monthly economic news and views lagos business school … · 2019-10-04 · global economic...

Monthly Economic News and Viewsat Lagos Business School Executive Breakfast Meeting

October 2009 Presented by B.J. Rewane

Financial Derivatives Company Limited

• Global Economic Review

• Economic Performance is shaky

• Policy Response

• Leading Economic Indicators

• The Stock Market

• Outlook For October

Outline2

Fallout Of CBN Intervention

LinkagesDynamics Transmission Spillover

From 24 to 16 banks

We said it ……………

It's never over until the fat lady sings

Matters Arising – The Dog that didn’t Bark

Bull markets are born on pessimism

Grow on skepticism,

Mature on optimism

Die on euphoria

- Sir John Templeton

The Nigerian Stock market is in another

bout of volatility

With known unknowns now approximately

equal to unknown unknowns

What part of the economic cycle is Nigeria?

Is there a link between financial market

indicators and economic performance?

Are the policy responses just necessary or

are they sufficient to start a recovery?

Which institution drives the economy and

which maintains economic balance?

Those who do not learn from history will

become history


The sanitization of the banking system

was necessary and inevitable

Delayed action by Soludo worsened the

condition and magnified the systemic

costs – described by some as the dog that

didn’t bark

Like the Watergate scandal, the offence

was minuscule compared to the cover-up


Covering up the wounds and

misrepresenting the facts was a bigger

infraction than the booking of toxic assets

and reckless lending

There is ample evidence of stock price

manipulation with depositors funds by the

sanctioned banks


De Ja Vu – Learning from the Asian Crisis

of 97/98

The banking problems identified are quite

similar to those of SE Asia in 1997/98

meltdown

The weaknesses in the domestic financial

systems were at the core of the region’s

vulnerability to the crisis

The creation of viable and sound financial

systems was an essential precondition for

a sustained recovery

Asian governments had to close deeply

insolvent institutions

Like in Nigeria, the recognition of

deterioration in asset quality and provisioning

for these losses were the first steps in the

sanitization process

It was followed by disposal of non performing

assets and the recapitalization of institutions

whose capital adequacy had dropped below

minimum levels


of 97/98

The emergent institutions were able to

endure the impact of the economic crisis

The problem confronting the Nigerian

authorities is that there are no guarantees

that the quarantined institutions will emerge

stronger from the crisis

Should they have been liquidated or forced

to merge or recapitalized by a Right Issue


of 97/98

KEY FINANCIAL SECTOR POLICY

RESPONSE TO THE ASIAN CRISIS

The Thailand, Indonesia and Korea Template

3 Important Steps

The closure of deeply insolvent financial

institutions was a prominent feature of the

policy response in all countries

Thailand announced guarantees for all

depositors of banks and finance

companies

Thailand announced in October 1997 the

creation of an Asset Management

Company as well as immediate

challenges to the banking intervention

Ownership Rights – Entrenched in the

Constitution

It is perfectly justifiable to fire corrupt and

dysfunctional management of a deposit

taking bank by the regulator

It is difficult to explain the government

appointing management into a company

that is privately owned without liquidation

If the courts rule against the regulator, this

could become messy

Moderating the Impact of Pro-Cyclicality

• The current economic situation will be a challenge to all financial institutions

• Nigerian banks have handled the first wave of financial market turmoil relatively well

• The second wave i.e. the serious economic downturn will hit both capital and profit

• The surviving banks will be better positioned than most other systems in West Africa

• Measures to dampen pro-cyclicality and ensure that they do not amplify the economic cycle will be difficult to implement

Moderating the Impact of Pro-Cyclicality

• The CBN will need to articulate a package of incentives that will motivate banks to resume lending

• Fiscal and monetary policy coordination and rein in the politicians on profligacy in an election year

• The maintenance of a real equilibrium exchange rate if the pressure on the reserves continue

• Maintaining CBN’s autonomy after an extended period of subjugation of the ride to presidential direction

