recession. Q2 2009 GDP data for many
economies shows that the rate of deterioration has eased, suggesting that recovery is imminent
as we approach 2010. In spite of recent optimism, the stabilization process will be slow and
uneven, with many countries still struggling to combat recessionary forces. The International
Monetary Fund (IMF) is hopeful that there will be an upturn in global activity by about 2.7%
(higher than it had projected in April) by 2010. The monetary authority, however, still expects the
global economy to contract by 1.4% in 2009, in line with its April 2009 projection. The projection
signifies expectations of a v-shaped global recovery buoyed by continued favourable counter-
cyclical measures. However, this brings the following decisive questions to the fore: is the worst
over, and has the recession bottomed out?
Introduction: The Road To Global Recovery
Nigeria: The Road Ahead
3 October 2009
Chart 1: Quarterly GDP Growth of Selected Countries (2008-2009)
The recent signals of a recovery are indicative of the measured success of the expansionary
macroeconomic (fiscal and monetary) policies implemented by various countries governments.
The combination of lower interest rates, easing of credit, state guarantees, and the recapitalization
of banks by various governments, has helped reduce uncertainty, bolstered confidence and
demand in many economies. However, the degree and pace of recovery will be unique for each
country.
The idea of using a fiscal stimulus program to manage an economy through a recession has once
again proven to be popular in combating a severe economic downturn. An attestation to the
success of the Keynesian fiscal stimulus theory was its successful implementation in bringing to
an end the great depression of 1929, the longest and most severe decline the world has ever
seen to date. The recession had lingered then because governments, especially Americas under
President Hoover, failed to adopt the initiative between 1929 and 1932.
Source AIS Research
Chart 2: Annual GDP Growth by Regions (2007-2010)
Q2 2009 GDP data in man
economies show that the
rate of deterioration has
eased and thus suggestiv
of an imminent recovery a
we approach 2010
The combination of lower
interest rates, credit easin
state guarantees, and ba
recapitalization bygovernments, have helpe
reduce uncertainty
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Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09World 3136 3378 3486 3834 3898 4313 4306 3420 2678 2883
North America 427 461 461 491 497 543 538 457 371 380
South & Central America 108 125 132 139 139 167 178 123 97 116
Europe 1360 1419 1419 1597 1655 1795 1661 1350 1134 1185
Asia 914 1001 1076 1140 1102 1223 1298 1079 810 904
Others 325 371 397 467 505 583 630 410 266 299
Memorandum items
European Union (27) 1257 1310 1308 1469 1518 1643 1517 1235 1034 1085
Intra-trade 873 893 879 995 1044 1116 1010 815 703 725
Extra-trade 383 416 429 474 474 527 507 421 331 360
America And China: Playing A BIG Role
China launched a US$585 billion (RMB 4 trillion) stimulus package in November 2008. Funds were channelled to
domestic projects such as infrastructure and mining, amongst other measures including a loosening of the countrys
monetary policy. The ripple effects of these actions bolstered domestic demand and production, as well as the
opportunity for foreign companies (especially American ones) to reduce their exports overhang through renewed
Chinese demand. In its March 2009 quarterly on China, the World Bank had forecast that stimulus spending would
represent 4.9% of the 6.5% GDP growth projections for China in 2009.
Likewise, the US, the worlds largest economy, launched its US$787 billion stimulus package through its American
Recovery and Reinvestment Act of 2009 in February. This legislation provided for federal tax cuts, increased
unemployment benefits and other social welfare provisions, and domestic spending in sectors such as infrastructure
energy, health care, and education. By virtue of the fact that America and China account for about a third of world
output, stimulus actions by both countries are bound to have an overarching impact on the global economy during these
difficult times.
Nigeria: The Road Ahead
4 October 200
Chart 3: Quarterly Exports (2007-2009) Chart 4: Quarterly Imports (2007-2009)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09
US$Billion
World North America United States
Brazil Europe United KingdomGermany Asia Japan
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09
US$Billion
Wo rld North Ameri ca Un ited States
Brazil Europe United Kingdom
Chart 5: Quarterly Exports By Region (2007-2009) in US$ Million
Source: WTOSource: WTO
Source: WTO
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3,000
4,000
5,000
6,000
7,000
8,000
Jan-0
8
Mar-08
May-0
8
Jul-08
Sep-0
8
Nov-0
8
Jan-0
9
Mar-09
May-0
9
Jul-09
600
800
1,000
1,200
1,400
1,600
Jan
-08
Mar-
08
May
-08
Jul-08
Sep
-08
Nov
-08
Jan
-09
Mar-
09
May
-09
J u l 0 9
Uptrend Promising, But Absolute Recovery May Be Premature
Although the expectation is for little or no economic growth in advanced countries
until 2010 according to analysts opinions, many countries have shown promising
signs of recovery. In the following sub-section, we highlight the performances of
selected global powers.
US: Returning Consumer Confidence?
The American economys woes, rooted as they are in two sectors, financial ser-
vices and housing, appear to have begun to abate. House prices and new-home
sales improved slightly in Q2 2009, while significant part of the financial sector
experienced a strong recovery and a return in inter-bank confidence and activities.
Recent data also reflects a slowdown in the rate at which unemployment was ris-
ing. The aid provided to the automobile industry may have contributed to the eas-
ing in the rate at which companies were downsizing, although projections show
that the labour market is still set to experience a continuous rise in unemployment.
The equity markets picked up and further strengthened on optimism of a likely re-
covery, evidenced by the performance of the S&P 500 index, which surpassed the
1,000 mark, and is 56% above the recent low seen in March 2009. Likewise, the
Dow Jones Industrial Average (DJIA) rose by 47% as of September 2009 from the
recent low recorded in March 2009. On the downside, increased savings levels by
consumers and the de-leveraging of balance sheets by businesses and house-
holds alike continue to dampen investments, further corroborating projections of
low output in the near term .
UK: Still In Recession
Q2 2009 figures in Europes third largest economy indicate that the rate of decline
in general activities might be easing, as quarter-on quarter (QoQ) GDP dropped by0.7%, compared to a negative rate of 2.4% in Q1 2009. Improvements in the hous-
ing sector also gave indications of renewed optimism. According to the Organiza-
tion for Economic Corporation and Development (OECD), the UK economy will
shrink by about 4.7% in 2009, and will emerge last from the recession among the
worlds advanced countries. The report considered the UKs financial challenges
as the UK government has expended US$175 billion through the Bank of Eng-
lands quantitative easing programme, an amount considered huge relative to the
size of the UK economy. While the IMF agrees that the UK banking sector is frag-
ile, it however expects the UK to experience gradual but sluggish growth.
Euro Area: Seeing Improvement, But Still WeakThe economic situation in the Euro Zone continued to be a weak one. Macro-
economic policies continue to support the zone but unemployment is still on the
rise. Euro-zone GDP fell by 4.8% in Q2 against a decline of 4.9% in Q1. Germany,
the regions largest economy, saw exports rise in Q2 amid a minimal increase in
productivity. Exports for the Euro-zone fell 17.7% in Q2, compared to a decline of
16.8% in Q1. For most countries in the zone, the banking sector is frail and the
outlook for consumption and productivity is not impressive.
