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FSDH recently released their analysis/review of the Nigerian economy for the first half of the year and their outlook for the rest of the year.
Below is their summary. And you can read the full report below.
FSDH - HY2 2012 Economic and Financial Review (902)
2012 So Far…
According to the Food and Agriculture Organization (FAO), the FAO Food Price Index (FFPI), which measures the monthly change in international prices of a basket of food commodities averaged 201 points in June 2012, down by 1.8% from a slight upward revision in May value of 205 points, and still the lowest since September 2010.
According to the organization, continued economic uncertainties and generally adequate supply prospects kept international prices of most commodities under downward pressure. The decline in the global food prices had a moderating effect on inflation rate across regions in the first half of the year. The rising inflation rate in Nigeria was due to home grown structural issues.
Nigerian Economy: GDP
Available data from the National Bureau of Statistics (NBS) shows that the Real Gross Domestic Product (GDP) in Nigeria grew by 6.17% in Q1 2012, compared with 7.13% recorded in Q1 2011. The NBS noted that the growth rate surpassed its previous forecast of 5.34%, which indicated that the economy is more resilient than otherwise anticipated.
The observed decline in Q1 2012 real GDP figure was due mainly, to the partial removal of subsidy on petrol, subsequent civil unrest and weaker consumer demand following the higher price levels across major segments of the economy. Higher cost of production and prevailing security concerns also contributed to the decline in growth rate of real GDP during the period. Oil nominal GDP accounted for 44.02%, while non-oil nominal GDP contributed 55.98%.
The Nigerian economy as measured by the real GDP growth rate has been decelerating since the beginning of 2011 in the face of high unemployment rate currently at 23.90%. Various factors have been given for the declining growth rate. Some of which are: the poor infrastructure in the economy; security challenges in the country which has reduced free mobility of goods and people; vandalism of petroleum pipelines in the country; weak purchasing power and high interest rates regime in the economy. We appreciate the fact that some of the factors causing the declining GDP growth rate may not be addressed by pure monetary policy tools, but a relaxed monetary policy stance may improve the situation to prevent Nigeria from joining the league of countries already in recession.
Nigeria’s Foreign Trade Statistics
Foreign Trade Statistics published by the National Bureau of Statistics (NBS) released on June 5, 2012 indicated that the total value of merchandise trade for the Nigerian economy in Q1 2012 stood at N6.62trn, representing an increase of 4.69%, compared with N6.33trn recorded during Q1 2011. A cursory look at the foreign trade statistics shows that exports accounted for N4.97trn or 75.05%, while imports accounted for N1.65trn or 24.95%. Hence, there was a trade surplus of N3.32trn in Q1 2012, representing a significant increase of 2911.17% over the N110.17bn recorded in Q1 2011. An analysis of import by region shows that the highest import was recorded from Asia with an import value of N617.70bn (37.40%), Europe: N537.10bn (32.50%), Americas: N395bn (23.90%) and Africa: N59bn (3.60%). While an analysis of export by region shows that Europe recorded the highest contribution of N1.82trn (36.60%), Americas: N1.39trn (27.90%), Asia: N1.14trn (22.40%) and Africa N535bn (10.80%). India was Nigeria’s largest destination for exports in Q1 2012 at N688.50bn, made up of N626.01bn oil exports and N62.52bn non-oil exports. With respect to import destination China, United States of America, United Kingdom, Brazil and India, in that order, were Nigeria’s largest import destinations. However, Nigeria recorded a favourable balance of trade (BOT) between 2009 and 2011.
According to the Nigerian Communications Commission (NCC), the installed capacity in the telecommunications industry as at April 2012 stood at 199,639,372 lines, an increase of 14.98% over 173,631,441 lines as at December 31, 2011. The installed capacity is made up of Mobile Global Systems Mobile (GSM), Mobile Code Division Multiple Access (CDMA) and Fixed wired/wireless in the proportion of 84.93%, 9.75% and 5.32%, respectively. FSDH Research maintains that the internet usage per head in Nigeria at 5% is very low and telecoms operators can develop products to bridge the gap. This is where the next level of growth will come from in telecommunications in Nigeria.