Global Market

Global Economic Highlights

The global economic recovery continues

despite signs of stuttering

The IMF, in its October World Economic

Outlook, revised its global growth forecasts

upwards to 3% in 2010 from -1% in 2009

It projects that SSA growth will recover from

its trough of 1.75% in 2009 to a modest level

of 4% in 2010


The African recovery story has relied more

on fiscal balance shock absorbers and

stimulus than an inward flow of

investments

Advanced economies are expected to

witness a sluggish recovery in 2010 to

1.25% from a contraction of -3.5% in 2009

Unemployment will continue to rise across

the advanced economies until Sept. 2010


Unemployment rate in the US is now at

9.8%, a 26 year high

The fiscal deficit in the U.S. will hit a record

high of $1.75trn this year

The main downside risks to growth remain a

concern even though they are now recessive

Fears of a stalled recovery, due to a

premature exit from an accommodative

monetary and fiscal policy stance


U.S, the largest economy in the world now

produces 24% of global output

The Central Banks in Europe all held their

benchmark interest rates steady

Both the Bank of England and ECB are

assessing current policies to see if they

are enough to halt the economic slide

As expected, the Fed kept the interest rate

target range unchanged in September


The open market committee noted that

economic activity had picked up since the

last meeting

It alluded to an interest rate freeze by

stating that conditions warrant

exceptionally low levels of interest for an

extended period


It also expects inflation to remain subdued

because of a continued resource slack

Stock markets have rallied across the

advanced economies

Despite the recent dip in the US, the

markets have gained over 50% in the last

six months

EU Financial System Stress Tests

The tests revealed that the top 22 EU banks

could survive $585bn in credit losses in 2009

and 2010

Assumed economic contraction of 5.2% in

2009 and 2.7% in 2010.

Current forecasts: 4% contraction in 2009 and

0.4% growth in 2010

Tier one capital for the 22 banks is well

above 9% (minimum is 4%)

EU Financial System Stress Tests

IMF’s more extensive study states that EU

banks meet the 6% Tier 1 ratio requirement

but need to raise $150bn to increase to 8%

The results feed into E.U/U.S tension on

whether EU banks are sufficiently capitalized

US banks’ stress tests in May revealed 10

US banks need to raise $74.6bn in capital

US tests were more detailed pointing how much

each bank needed to raise

SSA Region

SSA economies have become more

competitive in the past year despite the

global recession and contraction in output

The World Economic Forum Global

Competiveness Report reveals that 13 of the

26 countries have improved their rank

Three countries remain unchanged from

2008 and 10 have slipped

SSA Region

The best performers are Uganda, Lesotho

and Tanzania

The worst performers are Mali, Ghana and

Botswana

South Africa is the most competitive followed

by Mauritius, principally because of the

efficiency of their financial markets

South Africa suffers from labour market

inefficiency (hiring and firing practices)

SSA Region

• It also suffers from a low university enrolment ratio of only 15% (94th in the world)

• Nigeria is in 99th place out of the 133 countries

• It scored very high for its macro economic environment (20th in the world)

• It suffers from weak and corrupt institutions

• It scored low for infrastructure, health and primary education

• Ghana declined 12 places to 114 because of a worsening macro-economic situation: large fiscal deficit, rising public debt and high inflation

African Competitiveness Rankings

Country 2009 2008 Change

South Africa 45 45 0

Mauritius 57 57 0

Botswana 66 56 -10

Nigeria 99 94 -5

Tanzania 100 113 13

Uganda 108 128 20

Ghana 114 102 -20

Source: World Economic Forum (Global Competitiveness Report (2009/10)