Nigeria: The Road Ahead
5 October 2009
Chart 6: S&P 500 (2008 - 2009)
Chart 7: DAX Xetra (2008 - 2009)
Chart 8: FTSE (2008 - 2009)
Source: Bloomberg
Source: Bloomberg
1,700
2,000
2,300
2,600
2,900
3,200
3,500
Jan
-08
Mar-
08
May
-08
Jul-08
Sep
-08
Nov
-08
Jan
-09
Mar-
09
May
-09
Jul-09
Source: Bloomberg
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3,000
4,000
5,000
6,000
7,000
8,000
9,000
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Japan: Out Of Recession
After the countrys economy contracted by 4% in Q1, Japans economy pulled
itself out of recession by growing by 0.9% in Q2. Signs of an increase in ex-
ternal demand for Japanese products, a gradual depletion of surplus invento-
ries, a new stimulus programme, and a boost in public spending are all likely
indicators of growth for the Japanese economy. The fear of an export over-hang is remote, as global demand appears to have picked up, especially Chi-
nese demand for Japanese products. Contrary to the positive factors high-
lighted above, the Japanese domestic economy still faces the twin challenges
of rising unemployment and lower wages. In addition, the countrys exports
base still requires significant improvements in demand from the West. Expec-
tations are that the Japanese economy will see relative growth in 2010.
China: Bright Spot Amid Recession
Chinas economy positively responded to monetary and fiscal stimulus
programs by the government resulting in China being the best performing
economy globally with GDP performance of 7.9% in Q2 (compared to 6.1% in
Q1). With loose monetary policy as its focus, the Chinese government en-
abled the countrys banking system to make new loans at twice the level re-
corded in the first half of 2008. The success of the worlds third largest econ-
omys stimulus plan has been one of the few bright spots of the global reces-
sion. The credit boost has engendered confidence and strengthened the
economy. The government, however, is trying to adjust its stimulus to forestall
a possible asset bubble as prices in the housing market are rising at an annu-
alised rate of 10%.
Sub-Saharan Africa: The Risks Have RisenThe global crisis has severely affected the sub-Sahara African (SSA) market
in 2009 as weak global demand affected African exports and the credit crunch
weakened remittance flows and tourism. Growth continues to recede as ex-
port volumes and prices decline, and the provision of sustainable fiscal policy
responses proved challenging to policy makers. The two largest economies of
SSA, South Africa and Nigeria, account for 56% of SSAs GDP and are on a
rocky road to survival. South Africa, Africas largest economy, slid into reces-
sion after it contracted by 3% in Q2, on declines in the activities of major sec-
tors including manufacturing, wholesale and retail trades, hospitality, finance,
real estate, and agriculture. The tale is slightly better but not without pain in
Nigeria, where GDP rose by 6.7% during Q2 on the back of strong agriculturalproduction, wholesale and retail trade, but with a negative contribution to
growth from crude oil, the countrys main earner. The statistics office pro-
jected that Nigeria would grow at 5.3% in 2009, a much lower figure than the
governments budgeted growth of 8.9%. However, availability of liquidity, re-
duced external reserves and currency management in the face of key infra-
structure deficits are critical issues facing the country.
Nigeria: The Road Ahead
6 October 2009
Chart 9: Nikkei 225 (2008 2009)
Chart 10: Hang Seng Index (2008 2009)
Chart 11: JSE ASI (2008 2009)
10000
14000
18000
22000
26000
30000
Jan
-08
Mar-
08
May
-08
Jul-08
Sep
-08
Nov
-08
Jan
-09
Mar-
09
May
-09
Jul-09
6600
8100
9600
11100
12600
14100
15600
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
S e p 0 9
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
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Chart 12: Selected Commodities Prices (2008 -2009)
Global Commodities Recover
Commodity prices continue to recover due to the anticipation of a resurgence in global demand.
Crude oil prices have been on the rise since their December and February lows, and now hover
above US$70/bbl. Energy prices continue to be driven by speculation, and by hopes of a global
economic recovery, even as market fundamentals remain weak. In spite of the fact that US oilconsumption is still on the decline, a rally in demand from other countries continues to push
prices up. Other commodities such as agricultural produce and metals (base driven in part by
improving US Home Sales figures, whereas the sharp fall in the Dollar Index-the US dollar
pegged against 6 major currencies, supported the rally in precious metals such as gold. Assets
traded in US dollar terms appreciate in value terms when the dollar weakens, thus, a further
weakening of the dollar will support a strong rally in gold prices.
Nigeria: The Road Ahead
7 October 2009
Other commodities such
as agricultural produce,base and precious metals
have equally recovered
on hopes of economic
recovery
Sustaining Growth Beyond 2010
AIS Research maintains its position that the World economy is set for an upturn in performance.
We believe that the speed of the recovery depends on strong and perceptive policy implementa-
tion. We note that financial system impairments and the rebuilding of savings in countries that
have suffered asset price erosion might slow down the process of recovery. In addition, weak de-
mand from countries with current account deficits such as the US could hamper growth in export
dependent countries.
In conclusion, further fiscal injections through clearly defined and insightful macroeconomic poli-cies remain the catalyst for growth in the mid to near term. Emerging economies account for
about 40% of the world's business (or US$25 trillion a year), thus we expect that China and In-
dia's projected GDP growth of 9.6% and 6.5% in 2010, respectively, would spur demand and ac-
celerate international trade, thereby leading a full-blown global economic recovery in 2010.
We note that financial
system impairments and
rebuilding of savings in
countries that have
suffered asset price ero-
sion might slow down the
process of recovery.
Source: Bloomberg
40
60
80
100
120
140
160
180
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Cocoa Soybeans Crude Oil Copper Coal
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What Policy Direction?
The focus of President YarAduas administration is encapsulated in the 7-point agenda which
calls for a revolution in the supply of power and energy, food security, wealth creation,
transportation, land reforms, security, and education. However, it is unclear if the administra-
tions economic policy would take a market or social orientation, given actions such as the
reversal of the sale of government owned refineries and delay of the governments privatisation
programme. The agenda offers Nigeria a guideline to success but despite its efforts, the gov-
ernment has yet to meet its set target. This delay in implementation, coupled with the current
challenges thrown up by the global economic downturn would appear to be limiting factors in
Nigerias vision of ranking among the top 20 economies by 2020. We think that issues such as
the critical power deficiency and finding a lasting solution to the problems in the Niger Delta
region are of utmost importance and require swift action if Nigeria is to meet its vision 2020
goal.
Niger Delta Amnesty Deal: A Solution Proffered
In June 2009, President YarAdua offered an amnesty deal to militant groups in the Niger Delta
in a bid to bring a lasting solution to the problems in the region. The amnesty is for repentant
militants who unconditionally surrender their arms and ammunition and renounce militancy. The
deal, which elapsed on October 4, 2009, was also extended to all persons under prosecution
for offences associated with militant activities before the cut-off date. In reaction to the amnesty
deal, major militant leaders have since declared their intentions to give up militancy while others
have already surrendered their weapons. Some other militant factions have criticised the deal
stating that there has not been an international component to it. They believe that involving the
international community might prevent the government from reneging on its commitment to the
deal. Critics say the plan does not address any of the militant's key demands: jobs, economicdevelopment and a greater share of oil wealth for the region, and thus, might not be an all-in
solution to the Niger Delta problem. So far, the deal appears to have recorded some measure
of success, as there has been a decline in insurgency, while crude production is up to 1.8 mil-
lion bbl/d against year-lows of 1.6 million bbl/d. Despite this development, main militant group,
Movement for the Emancipation of the Niger Delta (MEND), have threatened to resume attacks
after a cease-fire expired on September 15. Although production has risen slightly during this
cease-fire period, we fear that the militants could resume attacks on oil facilities if talks break-
down. The violence in the Niger Delta cost the country about US$1 billion in lost oil revenue last
year, as global energy investors are wary of Nigeria.
