The favourable domestic macroeconomic environment in the first half of 2008 is expected to be sustained as internal balance is combined with external viability. The real GDP growth rate is projected to improve further based on expected good agricultural harvest owing to increasing volume and spread of rainfall, reinforced by the Federal Government agricultural policies, especially on fertilizer procurement and distribution.

Industrial output is expected to be buoyed as investment in the power sector and other infrastructural facilities begin to yield positive results. Crude oil output is likely to grow moderately in the second half of 2008 as the violence in the Niger Delta is stemmed. High international price of crude oil, the  sustained capital inflow and huge external reserves are expected to have positive impact on the external sector.

The implementation of the seven-point agenda of the President, the Vision 2020 programme and the continued favourable sovereign rating of the Nigerian economy are additional factors that would give the domestic economy a boost. The expected inflow and the resultant expansionary fiscal profile of the three tiers of government,  especially the bunching of capital releases in the second half of 2008 could precipitate liquidity surfeit in both the foreign exchange and domestic money markets leading to exchange rate appreciation and inflationary pressures. Expectedly, the sustained proactive monetary policy actions by the monetary authorities would have to be applied to head-off the emerging threat to macroeconomic stability.

Their forecast did not take the dramatic fall of the crude oil into consideration. It also did not consider the financial meltdown. If you will recall, as at March last year, there were already few signs of the impending meltdown.

CBN 1st Half of 2008 Report - 1 (701)
CBN 1st Half of 2008 Report - 2 (137)
CBN 1st Half of 2008 Report - 3 (70)
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CBN 1st Half of 2008 Report - 5 (63)
CBN 1st Half of 2008 Report - 6 (83)
CBN 1st Half of 2008 Report - 7 (69)

Meristem Securities has also prepared an analysis of the banking and insurance stocks. 

Happy reading.

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Banks plan merger, acquisition – To beat global credit crunc

By Lanre Oyetade, Odidison Omankhanlen, Tunji Adeleye and Adeolu Adeyemi

Against the backdrop of mounting effects of the global economic crisis, particularly on the nation’s financial sector, banks in the country have begun to seek alliances with one another with a view for merger and acquisition. Investigations carried out by the Nigerian Tribune showed that banks had begun talking to one another with a view to combining businesses. In particular, a bank which recently broke away from merger plans is already holding discussions with another bank.

A source in the bank, who confirmed this development, said the deal was being carried out with utmost secrecy to give room for the success of the merger. It will be recalled that the immediate past Managing Director, First Bank Plc, Mr. Jacobs Ajekigbe, gave this indication recently at the valedictory lecture organised for him by the Chartered Institute of Bankers of Nigeria (CIBN) when he said a second round of consolidation in the industry through market-determined combinations and alliances was imperative, stressing that very few banks exerted so much control over the liquidity of the banking system.

He noted that in the light of current global economic crisis, business combinations was the most appropriate response to margin compression and optimisation of technology infrastructure. According to Dr. Mobolaji Aluko, US-based political scientist, three big Nigerian banks are tied up in this Fortis/ABN Amro/BNP Paribas tangle.

He pointed out that Royal Bank of Scotland, one of the Nigeria’s asset manager, was one of the UK’s largest banks that was given 37 billion pounds with government owning a majority share. The overwhelming majority of Nigeria’s asset managers have been having significant trouble managing themselves and have given Nigeria’s foreign reserves toxic exposures.

Dr. Aluko said that instead of foreign reserves being piled up in foreign banks, government ought to have used them strategically in developing critical infrastructure as many long-suffering Nigerians had called for. The political scientist said that the massive decline in Nigeria’s foreign reserves led to stoppage of the entries since October last year. The lack of further entries on the foreign reserves in Central Bank’s website has further heightened the belief that Nigeria has suffered a major loss in its reserves.

As of October last year, the nation lost had $1.5 billion in its foreign reserves, through the three big banks. The Central Bank of Nigeria’s Director of Corporate Affairs, Mr. Festus Odoko, had said at the time that the decline in the nation’s foreign reserves was as a result of the rise in the demand for foreign exchange.

