lagos business school presentation on nigerian economy by fdc april 2007

8/15/2019 Lagos Business School Presentation on Nigerian Economy by FDC April 2007

1/62

B.J. REWA NE

FINANCIAL DERIVATIVES CO. LTD.FINANCIAL DERIVATIVES CO. LTD. April 03, 2007

Monthly Economic News and ViewsAt

Lagos Business School(Executive Breakfast Session)


2/62

Financial Derivatives Company Limited

OutlinePolicy & Political Update

Activity Wrap Up

Oil Markets

Inflation, Money Market and InterestRates

Forex & External ReservesOutlook for April


3/62


The Final Days The last scramble for contractsFederal govt. releases excess crude oil fund to

the states ahead of elections. Total Nairareleased is N489bn or approx. 10% of moneysupply

A rash of contract awards in the dying monthsof the administration is raising eyebrows both atFederal and state levels

There are rumours of a cabinet dissolution inthe offing for April


4/62


The Final Days The last scramble for contracts

FGN is putting 30 oil blocs for sale on May 2,

2007This is almost identical to the final days of the

Abdulsalam Abubakar administration in whichoil blocs were given away to their cronies

Many of those awards were subsequentlyoverturned by the present administration


5/62


The Final Days The last scramble for contracts

This time the govt. is supposedly insisting on a

50% down paymentEdmund Daukoru the oil minister has visited

China trying to drum up interest in the acreageblocs. He has expressed confidence that theblocs will be fully sold before the end of this

administration


6/62


Power Supply No light at the end of the tunnel

Power generation has collapsed again to below

15% of generation capacityPower Holding Company was forced to closedown Egbin power station on March 11 to clear a

blockage in a gas supply lineIt subsequently said it had restored 600MW ofsupply at Egbin and the PPMC has been directedto arrange regular supply of fuel to fire oneturbine which has added 200MW to the grid


7/62


Power Supply No light at the end of the tunnel

Arrangements have also been made to increasewater flow into Jebba to start a turbine that willgenerate another 900MW

The near collapse of power supply has become ahuge political embarrassment to Obasanjo andthe PDP


8/62


Policy UpdateIt was the first major policy promise made byObasanjo and the late Charismatic Bola Ige in1998Eight years later and a few billion dollars spent,

there is no flicker at the end of the tunnelAll NITEL lines in the Lagos area went down for2 days because of power outage and no funding

for dieselThis is a black eye for the newly listed


9/62


Nigeria : Electricity Industry & Distribution

Company Data

Source : African Energy


10/62


Policy Update - Niger Delta still a hot spot

The FGN launched the Niger Delta DevelopmentMaster Plan estimated to cost N6.3trn over a fiveyear period

Exploration and production companies tocontribute 6% of the budget

In spite of the fanfare of the launch, violence andkidnapping has continued


11/62


Policy Update - Niger Delta still a hot spot

In the past year over 100 workers have been

kidnapped. Higher security costs and a shrinkingnumber of expats is becoming a problem in theNiger Delta

IFC commits the sum of $155m to back the saleand privatization of the Eleme Petrochemical

Company to Indorama International Finance, anIndonesian private investor


12/62


Policy Update - Niger Delta still a hot spot June 2005 Six oil workers including two Germans kidnapped.

11 January 2006Shell oil pipeline attacked in Brass Creek area. Four foreign workers taken hostage inBayelsa. Previously unknown Movement for the Emancipation of the Niger Delta(MEND) claims responsibility

15 January Separatist militants attack Shell pumping station in Benisede, seven killed includingtwo Shell workers.

15 February Helicopter fires on barges used to smuggle oil near separatist base; militants strikeback

18 February Separatists kidnap nine foreigners working for Shell subcontractor Wilbros.

19 April Car bomb in a barracks explodes in Port Harcourt, killing two. MEND claimsresponsibility

Courtesy of African Energy


13/62


Policy Update - Niger Delta still a hot spot29 April Car bomb activated by mobile phone explodes at an oil-tanker stop in Warri. MEND

claims responsibility, said to be Nigerias first car bomb.

10 May US national working for Baker Hughes shot dead in Port Harcourt.

3 August Five members of Survicom, a Shell contractor working on a topographical survey inRivers state are killed

3 October Seven foreign workers four Britons, one Romanian, one Malaysian and anIndonesian kidnapped from an ExxonMobil compound in Eket. Released soon after

10 October Militants seize a Shell oil pumping station in Oporama capturing 60 oil workers.

Released shortly after.

