+

LBS Alumni Day

By Bismarck RewaneCEO, Financial Derivatives Company Ltd.

November 20, 2014

Nigeria – Always Does Better Under Pressure

+Outline

Background- 5year View

Nigerian Structure, Size, Growth and Trends

Financial Markets

Policy Landscape

What Next?

+Background- 5 year View

+5-year View

When the going gets tough, the tough gets going- Joseph Kennedy, father of U.S.

President John F. KennedyStructure of the Nigerian economy has changed but only minimallyHighly oil and gas dependent – 94% of export revenuesAgriculture was the highest contributor to GDP at 32.85% in 2009

This has declined to 26.63% in Q3’14

+5-year ReviewFastest growing sectors

Telecommunications:

34.18%

Mining and quarrying:

12.08%

Services: 10.02%

2009

+5-year ReviewFastest growing sectors

Telecommunications:

34.18%

Mining and quarrying:

12.08%

Services: 10.02%

Electricity: 40%

Financial institutions: 32%

Arts and entertainment:

27%

2009 2014

+ Then & Now

Second largest economy in

Africa with a nominal GDP

size of $271bn Growth rate of 6.9% GDP per capita: $1,718 Oil & gas as a % of total

exports:98% % of revenue: 70% Private consumption of

$204bn or 75.28% of GDP Government consumption:

$22bn

2009

+ Then & Now

Second largest economy in

Africa with a nominal GDP

size of $271bn Growth rate of 6.9% GDP per capita: $1,718 Oil & gas as a % of total

exports:98% % of revenue: 70% Private consumption of

$204bn or 75.28% of GDP Government consumption:

$22bn

Largest economy in Africa with

a rebased GDP size of $510bn Growth rate of 6.2% (Q3’14) GDP per capita of $2,688.

Income inequality is

increasing as GDP accelerates Oil & Gas composition of total

exports has decreased to 94% % of revenue: 76%

Growth in private

consumption of $426bn, but

now accounts for a smaller

share of GDP: 72.4% Government consumption has

increased by 123% to $49.2bn

2009 2014

+ExportsUS oil imports declined sharply

2009

Source: EIU

+ExportsUS oil imports declined sharply

2009 2014

Source: EIU

+Nigeria’s Exports

Gum Arabic

Cocoa

Oil

Rubber

Oil Palm

Cotton

+Nigeria’s Exports

CocoaOil

Rubber

Oil Palm

Cotton

+Nigeria’s Exports

Gum Arabic

Cocoa

Oil

Oil Palm

Cotton

+Nigeria’s Exports

Gum Arabic

Cocoa

Oil

Rubber

+Nigeria’s Exports

Gum Arabic

Cocoa

Oil

Rubber

Oil Palm

+Nigeria’s Exports

Gum Arabic

Cocoa

Oil

Rubber

Oil Palm

Cotton

+Nigeria’s Exports

Gum Arabic

Cocoa

Oil

Rubber

Oil Palm

Cotton

+Trade Flows - Imports

2009

+Trade Flows - Imports

2009 2014

+Imports

Machinery

Chemicals

Wheat

Sugar

Iron & steel

+Socio-Economic Indicators

Population of 158m

Labour force: 48.4m

Unemployment rate: 19.7%

Misery index (inflation +

unemployment rate): 33.6%

President: Yar ‘adua

Terrorism was focused in

the Niger Delta

5 years ago

+Socio-Economic Indicators

Population of 158m

Labour force: 48.4m

Unemployment rate: 19.7%

Misery index (inflation +

unemployment rate): 33.6%

President: Yar ‘adua

Terrorism was focused in

the Niger Delta

Population of 170m

Labour force has increased

to 55m

Unemployment rate is

higher at 24%

Misery index is lower at

32.1% due to a slower rate

of inflation

President: Jonathan

Now focused in the North

Central and North East

5 years ago Current State

+Demography: median age now

2009

Working age population: 81.3mGini Co-efficient 43.0

Above 65 years

+Demography: median age now

2009

Working age population: 81.3mGini Co-efficient 43.0

2011

Working age population: 92.8mGini Co-efficient 43.7

Above 65 years Above 60 years

+Monetary Condition Vs Policy

Monetary policy was

accommodative( MPR: 6%

p.a.)

CBN Governor: Sanusi

Inflation rate: 13.9%

Exchange rate of N148.9/$

External Reserves:$42.38bn

2009 2014

Monetary policy now contractionary (MPR: 12% p.a)

CBN Governor: Emiefele

Inflation rate: 8.1%

Naira has depreciated 16.18% since 2009 to N173/$1

External reserves down 11.4% to $37.55bn

+External Balance

Trade balance of $25.4bn

Export revenue: $56.2bn

Brent crude: $61.9pb

Import revenue: $30.8bn

Current account balance:

$13.9bn

External Reserves consisted

primarily of portfolio funds

and hot money

Trade balance has increased by

62.99% to $41.4bn Export position of $94.3bn is

expected to decline due to lower

oil prices Brent crude: $79pb Import revenue is up 71.43% to

$52.8bn Currently at $19.4bn and may

be completely eroded due to

impact of lower oil proceeds Capital flow reversals have

intensified with the end of U.S.

