monthly economic news and views 1 at lagos business ...u.s. reports sluggish q2 gdp growth rate of...

Monthly Economic News and Views at Lagos Business School

Executive Breakfast Meeting

August 1, 2012

Presented by B.J. Rewane Financial Derivatives Company Limited

1

2

Financial Derivatives Company Limited

Budget Implementation !!

The Politics of Fiscal

Responsibility

Outline

July Highlights

Global Update and Implications

Leading Economic Indicators

Policy Update

Markets and Business Proxies

Political Review

Outlook

3


July Highlights 4


July Highlights

GDP estimate for Q2’12 up marginally to 6.37% from

6.17% in Q1’12

MPC maintains MPR at 12% p.a.

Inflation rises marginally to 12.9% in June

Cash Reserve Ratio (CRR) increased from 8% to 12%

Effectively quarantining N823bn, or 6.3% of money supply

Accretion in external reserves slows to $36.40bn in

July

3.6% lower than this year’s peak of $37.77bn

5


July Highlights

Forex sold at WDAS fell to $2.16bn in July

a 21.45% decline from $2.75bn sold in June

Bank Net Open Position (NOP)forex limit reduced

from 3% to 1%

Marginal appreciation in exchange rate to $/N155

and $/N163

CBN increases the capital adequacy ratio of banks

with foreign subsidiaries to15%

PIB finally presented to the National Assembly

6


July Highlights

$5.76bn per annum lost in oil thefts

Representing 16.3% of National Budget

The House of Reps’ threat to impeach the President

over budget implementation

Hike in wheat and rice tariffs kicked in, leading to

20% increase in the price of bread

7


July Highlights

$1.48bn contract awarded to the Chinese for the

Lagos- Ibadan standard gauge rail track

Clampdown of subsidy cabal begins

Ms Arunma Oteh resumes as the DG of SEC

Stock market rallied 7% in July

8


Global Update 9


Global Update

U.S. reports sluggish Q2 GDP growth rate of 1.5% Consumer spending which constitutes 70% of economic activity, increased by 1.5% compared to 2.4% in Q1 2012

Federal Reserve may consider cutting interest rates With rates already at 0.25%pa, there is not much left to cut

The euro zone periphery has been at the epicenter of the further escalation in global economic stress

Citibank believes that there is a 90% chance that Greece will leave the euro zone

Triggered by increased political and financial uncertainty

10


Global Update

Euro zone confidence crumbles as Spain's troubles

mount

Spain’s GDP contracted by 0.4% in Q2, compared to a

0.3% drop in Q1

Spanish unemployment also hits an all-time high of

24.63% from 24.44%

6 of the 17 countries in the euro zone are in a recession

Moody’s lowered the outlook of Germany and the

Netherlands and Luxembourg from stable to negative

12


Global Update

IMF scales down its estimate of global growth in 2012

from 3.6%to 3.5%

Due to fear that insufficient and delayed policy action will

further escalate the Euro crisis

Italian bond yields drop on the prospect of bond buying by the European Central Bank

5-year debt yields declined by 60 bps to 5.29% from

5.89%

10-year debt yields declined by 23 bps to 5.96% from

6.19%

13


Global Update

UK economy continues to endure a lingering recession

GDP projected to contract by 0.7% in Q2, the third

consecutive quarter of shrinking GDP

LIBOR scandal continues to claim casualties as the size

of the scandal grows

The scandal is expected to cost the finance industry

between $20m-$40m

14


Global Update

Chinese economy loses pace in Q2

Reports GDP growth of 7.6%, a 3-year low

However, China’s manufacturing Purchasing Managers

Index (PMI) rose to 49.5 in July from 48.2 in June

The below 50 July reading implies demand remains weak

Japan's industrial production fell by 10 basis points in

June after May's 3.4% decline

Economists had expected a 1.5% gain

15


Implications for Nigeria

Fiscal tightening in the US will affect revenues, as 36%

of exports go to the US

Hard landing in China could reduce investment flows

to Nigeria

China’s investment in Nigeria is over $8.4bn

Tighter financial conditions in Europe to affect short

term financial flows

Additional downgrades by the ratings agencies could seriously affect Nigeria’s terms of trade