6 November Gunmen take control of Agips Tebidaba flow station in Bayelsa state. After a two-week siege, 40 Agip hostages are released



14/62


Policy Update - Niger Delta still a hot spot22 November British oil worker David Hunt killed when troops try to free seven foreigners

abducted from a vessel belonging to a Eni subsidiary

18 December Two bombs explode in Port Harcourt one near the company of Italys Agip and onein the Shell residential compound. No casualties. MEND claims responsibility

21 December Gunmen storm the Total-operated Obagi field facility in Rivers state, three guardskilled. Another group takes over an Eni facility. The companies shut downproduction at both facilities, some 80,000 b/d

23 December Car bomb explodes outside government office in Port Harcourt in the first targetingof a government installation by a militant group

16 January 2007Two oil workers one Nigerian and a Dutch national are killed when gunmenattack a boat operated by Hyundai transporting workers from Bonny Island to PortHarcourt



15/62


Policy Update - Niger Delta still a hot spot7 February A 59 year oil French engineer working for Total is kidnapped in Port Harcourt

23 February Lebanese worker killed and another injured, along with the driver, when a car isattacked near Port Harcourt airport. Two Italians kidnapped by speedboat.

6 March Government says it has deployed more gunboats to the Delta. Oil output in Deltreportedly down by over 600,000 b/d, with Shell losing 187,000 b/d to a spill on

trunk line.

26 Filipinos kidnapped in Bayelsa became subject of CNN documentary

28 March 3 contractors kidnapped in Port Harcourt area

2 April 2 Lebanese kidnapped and four policemen killed



16/62


Policy Update Fitch retains ratingThe project is structured to allow for 10% ofNNPCs residual interest to be owned by thecommunity. Standard Bank, UBA and Fidelityare the local lenders of $90m of facilities

Fitch cites the positive comparison betweenNigeria and its peer group in the BB ratedcategory

One of its major striking ratios was thatExternal Reserves were 163% of BroadMoney with 11.1% months of import cover


17/62


Policy Update Fitch retains ratingFitch reaffirms Nigerian BB- rating in spite ofsignificant and increasing political challenges

Analysts were pleasantly surprised at the ratingbut considered its timing curiousComing after the mending of fences with the CNNafter the Philipino hostage saga. It was welcomeby the Nigerian govt.Fitch outlined the improving financial ratios, reformprogress and strong growth in the non-oil sector


18/62


Policy Update Fitch retains ratingIt cites the massive increase in public investment

to bolster the countrys inadequate infrastructureNigerias growth prospects are good and itsdiversification away from hydrocarbondependence is looking distinct

The report expresses concerns about the coming

elections and the risks of stability and thedemocratic structures


19/62


Policy Update Fitch retains ratingIt takes comfort in the promise and likelihood that

all candidates will embrace reformFitch claims that relative to its peers, Nigeria is acompelling case for a positive rating and a

reaffirmation of the current IDR (Issuer DefaultRating)


20/62


Policy Update Fitch retains ratingNigerias financial ratios much better than the BBcategory median

Indicators (%) Nigeria BB Median Real growth GDP 5 year average 6.3 5.2

Per capita income 843 2652Investment GDP 5 year average 23.7 21.1Inflation 5 year average 13.7 6.7Budget balance GDP 12.7 -2.8

Government debt GDP 16 42.2Current account balance GDP 20 -0.8Net External Debt : GDP -35.2 14.9Reserves : GDP 35.5 15.5

Peer Comparator Table 2009

Source: Fitch


21/62


Policy Update Fitch retains rating

2007 2008Real GDP Growth (%) 6.0 6.5

Gross Domestic Savings as % of GDP 35.9 33.9 Gross Domestic Investment as % of GDP 27.0 28.3 Growth in Broad Money (%) 25.0 17.0 Exchange Rate 126.5 125.5REER % change appreciation 3.0 2.0 External Debt Gross ($bn) 6.9 7.7 External Reserves ($bn) 55.9 66.7 Months cover imports 11.6 12.5 External Reserves as % of M2 163.0 168.0External Debt Service as % of Exports 2.3 1.5 Current Account Balance ($bn) 10.2 6.7 Fiscal (Deficit)/Surplus as % of GDP 5.0 5.5

Key Indicators and Projections by Fitch


22/62


Policy Update Goldman is cautiously optimisticGoldman Sachs, the highly reputed Investment