30
50
70
90
110
130
150
Apr-08
Jun-08
Jul-08
Aug-08
Oct-08
Nov-08
Dec-08
Jan-09
Mar-09
Apr-09
May-09
Jul-09
Aug-09
Sep-09
1600
1650
1700
1750
1800
1850
1900
1950
2000
2008
3Q08
4Q08
1Q09
2Q09
May-0
9
Jun-0
9
Jul-09
Aug-0
9
Sep-0
9
'000 bbl/d %
Average Crude Production % of Opec
Nigeria: The Road Ahead
8October 20
Nigeria: Polity, A Stable Terrain?
We think that issues suc
the critical power deficie
and finding a lasting solu
to the problems in the N
Delta region are of utm
importance and require s
action if Nigeria is to m
vision 2020.
Chart 13: Bonny Light (2008-2009) Chart 14: Crude Production (2008-2009)
So far, the deal appears
have recorded some me
ure of success, as there
been a decline in insur-
gency, while crude produ
tion is up to 1.8 million bb
against year-lows of 1.6
million bbl/d
Source: OPECSource: EIA
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05
10
15
20
25
30
35
Electricity
Generated as at Q2
2009
Dec 2009 Target Nigeria's Estimated
Requirement
Nigeria: The Road Ahead
9
October 20
Power: Not On All Phases
With US$16 billion of expenditure and eight years of democratic rule under former president,
Olusegun Obasanjo, the Nigerian government failed to make any appreciable improvement in
its power sector. This critical situation has prompted the YarAdua administration to make the
power sector one of its focal points. The administration has declared that its immediate goal is
to improve power generation to 6000 MW/day by the end of 2009. Nigerias average power
generation at the end of Q2 2009 stood at a historical low of 1,503.4 MW/h. Government offi-
cials have blamed a shortage of gas for the low levels of generation. There have been squab-
bles between the Power Holding Company of Nigeria (PHCN) and the Nigerian Gas Company
(NGC) over pricing. NGC claims that PHCN is not paying the right price for this scarce re-
source and would rather supply to those who will. This pathetic power situation continues to
douse industrial production and the overall economic development of the country. Since en-
ergy is the engine that drives industrialization and development, a sound energy policy would
directly and indirectly create jobs. We think that the December 6000 MW target is unattainable
given the current level of generation, investments and attendant gas shortages.
The administration has declared that its immediate
goal is to improve power
generation to 6000 MW/da
by the end of 2009.
Chart 15: Quarterly Electricity Generation Index (2007-2009)
Chart 18: Electricity Generation, Target & RequirementChart 17: Quarterly Industrial Production Index (2007-2009)
Chart 16: Electricity Generation (2004-2009)
150
155
160
165
170
175
180
185
190
195
Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09
1990=100
110
112
114116
118
120
122
124
126
128
130
Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09
1990=100
0
500
1000
1500
2000
2500
3000
2004 2005 2006 2007 2008 Q2 2009
MW/H
Source: CBN
Source: CBN Source: CBN
Source: CBN, NERC
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Nigeria: The Road Ahead
10
October 20
Petroleum Subsidy: Phasing Out
There are plans by the Nigerian government to remove the subsidy on petroleum products and
completely deregulate the downstream oil sector. The huge strain placed on government
finances by the expenditure on this subsidy for the 2008 fiscal year is likely to have prompted
this announcement. In 2008, the Nigerian government spent N633.2billion on this subsidy (30%
of the countrys overall recurrent expenditure). Although the subsidy for 2009 will fall short of
2008 figures because of the decline in oil prices, its removal will undoubtedly raise other
issues.
Various bodies including the Labour, Trade Union, Petroleum and Natural Gas Senior Staff
Association of Nigeria (PENGASSAN), National Union of Petroleum and Natural Gas Workers
(NUPENG) and civil society groups have opposed the policy on the ground that it will lead to a
hike in product prices. Data from the Petroleum Products Pricing Regulatory Authority shows
that the expected open market price for Premium Motor Spirit (PMS or gasoline) as at October
12, 2009 is N94.74 per litre, 46% above the current recommended retail price of N65. A price
increase could create inflationary pressures, dampening any hopes of achieving price stability
in the short run. Also, swings in oil prices could mar product pricing and availability, thereby
creating uncertainty and planning challenges for many businesses. However, a significant
advantage of the subsidy removal is that it will free up government funds for developing other
critical areas. Another consideration is that it will align Nigeria with the G20 nations as far as
fossil fuel policy is concerned even though the underlying reasons at this point differ. Although
no timing was given, the G20 leaders have put forward a proposal to stop subsidizing fossil
fuels, in an attempt to reduce emission of green house gases.
For Nigeria, we see long-term benefits in the removal of the subsidy and the full deregulation of
the downstream petroleum sector as it will create a truly free market and encourage invest-
ments in this sector. In the short term however, we believe that as long as the country dependssolely on importation, complete deregulation, if not properly managed, could lead to unstable
prices in goods and services.
Data from the Petroleum
Products Pricing Regula
Authority show that the e
pected open market pric
Premium Motor Spirit (P
or gasoline) as at Septem
30, 2009 is N94.74 per li
46% above the current r
ommended retail price o
N65.
Chart 19: Petroleum Products Pricing Model
Phasing out the subsidy
fossil fuel will align Niger
with the G20 nations eve
though the underlying resons at this point differ.
Source: PPPRA
Cost of products as quoted on Platts Oil gram+ Costof transporting 30, 000 mt (30kt)product from North West Europe to West Africa
Cost incurred on the trans-shipment of imported petroleum products from the mothervessel into daughter vessel
Cargo dues (harbour handling charge) charged by the Nigeria Ports Authority (NPA) fuse of Port facilities
Cost highlighted above at prevailing N/US$ rate
This is the tariff paid for use of facilities at the Jetty by the marketers to move productthe storage depots.
For depot operations covering storage charges and other services rendered by the deowners
Direct Product Cost
Cost of fund of imported product including cargo financing based on LIBOR+5% premfor 30 days. Also includes inertest charge on the subsidy element
Cost of imported products delivered into the Jetty depots. It is made up of componenhighlighted above
Include Retailers, Transporters, Dealers, Bridging Fund and Administrative charge. Thamounts to N13.20 per litre
Sum of all costs highlighted above
8/8/2019 Nigeria_The Road Ahead
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Source: CBN
Dwindling Revenue
Nigerias revenue continues to decline amid the global economic downturn. Falling oil prices and
production constraints in the erratic Niger Delta region are the main reasons for this decline.Over the last five quarters to Q2 2009, federally collected revenue dropped by 44% from N1,880
billion in Q2 2008 to N1,045 billion by the end of Q2 2009. Oil revenue was down 55% over the
period compared to a 9% rise in non-oil revenue. The growth in non-oil revenue over this time is
attributable to an increase in customs and excise duties, value added tax (VAT) and company
income tax. The non-oil share of revenue grew from 17% in Q2 2008 to 33% by Q2 2009, while
the share attributable to oil dropped from 83% to 67% over the same period. Given this trend in
oil revenue, we expect that federally collected revenue will fall below the budgeted N5,305 bil-
lion by year-end.
Nigeria: The Road Ahead
Over the last five quarterto Q2 2009, federallycollected revenue hasdropped 44% from N1,880 billion in Q2 2008 toN1, 045 by the end of Q22009.