The OPEC Reference Basket (ORB) declined for the third consecutive month in June to US$93.98/b, representing a decline of 13%, the largest month-on-month loss since December 2008. Besides the current economic climate in the Euro-zone area, the main factors responsible for the decline in the Basket value were abundant crude oil supplies and speculators who increasingly sold off long positions. OPEC opined that unsteady pace of the global economic recovery is causing a great amount of uncertainty on oil demand; and it expects the second half of the year to experience more uncertainty. In 2012, demand for OPEC’s crude is expected to average 29.9mb/d, representing a marginal decline of 0.1mb/d from 2011.
According to Central bank of Nigeria (CBN), Nigeria’s external reserves position as at June 29, 2012 stood at US$36.72bn, representing an increase of 15.15%, compared with US$31.89bn as at June 30, 2011 while it grew by 11.54% from US$32.92bn as at end-December 2011. However, the reserves position has been under threat since May 2012 due to the downward spiral in international price of oil arising from concerns about the prospects of the global economy, and the withdrawal of funds by foreign investors from the government securities market on concerns about inflationary pressure and security challenges in the country.
Available data from the Debt Management Office (DMO) shows that Nigeria’s total debt stock (addition of external and domestic debts) as at March 31, 2012 stood at N6,889bn representing an increase of 5.82% from the December 31, 2011 figure of N6,510bn. A breakdown of the debt stock shows that external debt accounted for 13.39% of the total debt stock at N922.40bn, while domestic debt stock accounted for 86.61% of the total debt stock at N5,967bn. The total public debt stock in the country as at December 2011 is estimated at about 17.50% of the GDP, as against the applicable critical limit of 40% for countries in Nigeria’s economic peer group.
The total external debt stock is estimated at about 2.39% of the GDP as at December 2011. The breakdown of the external debt in 2011 showed that 83.28% was owed to Multilaterals, which includes the World Bank Group, International Fund for Agricultural Development (IFAD), African Development Bank Group (ADB), International Development Bank (IDB) and Economic Development Fund (EDF); 8.26% was owed to Non-Paris Group of creditors and 8.46% was owed to others. An analysis of Nigeria’s external debt by holder type indicate that the Non-financial Public (FGN & States and Government Parastatals) held 87.27% (US$4.95bn); while the Financial Public (Banks & Non-banks) held 12.73% (US$721mn) of the total external debt of US$5.67bn as at December 31, 2011.
The ratio of domestic debt stock to GDP as at December 31, 2011 is estimated at 15.11%. The breakdown of the total domestic debt stock by instrument type as at March 31, 2012 shows that the FGN Bonds accounted for N3,665.85bn representing 61.44%; Nigerian Treasury Bills (NTBs) accounted for N1,947.19bn, representing 32.63% and Treasury Bonds (TBs) accounted for N353.73bn, representing 5.93%. An analysis of Nigeria’s domestic debt by holder type indicate that the Non-financial Public (FGN-Sinking Fund) held 2.61% (N146bn); Other Non-Financial (Non-bank) held 23.77% (N1.34trn); CBN : 6.20% (N348.84bn), while Banks & Discount Houses held 67.42% (N3.79trn) of the total domestic debt of N5.62trn as at December 31, 2011.
The Composite Consumer Price Index (CCPI) for the month of June 2012, released by the National Bureau of Statistics (NBS), showed that inflation rate year-on-year (y-o-y) in Nigeria moved upward to 12.9% in June 2012 from 12.7% recorded in the month of May 2012. On a monthly basis, the CCPI was higher by 1.15% in June 2012 compared with May 2012. Year-on-year core inflation (all items less farm produce and energy) stood at 15.19% in June from 14.54% in May 2012. The NBS noted that the increase in the y-o-y inflation could be partly attributable to persistent increase in the prices of some farm produce such as yam tubers as well as the increase in the electricity tariff; in addition to the increase in the cost of some other recreation and sporting services, catering services, and miscellaneous services. Earlier, the NBS released an inflation rate forecast of 13.57% to end the year.