According to him, the decline was not as a result of the global financial meltdown but the function of market situation in Nigeria. He added that when the inflow was higher than the outflow, the reserves would go up, but when the outflow was higher than the inflow, the reserves would drop. Mr. Odoko said the only way out for the nation was to expand the sources of foreign earnings instead of concentrating on the reserves built from the oil revenues. The official report from CBN shows that the foreign reserves rose to $67 billion by the middle of 2008, but dropped to $53 billion by December.

This represents a decline of $14 billion within three months. However, a top bank chief executive officer, when asked, refused to confirm the merger plans, saying it was not unusual for organisations to seek mergers or acquisitions. He said in the light of the current global financial crisis, every organisation was looking for a way out, stressing that such business combinations could not be ruled out at this time.

Commenting on this development, a financial analyst and Chief Operating Officer, Landmark Investments, Mr. Okechukwu Amadi, advised banks to step up such discussions if they were not doing so yet, stressing that only strong and healthy banks could withstand the present financial crisis.

“I hope it is not belated. They shouldn’t waste time about it. Banks that are not particularly healthy should seek for acquisition and let the big banks help out. The banks need strength to withstand the current crisis,” he said.

However, a financial analyst, Mr. Dotun Mayowa, opined that it was foolhardy for banks in the country to contemplate any merger at this time. According to him, it was difficult to ascertain the level of healthiness in each of the banks, stressing that most of the banks were highly indebted to the CBN.

“It is a clear case of misdirection for any bank to take on another at this present moment. It is difficult to ascertain the level of healthiness. Besides, this moment of uncertainty calls for caution. The truth is that some of these banks are surviving by the grace of the CBN,” he stated. – Tribune

Companies they like:
- Custodian and Allied Insurance
- Dangote Sugar
- Glaxo Smithkline
- Guarantee Trust Bank
- Guiness Nigeria
- Nigerian Breweries
- Nigerian Bottling Company
- UAC
- UBA
- Lafarge Cement Wapco PLC

THE OIL PRICE CRASH: A TIME OF AWAKENING FOR NIGERIA by Ben Okolo
Earlier in 2008 and up to the last quarter of the year, the price of crude oil was at its all time high. Then suddenly, as if the plugs were pulled off, the price started crashing like a pack of cards. At its height, Nigeria was swimming in excess crude oil income, having set its budget at almost a third of oil price. Notwithstanding the disruption to Nigeria oil output as a result of the crisis in the Niger Delta, Nigeria was still raking in its share of the oil windfall. To the Yar’Adua’s government, it was as if the blessing that the Obasanjo administration enjoyed was set to continue, but alas, the chicken had come to roost. Nigeria government suddenly discovered that the golden egg that had been laid by the abandoned goose might no longer be so golden.

With the global financial crisis hitting hard and the crumble of Nigeria’s major source of foreign income, pundits were quick to point out that Nigeria’s economic woes were just beginning to unfold. Granted that Nigeria is reputed to have about US$60 billion in foreign reserve, the question that arises in many quarters is how this has benefited ordinary Nigerians.

Some Nigerians, especially those in the Diaspora, favour the oil price crash. Why? Does it mean that they do not want Nigeria to garner enough foreign income? Of course, while they may be patriotic Nigerians, it has often been suggested, and rightly so, that during the high oil prices ordinary Nigerians did not enjoy the windfall as should have been the case through improved government services. In fact, it can be argued that it was the time Nigerians witnessed more power outage and general infrastructural failure.

In fact, why some of us that reside in South Africa for instance favour a lower oil price is that, the lower the cost of crude oil, the less we pay for fuel. For instance, at the height of the oil price increase in July 2008, the cost of fuel was about 10.50 rand per litre. However, with the continued drop of oil price, the price of fuel in January 2009 at the pumps is 5.82 rand per litre. Have we ever heard of fuel price reduction in Nigeria? There are various reasons advanced by the government why the ordinary citizens should not enjoy the windfall from the crash of oil price. Chiefly amongst them is that the government has been subsidizing the cost of fuel for Nigerians. In fact, they are even thinking of introducing fuel tax. When the price of crude was high, the ordinary Nigerians never benefited from the windfall, now that the prize is low, the ordinary Nigerian is meant to pay the penalty. What an irony! Commodities in Nigeria do not obey the law of gravity.