11October 200
The Economy: Resilient, But Challenges Abound
Chart 20: Quarterly Federally Collected Revenue (2008-2009) Chart 21: Quarterly Revenue (2008-2009)
Chart 22: Oil Share of Revenue (2004-2008) Chart 23: Non-Oil Share of Revenue (2004-2008)
0
500
1000
1500
2000
2500
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
N'Billion
Oil Non Oil
0
500
1000
1500
2000
2500
BudgetActualBudgetActualBudgetActualBudgetActualBudgetActual
Q2 2009Q1 2009Q4 2008Q3 2008Q2 2008
N'Billion
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2004 2005 2006 2007 2008
Total revenue Oil revenue Oil (% of total Revenue)
N Bill ion
01000
2000
3000
4000
5000
6000
7000
8000
9000
2004 2005 2006 2007 2008
Total revenue Non Oil revenue Non Oil (% of total)
N Billion
Source: CBN Source: CBN
Source: CBN
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Expenditure: Closer To Budget...
The government appears to be containing expenditure amid its dwindling revenue. For much of
2008, actual expenditure shows a wide variance with the budget (66%, 104% and 70% in Q2, Q3
and Q4 respectively). In 2009, the difference between the actual and budgeted expenditure
narrowed to 10% in Q1 and 11% by Q2. The overall fiscal deficit has widened over the last five
quarters as federal government retained revenue (federally collected revenue less disbursementsto states and local governments) continues to fall short of expenditure, rising from 2% in Q2 2008
to 6% by Q2 2009. Financing the deficit required the government to increase borrowing through
the additional issuance of bonds. As a result, domestic debt rose 20% from N2,339 billion to
N2,813 billion over the five quarters. External debt has risen at a much slower pace compared to
domestic debt. Q2 2009 data show that over the last five quarters, external debt rose 13% from
N490billion in Q2 2008 to N551billion by Q2 2009.
Nigeria: The Road Ahead
12 October 2009
Our estimates indicate
that fiscal deficit will fall
over 6% of GDP in 2009
almost doubling the 3.9
target.
In 2009, the difference
between actual and budg
eted expenditurenarrowed to 10% in Q1
and 11% by Q2.
Chart 24: Expenditure Chart 25: Domestic Debt
Chart 26: External Debt Vs Fiscal Deficit (YoY) Chart 27 Fiscal Deficit (QoQ)
...But Overall Fiscal Position May Deteriorate In H2
A review of the fiscal data over the last five quarters suggests a softening is imminent. We expect
Nigerias fiscal position to deteriorate in the second half of the year as the factors that have led to
this trend (unstable oil prices and Niger Delta challenges) have not abated. Also, with the federal
governments commitments to fast track the development of infrastructure particularly in the power
sector, we expect that expenditure will closely match or exceed the budgeted figure. Our esti-
mates indicate that fiscal deficit will rise above 6% of GDP in 2009, almost double the 3.9% target.
Our model assumes:
Oil prices will average US$60 per barrel for the year
Crude oil production will average 1.8 million barrels per day
An average exchange rate of N150/US1
N'Billion
-
200
400
600
800
1,000
1,200
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
Actual Budget
0
5
10
15
20
25
30
35
0
500
1000
1500
2000
2500
3000
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
N'Billion %
Domestic Debt % of GDP
Source: CBN Source: CBN
Source: CBNSource: CBN
-400
-300
-200
-100
0
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
N'Billion
Overall Deficit % of GDP-10.0%
10.0%
30.0%
50.0%
2004 2005 2006 2007 2008
External Debt (%GDP)
8/8/2019 Nigeria_The Road Ahead
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Output Growth: Strong, Against All Odds
Available data from the National Bureau of Statistics (NBS) shows that the economy expanded by
6.73% in Q2 2009, against a 5.65% growth in Q2 2008. This unexpected strong growth is on the
back of a challenging economic environment. According to the CBN, growth was largely driven by
contributions from agriculture, wholesale and retail trade. The contribution from oil which had
dampened growth in the past 3 years, improved but remained in negative territory at -1.72%
compared to -4.51%, -4.54% and -4.76% in 2006, 2007 and 2008 respectively. The NBS forecasts
real GDP growth of 5.33% for 2009, while AIS Research estimates GDP growth of 4.5% for the
year. We expect agriculture to continue to drive non-oil growth given its large contribution (43%),
but the oil sector will inhibit overall growth for the year. On the whole, Nigerias growth for 2009 is
set to outperform the rest of SSA (1.5%) and the world (-1.4%).
Nigeria: The Road Ahead
13 October 200
According to the CBN,
growth was largely drive
by contributions from
agriculture, wholesale a
retail trade.
Chart 28: Quarterly GDP Growth (2008-2009) Chart 29: Oil vs Non-Oil % Contribution (2008-2009)
Chart 30: Sector Contribution To GDP (2008) Chart 31: Annual GDP Growth (2006-2009)
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
%
10
12
14
16
18
20
22
24
75
77
79
81
83
85
87
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
Oil Non-Oil
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2006 2007 2008 2009
%
AIS Research Estimate
Source: CBN Source: CBN
Source: CBN, AIS Re-Source: CBN
42.07
4.13
17.54
0.31
2.9
1.83
3.79
0.46
17.33
9.63
Ag ri cultur e Manufactur ing Petr oleum and Natur al Gas
Solid Minerals Telecommunications Building and Construction
Finance and Insurance Hotel and Restaurants Wholesale and Retai l Trade
Others
8/8/2019 Nigeria_The Road Ahead
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Nigeria: The Road Ahead
Events such as a rise in oi
prices, governments plan
to remove the petroleum
products price subsidy and
the usual spending aheadof the Christmas and New
Year seasons are likely to
create inflationary pressur
by the final quarter of the
year.
The measures introducedby the CBN, coupled withrecent oil price recoveryand stability in crude pro-duction, appear to havebeen successful...
14 October 200
Inflation: Upward Pressure Looms
After peaking at 14.6% in February, headline inflation eased to 10.4% in September 2009. The
increase in food prices has been the primary driver of inflation for some time. We expect that
the rise in food prices will moderate further due to improvements in the supply of agricultural
produce as we enter the harvesting season. The main threat to price stability is in non-food or
core inflation. Although we expect core inflation to head southward, in coming months, events
such as a rise in oil prices, the governments plan to remove the petroleum products subsidy
(which would force an increase in the price of energy and transportation) and the usual
spending ahead of the Christmas and New Year season is likely to create inflationary pressure
in the final quarter of the year. However, we think that as the economy adjusts to the changes
highlighted, inflation may ease as we approach the second half of 2010.
Currency: Downside Risk Prevalent
Following the re-introduction of the Wholesale Dutch Auction System (WDAS) in June 2009,
the foreign exchange market showed signs of stabilizing. The CBN had introduced the Retail
Dutch Auction System (RDAS) after the Naira depreciated against the U.S dollar in December2008. In that month alone, the local currency lost 16% at the official window because of over-
whelming demand (spurred by repatriations and speculation). Spreads between the inter-bank
and Bureau De Change (BDC) rates widened against the official rate; from 0.2% and 4.4% to
6.2% and 8.8%, respectively. The depreciation and high volatility witnessed in late 2008 and
first half of 2009 adversely affected many businesses, increasing production costs for local
manufacturers, particularly those that depend largely on imports. The measures introduced by
the CBN, coupled with a recovery in the price of oil and improved stability of crude production,
appear to have successfully reduced the spreads at the various currency auction windows and
improving the stability of the Naira. As at the end of September 2009, the spread between the
auction and BDC rates had narrowed to 4% as the naira strengthened on weaker demand.