Bank, has initiated coverage on Nigeria onMarch 29 with a title Nigeria Medium TermOutlook clouded by near term election risk

It says that foreign reserve build up has beenstrong

Paris Club write-off and high oil prices reduceexternal risks


23/62


Political Update The finish line is still blurredAppeal court ruling on general principles of lawon INECs power and High Court Ruling onAtiku specific affirming his eligibility is roiling thepolitical space

The probability of an extension of the electoraltimetable to accommodate a presidentialelection postponement is getting higher

Alternatively an AC/ANPP and coalition of theunhappy parties is also seeming more likely


24/62


Political Update The finish line is still blurredThe election has now become a referendum on

Obasanjo to the delight of the oppositionYarAdua remains marginal favourite in a threeway race because of incumbency and resource

endowmentIn a two way race and an alliance of theAC/ANPP, Buhari looks very good


25/62



26/62


Activity Wrap Up Pre-election spending gravity

Speculative build up ahead of the elections hasled to some bunching of deals and transactions

All indicators point to a stronger than expectedMarch both in volumes and valueEarly April seems to be a continuation but couldbe hit by Muslim, Easter and electionconference of eventsValue of cheques cleared through the Lagosclearing house which usually representsapprox. 60% of National transaction flows wasup 1.7% to N675bn


27/62


Activity Wrap UpForex demand at the auction was up 1.2% to$1.07bn in MarchThere was also significant activity in theinterbank market and the BDC corridor

Ships berthing at Apapa and Tincan Islandare up 2.5% to 65. This is 32.8% abovecorresponding level in 2006

Apapa and Tincan is attracting more shippingand cargo traffic because of its faster clearingand turnaround time


28/62


Activity Wrap Up

Hotel occupancy in the key markets is up inAbuja and Lagos and declining marginally inPHCWith 3 carriers operating 10 frequencies intoPHC (NAF) base, day return visits are backagain

Feb. March % change

PH 70% 65% (5)Lagos 70% 73% 3Abuja 60% 65% 5


29/62


Activity Wrap Up

Airline load factors were uncharacteristically

strong in all directions over 50% ofinternational ticket sales are now ex-Nigeriai.e. in foreign currency and diaspora

This indicates that international travel is not adrain on the capital account


30/62


Activity Wrap UpLoad Factors

International - EuropeMarch April

Outbound 85% 80%Inbound 90% 70%

USAOutbound 90% 75%Inbound 80% 65%

Domestic 75% 65%

* April figures represent booking levels


31/62


Activity Wrap UpHigher frequency of travels before electionsVNA opened up Lagos PH (NAF BASE)with very strong market presenceCameroon airlines has closed shop and is

being taken over by a private concernVNA and North American airlines haveentered into a cooperation agreement with

NAA selling VNA destinations into PH andAbuja. A code share is planned shortly


32/62


Activity Wrap Up

Royal Air Maroc has commenced flights from

Casablanca to Brazzaville via Douala 3 times aweekCommencement date of open skies agreement

between E.U. and the U.S. pushed forward tomarch 08 to allow for opening of Terminal 5 atHeathrow

After the speculation of a bid by LufthansaGerman Airlines to takeover Iberia, anotherinteresting bid is now on the table


33/62


Activity Wrap Up

Texas Pacific Group a private equity firm hasapproached Iberia with a $4.5bn bid, the firstattempt at a cross-border takeover since thenew open skies agreement between the U.S.and EuropeMultilinks the PTO with a very loyal and strongsubscriber base in the Lagos area has sold 75%

of its equity to Telkom of South Africa for$280m. Multilinks have a unified license and isvery well positioned to compete


34/62


Activity wrap upTelkom also bought Internet Service providerAfrica Online for $20.25m. The purchase givesTelkom a base outside South Africa where itsfixed line revenue is stagnating. Africa Onlineoperates in a number of Regional marketsincluding Ghana, Kenya, Namibia, etcMTN had earlier acquired VGC

Communications for $60m, which already has aunified license


35/62


Activity wrap up

Competitive pressures are beginning to manifestin all segments of the Telecom IndustryUBS Investment bank has raised its estimatesfor MTN longer term penetration assumptions.Its five year (Dec. 2011) assumption of averagepenetration across MTNs sub-Saharan Africaregion is now 39% and includes Nigeria at 47%

UBS estimates total subscribers in Nigeria toreach 75m by Dec 2011. Current marketestimates are 27m