As much as Nigerians are said to have short memories, they still remember the unaccounted US$12 billion windfall from oil prices during the first Gulf war. During Obasanjo’s eight year tenure, oil price was continuously on the increase. Instead of engaging in more public service oriented development, the administration thought it better to pay off in one swoop, Nigeria’s foreign debt. While the payment of a country’s debt is desirable, it does not make economic sense that money which could have been invested in the achievement of the Millennium Development Goals (MDGs), was used in paying debt. Whatever happened to the Abacha loot?

Maybe, the crash of oil price is a blessing in disguise for Nigeria. First, Nigeria must remember that prior to the discovery of oil in commercial quantity in 1956 at Oloibiri in present day Bayelsa state; it was earning its foreign income mainly through the export of agricultural products. It is time Nigeria went back to its roots; agriculture. The country is blessed with large expanse of arable and fertile land. All the government need to do is create the enabling environment for interested persons and corporations to go into large-scale commercial farming of food crops, cash crops and animal farming. Nigeria should rise up to the challenge of being the food basket of West Africa. Achieving food security should be topmost in Yar’Adua’s administration, more so, since it is part of his Seven Point Agenda.

Secondly, the development of Nigeria’s solid industry should be accelerated. Nigeria must be careful to avoid the repeat of the corruption of the oil industry to creep into the solid minerals industry. Sincerity is what is required. A situation where certain sections of the country hoard what solid minerals it has, hoping to use it in the eventual break-up of the country is very disingenuous. Nigeria is richly blessed with viable solid minerals which, if well managed, can diversify its economy, and help it realise its dream of being a giant of Africa.

Thirdly, the development of Nigeria’s tourism industry will contribute to Nigeria’s economy. However, it must be stated that tourism cannot develop in vacuum. The enabling environment must be created by the government, through the provision of functional infrastructure, and security of lives and persons, before private investors can make any impact. This, therefore, means that the government need to put more efforts into power generation and distribution, road construction and maintenance, crime prevention, detection and punishment strategies. The transportation industry must be up to scratch to guarantee tourists at least the minimum level of safety that the world can offer. As Prof. Wole Soyinka said sometime in response to Nigeria’s quest as a tourist destination, that it is only masochists that would consider Nigeria as a tourist destination, if this area of the economy must yield its full potential, the attitude of Nigerians and the government towards fleecing foreigners must change.

Finally, accelerated industrialisation of the country would be the key to Nigeria’s rise to its pride of place in Africa. The government should eschew apartheid oriented policies, and pump in the required funding to those areas of the country that have shown signs of taking the lead in transforming Nigeria to a modern day Japan of Africa. For instance, the famous Nnewi industrialisation efforts should be supported by the government. If the government lends its support to the development of that sector, Nigeria would in no time become the industrial hub of Africa.

If Yar’Adua’s Vision 2020 is to be achieved, now is the time. We should see the oil price crash not as a curse, but as a blessing; a challenge to bring out our latent skills in turning the country around. Maybe, this oil price crash will help in solving the Niger Delta crisis, since oil will no longer be so attractive to die for.

Going Forward: What are the Opportunities?
Overall, Afrinvest Research expects  that a return to +5%/-5% will lead to a significant sell-off in Nigerian equities, and a sharp decline in market valuations. However, we expect that the return to previous levels of daily trading liquidity will encourage long term value investors  to focus on bargain acquisitions of stocks with healthy operating fundamentals, high cash generative businesses, and a good dividend history. Similarly, we believe that book value based trading multiples will likely provide the basis for a floor on commercial bank market prices. While we do expect that market reactions to the re-instated trading boundaries will be swift and potentially outsized, we recommend a continuous and careful evaluation of selected stocks going into 2009. Further, we expect that as prices begin to test new lows, and dividend yield thresholds begin to approach the same level as corporate Return on Equity (ROE) targets for many cash rich companies; defensive share buy-back programs will begin to appear even more attractive to several of these companies. We expect that some of these buy-back programs will be financed by a cut back on dividend pay-out  ratios, as effective yields continue to improve with declining prices.

