lbs july 2016
TRANSCRIPT
Monthly Economic News and Views
Presented by B.J. Rewane Financial Derivatives Company Limited
Lagos Business School
Executive Breakfast Meeting July 13, 2016
Nigeria Stumbles into Economic Reform
2
Nigeria Responds to Crisis
Market economy in sequence
Policy Reform: hard choices and change
The Outcome: difficult and uncertain
Outlook: positive but painful
3 Outline: Making Sense of the New Normal
Highlights & Indicators
Long Winding Path towards Reform
Winners & Losers- Markets
The Political Pushback
Outlook for July
5 Finally A Month of Inflection
From month of woe to June of glow
In May, another lull in economic activities
Q2 GDP growth estimated to fall to -1.5%
Meaning that Nigeria is in Recession
IMF fears that 2016 will be a full year of negative growth
EIU revised full year GDP down to 0.4% from 2.1%
Fitch downgrades sovereign rating to B+
6 Finally A Month of Inflection
CBN published PMI shrank 8.5% from 45.8 to 41.9
Output, new orders, inventories & hiring all down sharply
Power supply from national grid down to 2,828MW
Average airline load factors declined for the 3rd consecutive month
7 Finally A Month of Inflection
Oil production crashed to 1.4mbpd from a high of 1.9mbpd
Mainly from the offshore and deepwater assets
From where the FGN earns more dollars
FAAC shared amongst states increased fractionally to N305bn
Mainly due to improved collection from FIRS
Average oil price in June was $49.99pb
41.8% above Q1 price of $35.21pb
8 Finally A Month of Inflection
Rig count in Nigeria down by 16.67% to 5
At the peak, Nigeria had 22 rigs
Headline inflation spikes to 16.5%
Highest level in 6 years
Nigeria now has the 8th highest inflation rate in SSA
6.6% above the 9% inflation ceiling of the CBN
9 Finally A Month of Inflection
Money supply now N20.72trn, annualized growth of 2.1%
Average opening position of banks up to N189.64bn
Average interbank interest rates surged to 75% p.a. before
dropping to 4.5%
CBN introduced a new forex policy – managed floating rate
Sold $532m in the spot and $3.48bn in the forward market
10 Finally A Month of Inflection
CBN sacks board of Skye Bank on solvency concerns
Also showing zero tolerance for financial delinquency
Silverbird, R.T Briscoe, Jimoh Ibrahim and MRS petroleum on
AMCON hit list
NNPC gets a new board at last
Governance structure could slow the dynamism of the sole
administrator
12 Global and Regional Context
U.S. economy grew at 1.1% in Q1’16
Slightly higher than 0.8%, the original estimate
Slowest pace in 12 months
Nearly all the 33 banks passed the Federal Reserve annual stress
test
The U.S. subsidiaries of Deutsche Bank and Santander had their
dividend and share buybacks plans rejected
13
Brexit – London is not the U.K.
The surprise outcome of the Brexit vote left global markets in turmoil
Wiping $3trn off global market valuations
British companies and investment trusts lost 14% in 3 days
Trading in Barclays and Royal Bank of Scotland shares were suspended
The Bank of England promised to pump $350bn into the financial
system
14
The market turbulence spread to Italy’s beleaguered banks
Bank of England relaxed capital requirements for banks
The next Monetary Policy Committee (MPC) meeting tomorrow
would move to ease rates and increase QE
The Chancellor also plans to cut corporate income tax to below
15%
Brexit – London is not the U.K.
15 Brexit - Implications
The Empire on which the Sun never sets – Christopher North 1829
The British Empire spanned the entire globe
The Empire is now where the sun hardly rises
Nigerian global diaspora remittances in 2014 approximately $22bn
Approx 33% from the U.K.