The recent alteration of the Netherland’s outlook to

negative could affect its bilateral trade with Nigeria

16


Implications for Nigeria

THE Netherlands is Nigeria’s largest trading partner in

the EU in Q1’12

Leading Dutch investments in Nigeria include

NB Plc/Heineken

Royal Dutch Shell

WAMCO

Unilever

Promasidor

KLM – Air France

17


Regional Update

South Africa’s growth estimate trimmed to 2.9%

SARB reduces rates to 5% to reignite growth

Seamless transition of power after the death of Atta

Mills in Ghana

Evidence of mature political institutions and structure in the

West African nation

Dispute over offshore oil wells claimed by Cote

d’Ivoire remains unresolved

18


Regional Update

The SSA is expected to continue robust growth into

2013, but threats remain due to the global recession

ADB expects 4.5% growth across SSA in 2012 and

4.8% in 2013

As against IMF projections of 5.3% for 2012 and 5.4%

for 2013

19


Regional Update 20


Policy Update 21


Monetary Policy - Highlights of MPC Decision

Keeps monetary policy rate (MPR) at12% p.a

Raises cash reserve ratio (CRR) to 12% from 8%

FX net open position (NOP) reduced to 1% from 3%

Immediate impact was an appreciation of the Naira by 0.04%

Decision is based on the need to stabilize the exchange rate and tighten liquidity

According to the CBN, Lowering interest rates in the face of slowing output growth prospects will weaken the naira and increase reserve depletion

22


MPC’s decision to have a profound impact on markets

Initial knee jerk reactions pushed average NIBOR upwards by approx. 200bps or 2% of the range.

CRR is effectively withdrawing N823bn from the system

Marginal impact is N274bn

Effectively reducing volume of funds available for lending

Increased borrowing costs for customers by 2-5%

Margins to remain pressured by high cost environment

CBN – Carrot and Stick - Implications

23



The further tightening will affect bank loan growth

and the cost of funds

We believe that Tier 1 banks will remain insulated due to

the cheap funds available to them

Manufacturing companies also face challenges as their

cost of borrowing increases

Sharp increase in NIBOR rates

We expect a further rise in bond yields

24


Higher interest expense squeezes the net-interest

margins of Banks

NIM’s are expected to shrink by 1.50%

Cannot be effectively transferred to borrowers

Banking stocks might face sell pressure in the short-run

Higher interest rates may adversely impact stock

market sentiment

Long-run expectations of stock market returns remains

unchanged


26


What do you do now?

Initial impact is unpredictable but so far neutral

A likely correction of about 4% to the NSE on the downside

Any irrational fall in stock prices will be an opportunity to buy

Govt. securities coupon rates have benefited from the

market tightness

We believe the short end of the yield curve remains

the most attractive

27


The Politics of Budget Implementation

Fiscal Policy 28


Budget as a tool of economic management

N4.88tn represents 8.93% increase over the 2011

budget of N4.48tn

About 75% of the budget is recurrent expenditure

56% budget implementation is achieved by the FG

based on disbursement

In terms of value, infrastructure gap remains high at

$500bn

Increased security challenge despite huge expenditure

vote of N921.21bn (18.89%) in 2012 budget

29


Constraints to Budget Implementation

Fiscal indiscipline

Loss of revenue due to the declining oil price

Late harmonisation and implementation of budget

Harmonisation/Approval in April, and implementation started in May

Budget assumptions do not support current situation

Fiscal

Balance as % of

GDP

2011 2012 2013

-3.1 -2.2 -2.1

Source: Citi Research

30


Assumptions Budgeted Actual

GDP Growth Rate (%) 7.20 6.38

Inflation (%) 9.50 12.90

Oil Production (mbpd) 2.48 2.10

Exchange Rate (N/$) 155.00 155.84


Not Doing Badly

31


Indicators May’12 June’12 July’12 May/Jul (%)

Oil Markets

Spot price ( end of month) 103.85 99.31 103.57 0.27

Spot price (avg $’pb) 110.67 95.81 101.82 8.00

Production (mbpd) 2.13 2.18 -

Money Markets (End Period)