The Debt Management Office (DMO) is currently working with the primary market dealers in the bond market in Nigeria to switch bonds with short term maturity to long term maturity in order to restructure the FGN financial obligation in favour of long term maturity. Comparing tenor to tenor, the 3-year, 5-year & 10-year FGN Bonds issued in HY1 2012 received higher average marginal rates than those issued in HY1 2011.
The NSE ASI pattern during the period shows that the market responds to earnings and corporate benefits. The developments in the Nigerian macroeconomic environment also impacted the market. The NSE ASI closed HY1 2012 at 21,599.57 points, up from 20,730.63 points as at December 31, 2011, representing an appreciation of 4.19% (a gain of 4.68% in US$), against the appreciation of 0.85% in HY1 2011. The market capitalization gained 5.55% (a gain of 6.04% in US$) to close HY1 2012 at N6.53trn (US$44.22bn), compared with the gain of 0.93% in HY1 2011 at N7.99trn. The difference in the rate of change between the NSE ASI and Market Capitalization was due to new and supplementary listings in the period under review. All the FSDH Indices appreciated in values in HY1 2012 except the FSDH Manufacturing & Allied Index which lost marginally by 0.57%. FSDH 40 Nigeria Equity Value Index (NEVI) appreciated by 0.92% while the FSDH Banking Index gained 8.17%. A cursory look at some of the World Stock market performance in June 2012, compared to Nigeria, shows that the Cairo SE Gen (Egypt) was the best performing market among the selected markets.
Money Market and Fixed Income Securities
The restrictive monetary policy stance of the Central Bank of Nigeria (CBN) kept money market rates high during the first half of the year 2012. The CBN argued that its monetary policy stance continued to be influenced by the near-to-medium term inflationary pressure in the Nigerian economy and the somewhat return of excessive demand pressure at the foreign exchange market. A total of about N1,869.50bn was injected into the money market from the monthly statutory allocation and excess crude account in the first six months of 2012.
A cursory look at the Nigerian Inter-Bank Offered Rate (NIBOR) showed that there was upward pressure in the average inter-bank rates during the period under review, compared with the corresponding period in 2011. The upward pressure in the rates was due to the continued restrictive monetary policy stance of the CBN.
Treasury Bill Transactions
The CBN employed the use of OMO as an effective monetary policy tool to regulate the monetary conditions in the first half of the year. Funds were attracted to this segment of the market as it offered attractive yields to investors, in addition to the fact that it carries minimal risk.
Foreign Exchange Market
The analysis of the transactions in the official foreign exchange market in the first six months of 2012 showed that both the volume of offer and sales were lower than the volume offered and sold in the corresponding period of 2011. The subdued demand in the market, and the readiness of the CBN to meet genuine demand, led to an appreciation in the value of the Naira at both the official and parallel markets. Meanwhile, there was demand pressure in June following the exit of some foreign portfolio investors from the fixed income securities market.
Revised Outlook for 2012
The World Economy
The highlights of the latest revised consensus from international organisations such as the IMF, OPEC and World Bank on the outlook of the world economy in the remainder of 2012 are:
- Looking at the world economic growth rate in 2012, IMF projects 3.5% and OPEC projects 3.3%, while the World Bank projects 2.5%. The IMF’s projection is lower than the estimated growth rate of 4.5% in 2012 released in the WEO April 2012 Edition.
- The IMF asserts that downside risks to the weaker global outlook continue to loom large. The most immediate risk is still that delayed or insufficient policy action will further escalate the Euro-area crisis; while downside risks to growth in emerging and developing economies seem primarily related to external events in the short-term.
- The world oil demand in 2012 is projected at 88.7mb/d. OPEC crude demand is projected to average 29.9mb/d. Meanwhile, the Non-OPEC supply is projected at 53.1mb/d.
- The IMF stated that Sub-Saharan Africa is expected to grow by 5.4% and 5.3% in 2012 and 2013, respectively, while according to the World Bank, Nigeria is projected to grow by 7%, 7.2% and 6.8% in 2012, 2013 and 2014 respectively.
- The revised projection for the oil price in 2012 is US$101.80/b based on future markets.
