Asset and Resource Management (ARM) Company recently released their report on the performance of the Nigerian economy in 2009 and the outlook for 2010. The Executive summary is below. You can also download the full report after the summary:

Political activity intensifies ahead of 2011 polls
• As political campaigns intensify towards the 2011 elections, the President’s ailing health condition is sparking political manoeuvres as there have been calls from the public for the President’s resignation.
• The missing link seems to be the lack of much-anticipated electoral reforms, even as Nigerians go to the polling booth for the Anambra state gubernatorial elections in February 2009 without any change to the 2007 electoral system.
• The battle for supremacy between members of the upper and lower legislative chambers delayed the presentation of the 2010 Appropriation bill, and also continues to impede the review of the country’s constitution.

Policy environment remains uncertain
• The much-anticipated passage of the Oil and Gas industry bills continued to be stifled by opposition from diverse interest groups and delays by the legislature.
• Even as the deregulation of the downstream petroleum sector portends long term benefits, we are not convinced that the deregulation policy will take a foothold before the next elections given the antagonism from the powerful labour unions.
• The Niger Delta security situation is improving following the conclusion of the 60-day amnesty programme. However, the risk lies with the absence of the President given that he has been championing the agenda and holding peace talks with the militant leaders.
• The failure to deliver on the promised 6,000MW power generation and apparent reluctance in conveying the true situation continue to place a credibility burden on the government’s policy pronouncements.

Macroeconomic conditions are improving
• The Nigerian economy witnessed another year of strong growth in 2009 (NBS preliminary estimate: 6.9%) due to the positive contribution from the oil sector, and a resilient performance in the non-oil sector.
• With the continuous rise in crude oil prices and improvement on crude oil production levels in the third quarter of 2009, the Naira enjoyed stability around the N150/$ mark, while reserves stabilised at $43 billion.
• Liquidity conditions improved in the second half of 2009, following the series of expansionary monetary policy initiatives and the N620 billion capital injection into the troubled banks.
• Even though improved liquidity has translated into lower deposit and interbank rates, lending rates (prime and maximum) appear to be downward sticky.
• Headline inflation picked up in the second half of 2009, as food supply shortage resulted in food price inflation, while imported inflation pushed non-food inflation higher.

Markets suffered another year of woeful performance
• The NSE All Share Index (ASI) declined 33.8% in 2009, while the ARM index of the 40 most capitalised stocks on the NSE lost 27.4%.
• The banking sector, which represents about half of the market capitalisation, declined 38.7%, counteracting gains recorded by some non-financial sectors (building materials, conglomerates and brewery sectors).
• The decline was triggered by the CBN Governor’s pronouncement that the Nigerian banking sector suffered a huge crisis of credibility from bad debt overhang particularly from margin loan and oil sector loan losses.
• Equity market losses were subsequently magnified by the release of the outcome of the CBN/NDIC joint audit on the 24 banks in August and October, where 9 out of the 21 quoted banks were found wanting. This, coupled with the release of debtors list of the rescued banks in the newspapers, sparked an equity sell-off by debtors in a rush to repay margin loans.
• Activity remained vibrant in the bond market with a tilt towards the longer tenors in line with the country’s debt management strategy. State governments have also made forays into the bond market.

Fiscal policy inconsistent with economic priorities
• The proposed government spending for 2010, tagged ‘fiscal stimulus budget’, is focused on stimulating consumption and not particularly focused on spending on productive sectors to boost economic recovery.
• The government also lamented about the poor implementation of 2009 capital votes, but we have not seen any tangible plans to address the situation in the coming fiscal year.
• Government intends to fund the huge budget deficit (N1.6 trillion) mainly with the issuance of external and domestic debt, with serious implication for crowding out the private sector borrowing. We also expect a complete drawdown of excess crude savings in 2010.

Economic outlook for 2010 looks promising
• Improvements in the oil sector following the relative calm in the oil-rich Niger Delta region should drive strong economic performance in 2010.
• The non-oil sector’s performance will continue to play an important role in the economy, as agricultural production continues to be boosted by increased investment in the sector and better weather prospects.
• Manufacturing output, on the other hand, is expected to remain in decline throughout the rest of the year as infrastructural bottlenecks, especially power supply and transportation systems, remain unresolved.
• We expect the CBN’s N500 billion quantitative easing plan, which includes investment in bonds to be issued by the Asset Management Company (AMC), to continue boosting liquidity in the system and expand money supply. However, we do not foresee any significant drop in lending rates in the short term given the high inflationary outlook and significant credit risk arising from high economic and industry risks in Nigeria.
• We expect inflation to remain high in 2010 with pressures mounting from both food and non-food components of the CPI basket. However, if the petroleum price deregulation occurs in 2010, the upward adjustment of petroleum prices will likely drive inflation far beyond our 13% target.
• While prevailing fundamentals point to the appreciation of the Naira in 2010 even as foreign reserves remain resilient at $US43 billion, the CBN’s deliberate effort to counter any significant appreciation, leads us to forecast a N/$US exchange rate around current levels of N150/$US.

Equity market shows signs of recovery
• We expect investor sentiment to switch gradually towards the supportive macroeconomic and liquidity outlook for 2010.
• Notwithstanding, we expect investor sentiment to remain fragile through much of the first half, given difficult economic and operating conditions as businesses struggle to access finance, unemployment increases, uncertainty deepens over the deregulation of the downstream oil sector, and the stalemate over the leadership of the country remains unresolved.
• We think support for market recovery will come partly from current deeply discounted valuations, especially in the context of a global market that has recovered to near precrisis levels with risk aversion thinning out significantly.
• Developments in the Niger Delta will also remain critical to market sentiment, directly impacting the nation’s medium to long term macro-economic prospects and the policy responses of the government to the myriad of issues facing the economy will set the backdrop for local and international re-pricing of Nigeria risk.

Bond market set for a surge in activity
• We expect the Federal Government to take the lead especially as its 2010 expansionary budget includes a deficit of over N1.5 trillion; at least N700 billion of which is intended to be funded through local bond issues.
• Given the cap (10% of loans) placed on bank lending to the public sector, we expect more states, in 2010, to follow the lead of the 4 states that issued bonds in 2009.
• We also anticipate an increase in corporate bond issues especially from banks as they try to increase the tenor of their liabilities to better fund longer term assets.
• Investors with long term investment horizons are advised to overweight state bonds (especially short tenors) given the significant yield pick-up (as much as 700bps) they offer over FGN bonds.