OBB (%)p.a 11.58 14.54 15.29 371bps

Overnight (%)p.a 12.17 15.08 15.71 354bps

MPR (%)p.a 12.00 12.00 12.00 -

T-Bill Rate(%)p.a 13.50 14.19 13.85 35bps

CPI ( %) 12.70 12.90 -

External Reserves ($’bn) 37.68 36.72 36.40 3.40

Market Capt 7,037.23 6,895.29 7,340.06 4.30

Exchange rate (End Period)

Official (N/$) 155.75 155.90 155.84 0.06

Inter-bank (N/$) 159.65 162.50 160.7 0.66

Parallel (N/$) 162.00 164.50 163.00 0.62



Oil price recovers by 15% from initial sharp decline of

$90pb

Sluggish growth in money supply persists as tightening

measures kick in

Upside: risks to inflation remain as CPI rose to 12.9%

in June

NIBOR rates still trending high at an average range of

14-16%

33



Naira strengthened across forex markets, closing at

N163/$1 at the parallel market

Decline in external reserves to $36.4bn as oil price

hovers above $100pb

Stock market rally of 7% in July

Is this sustainable?

34


Markets and Business Proxies

35 Financial Derivatives Company Limited

Oil Markets

Oil prices are hovering above $100pb

OPEC: $102.94pb(end-period)

Bonny: $105.1pb

Brent: $103.57pb

WTI: $89.78pb

Nigeria’s crude production went up to 2.177mbpd in June

May output was 2.126mbpd

36Source: OPEC, EIA, CBN, FDC

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

4-J

an

11-J

an

18-J

an

25-J

an

1-F

eb

8-F

eb

15-F

eb

22-F

eb

29-F

eb

7-M

ar

14-M

ar

21-M

ar

28-M

ar

4-A

pr

11-A

pr

18-A

pr

25-A

pr

2-M

ay

9-M

ay

16-M

ay

23-M

ay

30-M

ay

6-Jun

13-Jun

20-Jun

27-Jun

4-Jul

11-Jul

18-Jul

25-Jul

Oil Price Volatility


Source : OPEC, EIA, FDC

Oil Markets

Continuous vandalism of oil pipelines and theft remain a threat to production growth

Impact on oil revenue is significant

Govt. revenue declined by 12.3% to N855.14bn in May(CBN report)

Oil receipts declined by 8.2% to N671.12bn

37

1.95

2

2.05

2.1

2.15

2.2

95

100

105

110

115

120

Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12

Oil Price vs. Production

oil production(mbpd; RHS) oil price($'pb)


Source : OPEC, EIA, FDC

Naira strengthened by 0.06% in July

Official: N155.84/$1

Inter-bank: N160.7/$1

Parallel: N163/$1

Reduction in NOP will lead to less forex for banks to trade with

Expected increase in demand pressure at the interbank

38

Forex (N/$)

Exchange Rate and External Reserves


Source : CBN, FMDA, FDC

39

Financial Derivatives Company Ltd.

Forex sales at the Dutch auction declined by 28.73% to $1.96bn in July

External reserves continue gradual decline to $36.4bn

After reaching a peak of $37.72bn 8th June (21 month high) Forex inflow in May was $3.63bn; 11.85% higher than April’s figure(CBN report)

40

32.0

33.0

34.0

35.0

36.0

37.0

38.0

Jan'12 Feb'12 Mar'12 Apr'12 May'12 Jun'12 Jul'12

External Reserves ($'bn)

Exchange Rate and External Reserves


Source : CBN, FDC

Money Market

Broad money supply (M2)

declined by 0.88% to N13.48trn in June

Largely to the 5.75% decline in net foreign assets

CPS rose by 1.53% to N14.69trn

Demand deposits rose by 1.81% to N5.51trn

41

11.40

11.60

11.80

12.00

12.20

12.40

12.60

12.80

13.00

0

2

4

6

8

10

12

14

16

jan'12 feb'12 mar'12 apr'12 may'12 jun'12

Growth in Monetary Aggregates & Inflation rate(%)

M2 (N'trn) CPS (N'trn) M1(N'trn)

DD(N'trn) Inflation (%; RHS)