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This is Zenith Securities’ stock market report for last week. Happy reading!
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World Bank - Doing Business In ECOWAS States 2009 (93)
World Bank - Doing Business In Nigeria 2009 (167)

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They also prepared reports on the banking and insurance sectors earlier in the year. You can also read those here:
Afrinvest 2008 Nigerian Banking Sector Report (453)
Afrinvest 2008 Nigerian Insurance Sector Report (381)
Some of the main points in their non-financial sector reports are:
Historically, the industial corporations used to be the main stay of the Nigerian economy.
Factors for the reduced emphasis of the non-financial secotr:

1. The emergence of banks on the public equities scene and the rapid growth in thier earnings and valuations has made the banks the dominant factors in the NSE.
2. The Nigerian economy has become more transactional rather than productive.
3. The financial services sector has been quicker to the see the benefits of the macroeconomic policies of the government.
4. Industrial corporations have not been active in issuing new shares creating a general lack of trading liquidity in their stocks relative to banks.

Reasons for the slow growth of the non-financial services sector:

1. The crippling effect of the epileptic power system resulting in increased costs of doing business.
2. The global food crisis.
3. Higher interest rates.

Opportunities:

1. Relative political stability
2. Increased consumerism

The companies covered are:

1. Building and Construction Sector:
2. Ashaka Cement Plc
3. Benue Cement Company Plc
4. Cement Company of Northern Nigeria Plc
5. Lafarge Cement Wapco Plc
6. Julius Berger Plc

Consumer Goods Sector:

1. 7-UP Bottling Company Plc
2. Dangote Sugar Refinery Plc
3. Flour Mills of Nigeria Plc
4. Guinness Nigeria Plc
5. Nestle Nigeria Plc
6. Nigeria Bottling Company Plc
7. Nigerian Breweries Plc
8. P Z Cussons Nigeria Plc
9. U A C of Nigeria Plc
10. Unilever Nigeria Plc

Healthcare Sector:

1. Glaxo Smithkline Plc
2. May & Baker Plc
3. Nigerian-German Chemicals Plc

Chemical and Paints Sector:

1. Berger Paints Plc
2. CAP Plc

Petroleum Marketing Sector:

1. African Petroleum Plc
2. Chevron Oil Plc4
3. Conoil Plc
4. Mobil Oil Nigeria Plc
5. Oando Plc
6. Total Nigeria Plc

Others:

1. Japaul Oil & Maritime Services Plc
2. R T Briscoe (Nigeria) Plc
3. Starcomms Plc
4. Vitafoam Plc

My main qualm with the article is that it does not provide a recommendation or directions on how to start investing in bonds.

But overall, it is worth reading.

1. Nigerian banks appear expensive on a relative and absolute basis
2. Nigerian banks’ earnings growth is likely to outstip most other emerging markets over the next few years
3. Nigeria is one of the riskier emerging markets
4. The P/E ratio is expected to converge to other emerging markets
5. Oceanic bank is rated as a lower quality/high risk operation compared to its peers
6. GTB is the top pick as it is the only bank of the top 7 offering positive share price performance on a 12 month view while First Bank and Intercontinental are the least preferred of the top banks
7. Zenith and GTB have the higest quality operations while Union Bank has the lowest quality operation
8. Concerned that the risk management capability at Oceanic and Intercontinental Banks have not kept pace with their robust growth
9. Expect an average negative return of 21% for the top 7 Nigerian banks

Strengths
- Continued strong economic growth and sustained high oil prices
- Improving regulatory environment
- Presently well capitalised
- Increasing breadth of operations lowers risk to earnings because of diversification benefits
- Senior management teams at all teh banks are experienced bankers

- Weaknesses
- Lack of nationala identification system and lack of clearly functioning credit bureau
- Significant and widening gap between Nigerian banks and their international pairs in terms of valuation
- Untest risk controls
- Banks are a major portion of the NSE
- Lack of cross-border consolidated supervision

Opportunities
- Low penetration rates as evidenced by low deposit to GDP and loan to GDP ratios
- PPP projects to fund infrastructure spend
- Growth in retail segment
- More efficient capital structures
- Continued penetration of low cost retail deposits
- Improved efficiency

Threats
- Increasing competition has squeezed net interest margins
- Consolidation
- Growing NPLs
- Dependence on local investors
- Many of the banks depend on a few senior executives

Augusto de la Torre and Sergio L. Schmukler of the World Bank prepared this huge document focussing on the capital markets in the emerging economies of Latin America. It describes the historical developments in the capital markets and the related policy issues. It also analyzes the local capital markets and their place in the ongoing globalization of financial markets. It also compares the outcomes with those of other countries.

The authors conclude that the market reforms of the 1990s spurred capital market development and finacial integration.

Read the “book” here.