However, we still see downside risks to the currency since FX supply is strongly linked to
volatile oil prices.
External Reserves: Stable Outflows, Slower Inflows
As alternative channels for sourcing foreign exchange dried up because of the global downturn,
the Nigerian government was forced to dip into its foreign exchange reserves. Nigerias
reserves have dropped from a high of U.S$63 billion in October 2008 to US$44 billion as at
October 2009, a fall of 33%. It is important to note however that a combination of weaker FX
demand, an increase in oil production, and a recovery of oil prices has supported a marginal
build up of external reserves over the past month (reserves up from a low of US$41 billion in
September to US$44 billion in October). Further downside risks exist considering the fact thatthe U.S dollar has lost ground against other major currencies such as the Euro, British Pound
and Yen. We believe that if Nigerias oil earnings fail to improve, its external reserves will come
under pressure and the Naira will struggle against the US dollar.
Nigerias reserves havedropped from a high ofU.S$63 billion in October2008 to US$44 billion as aOctober 2009
8/8/2019 Nigeria_The Road Ahead
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-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.045.0
Jan-04
May
Sept
Jan-05
May
Sept
Jan-06
May
Sept
Jan-07
May
Sept
Jan-08
May
Sep
Jan-09
May
%
All I tems I ndex Core Food Index
0.0
4.0
8.0
12.0
16.0
20.0
Jan-08
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-09
Feb
Mar
Apr
May
Jun
Jul
Aug
%
All- items Core Food
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2004 2005 2006 2007 2008
N'Billion
Imports Exports
- 100,000 200,000 300,000 400,000 500,000 600,000
US
China
France
UK
Netherlands
Germany
Italy
India
BrazilRussia
N'Million
Nigeria: The Road Ahead
15October 200
Chart: 32: YoY Inflation (2008-2009) Chart 33: 12 Month Moving Average Inflation (2008-2009)
Chart 34: YoY Inflation (2004-2009) Chart 35: Top Non-Oil Imports (2008)
Chart 36: Oil Exports By Region (2008) Chart 37: Trade (2004-2008)
- 1 00 ,0 00 20 0,0 00 30 0, 00 0 4 00 ,0 00 50 0, 00 0
Africa
Asia
Europe
U.S
Americas
(Without
U.S)
Thousand bbls
Source: NBSSource: NBS
Source: CBN
Source: NBS Source: CBN
Source: CBN
0.0
5.0
10.0
15.0
20.0
25.0
Jan-0
8Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-0
9Feb
Mar
Apr
May
Jun
Jul
Aug
%
All Items Index Core Food Index
8/8/2019 Nigeria_The Road Ahead
17/26
Nigeria: The Road Ahead
16
October 2009
Chart 38: Quarterly Macro Indices (2007-2009)2nd Qtr 07 3rd Qtr 07 4th Qtr 07 1st Qtr 08 2nd Qtr 08 3rd Qtr 08 4th Qtr 08 1st Qtr 09 2nd Qtr 09
GROSS DOMESTIC PRODUCT(at 1990 Constant BasicPrices)
Growth rate (%) 5.5 6.6 7.8 5.8 5.2 6.0 8.2 4.85 5.
Oil Share of GDP (%) 18.7 18.6 18.0 21.6 16.7 16.9 15.8 19.0 14
Non-Oil share of GDP (%) 81.3 81.4 82.0 78.4 83.3 83.1 84.2 81.0 85
GROSS DOMESTIC PRODUCT (at current Basic Prices)
Growth rate (%) 26.9 12.99 38.70 14.35 17.52 14.77 15.13
Oil shate of GDP (%) 29.7 45.7 31.0 46.31 37.50 35.20 37.92
Non-Oil share of GDP (%) 70.3 54.3 69.0 53.69 62.5 64.8 62.08
MONEY & CREDIT
Narrow Money (M1) (%) -4.0 17.5 11.9 20.2 -4.1 4.5 7.4 -3.9 -3
Broad Money (M2) (%) 2 9.3 7.9 14 -0.2 12.7 2.3 -1.9 0
Narrow Money (M1) (%) 0.6 18.3 32.4 45.9 39.9 45.2 56.9 -3.9 -7
Broad Money (M2) (%) 11 21.3 30.9 37.7 37.4 54.1 57.8 -1.9
Aggregate Credit (Net) (%) 20.9 324.6 52.4 35.8 17.7 4.4 27 -2.6
Aggregate Credit (Net) =N='b) 330.9 1,404.80 2,141.40 2,907.40 613.2 5,391.80 4,820.80
Credit to Government (Net) (%) -14.2 11.7 -5.6 -5 -7.8 -18.9 -17.2 -9.6 15
Credit to Government (Net) (=N='b) -3,117 -2,752.60 -2,908.10 -3,054 -195.9 -3,230.00 -2,674.50 -3,405.60 -2,879.
BY CBN -3,596.90 -3,818.40 -4,074.40 -4,474.00 61 -5,107.60 -4,097.80 -4,658.20 -4,348.BY DMB 480 1,065.80 1,166.30 1,420.10 -256.9 1,877.60 -1,423.30 1,252.60 1,4
Federal Government Deposits (=N='b) 4,718.40 4,963.70 4,171.50 4,548.20 4,498.70 4,745.20 5,475.30 5,059.40 4,812.
Credit to Private Sector (%) 14.8 20.6 21.5 18.1 13.6 10.4 7.9 2.1 3
Credit to Private Sector (=N='b) 3,447.80 4,157.40 5,049.50 5,961.30 809.1 7,474.70 8,066.30 8,226.40 8,305.
Private Sector Deposits (=N='b) 15.8 11.6 70.5 54.8 63.4 163 339.6 280.5 291
Aggregate Credit (%) 340.4 86.3 184.1 35.8 51.6 56.8 100.6 -2.6
Credit to Government (%) 50.4 -51.9 -60.5 -5 -13.9 -36.4 -12.3 -9.6 7
Credit to Private Sector (%) 14.8 62 96.8 18.1 33.9 47.8 59.5 2.1 6
Basic Money (=N='b) 858.3 898.3 1,195.30 1,200 1.517.8 1,247.20 1,497 1,239.40 1,239.
(Growth Rate. %)
Currency in Circulation (=N='b) 722.3 960.8 891.8 891.8 918.3 976.4 1,155.30 1,037.80 1,006.
Bank Reserves (=N='b) 245 647 827.4 308.2 599.5 270.8 393.8 346.3 284
Money Supply (=N='b) 4,458.50 4,811.70 6,486.20 7,998.20 7,982.90 8,960.70 9,180.90 8,997.80 9,0
NTB SALES (=N='b)NTB Sales at Primary Market 359.9 327.1 689.6 399.5 569 188.8 264.2 235.6 341
NTB Sales at OMO (N'B) 743.6 847.7 1,684 484.3 919 861.5 0 62.29 185
INTEREST RATES (%)
Inter bank Call Rate (Weighted Average) 8 8.13 8.25 10.21 10.4 12.83 14.01 15.27 14.
Minimum Rediscount Rate/Monetary Policy Rate 8 8 9.5 10 10.25 9.45 9.75 9.75
Treasury Bill Rate
Savings Deposit Rate 3.81 3.51 3.23 2.97 2.97 3.06 3.17 2.91 2.