An 11% pound sterling fall equals $800m decline in remittances to
Nigeria
16
A shrinking U.K. economy means possible lay-offs for Nigerian
diaspora
British schools now cheaper for education
U.K. will become a more affordable destination for holidays, tourism
& medical services
Nigerian/British trade N2.3trn in 2015
Brexit - Implications
17 The African Entrepreneur
SSA’s number of small businesses is only 25%
of Asia’s, relative to its population –World Bank
Africa has produced just one of the world’s
169 “unicorns”: African Internet Group (AIG)
Label given to privately held tech start-ups
with a valuation of more than $1 billion
AIG adapts foreign business models such as e-
commerce and mobile cab-hailing to African
circumstances
18 The African Entrepreneur
Crowding out effect of the government continues to limit Africa’s
ability to produce profitable start-ups
Banks continue to channel savings to the government rather than
entrepreneurs
Treasury bills offer juicy rate of interest
Government borrowing pushing interest rates up
19
SSA - Economic Review
The African Union has announced a proposal for a “single African
Passport”
Proponents for this agenda argue that it would boost Africa’s
regional integration
The single passport would promote free movement of labor, capital,
goods and services
This proposal is set to materialize by 2018 to all AU citizens
Ghana has scrapped visa requirements for all African citizens
20
SSA - Economic Review
The World Bank has revised their growth estimates for SSA in
2016 to 2.5% in 2016 from 2015’s 3.0%
The downward revision of South Africa is weighing on the region’s
outlook
The economy contracted by 1.2% in Q1’16 from 0.6% in Q4’15
23
Act I Scene I - May 2016
Helpless Petroleum minister sees unending petrol queues
National security threatened by possible backlash and social chaos
Needs to act swiftly and wisely
Desperately meets with downstream players
Earlier attempts to get multinationals to fund local subsidiaries failed
24
Act I Scene I - May 2016
Ministers asks: what’s the Constraint????
Operators say: subsidy, delay and forex scarcity
Government offers: forex at N285/$ and PMS at N145
Bingo!!! queues disappear
Market in equilibrium
Operators dump import of diesel and kerosene
Price of diesel and kerosene up 100%
Free markets also create scarcity
25
Act I Scene 2 - May 2016
MPC meets against backdrop of NNPC determining a shadow
exchange rate
Lame duck MPC with the dog wagging the tail
Announces new forex policy with no guidelines
Market relieved, anything is better than nothing
Guidelines expected at the appropriate time, meaning??
Dual exchange rate muted knock wood
26
Act 1 Scene 3 - June 15
CBN releases guidelines
Surprise! Surprise!! single exchange rate
Barriers to entry, only a select club of primary dealers
The lobbying begins against a possible cabal
The big boys lobby for barriers
CBN is between a rock and a hard place
27
Act 2 Scene 1- June 20
June 20- markets open
All authorised dealers are allowed as primary dealers
Another blow to the allocation cabal
Spot market on 2-way quote basis
Starts tentatively at N253/$
Average rate rises to N280/$
28
Act 3 Scene 1 – CBN Shocks the Market
11 am – June 20
CBN calls for bids for 90-day forward to be paid spot
Bids to be in 2 hours, objective is to clear forex backlog
Investors, banks, airlines, manufacturers scratching their heads
Use it or loose it, market in confusion
CBN sells $3.48bn to be delivered September 23
29
Act 3 Scene 2
Market in shock, N1.1trn sucked out of the system
Naira money market in turbulence, rates rise to 12% p.a.
