lbs august 2016
TRANSCRIPT
Monthly Economic News and Views
Presented by B.J. Rewane Financial Derivatives Company Limited
Lagos Business School
Executive Breakfast Meeting August 3, 2016
Policies Daunting, Markets Uncertain, Citizens Groaning
2
Outline
July Highlights
Global & Regional Context
Outlook for June
Policy Directions
Business Proxies & Stock Market
Political Risk Analysis
July Highlights
High Expectations & Dashed Hopes
4
High Expectations & Dashed Hopes
Flexible exchange rate policy launched with fanfare
Naira falls modestly initially and dipped sharply lower to N316/$
Estimates for Q2 negative growth increase with consensus at -
1.5%
IMF projects full year of negative growth of -1.8% for 2016
Power output from the national grid stays at 2400MW
Court orders suspension of tariff increase
5
High Expectations & Dashed Hopes
Government cancels Manitoba contract with Transmission
Company of Nigeria
No official reasons offered
Price of diesel skyrockets on increased demand for alternative
energy- N215/litre
Kerosene price rises stratospherically to N600 per litre
Economic activity shows signs of marginal recovery as PMI inches
up to 51.9 (FBN)
6
High Expectations & Dashed Hopes
Oil output also up marginally to 1.52mbpd
Militant pipeline attacks in Delta are down due to a step in counter
insurgency
New spectacular attacks on gas pipelines & facilities in Ogun state
Oil price entered a bear market, down 22% in 2 months
Average oil price in July at a 2-month low of $46.51pb
0.81% lower than the Q2 average of $46.89pb
Denting the dollar inflow and external reserves of Nigeria
7
High Expectations & Dashed Hopes
OPEC countries increase production and Saudis offer discounts
FAAC amount surges 83.2% to a high of N559bn
Attributed partially to improved tax collection and exchange
rate gains
Estimates for FAAC in August is N700bn, highest level in 30
months
Average opening position of Nigerian banks was N257.2bn
8
High Expectations & Dashed Hopes
MPC resumed the tightening cycle, raising the MPR by 200 basis
points to 14% pa
Primarily to contain price inflation and reduce regulatory arbitrage
T/bill rates rise to record levels of 18.5% pa (364-day)
Banks were borrowing from CBN at 14% pa and lending to FGN
at 17% pa
Headline inflation jumped to 16.5% while core inflation climbed
to 15.3%
Driven by continued supply shocks and base year effects
9
High Expectations & Dashed Hopes
Corporate performance declined across all sectors
Nestle the most pricy company on the exchange reported
sharply lower earnings
Nigerian credit ratings remained unchanged after the downgrade
by Fitch last month
Nigerian Misery Index now at an all time high of 47.7%
Threatening political stability and social cohesion
Global & Regional Context
12
FED Errs on the Side of Caution
The United States (world’s largest economy) grew by 1.2% in
Q2
Significantly lower than earlier forecasts of 2.5%
Business investments fell by 4.5% in Q1 and PMI shrank to 50.4 in June
US stocks also sank from its record high
13
FED Errs on the Side of Caution
The Fed Reserve decided against raising interest rates
Currently 0.25 – 0.5%
Subdued inflation expectations and global worries were major
considerations
The possibility of a rate hike increase later this year has
increased
Just as near term risks diminish
14
FED Errs on the Side of Caution
Political and election considerations may be a tacit consideration
An increase in interest rates, a stronger dollar and lower oil
prices are naira negative
Could trigger capital flow reversals and increased debt service
for Nigeria
The US remains one of Nigeria’s strategic trading partners
15
UK
Bank of England (BOE) meeting on August 4th
BOE cut interest rates to 0.25% from 0.5%
Making the pound weaker and British goods more competitive