36/62


Oil Markets Oil prices bounce backOil prices surged to a six month high in April.Bonny has reached $69.34pb and New Yorklight sweet crude traded at $66.54pb beforeretreating sharply

Rumours that a U.S. citizen has been reportedmissing in Iran pushed prices up over $1.70pbThe standoff between Britain and Iran over the

fate of 15 British sailors held for trespassingIranian waters had roiled the markets sendingprices far beyond equilibrium


37/62


Oil Markets Oil prices bounce backThe fear that Iran could disrupt world oil flows

by blocking the strait of Hormuz through which17 million barrels of crude oil pass through aday


38/62


Crude Oil - New York Mercantile Exchange

5052

54565860626466

687072747678

80

4 / 1 0

/ 0 6

4 / 2 4

/ 0 6

5 / 8 /

0 6

5 / 2 2

/ 0 6

6 / 5 /

0 6

6 / 1 9

/ 0 6

7 / 3 /

0 6

7 / 1 7

/ 0 6

7 / 3 1

/ 0 6

8 / 1 4

/ 0 6

8 / 2 8

/ 0 6

9 / 1 1

/ 0 6

9 / 2 5

0 6

1 0 / 9 /

0 6

1 0 / 2 3

/ 0 6

1 1 / 6 /

0 6

1 1 / 2 0

/ 0 6

1 2 / 4 /

0 6

1 2 / 1 8

/ 0 6

1 / 1 /

0 7

1 / 1 5

/ 0 7

1 / 2 9

/ 0 7

2 / 1 2

/ 0 7

2 / 2 6

/ 0 7

3 / 1 2

/ 0 7

3 / 2 6

/ 0 7

d o

l l a r s p e r

b a r r e

March 23 = $62.28

Oil Markets


39/62


Oil Markets OPEC maintains quotaOPEC maintained its production quota at itsmeeting on march 15 claiming that its happy

with $60pbRoyal Dutch shell has restored significantportions of its lost production in the NembecreekIn Nigeria, the rig count has been declining in

view of the restiveness in the DeltaProduction is however beginning to climbreaching 2.25mbp in February


40/62


Oil Production (2006/07)

2.002.052.102.152.202.252.302.352.402.45

J a n

F e b

M a r

A p r

M

a y

J u

n J u

l

A

u g

S e p

O c t

N o v

D e c

J a n

F e b

Source: OPEC

m

b p d


41/62


Oil MarketsCanada based Addax petroleum has enteredinto a farm out agreement with Star CrestNigeria EnergyIt has signed a production sharing contract inrespect of deepwater OPL 291. The block issituated near Agbami Oil field being developedby Chevron


42/62


Oil Markets April will be good for oil

Outlook for April

We expect Bonny light to trade above $60pbthrough April, even if there is a diffusion of

tension in the gulf of ArabiaThe Niger Delta could witness some extra

activity over the election period in Nigeria,

cutting off some production


43/62


M S l & I t t R t


44/62


Money Supply & Interest Rates Excessliquidity is depressing rates

The release of the monthly statutory allocationtogether with the excess crude payment made

up an aggregate of N488bn in March, anequivalent of approx. 10% of money supplyThe excess liquidity created depressed short

term rates below the CBN rate of 7% p.a andan unprecedented oversubscription of govt.securities by 277%

Bond yields have fallen sharply forcing aninversion of the yield curve for maturities over12 months


45/62


Money Supply & Interest Rates

The stop rate on 90 day T/Bills is now down to6.30%, meaning that 90 day yields is lower thanovernight ratesBroad money supply growth in 2006 was 27%and is targeted at 17% in 2007At current growth rates of M2, inflationarypressures will be ignited in Q2 and Q3CBN remains determined to leave rates andpolicy unchanged through Q1 and Q2 aspromisedThere has been a general decline in lendingrates by approx. 150 basis points since January


46/62


Money Supply & Interest Rates

Yield Curve as at Mar 26th, 2007

-

2.00

4.006.00

8.00

10.0012.00

14.00

OBB 7Days

30Days

60Days

90Days

180Days

365Days

3-Year 5-Year 7-Year

%


47/62


Inflation Prices begin to climb

The monetary policy committee in itscommuniqu on Feb. 7, confirmed that foodinflation was 3.9%, whilst headline inflationwas down to 8.5%

It confirmed that core inflation which is pricechanges after discounting seasonal factorswas up at 17%