Deposit Rates (Consolidated) 7.75 7.67 7.47 7.86 9.67 9.92 10.45 9.67 10.
Average Term Deposit Rates 9.04 9.05 8.69 9.35 10.78 11.06 11.67 12.27
7 Days 5.59 5.83 5.54 5.38 5.55 5.64 7.06 6.97 6.
1 Month 10.38 10.5 9.9 10.51 11.71 11.52 12.1 12.85 12.
3 Months 10.37 10.45 9.87 10.71 12.19 12.22 12.76 13.85 13.
6 Months 9.96 9.67 9.49 9.98 11.94 12.33 12.74 13.57 13.
12 Months 8.11 7.46 7.75 9.48 11.16 12.28 12.68 13.43 12.
Over 12 Months 9.85 9.69 9.56 10.01 12.14 12.38 12.66 13.23
Prime Lending Rates 17.3 14.48 16.49 16.05 15.86 15.97 16.03 18.34 19.
Maximum Lending Rates 18.16 15.63 18.24 18.17 17.9 18.1 19.79 22.24 22.
Average Lending Rates
Real Interest Rrate (Max. Lending Rate) 12.34 11.53 11.64 10.37 5.08 3.3 4.69 7.14 11.
Real Interest rate (Ave. Deposit Rate) 1.31 3.57 2.09 1.55 -1.22 -4.88 -4.65 -2.83 0.
CAPITAL MARKET
All share Value Index
Market Capitalization (=N='t) 8.9 9.2 13.3 15.3 14.2 10 7 7.2 8
Value of Shares Traded (=N='b) 330.5 231.3 582.4 990.4 743.1 475.6 150.8 106.9 199
Volume of Shares Traded ('b) 37.8 35.9 37.7 68.6 53.1 45.6 23.7 19 27
Source: CBN
8/8/2019 Nigeria_The Road Ahead
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Total Equity (N'Billion)
Intercontinental Bank 200
Oceanic Bank 217
Union Bank 119
Afribank 152
Finbank 11Bank PHB 247
Equitorial Trust Bank 32
Spring Bank 35
Wema Bank 25
Total 1038
Total CBN Bailout 620
Total Bailout (as a % of Total Equity) 60%
Banking: Major Shake Up
On August 14, 2009, the newly appointed CBN governor, Sanusi Lamido Sanusi, rattled the en-
tire banking industry, and the country as a whole, with major board changes in some Nigerian
banks. This followed a joint audit of the 24 banks by the CBN and Nigerian Deposit Insurance
Corporation (NDIC) to ascertain the financial soundness of the industry. The initial examination
of the first set of 10 banks in August, resulted in the removal of the executive management of
five banksAfribank, Intercontinental Bank, Union Bank, Oceanic Bank and Finbank. The result
of the examination showed that the aforementioned banks had excessively high levels of non-
performing loans totalling N1,143 billion (48% of collective loans) from exposures to the capital
markets and oil and gas sector. These bad loans, attributable mainly to poor corporate govern-
ance and weak risk management practices within these banks, have led to huge provisioning,
and as such, have seriously impaired the liquidity and solvency of these banks. Liquidity ratios
for the five banks ranged from 18% to 24%, below the regulatory minimum of 25%. The CBN
injected N420 billion into these banks due to their systemic importance (These banks own39.93% of industry total loans and 29.99% of deposits).
The results for the other 14 banks were announced in October, and this time, four other banks,
namely, Bank PHB, Equatorial Trust Bank (ETB), Spring Bank and Wema Bank, were found
wanting. Like the initial five, the executive management of three of the four banks were sacked,
while non-executives of Spring and ETB were also removed. A fifth bank, Unity Bank was
adjudged to have insufficient capital, but a healthy liquidity position. N200 billion was injected by
the CBN into the four banks as liquidity support and long term loans, bringing the total amount of
money injected so far to N620 billion. These four banks, along with Unity Bank have been
mandated by the CBN to explore options for recapitalisation to shore up capital adequacy and
liquidity positions.
The asset quality and capital audit of all 24 banks was designed to restore confidence in the
banking sector by providing a reliable assessment of the scale of the industrys margin loan and
oil & gas exposure and to outline measures to appropriately deal with the situation.
Nigeria: The Road Ahead
The CBN sacks the ex-ecutive management ofeight banks Afribank,Intercontinental Bank,Union Bank, OceanicBank, Finbank, BankPHB, Equitorial TrustBank and Spring Bank
17October 200
The Financial Sector: Reform 2.0
Chart 39: Equity Capital Of Affected Banks Prior To The CBN Action
examination showed thatmost of the banks hadexcessively high level ofnon-performing loansfrom exposures to capitalmarket and oil and gasexposures.
Source: Banks last published annual reports, CBN
The asset quality and
capital audit of all 24 Ni-
gerian banks is designed
to restore confidence in
the banking sector by
providing a reliable as-
sessment of the scale of
the industrys margin loa
and oil & gas exposure
and to outline measures
to appropriately deal with
the situation.
8/8/2019 Nigeria_The Road Ahead
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0%
20%
40%
60%
80%
100%
120%
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
-20
-10
0
10
20
30
40
50
60
70
Q2'07
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
Q4'08
Q1'09
Q2'09
%
QM1 QM2 CM1 CM2
Capital Erosion, Liquidity Risks: Additional Funding Needed...
Prior to the industry-wide audit, the banking industry was thought to be adequately capitalised. The
fallout of the examination by the CBN governor has, however, proved otherwise. The high levels of
loan-loss provisioning needed will put a severe strain on capital adequacy and liquidity levels, re-
quiring many banks to seek additional funding. Given the state of the equities market, an attempt
at equity offerings will likely prove futile. Thus, debt offerings appear set to become the primarysource for banks to meet their capital shortfall. Already, a number of banks First Bank, UBA and
GTB have received shareholders approval to issue bonds. We expect many more banks to follow
suit in order to meet their liquidity and capital adequacy requirements.
...As Credit Growth Contracts
As expected, the availability of credit to the private sector has decreased substantially as banks
have become more focused on recovering outstanding debts and appear increasingly reluctant to
extend new lending facilities. Provisional data from the CBN indicates that YoY credit growth
slowed to 30% in August 2009 compared to 59% in January 2009 and the highs of over 100% in
2008. We expect credit growth to fall for the rest of this year. Despite a reduction in the benchmarkinterest rate, expectations are that as the credit squeeze sets in, corporate and consumer lending
rates will remain high. In July, the CBN cut the monetary policy rate (MPR) to 6% from 8% and in a
move to further ease rates and boost lending, guaranteed inter-bank lending. These measures
helped ease inter-bank call rates from over 20% in July, to below 10% in October.
Nigeria: The Road Ahead
High level of provisioninwill put a severe strain obanks capital adequacyand liquidity levels.
18 October 2009
Chart 40: YoY Credit Growth (2008-2009) Chart 41: Quarterly & Cumulative Aggregate Money Supply (2007-2009)
YoY credit growth sloweto 22.9% in July 2009compared to 26.7% in
June and highs of over100% in 2008.