Source: CBN, FDC


Nominal interest rates

are still high

Average range of 14%-16%

91-day T/bills: 13.95%

Real interest rates are

still positive despite high inflationary pressures

42

Money Market

10

11

12

13

14

15

16

17

18

19

2-Jun

4-Jun

6-Jun

8-Jun

10-Jun

12-Jun

14-Jun

16-Jun

18-Jun

20-Jun

22-Jun

24-Jun

26-Jun

28-Jun

30-Jun

2-Jul

4-Jul

6-Jul

8-Jul

10- Jul

12-Jul

14-Jul

16-Jul

18-Jul

20-Jul

22-Jul

24-Jul

26-Jul

28-Jul

30-Jul

1-A

ug

NIBOR (% p.a.)

OBB ON 7-day 30-day 60-day


Source : FMDA, FDC

June inflation rate rose to 12.9% (yoy) from 12.7% in May

Still below CBN’s forecast of 14% by H1’12

Costs of key food items continue to impact the inflation rate

Impact of hikes in import levies and electricity tariffs to put pressure on price index

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

Monthly (YoY) Inflation Rate

Headline Inflation All items less farm produce Food Inflation

•Source: CBN, NBS

Inflationary Pressure 43


Business Proxies 44


Business Proxies

Value of cheques in

Lagos declined by

5.21% in June to

N1.52trn

M2 declined by 0.88%

to N13.48trn

Due to 5.75% decline in

net foreign assets

45

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

jan'12 feb'12 mar'12 apr'12 may'12 jun'12

Value of Cheques

Value (N'bn) LHS (Volume' m) RHS


Source : CBN, FDC

June’s federal allocation rose by 8.48% to N563bn

46

Business Proxies

606.45

620.7 613

563.09

519.35

569

FAAC (N' bn)


Source : FMF

47

5 5 4 4

5

8

14 13 13

11 10

11

Offshore and Onshore Rig Count

Business Proxies

Oil rig count rose by 4

units, from 15 in May to 19

in June

Significant improvement

recorded onshore


Source : Baker Hughes

Forex sales declined by 21.45% to $2.16bn in July

As demand pressure eased

48

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

Forex Sold @WDAS

Business Proxies


Source : CBN, FDC

Aviation Sector

49

Turbulence in Profits and in the Skies


Global Aviation

Q1 profits down significantly from 2011

North American and Middle Eastern airlines performed strongly

# Airlines Q1 2011 Q1 2012

Operating profit

Net post tax profit

Operating profit

Net post tax profit

14 North America 2013 -5 2151 518*

19 Asia-Pacific 1219 791 718 -231

12 Europe -1702 -1680 -2135 -1710

5 Latin America 477 349 266 216

5 Middle East 551 562 270 195

55 Sample total 2558 17 1260 -1012

Figures are shown in terms of US$ (million)

*Excludes AMR reorganization items, totaling US$1.4billion

Source: IATA Economics

50


Global Aviation

Market conditions were favorable to airline profits in

Q2

Q2 jet fuel prices fell by approximately $30

20% below their Q1 peak

Prices have eased back to their late 2010 levels

The decline is a result of the increase in oil supply as global economic growth expectations fell further

Worldwide airline fares have fallen by 2% in 2012

US passenger yields continue their upward trend

51


Global Aviation

Air travel markets expanded through Q2

Though the strong upward trend in RPKs leveled off in May

Growth in passenger capacity continues to outpace passenger demand growth

In May capacity growth was 0.5%, while passenger demand increased slightly by 0.1%

Passenger load factors have reduced in May while cargo load factors maintained their levels

Passenger load factor receded by 0.1% to 77%

compared to 2011.