This is the first time that core inflation hasbeen segregated


48/62


InflationEnergy costs is driving up the producer priceindex. Upper class incomes are spending

approx N10,000 per day on dieselFDC urban retail consumer price indexincreased by 0.66% to 10.81% in Feb. and isexpected to increase in MarchInflationary pressure would have been more ifnot for Naira appreciation against the dollar of9% since 2005 and effective fiscal surplus in2006


49/62


Specific Price Movement - February 2007

-60

-40

-20

0

20

40

60

80

G a r r i

M a i z e

B o u

r n v

i t a

E g g s

R i c e

R o o f i n g S h t

Y a m

F l o u

r

C e m e n t

S a n d

K e r o s e n e

C a n d l e

P a i n t s

FDC Market Survey

% 11


50/62


Inflation

OutlookLook out for higher price levels in March andApril

With diesel at N82 per litre and higher wage

pressure, price levels is bound to spike


51/62


52/62


With slippage in External Reserves to $41bn,CBN has maintained Naira parity with the U.S.$

The apex bank increased total forex sold atWDAS by 1.2% to N1.06bn in MarchThis resulted in the mopping up of over N130bn

of liquidityThe official exchange rate appreciated by0.16% to N126.79 from N127

The Fed. Reserve left rates unchanged thusallowing for some slippage against othercurrencies

Forex Management


53/62


Forex Management

Exchange Rate 2006/07

115

120

125

130

135

140

145

150

155

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Source:CBN

N

/ $

OfficialInterbank

Parallel


54/62


Forex Management

Outlook

With interest rate differential in favour of theU.S. dollar, we can expect some speculativeshort term buying of dollars

The parallel market will remain stable if there isa smooth election


55/62


Stock Market The rally continues

Market gained approx 3% in the last 3 weekswith an all share index of 43,456.14 and a

market capitalisation of N6.15 trillionThe results of O and O with a turnover N209bnand profit N2.79bn up from N1.51bn waswelcomed by the market. A dividend of N4.00and a dividend yield of 5.6%

Benue Cement reported a fascinating 50%PAT of N3bn on a turnover of N6bn to thedelight of the market

S k M k


56/62


Stock Market

The market is still grossly overvalued and is

trading at 37 times earningsIn spite of its price UBA and Oceanic bankissues are still very hot and sizzling

Nigerian banks continue to tap the Eurobondmarket in London but are facing investorapathy

S k M k


57/62


Stock MarketFBN subordinated Bond (senior debt) raisedonly $175 at a coupon of 9.75 and an Issue

price of 99.035 lead arranger is Merrill Lynchwhich has supported the bond at 99.28The problem for Nigerian banks is the GT Bankbond which lost 60 cents on the first day ofIssue. Standard Bank failed to support it. Thebond is trading at 2.75cents below its initialpriceThere is currently limited appetite for Nigerianbank paper


58/62


Corporate Results


59/62


Corporate Results

Average Growth in Earnings Average P/EBank 105% 21.6Breweries 7.6% 23.63F, B & T 60.5% 20.1

Pet. Marketing 14.5% 16.35

27.0114955.20.3130.261.98FY Dec. 06CAP

17.3648973.66917.79 Mths Jan 06FCMB

22.715086.964.8170.516.69 Mths Dec 06IBTC

27.8515216.50.63221.44.53 Mths Dec 06Sterling

14.597382.54.679.2528.59 Mths Dec 06Diamond

22.671681394.52722.13 Mths Dec 06UBA

125

316

537

276

EPS

1487.76516.5FY Dec 06NIB

47.538.43.1050.546.03FY Dec .'06BCC

-16.65-83.7FY Dec '06Dangote

16.3584.82.7914.5209.2FY Dec 06Oando

22.0120.74.737.629.376 Mths Dec 06Guinness

P/E % PAT

(Nbn) % Earnings (Nbn) Period Ended Company

Outlook for April


60/62


Outlook for April

Political volatility along with judicial

pronouncementsA greater scramble for spoils as we approach thefinish line

The rush to the Eurobond market by Nigerianbanks will ease off

The first few Naira corporate bonds will be issuedin April/May

Outlook for April


61/62


Outlook for April

Inflationary pressure resulting from theaccommodative stance of the CBN on monetarypolicy will being to manifest

Profit taking by some margin traders to cover

transaction and carrying costs may trigger sellingstocks

Dividend disappointment based on normal resultswill lead to portfolio rotation


62/62

Thanks for your attention

lagos business school presentation on nigerian economy by fdc april 2007

Documents