Almost every bank goes to the CBN discount window
Market in shock for one week
Digests the spot plus forward and is gasping for more dollars
30 Act 3 Scene 3
CBN resorts to aggressive moral suasion
Compelling the banks to sell within an artificial band of N280/$ -N285/$
Spot market becomes totally illiquid
Act 4 Scene 1 CBN abandons the rigid artificial band
Dealers allowed to trade naturally
31
Outlook for exchange rate
The naira is 6.51% overvalued, needs to depreciate to N300/$
Spot market is illiquid
Non-deliverable forwards of N292/$ is a joke
Moral suasion is a regulatory shake down
Fair value (sweet spot) is approximately N295-N310/$
Markets fear that Sept 23rd delivery of forwards may not happen
32
Policy Shift – Fiscal Policy
Increased capital spending in 2016 budget
Subsidy removal increases revenue to government by 21%
State bailouts now possibly over
Impact:
Higher official price for PMS – N145/litre
National average price has declined from N163/litre to N150
No more queues
Partial deregulation first step to fully competitive market
33
Market settles at N295/$ spot
Sets the stage for a more realistic forward market
The parallel market is now trading at N365/$ - N375/$
Will appreciate towards 340 in August
Policy Shift – Fiscal Policy
35
Leading Indicators
Indicator Direction Comment
Oil price
$47.81pb
•Average for the year: $45pb
•Possibly of a further decline subject to slowing Asian
demand and supply glut
Oil production
1.8mbpd
•Recovery subject to further attacks
•Passage PIB a possibility in H2’16
•MoU with China is a positive development
Market Cap
N9.9trn
•Corporate earnings expected to flat line in H2’16
•Full recovery expected in 2017
36
Leading Indicators
Indicator Direction Comment
CBN PMI
41.8
•Recovery expected in Q3’16
•Driven by fiscal stimulus & forex accessibility
FAAC
N305.12bn
•Naira depreciation implies more oil revenue in naira
•Savings on subsidy frees up government funds
37
Coincidental Indicators
Indicator Direction Comment
Exchange Rate
N282.12/$
•Sustainability of forward market dependent
on spot market liquidity
•Risk of policy reversal remote
•Subject to further decline in oil price and
production
Treasury Bills
9.99%
•Government spending to dampen rates
MPR
12%
•Monetary policy to skew towards growth
enhancement and currency stability
38
Lagging Indicators
Indicator Direction Comment
GDP
(-0.36)%
•To bottom out in Q3, gradual recovery expected
from Q4
•Not enough to negate contraction in H1
•Year-end growth projected to be negative
External
Reserves
$26.4bn
•Forward transaction of $3.4bn yet to be
deducted
•Reserve accretion subject to new dollar inflows
Vacancy
Factor
Commercial : 34%
Residential : 49%
•Lower disposable income and high rates to shrink
demand
•Government activity to increase supply in the
market
41 Stock Market – Highlights
Global market shaken by the Brexit surprise
Wiping out over 1.28% of market
capitalization in the month of June
The Nigerian market had its own problems
Initial reaction to forex policy was a rally
(dead cat bounce)
International investors said not so fast
Market retreated into choppy waters Source: FDC Think Tank & NSE
26,000
28,000
30,000
32,000
NSEASI
42 How Corporates see the Policy Change
Forex market where the spot rate is closer to equilibrium
CBN more willing to fund market
CBN chooses growth ahead of inflation
No need to increase interest rates if forex rate does the mopping
up
Disposable income temporary
Shift in income to government as subsidies reduce
Removal of subsidy means availability of fuel and less time on
queues
Effective lower price of petrol
43 Implication on Corporates Earnings
Short-run higher costs
Lower margins and profitability
Most sectors to consolidate after a shake out
Critical success factors
Level of import content
Currency strength of exporting countries
Price elasticity of demand of the products manufactured
Ability of companies to extract cost efficiencies
Capacity to switch to local substitute
While keeping the average cost curve unchanged
44 Winners are Companies that have:
Tenacity to source raw materials from countries with weak
currencies
Argentina, South Africa, Brazil, U.K and China
Leverage on multinational parent to lock down volatile raw
materials in the futures market