Fed tapering

2009 2014

+Financial Markets

+The Stock MarketYear 2009 2014(Oct 31)

Market Capitalization N4.98trn N12.44trn

All Share Index 20,827.17 points 37,550.24 points

No of listed firms 216 188

No of ETFs - 3

No of listed upstream oil/gas firms

- 2

Market Makers nil yes

Total value of trades N684.4bn N1,104bn

ASI still far below 2007 levels; market P.E ratio of 25.66x

ASI below N9trn when adjusted for new listings;

DANGCEM, SEPLAT, CAVERTON, CWG

Stock market is still unreflective of GDP

Lacks depth with just equities and bonds

+Banking System 1/2Year 2009 2014 (Sept.)

No of Commercial Banks 24 21

No of Merchant/Islamic - 2 and 1

Total Assets N17.52trn N26.90trn

Total Deposit Liabilities N9.15trn N14.95trn

Total Loans to Private Sector

N7.38trn N12.19trn

Corporate Governance Structure

Poor/Lacking Fair/Improving

Risk Management Framework

Weak Strong

E-banking Infancy Stage Fast Developing

Value of Electronic Payment

N645.1bn N2.01trn (2012)

Number of clearing days 3 1

Non performing Loans (%) 36% (pre-AMCON) 3.7%; CBN limit is 5%

Average MPR 7.9% 12%

Cash Reserve Ratio 2% 75%: 18%Source: CBN, SEC, NSE

+Banking System 2/2 Better regulated than before Gradually adopting global best practices in terms

of risk management Higher adoption of technology and electronic

platform Nigerian banks interested in the regional game

ETI, UBA, STANBIC on the lead ACCESS, FBNH and GUARANTY playing catch up

More resilient than peers in Kenya and Ghana But less profitable due to regulatory constraints

and focus on safety Average ROE FY2013: Nigeria 18%, Kenya 26%,

Ghana 45% Average ROE H12014: Nigeria 18%, Kenya 26%,

Ghana 47%

+Pension Funds

Year Domestic Equities

Govt. Bonds

Money Market

Foreign Equities

Real Estate

Other

2009 14% 33% 37% 0.2% 9% 7%

2010 18% 41% 24% 1.2% 8% 7%

2011 13% 56% 13% 1.3% 8% 9%

2012 10% 63% 10% 1.0% 9% 7%

2013 14% 64% 12% 1.3% 5% 3.7%

06’2014 14% 64% 12% 1.26% 5% 3.7%

Total Pensions Assets of N4.08trn as at 2009 Compliance and remittance issues Limited investible asset classes

Total Pension Assets of N4.52trn as at August 2014 Just about 5% of GDP (in US dollars terms) Could easily double by 2020

+PFA Asset Allocation….5 years on

PFAs doubled allocation to Govt. bonds within 5 years Mandatory contribution increased to 18% from 15% Pension funds may hit $50bn by 2018 from $26bn in 2014 where will PFAs invest, still Govt. bonds? Infrastructure deficit requires about $400bn funding Significant institutional reforms required

Land use act Speedy Judicial process

+The 2015 Challenge A naira devaluation

More cost pressures for importers A Nigerian banking crisis after every naira

devaluation 1998, 2009, 2015?

As banks adhere to Basel II/III guidelines Stricter capital requirements

How to raise equity capital in a bear stock market? Significant pressure on profitability

Petrol subsidy removal Likely to be decided post-May 29th Case for subsidy removal more tenable with falling

oil prices Negative impact on the downstream players

+Policy Landscape

+Policies have been ProgressivePrivatization of the power sectorTrade liberalizationRestrictive monetary policyOpening up of markets

Investors are allowed in

Current account convertibility

Exchange rate devaluation, more market driven

Fiscal austerity measures to mitigate

against external shocksAutomotive policy to encourage local

production

+2015 Outlook

+2015 Outlook

2015 will be broken into 2 phases

Pre election and swearing in phase

Post election

Pre election and swearing in phase will be

dominated by politics

Increased government spending for

political campaign

Election-related instability

+Post Election PhaseOil prices will rebound but unlikely to trade

above $90pbFiscal revenue will be determined by oil

price prospects Projected decline in government revenue from

4.5% of GDP in 2013 to less than 3.5% Oil production will be constrained by

ongoing policy uncertainty surrounding the PIB Thefts, leakages

Increased international borrowing to fund revenue shortfall

A low external debt/GDP ratio of 3.7% provides some headroom for this

+Post Election Phase

Tax base will increase to boost

government revenue

Policy implementation will be slow given

political indecision, bureaucratic

inefficiency and corruption

Powerful state governors and strong

labour unions will remain a barrier to the

effective dissemination of government

policy and market based reforms

+Post Election Phase

Naira is expected to trade at N175/$ at the

interbank market

Likelihood of a reduction in interest rates

and a change in monetary policy stance

Disposable income will reduce due to the

effect of a naira devaluation

Implementation of automotive policy and hike

in electricity tariffs

+

Thank you