16
EU Banks Pass Stress Tests
31 banks pass stress test
Banca Monte dei Paschi di Siena (BMPS) fails European Banking
Authority (EBA) stress test
RBS and Barclays showed cause for concern
Deutsche Bank and UniCredit suffered sizeable hits to their
capital buffers
Deutsche Bank is one of Nigeria’s correspondent banks
May reduce its appetite for cross border risks in SSA
17
China’s Growth in Q2 is 6.7% - on par with Q1
1.5% higher than forecasts
PMI of 49 signals a mild contraction
Shanghai Composite index rises by 0.1%
Nigeria is the 2nd largest trading partner of China in Africa
China is a big commodity cost driver
Stagnant growth in China means that global demand for oil will
slow
China
18
SSA - Economic Review
International Monetary Fund cut its global GDP growth forecast
for SSA to 3% from 3.5%
Q2 GDP growth for South Africa shows marginal improvement
Yet highlighting a weak and strained economy
Unemployment remains unabated: 26.6%
GDP outlook improved for Angola, Cote d’Ivoire and Tanzania
Cote d’Ivoire , Tanzania and Ethiopia are expected to grow the
fastest
19
SSA- Economic Review
Conflicting inflationary and policy trend in SSA
Most SSA countries use interest rates to curb inflation
COUNTRY Inflation
Trend
Current
inflation %
Monetary
policy Interest
rates%
Change in
interest rates
Policy stance
NIGERIA
16.5 14 Tightening
SOUTH AFRICA
6.3 7 Tightening
ANGOLA
31.8 16 Tightening
KENYA
6.4 10.5 Easing
GHANA
18.4 26 Tightening
Commodities Market
21
Commodity Prices Outlook
Oils prices likely to maintain downward trend as supply builds
Bearish outlook for grain prices in August due to:
Expectations of bountiful harvests
and expanding inventories
Cocoa prices to increase as West African production fails to meet
target demand
Sugar prices to remain high as increased production from Brazil &
Europe not enough to bridge deficit
22
Implications for Nigeria
Average oil price between Jan – July is now $41.86pb
Production levels yet to recover to pre-militant attack levels
Lower agric commodities prices being eroded by naira depreciation
Average decline in agric commodities was 6.83% in July
Compared to naira depreciation of 8.55%
Domestic Economy
25
Leading Economic Indicators INDICATORS
Jun’16 Jul’16 (Jun/Jul)% change Aug* Oil Markets
Spot price (avg $’pb) 49.87 46.51 -6.73 40
Production (m’bpd) 1.523 1.55* 1.77
1.62
Money Markets (End Period)
OBB (%)p.a 4.42 3.75 -0.67 6.00
O/N(%)p.a 4.83 4.25 -0.58 6.50
MPR (%)p.a 12 14 200bps 14
CPI ( %) 16.5 16.8* 0.30* 17.00
External Reserves ($’bn) 26.35 26.23 -0.45
26.0
Exchange rate (End Period)
Inter-bank (N/$) 281.33 321.66 -10.67 305-310
Parallel (N/$) 351.00 378.00 -7.14 350-370
Other
Market cap (N’trn) 10.24 9.62 -6.05 9.30-9.50
FAAC N’bn) 559.03 600.02* 3.37 620.00
FBN PMI 50.2 51 51.5
52
Vacancy Factor Index 172 172 -
175
Source: FMDQ, CBN, * FDC Forecasts
26
IMF Cuts Growth Forecast... Again
IMF cuts Nigeria’s growth forecast to -1.8%
Second cut in 6 months
First time in April, from 3.5% to 2.3%
Economic activity will be constrained by forex shortage
GDP growth is expected to bottom out in Q3 and a marginal
recovery in Q4
27
PMI- Slight Expansion
FBN & CBN’s measure of PMI show
a recovery in the manufacturing
sector
PMI expected to increase in August
Source: FBN Quest, CBN, *: FDC Forecast
44.6 50.6
54.4
46.5 48.2 50.2 51 51.5 47.2 45.5 45.9 43.7 45.8
41.9 44.1 45.6
0
10
20
30
40
50
60
FBN PMI CBN PMI
28
Oil Price Tumbles as Production Falls
Oil price drifted lower towards $42pb and has recovered to
$45pb
Expect a trading range of $41pb-$45pb in August
Domestic oil production to stay flat in August at approximately
1.5mbpd
Unofficial sources put production at slightly above 1mbpd
29
We are in a New Oil Price Regime
30
What Could Go Wrong?