Financial clout to pay lower finance costs
45 MTN Listing an Hail Mary Pass
The listing of MTN in 2017 could increase market capitalization by
50%
Bringing about sector diversity in the exchange
Force Etisalat, Airtel and Glo to follow suit
This is the tonic the Exchange has been waiting for
46
NSE-ASI July 2016 – Irrational Exuberance vs False Expectation
Stocks rebounded after a low of 22,456.32
points in January
Low oil prices, soft economic data,
currency conundrum had a significant
negative effect
Monetary policy action took center stage
in May/June thus bolstered investors
sentiment
Source: FDC Think Tank & NSE
21,000
23,000
25,000
27,000
29,000
31,000
33,000
NSEASI Performance YTD
Jan
-16.5%
Mar
2.99%
May
10.38%
Apr
-0.96%
Jun
6.99%
Feb
2.74%
Q1: -11.65% Q2: +16.96%
47
NSE-ASI July 2016 – Dead Cat Bounce
Stock advanced on the month of June by 6.99%
Pulling returns to positive territory of 3.34% (YTD)
Market upheaval over Brexit but was short-lived
Average turnover declined by 44.7% to N2.5bn from prior period
Market capitalization increased by 3.2% to N10.16trn from N9.85trn
for half-year
The average daily volume of trade increased by 20.33% to N496.2mn
from N412.3mn prior period
Average market PE ratio currently at 9.1x
48
Scott-Free Index
BC30 index gained 5.93% in June
The SFNG Blue-Chip 30 Index (USD) was down
25.30% while the SFNG Blue-Chip Index (EUR) was
down 25.19% for the month of June
Adoption of a floating exchange rate
attributable factor
30 day volatility of 40.61%
Sharpe ratio of 0.13x
1 year return of -17.54%
Trailing P/E 6.77x
Scott-Free BC 30
50 Sectors to Watch – FMCGs
Will consolidate into fewer players
Flour millers that can source raw materials globally
Reduce shipping costs by large volumes and presence across
ECOWAS
Switch packaging materials and miniaturise to gain share
Staying power to fight price wars
Companies to watch include Nestle, NB, Guinness, 7up
51
FMCGs
Companies will reduce logistics & distribution costs
Taking advantage of the General Electric (G.E.) railway concession:
Lagos to Kano
Sector average price earning ratio (P/E) now 9.1x
Sector profit margins still have room to withstand shocks
Will recover rapidly as stimulus package becomes impactful
53 Downstream Petroleum
Sector consolidating more rapidly than any other
Total subsidiary in Nigeria will leverage on the resources of a solid
parent into the market
Mobil will do same drawing on the clout of the Fairfax Virginia
headoffice
Oando, now acquired by Vitol and Helios, will be the most lethal
competitor
After it sorts out its liquidity concerns
54 Downstream Petroleum
The former subsidy kings and overnight sensations of 2013/14 are
now dead on arrival
AMCON is in no mood to piggy back anybody or tolerate free
loaders
FGN may privatise downstream infrastructure
Pipelines, depots and lubricant plants
The downstream giants will gobble limping competitors
Industry will be dominated by a maximum of 4 players in 2017
56
Banking – Further Consolidation
Soundness of the financial system called into question by recent
developments
Historically, banking system weaknesses follows 12-24 months after
every currency adjustment
Gross border risk crystallising into domestic systemic crisis
1996 NERFUND crisis and the failed Bank decree
After exchange rate declined from N22 to N88/$
57 Banking – Further Consolidation
Killing approx 20% of all banks
The 2008 devaluation from N118- N160
Led to banking sector distress
Compounded by margin loans
8 out of 21 banks kicked the bucket
CBN AMCON to the rescue
N620bn of tax payers money used for a bail out of the system
58
No depositor lost any money
Shareholders lost their shirts
Industry now set for more consolidation
Asset quality will deteriorate further
4% of NPLs are in power, 7% in public sector & 26% oil and gas
45% of loans are dollar denominated
Banking – Further Consolidation
59
Capital is in naira: huge potential translation losses
Will erode shareholders’ value
Banking sector earnings will decline in 2016/17 by no less than 30-
40%
Sector will still be profitable, will recover in 2017/18 period
Banking – Further Consolidation
Nigerian Banking Sector
NPLs expected to rise to 6% in 2016 from 5.5% in 2015 above the
prudential CBN ceiling of 5% (BofAML)