0
5
10
15
20
25
30
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
%
CALL 7 Days
Chart 42: Call & 7-Day NIBOR (2009) Chart 43: 90-Day NIBOR (2009)
10
12
14
16
18
20
22
24
26
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
%
Source: CBN Source: CBN
Source: CBN Source: CBN
8/8/2019 Nigeria_The Road Ahead
20/26
10%
60%
25%
5%
CBN Banks & DHs Non-Bank Public Sinking Fund
60
70
80
90
100
110120
Dec-0
8
Jan-0
9
Mar-09
Apr-09
May-0
9
Jun-0
9
Jul-09
Aug-0
9
Sep-0
9
%
Equities Vs Bonds
0
20
40
60
80
100
120
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
US$'Billion
15,000
25,000
35,000
45,000
55,000
65,000
75,000
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Capital Markets: Equities Out...
Although the post-sub prime crisis risk aversion of foreign investors has contributed to reduced
foreign direct investment (FDI) and a fall in stock market values, domestic factors such as the
margin loan overhang, the state of the banking industry and the weaker economic outlook re-
main the main underlying causes of the continuing stock market depression. Bank stocks, which
account for more than 50% of the Nigerian Stock Exchanges market capitalisation, have borne
the brunt of investors anxiety. Primary offerings in the equities market, which were prevalent
throughout 2007 and in the first quarter of 2008, have virtually disappeared.
Nigeria: The Road Ahead
19October 2009
...Bonds InAs mentioned earlier, the depressed state of the equities market is already leading many
corporates to launch debt issues as an alternative source of capital. The bond market, historically
dominated by the federal government, will not only see an influx of corporates, but also state
governments and government parastatals. Following the July 2009 directive by the CBN for
banks to reduce their public sector exposure, we expect that the debt capital market will be the
main focus of capital raising efforts, for state governments and public sector establishments.
While this may be the much needed catalyst for the development of the Nigerian bond market,
we fear that many companies, particularly those with unfavourable credit ratings will record little
success as many institutional investors will only consider higher rated companies. Since Nigerian
investors will be expected to deal with debt instruments that they have hitherto been unaccus-
tomed to, comprehensive market enlightenment and education will be required for successful
issuances. However, the higher return and lower volatility that bonds attract vis--vis equities in
the short term provides a compelling case for investment consideration.
Chart 44 NSE All-Share Index (2008-2009)
Chart 46: Returns in 2009-Bonds vs. Equity (Rebased)
Along with the depressedstate of the equities mar-ket, we think that reasonsfor corporate preferencefor debt issues at this timincludes balance sheetleveraging, instilling discipline in management andimproving returns for equholders
Chart 45: Market Capitalisation (2008-2009)
Chart 47: Composition Of Domestic Debt Holders (Q2 2009)
Factors such as marginloan overhang, the stateof the banking industryand weaker economicoutlook remain the under-lying causes of continuedmarket depression.
Source: NSESource: NSE
Source: AIS Research Source: FDHL
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Money & Currency Markets
Sustained Stability Desired
With the CBNs guarantee of unsecured interbank dealings and the rate cut from 8% to 6%, webelieve stability has been achieved in the interbank market. There has been an improvement in
the risk perception Nigerian banks have with their peers and this is reflected in the reduced vola-
tility in interbank rates. We expect that the CBN will remain vigilant in its regulation of interbank
transactions. In the foreign exchange market, while there has been some stability following the
reintroduction of WDAS and reduced demand over an increasingly difficult business environ-
ment, we see downside pressure on the local currency due to the over-dependence on oil earn-
ings. If volatility in oil prices persists, crude production levels remain impaired by the Niger Delta
crisis, and external reserves continue to drop, the naira is likely to remain vulnerable to further
depreciation. We would like to see further diversification of the Nigerian economy across other
sectors besides petroleum to attract foreign direct investment (FDI) as an alternative to
petrodollars.
Nigeria: The Road Ahead
In as far as oil price vola-tility lingers, crude pro-duction levels impaired bythe Niger Delta crisis, andexternal reserves contin-ues to drop, the naira islikely to remain vulnerablto further depreciation
20October 200
Markets Outlook
Chart 48: Call Rates (2009) Chart 49: 90 Day NIBOR
Chart 50: Inter-bank FX Rate (2009) Chart 51: Spread Between Inter-bank & Parallel Market Rates
0
5
10
15
20
25
30
Jan
-09
Fe
b-0
9
Mar-
09
Apr-
09
May
-09
Jun
-09
Jul-09
Aug
-09
%
CALL 7 Days
10
12
14
16
18
20
22
24
26
Jan
-09
Fe
b-0
9
Mar-
09
Apr-
09
May
-09
Jun
-09
Jul-09
Aug
-09
%
-5%
0%
5%
10%
15%
20%
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Au
-09
Sep-09
Oct-09
NoInter
bank
Marke
t
135
140
145
150
155
160
Jan-0
9
Feb
-09
Mar-0
9
Apr-09
May-0
9
Jun-0
9
Jul-09
Aug-0
9
Sep-0
9
Oct-09
N/US$
No Interbank Market
Source: FMAN, AIS ResearchSource: FMAN
Source: FMAN Source: FMAN
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Real Estate
As Global Real Estate Prices Struggle
Global real estate prices have taken a beating since the global financial crisis began. All aspects
of real estate have been affected including public and private, equity and debt, residential and
commercial. Data from the Philippines based Global Property Guide shows that real estateprices across the globe continue to fall, however, we have begun to observe a slowdown in the
rate of decline and in some cases a positive month on month price movement. Consensus
estimates suggest a recovery in 2010. The table below shows quarter-on-quarter (QoQ) prices
(in %) for selected markets.
Nigeria: The Road Ahead
Available data from Philip
pines based Global Property Guide shows that reaestate prices across theglobe continue to fall.
21
October 200
Will Nigeria Follow?
Although comprehensive housing data on the Nigerian market is not readily
available, we believe that the recent shake up in the banking industry and
weak economic conditions will combine to force a correction in real estate
prices, particularly at the high end. We expect that as banks continue with
their loan recovery efforts, the forced sales of the properties of high profiledebtors are bound to occur, leading to a rise in supply of high-end real
estate assets and corresponding price declines. Also, as banks grapple with
toxic assets, corporate restructuring and related industry issues, we expect
branch expansion plans to be placed on hold in the near term. We believe
bank expansion has been a contributing factor to the rise of property prices
since the consolidation exercise in 2005. During this time, bank branch lo-
cations have increased by 32% from 3,468 in 2006 to 4,591 in 2008 across
almost all major cities within Nigeria. A sharp decline in demand for high-
end residential and commercial real estate is almost inevitable given the
reasons stated earlier. However, we expect that the low-end and mid-
income residential properties market will hold steady given the large deficit
in this section of the real estate market.
Chart 53: Nigeria Housing Deficiency (Million unit
De-leveraging Throws Up Opportunities
It is highly likely that most real estate developments were undertaken by
highly leveraged firms and individuals. Also, many leveraged positions in
the capital market and with oil and gas loans used real estate as security.
Given that banks attempts at recovering questionable loans will lead to
many forced sales, two scenarios are likely to play out. Firstly, a number of
distressed sales will facilitate a general reduction in real estate prices. This
could present bargain opportunities in some cases and help bring pricing in
line with new investor expectations. Secondly, weaker pricing of high-end
real estate could occur due to the less favourable economic conditions. Go-
ing forward, real estate prices will likely favour equity investors and both
private and pooled funds such as Real Estate Investment Trusts (REITs).
The REIT market in Nigeria is relatively under-developed, and as such, pro-
vides ample investment opportunities. On the other hand, given the high
interest rate on available mortgages and banks new cautious approach
toward lending, we think debt financing will be harder to come by.