Deadlock in talks and increased insurgency
Oil prices falling below $40pb
31
Inflation Upward Trend Sustained
Headline inflation to increase to 16.8%
Driven by supply shocks
Spike in prices of refined products
Forex scarcity and defensive buying
Higher interest rates unlikely to reduce
marginal propensity to consume
9.60
11.40
12.80 13.70
15.60 16.50 16.80
15.50
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
32
Domestic Commodities – Harvest Season
Commodity Jun’16(N) Jul’16 (N)
Garri (Yellow) 10,500 12,800
Rice (50kg) 14,000 19,000
Beans (oloyi) 16,000 18,500
Sugar 10,600 13,000
Semovita (10kg) 2,500 3,500
Tomato (Basket) 20,000 15,000-17,000
Source: FDC Think Tank
33
Domestic Commodities – Harvest Season
Harvest season notwithstanding, commodity prices remain
stubbornly high
Tomato prices, crashed 67% to N15,000
Effective curbing of pests and over cultivation
Rice, flour and sugar sharply higher on exchange rate pass
through effect
Locally produced commodities also more expensive as
substitution effect weighs in
Domestic substitutes also inching upwards
34
Energy Price Trend- Kerosene & Diesel Defy Gravity
Official price of kerosene increases by 62%
Likely to reduce the street price
0
50
100
150
200
250
300
Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Diesel N/l
PMS N/l
Kerosene/l
35
Impact Analysis
Growth Inflation FAAC PMI
Exchange rate
(depreciation and
scarcity)
Negative Negative Positive Negative
Falling PMS Positive Positive Neutral Negative
Surge in fuel price
(kerosene, diesel)
Negative Negative Neutral Negative
Higher MPR Negative Positive Neutral Negative
Policy Impact on Economy
38
Bold Decisions have been made…
Exchange rate
liberalization Reflect REER & correct trade imbalance
MPR rate increases Control inflation
Fuel subsidy removal Reduce fiscal and forex burden
DESIRED OUTCOMES POLICY
Note: REER means Real Economic Exchange Rates
Context
39
New Policy Sequence
40
41
Market Value (N400) vs. Economic Value (N315)
Economic prognosis suggests
the naira is undervalued by
1.26% at N314.99/$
Convergence crystallized in the
reverse direction
Market reality – IFEM rate
converging towards parallel
market rate
Conclusion: Divergence
between market realities and
economic expectations
Purchasing Power Parity
Jul-16
=N= US $ PPP ('=N=/US$)
Bottle of Coke (50cl) 120 2.65 45.28
Heineken 400 2.82 141.84
Hamburger (Johnny Rockets) 2,500 4.59 544.66
Uncle Ben's rice (S. Pkt) 1,585 3.65 434.25
Toyota Corolla 11,000,000 17300 635.84
Bottled Water (1.5ltr) 150 1.94 77.32
Big Loaf Bread 300 2.39 125.52
Irish Spring Soap (1 cake) 325 0.74 439.19
Chicken Drumsticks ( 1 kilo) 1,680 3.32 506.02
Eggs (One dozen) 510 2.55 200.00
Average PPP 314.99
Naira Price at IFEM 319
PPP (%)
Decision: Naira is Under valued -1.26%
Spot Rate (Parallel) 400
Outcome: Compared to IFEM rate of N319/$1, the Naira is undervalued by 1.26%
42
Daily Transactions in See-Saw Mode
Reduced premium between forex markets
168 198 199
330
210 230
266
377
0
50
100
150
200
250
300
350
400
Jan'15 Jul'15 Jan'16 Jul'16
Official rate Parallel Market
N42 N32
N67
N47
Spread between markets
0
20
40
60
80
100
120
140
160
Jul'25 Jul'26 Jul'27 Jul'28
48.24
7.83
144.05
23.74
Volume of Transactions Traded ($'mn)
1 Green, 7 Amber & 8 Red
44
Consumers are Struggling
Business Proxies
48
FAAC Up at an 18-Month High
FAAC to be shared in August is projected to
rise to N700bn
As a result of increased exchange rate gains
Reached highest level in 18 months
N559.03bn in July from N305.12bn in June
Government is better positioned to intervene
Pending N90 billion bailout to states
Only available to states who meet criteria (tax
review, debt ratio
49
More Ships in Lagos
Ships awaiting berth increased to 45 in July
