FSDH Securities recently released their report/outlook for the second half of 2009 for the Nigerian economy. Below is an excerpt of their summary of the outlook. You can also download the report below.

The Nigerian Economy
As noted in our earlier report, the current global economic and financial crises have serious implications for the performance of the Nigerian economy in 2009. But it is interesting to observe that the nation’s economic managers seem to be implementing policies that can lay a solid foundation for the economy in the medium to long run especially in the area of agriculture, manufacturing and broadening the revenue base of the country.

However, we note that the country appears not to be making real progress in the area of power generation that is fundamental to sustainable growth and development of the nation’s economy. We project a huge drop in the federally collectible revenue in 2009, leading to a drop in the amount of money to be shared through the Federation Accounts Allocation Committee (FAAC). In view of the progress made in achieving low inflation rate, we are inclined to review our earlier forecast to end the year at 9.5%-11.5% year-on –year.

The decision of the monetary authority to guarantee inter-bank placement up till March 31, 2010, should restore confidence in the inter-bank market and increase liquidity in the market which may lead to drop in interest rate. However, the state of infrastructure has to be addressed effectively in order to achieve a more desirable interest rate that can promote sustainable economic growth. We project exchange rate in the region of N140US$1-N150US$1 in HY2, 2009.

We reiterate that current credit squeeze in the financial market, depreciation/devaluation, weak aggregate demand as a result of the global economic crisis, and high costs of doing business in Nigeria are detrimental to the real sector of the Nigerian economy.

Learning from the experience of other countries of the world, we still believe that a veritable financial institution that the CBN can use to increase access to credit amongst the small and medium scale industries in Nigeria, is the Micro Finance Banks. We maintain our GDP growth rate of between 4% and 5% in 2009 if the current economic management team can put in place strong economic framework that can support the agriculture and the manufacturing sectors especially in the areas of improving infrastructure and access to cheap funds.

Fixed Income Securities
As anticipated in our Q2,2009 report, the CBN maintained the MPR at 8% in Q2, 2009. The MPR was changed at the MPC meeting on July 07, 2009 where it was reduced from 8% to 6% to signal an expansionary measure aimed at boosting liquidity in the financial system. Meanwhile, the removal of interest rate cap on inter-bank guaranteed loan around the MPR will encourage lending in the inter-bank market.

We expect that increased activity in the inter-bank market will invariably bring down inter-bank rates in line with economic realities. We expect this to affect lending rates, which should lead to reduction in the cost of doing business. We still believe that the large fiscal deficits that the Federal Government and most of the state government will run in 2009 will exert upward pressure on money market rates. This is majorly because revenue from crude oil has continued to dwindle coupled with the reduced volume due to the crisis in the Niger-Delta region of the country.

At the time of this report, we have not received from the DMO the Bond issuance calendar for HY2, 2009. However, we expect increased activities in the Bond auction market, especially by banks since they are eligible instruments for repo transactions not exceeding 90 days. Following this, we expect that FGN Bonds may continue to trade at a premium and at low yields. New Bonds may also carry low coupon rates. We expect slight volatility in bond yields in HY2, 2009. The Volatility will depend on the tenor of the bonds –we expect longer tenored bonds to be more volatile while the shorter tenored bonds will be more stable.

Equities Markets
We expect to see low levels of volatility in the equities market in HY2, 2009. We are of the opinion that the valuation of stocks quoted on the Nigerian Stock Exchange (NSE) appears attractive both in absolute and relative terms. Most stocks that have good fundamentals are currently trading close to their support level. If the proposed Federal Government N500bn bailout manufacturing fund is properly disbursed, we expect the appreciation witnessed in the Manufacturing & Allied subsector in Q2, 2009 to continue in HY2, 2009.

As we noted in our outlook report for 2009, we expect corporate earnings of companies quoted on the floor of the NSE to decline in 2009, as a result of high cost of funds, exchange rate losses, and increased provision for non-performing assets; especially for financial institutions. However, this situation may be ameliorated as a result of the efforts of the CBN to lower interest rate & inflation expectation.

We expect that some of the liquidity in the financial market that was aided by CBN’s measures to find its way into the equities market to take advantage of the current attractive valuation in some stocks in the market. A number of stocks on the NSE have good fundamentals and have prospects for growth in the medium to long-term. However, the market may not record a major appreciation until the outcome of the on-going banks audit by the CBN is known. The audit is expected to be concluded in August 2009. Meanwhile, the market continues to offer exceptional opportunities for medium to long-term investors.