53


Global Aviation

Key events of the summer: the Olympics and the entry

of Etihad airline

Air traffic is avoiding London routes due to the effect

of the Olympics

Entry of Etihad airline is cannibalizing the 5th freedom

carriers

i.e. Rwanda air, Kenyan airways, Ethiopian airways

50% of Rwanda air traffic now

54


Impact of Etihad entry on European carriers yet to

manifest itself

Impact on Emirates, Qatar will be moderate in the short run

The long term competitive position of these carriers is

negative

Delta airlines is holding its own against United airlines

in Nigeria

Direct competition between United airlines and Delta airlines in the US market

55

Global Aviation


Global Aviation

Delta airlines has gained greater share of incremental

traffic, losing mainly Houston passengers

Houston is the no1 preferred destination for Nigerians,

followed by Atlanta and Washington DC

Arik is improving market share to New York with 60%

load factor- summer effect

Its normal load factor is 30%

56


Regional Aviation

Arik is benefitting from the Air Nigeria crisis in West

Africa

Air Nigeria’s 4 Boeing carriers have been re-possessed

Asky has increased frequency to make up for supply

gap created by Air Nigeria

Air Senegal has joined Nigeria BSP to benefit from

the centralized revenue in the Nigerian market

Tickets for flights outside Nigeria can be issued locally

Air Cote d’Ivoire has acquired a new aircraft

Yet to fly Lagos route

57


Domestic Aviation

British Airways considers starting flights to Port

Harcourt

Turkish Airlines has applied for approval to start daily

flights to Abuja and Kano

Overland adds flights to Ilorin and Asaba

Morning and Afternoon flights on weekdays for the Lagos-

Asaba route

Sunday flights for Abuja-Ilorin and Lagos-Ilorin routes

58


Domestic Aviation

Air Nigeria confirmed its aircraft lessor, GECAS, has

repossessed its four Boeing 737-300s

The four aircrafts were repossessed due to the non-payment of accumulated monthly rentals

The carrier is considering cutting its workforce by 85%

Twelve pilots and engineers have already being fired for their involvement in the June organized strike

The airline continues to operate its Lagos-London-Lagos route

59


Domestic Aviation - After Dana Air Crash

Dana Air claims to have paid out the first round of

compensation to families of the victims of the June crash

Arik is biggest beneficiary of the Dana Air suspension

CBN reports that N86bn has been disbursed to

struggling carriers through PAIF

AMCON MD states that distressed airlines owe the corporation N135bn

Taken over the NPLs of the ailing airlines for the past 2

years

60


Domestic Aviation

Accident Investigation Bureau has submitted its

preliminary report on the Dana air crash

FG announces plans to establish a new national carrier

JV with 20% equity participation by an international carrier

FG also intends to construct a Maintenance Repair Overhaul (MRO) hangar

In efforts to enable domestic carriers to maintain their aircrafts in the country

61


Domestic Aviation

The Aviation Minister plans to peg the aircraft age

limit at 15 years

Nigerian aircrafts operating over the limit won’t be

certified

FG already proposed an age limit of 20 years in 2010

The current age limit is 22 years

Air fares may increase as airlines are forced to

purchase new carriers

The FG considers making IATA safety audit checks

mandatory for Nigerian airlines

62


Real Estate Update 63


Lagos State Residential Real Estate

Property values on the mainland are appreciating

Maryland, Agege, Gbagada

Life span of properties on the market on the decline

Average of 4 weeks

Affordability of rental prices, when compared to

prime areas, has helped increase demand

Prime areas still experiencing a supply glut

Property developments springing up in Lekki, Park View and Ajah

Average vacancy rate of 50-60% in prime locations

64


Commercial Real Estate

Average vacancy rate of 30-40% with the office

space segment comprising the majority

Vacancy rate in shopping malls is low at 10%

Free trade zone will have a positive impact on

property values along its axis

Airport and seaport to attract huge volume of business

The real estate market remains a viable form of

investment

Acts as a hedge against inflation

65


Stock Market


NSE – A High Seven in the Seventh Month

A positive return of 6.8% on the index was no surprise as investors took position in anticipation of H1 results

Bellwethers witnessed the biggest gain

Portland Paint returned 32.8% in July as a result of acquisition by UACN

6,600.00

6,700.00

6,800.00

6,900.00

7,000.00

7,100.00

7,200.00

7,300.00

7,400.00

7,500.00

20,500.00

21,000.00

21,500.00

22,000.00

22,500.00

23,000.00

23,500.00

24,000.00

30-Jun-16 05-Jul-16 10-Jul-16 15-Jul-16 20-Jul-16 25-Jul-16 30-Jul-16

NSE INDEX MARKET CAPITALIZATION (N'b)

68


July – A strong month but for how long?