Higher international trade activity, forex availability and settlement of
backlogs
Ships awaiting berth expected to increase to 50
Boosted by budget implementation, flexible exchange rate
0
100
200
300
400
0 10 20 30 40 50 60 70
Feb
-15
Ma
r-1
5
Ap
r-1
5
May-1
5
Jun-
15
Jul-
15
Aug
-15
Sep
-15
Oct
-15
Nov-
15
Dec-
15
Jan-
16
Feb
-16
Ma
r-1
6
Ap
r-1
6
May-1
6
Jun-
16
Jul-
16
Ships Awaiting Berth
Parallel Rate (N/$)
Ships Awaiting Berth
50
Power Output
1592.25
2753.6
4544.75
4382.2
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
4500.00
5000.00
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
4500.00
Power Output (Monthly Average)
Constrained Ouput Monthly Average
Power Output (MW) Average power output is constrained
Output yet to recover to pre-avenger
attack levels
Generation and output subject to
militant attacks and speed of repairs
Source: NERC
51
Domestic Retail Industry
Knock-on effect of forex policy seen in prices of imported items
Substitution to cheaper/local brands expected
Lower real income likely to reduce traffic in retail stores
Shelves are expected to thin out more due to higher import
cost
Stock Market
Market Expectation Up, Corporate Earnings Down
54
NSEASI July 2016 - Highlight
Nigerian stocks market tumbled by 5.36% to
close at 28,009.93 points
Bringing YTD return of the index to (2.21%)
Market capitalization closed at N9.62trn for the
month of July
Representing a 5.36% decreased from N10.16trn
The bourse average daily turnover decreased by
29.9% to N2.5bn from N3.54bn
26,000
27,000
28,000
29,000
30,000
NSE ASI
55
NSEASI July 2016 - Highlight
The average daily volume traded (ADVT) decreased by 21.7% to
273.9bn
The selloff that occurred in the first three weeks of the month of
July brought to light four key issues:
The flight to safety as yields on government securities surge upwards
FX illiquidity
Unimpressive corporate earnings result
Short term over board on economic indicators
Market PE ratio now 9.3x
56
ScottFree BC 30
ScottFree Index
BC30 index lost 3.98% in June
The SFNG Blue-Chip 30 Index (USD) was
down 14.24% while the SFNG Blue-Chip Index
(EUR) was down 15.59% for the month of July
30 day volatility in July was at 17.52% (down
from 40.61% in June)
1 year return of -21.52%
Trailing P/E 6.67x
57
H1’16 Corporate Earnings
H1’16 earnings season commenced
As of July 29th, about 49.7% of all NSEASI companies have
reported Q2’16 earnings
Stock prices reflective of perceived ability to deliver future
returns
Short term overboard on economic indicators
Results were disappointing but overall in-line with market
expectation
58
H1’16 Corporate Earnings
H1’16 Pre-Tax Profit down by 53.4% from N377.2bn, Earnings
up by 6.67% from N2.04trn
Banks’ H1’16 was disappointing:
Gross earning marginally increased 0.3% from N694.3bn and pre tax
profit declined by 19.1% from N122.3bn
Sector P/E – 7.26x
NSE Banking declined by 2.64% for the month of July
Banks
Gross earnings declined marginally by 0.2%
to N273.4bn from N273.9bn
Net interest income up by 8.85% from
N110.3bn to N120.1bn
Net impairment charge spiked to N32.9bn
from N17.8bn
Representing 84.8% increase
Pre-tax profit down by 32.31% to N41.6bn
from N61.4bn
P/E ratio 3.16
Share price N12.74
Gross earnings declined by 1.24% to
N268.45bn from N271.8bn
Net interest income down by 5.01%
from N132.7bn to N126.1bn
Net impairment charge spiked to
N69.9bn from N22.6bn
Representing 209.6% increase
Pre-tax profit down by 11.9% to
N45.8bn from N52.1bn
P/E ratio 11.18
Share Price N3.33
ECOBANK FBNH
61
Oil and Gas Downstream
Revenues rose 29.9% y-o-y to N145billion
Petroleum products and lubricant segments
grew by 29.2% and 35% respectively
PMS price increase by 67.6% to N145