Data from Q1’16 results of the largest banks shows average NPLs of 7%
Recovery in oil prices will to some extent be offset by lower oil
production
Regulatory authority remains unflinched about the sector
60
Nigerian Banking Sector
Delayed July 1 date for compliance with the new minimum capital
adequacy ratio of 16% from 15% this year (plus a 1% capital surcharge for
systemically important banks)
CBN’s power sector intervention fund
N620 billion sector bailout in August 2009
61
64
VFIX up to 172 in June 2016
The LVFIX increased marginally from 171 to 172 in May 2016
Reflects a slowed but continued deterioration in the real estate
market
Due to the lagging effect of the indicator
The number of vacant properties increased by 72% in 18 months
Base month is January 2015
Vacant properties higher in Lekki and Victoria Island
65 VFIX up to 172 in June 2016 – Slowed growth
0
20
40
60
80
100
120
140
160
180
200
Vacancy factor index (VFI)
Source: FDC Think Tank
66
VFIX Outlook
Housing market hit by economic realities
Increased supply of residential properties
Continued retrenchment increasing delinquency
High-end tenants in the oil and gas industry suffer the most
Overvalued properties are dampening demand further
Dollar denominated rents are most affected negatively
As the new forex market settles, housing demand will increase
Vacancy factor will decline in Q1 2017
67
VFIX up to 172 in June 2016
Month/Year VFIX Residential Index Commercial Index
January 2015 100 100 100
January 2016 160.2 169.2 148
March 2016 165.3 176.9 148
April 2016 165.9 180.8 143
May 2016 170.5 188.5 143
June 2016 172.2 188.5 148
Source: FDC Research
68
Outlook
No quick recovery
Effect of new policies will take some time before manifesting in
the industry
We expect market forces to shift rental prices downwards
As current rates are unsustainable in the long run
70
The Aviation Problem
$700 million blocked funds
Only dollar tickets sold
Industry consolidation taking place
New normal: flexible exchange rate
Massive transaction losses
40% haircut equivalent to $280million
71
Aviation Update
International carriers had borne the brunt of the Nigerian forex
issue
Discontinued cheap fares and cut capacity
7% pulled out of the market
But it is not yet time for eureka
72
In the Global markets
Global airline share prices dropped by 11.6% in June
Year-to-date decline of over 21%
Affected by Brexit and ISIS
Oil price rebound eating into margins
Exchange rate adjustments not affecting demand
Fares are US dollar denominated
Share price of European stocks hit by downgrades to U.K. and EU
economies
73 Global Aviation
Traffic into the U.K. to increase
GBP at 35-year low
After terrorism, bankruptcies and consolidation
U.S. airlines face increasing demand
Now facing shortage of pilots
Airbus A380 faces an uncertain future
No US carrier has bought the aircraft
Airlines are shifting away from “superjumbos”
75
Global Aviation
Global average yield has fallen by about 9% y-o-y
Due to current economic realities
Annual global traffic growth remained unchanged at 4.6%
Partly due to disruptions like the Brussels terrorist attack
Available seat kilometers grew by 5.5%
Annual growth of passenger capacity exceeded passenger traffic
Africa constitutes 2.2% of global aviation market
Up from 1.8% in 2014
76
Airlines Exit Nigeria
Sky team Star alliance One World Others
Existing Delta Airlines
Alitalia
KLM
Air France
Kenya Airways
China Southern Airlines
Virgin Atlantic Airways
Lufthansa
Ethiopian Airlines
Egypt Air
Turkish Airlines
South African
British Airways
US Airways
Qatar
Emirates
Exit
Total available seat
kilometers lost- 8958
United Airlines- 787-8
Flights per week- 7
No of seats per flight-
219
Seats per week -3066
Iberia-A319
Flights per week- 3
No of seats per flight-
156
Seats per week- 936
Emirates-Airbus 777-ER
Flights per week-7
No of seats per flight-
352
Seats per week- 4956
77 Nigerian Aviation - Regional and West Africa
Medview and Arik playing the price game
Quality not important
“Take your sleeping pills” before boarding
Risk of return flight cancellations
Kenya Airways expected to receive payment of outstanding fares
from Nigerian government within a month
78
Nigerian Aviation - After Forex Adjustment, What Next?
Medical tourism down by 40%
Shift from India to Israel and now U.K.