Market rallied in July as the floodgates of half year

results opened

The index gained 6.8% in July in comparison to the

-2.12% return in June.

YTD, the market return stands at 11.2%

The index crossed the psychological barrier of

23,000 points, hitting a year high of 23,381.05 on

the 23rd July

69


Results and so what?

Increased market activity in anticipation of results

However, as results filtered through activity withered

Was the market overheated before the half year

result?

Yes and No

Bargain hunting began in June as the market lost steam

Further bargain hunting was seen in early July, especially

in the banking and brewery sector

70


Results and so what?

Demand for banking and brewery shares led to an

increase in share prices

The GT Bank reached a year high of N17.50 and Nestle

crossed the N500 barrier reaching an all time high of

N505

Rocketing share prices alerted profit takers to lock in gains

Impressive results not a catalyst for stock performance

71


Results, so what?

Results released so far show the financial sector have

fully recovered while the non-financial sector are

seeing their margins squeezed

First Bank and Nestle post PBT of 125% and 24%

respectively

FBN shares have declined 3.9% while Nestle has remained

flat

Investors disappointed by the lack of corporate actions

72


Outlook – Muddling Through

The 100 days moving average of 22,099.08 needs to

be tested again

We ascribe the current bull run to earnings only, rather

than a change in market fundamentals

Fundamentals remain favourable regardless

We expect a further decline in market activity, both in volume and value

We believe market events will be hugely driven by profit taking in August, in the absence of any catalyst

Market to marginally correct and shed some of the gains

of July

73


Political Update

President Consolidates as Opposition Coagulates

74


Political Update

Two African leaders have passed away while in office in 2012

Ghana’s Atta Mills and Bingu Wa Mutharika of Malawi

Seamless transition in Ghana but not so smooth in Malawi

Evidence of mature political system and strong institutions

The battle between the House of Reps. and the president has reached new heights

Impeachment battle is a smoke screen for other underlying issues

PDP remains a party in constant crisis

75


Political Update

Boko Haram threat has continued, despite security chief changes

The Edo state election shows that performance and incumbency are insurmountable factors in modern Nigerian politics

A major boost for the coalition of opposition parties

Ondo state is the next battle ground Pitching Iroko party vs. ACN

The PDP is not a factor

Local government election results in Ogun state has followed in the same trend as the general elections

76


Outlook 77


Outlook for August - Global

Major central banks are likely to keep their policy

loose or ease further

Need for a second bailout for Portugal and Ireland

will become apparent

China to have a H2 rebound with sustained policy

easing

78


79

Financial Derivatives Company Ltd.

Outlook for August - Nigeria

Full impact of further tightening to become apparent

in August

Exchange rate to appreciate by 0.5%-1.0% in the

inter bank and parallel market

Inflation to decline marginally in July

Interest rates in the money market will remain

elevated between 14%-16% p.a.

Stock market will be flat in August

Olympics will be a good diversion from politics

80


Thank you for listening


Corporate Humour

The wise person questions himself, the fool

others.

In a Restaurant window: “Don’t

stand and be hungry; come on in and get fed up.”

- Unknown Author

The more help a person needs in his garden, the less it belongs to him.

82


- Henri Arnold

- William H. Davis

Corporate Humour

A good reputation is better than fame.

One man practicing sportsmanship

is far better than 50 preaching it. - Knute K. Rockne

He who is carried on another’s back does not appreciate how far off the town is.

83


- Louise Dudek

- African Proverb

Corporate Humour

To do injustice is more disgraceful than to suffer it.

A lot of people mistake a short memory for a

clear conscience.

At a Car Dealership: “The best way to get back on

your feet-miss a car payment.”

84

- Plato

- Doug Larson


- Unknown Author

Corporate Humour

Discipline is remembering what you want.

Nothing happens unless first a dream.

At a Taxidermist’s window: “We really know our stuff.”

85

- David Campbell

- Carl Sandburg


- Unknown Author

Bismarck J. Rewane, MD/CEO Financial Derivatives Company Ltd.

Lagos, Nigeria 01 - 7739889

86 Thank you for your attention


monthly economic news and views 1 at lagos business ...u.s. reports sluggish q2 gdp growth rate of...

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