attributable factor
Gross margin improved to 15.74% from
11.36%
Pre-tax profit increased by 198.58% to
N12.9bn
Profit margin improved to 8.8% from 3.86%
Declared interim dividends of N3 per share
payable in September 2016
P/E ratio 15.22
Share Price N181.5
Revenue up by 52.9% to N50.3bn
Reflective of PMS price increase in the
month of May’16 hike from N97 to
N145
Gross margin and profit margin were
flat at 81% and 12.9% respectively
Selling and administrative expense in
aggregate rose by 20.6% from N4.9bn
to N4.1bn
Pre-tax profit increased by 198.58% to
N12.9bn
P/E ratio 11.23
Share Price N162
TOTAL MOBIL
62
Agriculture
Revenue up 51.2% to N7.54bn
Local sales accounts for 89.7% of revenue
as against 81.9% for prior year
Finance cost reduce by 32.4% to
N164.7mn
Still enjoying its five (5) years moratorium
by Socfinaf S.A and single digit interest rate
from FGN
Pre-tax profit increased by 82.8% to
N3.91bn from N2.13bn
H1’16 profit margin 51.8% compared to
prior year of 42.8%
P/E ratio 8.36
Share price N33.66
Revenue up 60.5% to N7.52bn
Gross margin increased to 63.3%
Finance cost reduce by 5.62% to
N303.3mn
Pre-tax profit increased by 164.6% to
N4.12bn
H1’16 profit margin 54.8% compared to
prior year of 33.3%
P/E ratio 16.7
Share price N38.85
OKOMU OIL PRESCO
63
64
Outlook
Record rates at T/bill auction of 18.5% (364-day) is crowding
out equities
PFAs are scrambling for T/Bills
Retail investors and mutual funds also shorting equities
Weak earnings in Q2
Real Estate Industry
66
Real Estate Update
The vacancy factor index remains high at 172
The LVFIX is a lagging indicator - yet to respond to recent policy
changes
0.36% Q1 contraction in GDP still affecting the vacancy rates today
Expectations of a further 1.5% contraction in GDP is likely to push
the index up
67
Real Estate Update
In many areas in Lagos, rents have remained very high despite
the supply glut
Vacancy rates of commercial properties have remained stable
Dollar denominated rents becoming less prevalent
In dollar terms, rents are sharply lower
68
Real Estate Update
The increase in inflation rate to 16.5% is likely to reduce future
demand for housing
Individuals will face budget constraints
Will increase the number of rental defaults in the market
Real returns in the stock market have been negative
Real estate as an asset class still offers positive returns
Investors will rather divert funds to such markets
69
Outlook
Demand for housing is expected to shrink due to lower
disposable income
We expect a move from prime areas to more affordable housing
(mainland areas)
We expect to see new developments coming into the market
Positive changes in the sector are expected from 2017 onwards
As we see demand growing through expatriates coming into the
country
Aviation Sector-Dollar Backlog
Once Bitten, Twice Shy
72
Global Aviation Performance
Global airline share prices dropped by 11.6%
YTD decline of 21%, the worst since 2008 recession
Terrorist attacks increase negative sentiments to airline stocks
Q1 net post-tax profits are 25% higher than Q1’2015
Average global yield down by 9% YTD
Premium fares are the buffer for airline profitability
73
Global Aviation Market
Passenger and freight capacity increasing
African carriers have grown AFTK by 23% Y-o-Y
Passenger load factor is trending at record highs
74
Domestic Aviation Update - IATA Fares Go Up
Domestic carriers want to increase fares by 45%
Naira weakness leading to higher operating costs
IATA rate of exchange now flexible
Dollar scarcity still a fundamental problem
Backlog beginning to creep up again
After 9 months of using N200/$, it is currently at N312/$
75
Domestic Aviation Update
Jet A1 fuel spikes 100% to N240 per litre from 2015