In search of quality and weak currencies
Education- UK vs. US vs. Canada and others
79 After Forex Adjustment What Next?
Trading will be directed towards regions with cheaper air fares
Professionals will most likely change routes and flights
Airlines that benefit from FOREX adjustment include Emirates,
Kenya Airways, and Qatar
80
Qatar Airways Group - Profits up in 2016
Qatar Airways group reported a net profit of $439m
Operating profits increased 172% in 2016 to $824m
Increased traffic following currency adjustment
The airline plans to launch 17 new destinations in 2016/2017 fiscal
year
81
Nigerian Aviation-International Network
Lagos airport receives newest aircraft in the world
Ethiopian airlines Airbus A-350
Due to its strategic position in Africa
NCAA deregulates airline tariffs
Urges domestic airlines to increase fares
Tariff composition will be appropriately filed with the authority
Foreign airlines still selling dollar tickets
Despite warnings from the NCAA
82
Outlook
Nigerian aviation will consolidate
Airports concessioning
Fares this summer will drop due to competition
Positive effects from new forex policy will take time to manifest
85 Political Push Back
The Nigerian political class is under pressure
Fallout from the anti-corruption war
And the demolition of the rent seeking structure
Party members are becoming impatient in waiting for handouts
The APC is under fire for waging a one-sided war against corruption
The war is only at federal government level a PDP government
Naturally only the PDP is affected
86
Political Push Back
No state government has been investigated
Nepotism and key appointments are raising eyebrows
Just like Jonathan favored South East and South South
No justification for lopsided appointments
The APC needs to address nationwide representation both in numbers
and effective control
To reduce concentration and dictatorial tendencies
87
Political Push Back
Niger Delta Avengers avenging nothing
The militancy has become a proxy war for the anti-corruption
drive
The militants are likely to splinter as the pressure increases
The solution is better intelligence and constructive engagement
Buhari will need to fight past and present corruption
88
Political Push Back
The country will be looking out to see how many people have
been fired and prosecuted for new corruption
The level of impunity is sharply lower than in the past
Edo State and Ondo State elections a litmus test for INEC
PDP squabbles undermining opposition capacity to fight
91
Outlook for July
Inflation in July will increase marginally to 16.8%
Rate of change of inflation will slow to 0.3%
Stock market to remain choppy on poor corporate earnings
Naira will slip towards N310/$ in the interbank market
The parallel market will appreciate towards to N340/$
Airline load factors will increase in August, mainly in economy class
92
Outlook for July
MPC meeting will not change stance, monetary policy status quo
Waiting for a more sustainable inflation trend and forex market
stability
Banking sector systemic risks will dominate investor concerns
More appointments to Boards and agencies by Buhari
Investors will remain cautiously optimistic
93
Nigeria will start the international debt raising process
90-180days rates will spike closer to 14%
Housing vacancy factor to decline after forex market settles
The military will step up attacks on militants
Oil production will remain flat at 1.7mbpd
Outlook for July
94
Corporate Humour
The trouble with life in the fast
lane is that you get to the other
end in awful hurry – John Jensen
If you can see the light at the end of
the tunnel, you are looking the wrong
way – Barry Commoner
95 Corporate Humour
The entire economy of the
Western World is built on things
that cause cancer – The Movie
Bliss 1985
Muscles come and go but flab
stays
96 Corporate Humour
The lovely thing about being forty
is that you appreciate twenty five
year old men more – Colleen
Mccullough
Hard work never killed anybody
who supervised it – Harry Bomer
97 Corporate Humour
My problem is reconciling
my gross habits with my net
income – Errol Flynn
A lawyer with a brief case can
steal more than a thousand men
with guns – Mario Puzo
98 Corporate Humour
Gambling is getting nothing for
something – Wilson Mizner
Riches don’t make a man richer,
only busier – Conquest of
Paradise
99 Corporate Humour
On wall street enough is never
enough – Alison Cowan
There was a time when only a
fool and his money were soon
parted, but now it happens to
everybody – Adlai Stevenson