The Nigerian Economy
In addition to the import substitution strategy of the Federal Government of Nigeria (FGN) as outlined in the 2012 Budget Speech, the major events that will shape economic development in the remaining part of 2012 are:
- The deregulation of the downstream sector of the oil & gas Industry and the passage of the Petroleum Industry Bill (PIB) into law.
- The privatisation of the Power Holding Company of Nigeria (PHCN) in order to improve electricity generation, transmission and distribution in the country. The recent signing of a management contract between the Federal Government and a Canadian firm, Manitoba Hydro International of Canada for the management of the Transmission Company of Nigeria, is a step in the right direction.
- The security challenges in the country.
- The monetary policy stance of the CBN.
The World Bank and the IMF released a robust growth rate of 7% and 7.1% respectively for Nigeria in 2012. Looking at how the security challenges in the country and the restrictive monetary policy stance of the CBN will impact the economy, FSDH Research is inclined to review our upper limit of the GDP growth forecast downward to 7% from 7.5% in 2012. Thus our GDP growth rate forecast ranges between 6.5% – 7%.
In the short term, the outlook for inflation will be influenced by the anticipated increase in PHCN tariff, increase in import duties in wheat and rice, the prices of food in the international market, fiscal expansion, and supply shortages in the country due to low production, amongst others. However, the expected moderation in global commodities prices will lower the impact of imported inflation. Thus we expect inflation rate to hover around 12.5% – 13.20% to end the year.
With the price of Bonny Light at about US$100/b, we expect Nigeria’s foreign reserves to increase by about 17.10% to US$38.55bn which should be sufficient to finance about five months of imports cover. Also, given the price of oil at about US$100/b there may not be need for the FGN to grow its debt portfolio excessively, but may grow it aggressively if oil price fall sharply. We expect oil price to remain somewhat high, thus we think public debt will only grow by about 6.53% in 2012 to about N7.34trn. The growth in debt will partly be driven by the current high interest rate that government is paying on its domestic debt. The debt to GDP is expected to be in the region of 18.03%. Nigeria should maintain a relatively stable exchange rate in 2012. The possibility of marginal depreciation cannot be ruled out. We expect the exchange rate in the region of N158.50/US$1 to end the year.
Fixed Income Securities
Reviewing the macroeconomic developments around the globe and Nigeria in particular in the last few months and the short to medium term outlook, there are evidences to suggest that the MPC should change its monetary policy stance in favour of monetary easing in the short to medium term. This is with the intention to boost economic activities and stimulate the current weak purchasing power arising from the high unemployment rate of 23.90% and the recent economic policies of the government. Restrictive monetary policy as adopted in the last one and half years has not been effective in achieving price stability.
It appears that the Monetary Policy Committee (MPC) will maintain the current monetary policy stance for the remainder of the year. Thus we expect the following to take place in the money and fixed income securities market within the next 6 months: ? Maintain the Monetary Policy Rate (MPR) at 12% and the interest rate corridor around the current level.
- Maintain the current Net foreign exchange Open Position (NOP) at the current rate of 1% until there is an appreciable increase in the external reserves
- Maintain the Cash Reserve Ratio (CRR) and the Liquidity Rate at 12% and 30% respectively.
- Aggressive use of OMO to mop up liquidity
Although there are some challenges which may adversely impact the market, we are of the opinion that the equities market will show better performance in the second half of the year. The equities market in HY2 2012 will be impacted by the following factors:
- Improved Q2 and Q3 earnings from the quoted companies
- Expectations of good full year earnings and corporate benefits
- The pro-active measures being put in place by the Listing, Sales and Retention Unit of the NSE, which would help to attract and retain quoted companies’ interest in the market
- Adoption of the International Financial Reporting Standard (IFRS); which will engender better disclosure in financial reports
Therefore we are inclined to revise upward our earlier forecast. We think the NSE ASI has the capacity to achieve a growth rate of 11.58% in the second half of the year. This will lead to a growth of 17.77% for the year 2012. Thus our forecast NSE ASI is 17.77% to end the year 2012. This will generate NSE ASI of 36,852.84points.
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