Maintenance costs have skyrocketed
Flight delays and cancellations continue
Pilot and cabin crew training costs are all in dollars
76
Factors affecting the Domestic Aviation Market
Weaker naira and declining purchasing power
Nigerians are cutting back on international travel
Current connectivity within Africa is poor
State govts facing fiscal imbalance are slashing travel costs
77
Domestic Aviation Outlook
Ethiopian airlines offers the best deals
Lagos-Newark via Lome on a dreamliner for N400,000
Time and cost efficient deal in style
Qatar airways is next amongst Naira stretchers
78
Domestic Aviation Outlook
Load factors to the US picking up gradually
Nigerians are now cutting back on travel
Expect another round of capacity cuts into Lagos and Abuja
Fares will stagnate as devaluation eats deep into disposable
income
79
Implications
Delayed and cancelled flights will affect business activity and
connectivity
Revenue loss for many airline companies
Risk on flight safety
Capacity and frequency into Lagos and Abuja will be cut
Political Update
82
Political Update
Buhari finally starts making appointments to APC loyalists
Sharing of spoils helps consolidate power base
Poor economic performance is eating into Buhari’s favourability
Opponents are too weak to take political advantage
PDP in total disarray
83
Political Update
Lack of strong opposition is encouraging militancy
Political opponents are exploiting the economically frustrated
and disgruntled
Dismantling of rent-structure and war on corruption has
weakened the political class
Incumbency a major advantage but turnout very low in bye
elections
84
Political Update
Most elections are inconclusive at first count due to complicity
Senate & House leadership are all embattled
Edo State election likely to favour incumbent
But the State has always been electorally unpredictable
Militancy in the Niger Delta will continue to be a nuisance
Intelligence force and constructive engagement will be used
simultaneously
Outlook For August
86
Outlook for August
CBN will meet its August forward delivery
Reducing volatility in the spot market to N305-330 trading range
Narrowing the premium with the parallel market to 15%
CBN will increase OMO activities forcing T/Bill yields to above
17% p.a.
87
Outlook for August
FGN will accelerate its dollar debt issuance and budget support
facilities from multilaterals
Oil production will remain flat at 1.5mbpd
Amnesty payments will not ameliorate the attacks
Will increase the squabbles between the groups
88
Outlook for August
The administration will become more responsive to public
sentiment
Nigerians will alter spending patterns drastically in response to
challenges
89
Long Term Outlook
90
Corporate Humour
Life is one long process of
getting tired – Samuel Butler
Reality is the leading cause of stress for
those in touch with it – Jane Wagner
91 Corporate Humour
Time is a great teacher, but it
kills all its students – Hector
Berlioz
Happiness is an agreeable
sensation arising from
contemplating the misery of
others – Ambrose Bierce
92 Corporate Humour
Nobody cares if you are
miserable, so you might as well be
happy
A woman’s best beauty aid is a
near-sighted man
93 Corporate Humour
Resentment is like drinking
poison and waiting for the
other person to die.
The abdomen is a cavity
containing the organs of
indigestion – Evan Esa
94 Corporate Humour
Rome is like a man who keeps
himself by showing visitors the corpse
of his grandmother
Bismarck J. Rewane, MD/CEO Financial Derivatives Company Ltd.
Lagos, Nigeria 01-7739889
© 2016. “This publication is for private circulation only. Any other use or publication without the prior express consent of Financial Derivatives Company Limited is prohibited.”