56
16
12 12
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2003 2004 2006 2007 200
Source: CBN
Chart 52: Prices In Selected Markets
Source: Global Property Guide
Countries Q1'08 Q1'09 q-o-qQ1
China-Shanghai 28.3 1.76 -0.
Germany -4.03 -1.28 -2.
Japan-Tokyo 5.17 -1.46 -1.
US (FHFB) -3.18 -2.23 1.
South Africa -0.83 -8.3 -1
France -2.03 -10.41 -0
UK (Nation wide) 0.28 -19.01 -4.
UAE 59.71 -35.31 -42
Singapore 21.76 -22.7 -13
8/8/2019 Nigeria_The Road Ahead
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0
5
10
15
20
25
30
35
40
45
50
Jan-
09
Feb
-
09
Mar-
09
Apr-
09
May-
09
Jun-
09
Jul-09
Aug-
09
Sep-
09
US$'Billion
-40%
-35%
-30%
-25%
-20%
-15%-10%
-5%
0%
2-Jan
22-Jan
11-Feb
3-Mar
23-Mar
12-Apr
2-May
22-May
11-Jun
1-Jul
21-Jul
10-Aug
30-Aug
19-Sep
9-Oct
Stock Market
Uncertainty Lingers, But Value Remains
We expect a bleak outlook for the equities market for the rest of 2009. With no offerings recorded
since Q4 2008, the primary issues market has ground to a halt. Various analysts had held the view
that the stock market would rebound in Q2 2009 and close the year in positive territory. AISResearch does not share this view. Our view is that the market is likely to close the year in negative
territory with the index closing at around 23,000 (a negative return of 27%). Two main factors
support our position. Firstly, we think that the uncertainty in the banking industry has further
dampened investor confidence, bearing in mind that bank stocks alone account for over 50% of
market capitalisation. We expect investor confidence will remain dented until all of the dust
surrounding the CBNs capital audit settles. We eagerly await audited financials come December
31, the financial year-end, to get a clearer picture of the state of Nigerias banking sector. We do not
expect to see these December 31 year-end financials until Q2 2010, given that banks will now have
to adopt the International Financial Reporting Standard (IFRS) in reporting their results. Secondly,
we think that many banks still have propriety positions and stocks pledged as collateral on their
books, and thus will take advantage of short rides to de-leverage. We expect these two factors to
combine with a weaker economic outlook to keep the stock market depressed for the rest of 2009.
However, we expect that the opportunities created as a result of price corrections will support a
strong rebound in 2010, but we also anticipate that this will be accompanied by increased volatility.
Nigeria: The Road Ahead
Our view is that the
market is likely to closthe year in negativeterritory with the indexclosing at about 23,00
22
October 200
Access to professionainvestment managemservices offer the bespotential for out perfoance.
Managed Portfolio, Careful Stock Selection Key To Investment Success
We expect that the stock markets recent poor performance will leave many investors disillusioned
about investing while those still willing to do so will seek sound investment advice and deep re-
search. Hence, access to professional investment management services offers the best potential for
stellar performance going forward. We recommend companies with strong business fundamentals
in the banking, consumer, building and construction sectors. Banks that successfully rise above the
CBN audit and common year-ends without major challenges will be the most sought after. Even
though we anticipate that the real estate sector will struggle, we believe that the building and con-
struction sector will continue to benefit from the governments increased focus on infrastructure-
development, while a broad range of blue chip manufacturing companies will thrive due to sustained
consumer spending.
Chart 54: NSE, Year To Date Loss Movement (2009) Chart 55: Market Capitalisation (Year To Date)
Source: AIS Research Source: NSE
We expect opportunitcreated as a result ofprice corrections to suport a strong rebound2010, but anticipate ththis will be accompan
by increased volatility
8/8/2019 Nigeria_The Road Ahead
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0
2
4
6
8
10
12
14
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20YJan Mar Oct
0%
5%
10%
15%
20%
25%
30%
3yr 5-7yr 10-20yr
1,200
1,250
1,300
1,350
1,400
1,450
1,500
Jan-09
Jan-09
Feb-09
Mar-09
Mar-09
Apr-09
May-09
Jun-09
Jun-09
Jul-09
Aug-09
Aug-09
Sep-09
Oct-09
Bond Market
Long Maturities Drive Stellar Performance
As discussed earlier, the primary issuance market, historically dominated by sovereign bonds,
looks set to face an avalanche of corporate and state bonds. In 2009 thus far, the bond market
has returned over 17% and outperformed the equities market by 38%. The 20-year bonds have
returned an average of 30%, 10-year bonds have returned over 20%, while the short end bonds
have barely returned 10% year to date. As investors seek higher returns, the long term instru-
ments are becoming more attractive. We think that the long tenor bonds offer a greater risk/
reward profile than short end instruments. Thus, we hold the view that short term bonds should
be held to maturity to mitigate fluctuations in interest rates.
Nigeria: The Road Ahead
23
October 2009
Chart 56: Average Bond Price Performance (Year To Date) Chart 57: Access Bank Nigeria Government Bond Index (YTD)
Chart 58: Yield Curve (2009) Chart 59: Composition Of Domestic Debt Holders (Q2 2009)
The 20-year bonds havereturned an average of30%, 10-year bonds havereturned over 20%, whilethe short end bonds havereturned barely 10% yearto date.
Source: FDHL
Source: Access BankSource: FDHL, AIS Research
Source: FMAN
63%
23%
14%
0%
FGN Bonds Tbi ll s Tre asury Bonds De ve lopment S toc ks
8/8/2019 Nigeria_The Road Ahead
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Nigeria: The Road Ahead
24 October 2009
Disclaimer
This report has been issued and approved by Access Investment & Securities Limited (AIS), a wholly owned subsidiaryof Access Bank Plc. It has been prepared without regard to the circumstances and objectives of those who receive it.This publication is for information purposes only. AIS makes every effort to use reliable and comprehensive information.The information contained herein does not constitute an offer to buy or sell any security or to participate in any tradingstrategy. Any investments discussed may not be suitable for all investors as the appropriateness of an investment orstrategy will depend on an investor's circumstances and objectives. We therefore recommend that investors independ-ently evaluate particular investments and strategies, and encourage them to seek advice from professional financialadvisers.
The value of and income from your investments may vary due to changes in interest rates, foreign exchange rates,
securities prices, market indexes, operational or financial conditions of companies and other factors. Past performance isnot necessarily a guide to future performance. Estimates of future performance are based on assumptions that may notbe realized. We are under no obligation to inform you of changes in our opinions or information in AIS ResearchPublications.
AIS and/or any connected company may or may not have in the future a relationship with any of the entities mentioned inthis document for which it has received or may receive in fees or other compensation in the future.
This report may not be reproduced, distributed or published by any recipient for any purpose without prior writtenconsent of AIS. AIS is licensed by the Securities and Exchange Commission (SEC) to conduct investment business inNigeria.
8/8/2019 Nigeria_The Road Ahead
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Nigeria: The Road Ahead
ContactsResearch
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Ajibola [email protected]+234 1 7301476
Sales
Pamela [email protected]
+234 1 2714554
Portfolio Management
Felix [email protected]+234 1 7301474
Olateju [email protected]+234 1 7301474
Private Equity
Adekunle [email protected]+234 1 7301474
Access Investments & Securities Limited,14a, Idowu Taylor Street, Victoria Island,Lagos,Nigeria.
Telephone: +234 1 2714554, 7301476Fax: +234 1 2714553Email: [email protected].