FSDH’s 4th Quarter Analysis of the Nigerian Economy is available for download below. The summary is:

Outlook for Q4, 2009
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 which is fundamental to sustainable growth and development of the nation’s economy. The Federal Government (FG) promised to make 6,000M/W of electricity available in the country by the end of December of 2009. If this target is achieved, it will help to improve the power problem in the country.

The recent rising price of crude oil at the international market with the improved oil production in Nigeria following the Amnesty program of the FG to the militants in the Niger Delta area, should improve the fiscal position of the FG slightly better than the picture that we painted in our Half-Year report.

With reference to the deregulation of the downstream sector of the oil industry which is scheduled to take effect from January 01, 2010, we maintain our inflation rate forecast for the year in the range of 9.5%-11.5%, year-on–year.

FSDH Research is confident that deregulation will bring about a lower pricing regime for petroleum products in the country in the long run. We hold this view because of the competition that will set in and the efficiency gains which would trickle down to the consumers. We maintain that the extent of the drop will depend on what happens to price of oil at the international market, the value of Naira and the refining capacity in the country.

We support the intention and the efforts of the CBN to sanitize the Nigerian banking system. We had argued that the growth of the capital market and the economy at large will depend on the banking system that is committed to its traditional function of financial intermediation in the real sector of the economy.

We review our exchange rate forecast to end the year to a range of N145US$1- N150US$1 from N140US$1- N150US$1 released in our HY2, 2009 report.
Learning from the experience of other countries of the world, we believe that a veritable financial institution that the CBN can use to increase access to credit among the small and medium scale industries in Nigeria is the Micro Finance Banks. In order to achieve this, the CBN needs to intensify its efforts in capacity building for the industry operators. Also, adherence to good corporate governance especially among the top executives, will determine how effective the financial sector will contribute to the growth and development of the nation’s economy.
We maintain our GDP growth rate of between 4% and 5% in 2009 in view of the developments in agriculture especially in the area of access to cheap funds.

Fixed Income Securities
As we anticipated in our HY2, 2009 report, the CBN maintained the MPR at 6% in Q3, 2009. The MPC also maintains the MPR at 6% in its November 03, 2009 meeting. Going forward in Q4 2009, we expect that CBN will maintain the MPR at 6% with its cap of +2 and -4%. We expect inter-bank rates in Q4, 2009 to moderate especially on account of the guarantee of inter-bank and pension funds placements by the CBN to prevent counter-party default.

We expect increased activity in the Bond auction market, especially by banks as they view it as one of the secured investment channels at the moment. FGN Bonds should continue to trade at a premium and at low yield. The new Bond issuance may also carry lower coupon rates. We expect slight volatility in bond yields in Q4, 09. The volatility will depend on the tenor of the bonds – shorter tenored bonds will be more stable while the longer tenored bonds will be more volatile.

Equities Market
We expect to see low levels of volatility in the equities market in Q4, 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. 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 provisions for non-performing assets especially for financial institutions.

Nigerian banks are required to harmonize their financial year end starting from December 31, 2009. We believe that the CBN/NDIC special audit on the Nigerian banks have addressed most of the issues that would have created problems in December 2009, as a result of common financial year end. Given the provisioning that the CBN asked the banks to make in their accounts for the period ended September 30, 2009, we do not expect any major appreciation in the stock market for the remaining part of the year. Nevertheless, there may be some isolated demand in some stocks .We expect strategic investors to take positions ahead of improved earnings towards the end of Q1, 2010.