Nigerian Economy

The Nigerian economy is finally but

belatedly feeling the full severity of the

global economic crisis

The impact was initially muted by the huge

accumulation of external reserves and

strong fiscal surplus

It also benefited from some structural

shifts resulting from the stable currency

and investor friendly policies of the 2003-

08 period

Nigerian Economy

The lateness of the country in responding to

the exogenous shocks and the rigidity of

exchange rate when the fundamentals had

changed helped to fuel a speculative attack

on the Naira

The grossly overvalued equity market and

exchange rate was a speculator’s paradise

The combination of a huge sell off, profit

taking and capital flight eroded the strong

position of the Nigerian economy

Nigerian Economy

As in S.E Asia in 1997/8 the banks in

Nigeria were left holding the can and

exposed the country to systemic risks of

banking illiquidity and solvency

The CBN for the better of one year was

focused on the politics of the Governor’s

tenure

The financial crisis impact on Nigerian

banks was limited to the shortage and re-

pricing of confirmation lines and equity

market exposure

Nigerian Economy

The recent sanitization of the banks

without a mechanism to purchase the

toxic assets has led to a freeze on new

credit

The intervention mechanism which does

not differentiate between stock price

manipulation, rendering of false returns

and negligent lending has killed the

incentive to lend

Policy Update & Review

The President has approved a $2bn

stimulus package to jump start the economy

and resuscitate credit

The stimulus package will be funded from

the ECA and will be disbursed to the three

tiers of government

The funds will also be used to develop the

power sector and roadway system


Over the last 18 months, more than $10bn

has been shared from the ECA among the

three tiers of govt with no tangible

deliverables

Most of the disbursements have been

without clear and approved plans on how

the funds should be spent


CBN finally announced the result of the

2nd round of the stress test of banks

Of the 14 banks examined,

9 were found to be adequately capitalized

2 had insufficient capital but not in a grave

situation

3 were found to be in a grave situation


• The CBN intervened in the 3 banks and

fired the managements

• The CBN has injected a total N620bn as

tier 2 capital into the 8 banks

• Two of the options being considered are

partial nationalization or a Right Issue

Business Activity Wrap up

Lull in business activity continued in

September

The credit squeeze is curtailing business

activity and working capital

Year to date, credit to private sector growth

grew by 13.7%, compared to 37% in

corresponding period in 2008


Business activity was also affected by low

spending during the Ramadan fasting

FAAC allocation for Sep also declined by

5.2% to N346bn from N365bn in Aug

Value of cheques cleared in the Lagos

area was flat at N1.7trn


0

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1000

1500

2000

2500

N'b

n

Source:CBN

Value of Cheques Cleared (2008/09)


Demand for forex is down to $73.97m

Weak demand caused by credit freeze by

banks to major importers

The CBN supplied about $1.77bn at the

WDAS compared to $3.02bn in Aug

About 88.5% of forex demand was also met

by the Apex bank


• Hotel occupancy increased in Lagos, Abuja

and PH

Aug Sep % change

– Lagos 85 90 5

– Abuja 80 85 5

– P/H 20 35 75

• PH is beginning to benefit from the

perception of an amnesty deal.

• Lufthansa’s direct flights into PH is further

evidence of growing confidence

Aviation

Aviation

• Kenya Airways and Nigeria Eagle (Virgin

Nigeria) have signed a code share.

• It will allow NEA benefit from a sale of sky

team tickets and feed its domestic traffic

into the largest network alliance in the

World.

• B/A closed its ticketing office in Ikoyi and

outsourced it to International Express

Travel limited trading as CWT Nigeria a

touchdown travel subsidiary.

Aviation

• B/A tickets can be bought at travel

agencies, online and through GT Bank.

• Lufthansa is upping the ante by doubling

capacity into Nigeria.

• It now has a daily service into Abuja and

four flights into Port Harcourt.

• It operates an Airbus A340, possibly one

of the best products on the international

route into all three destinations

Aviation

On alternating days the Frankfurt-Abuja

service is tagged along with either Malabo

or Port Harcourt.

The price war going into the off-peak

season has begun on a fierce note.

From October 2, 2009 the following US

dollar discount fare are available on the

Lagos-London-Lagos route

Aviation – Price war on the Lagos –London

routeNetwork Carrier Discount Fare

Iberia $ 205

Royal air maroc 210

Alitalia 299

KLM 430

Air France 430

Lufthansa 469

B/A 475

Virgin Atlantic 529

Source: HRG Travels

The above mouth watering fares are a sign of

market capacity saturation

Aviation

• With Lufthansa’s entry of into Port

Harcourt, the city is now served by Air

France and LH

• This is a direct competition with Delta who

operate out of Lagos and Abuja.

• It also affects Arik, Nigeria Eagle and Aero

Services from PH to Lagos and Abuja

• By cannibalizing International traffic out of

the East, it further erodes the profit

potential of domestic carriers.

Aviation

• Leadway Assurance will provide the credit

cover on behalf of all travel agents to the

airlines.

• Tickets issued will cover an extra $4 to

cover the premium up to a maximum of

$1.2m turnover per travel agent.

• The price war is intensifying amongst

domestic carriers with Aero offering a

special Independence fare of N5000.

Aviation

Domestic Market

Arik remains the leader in capacity with

34% of seats available.

Carrier Capacity Share

Arik 34%

Aero 18%

Virgin (Nigeria Eagle) 16%

Chaichangi 14%

Dana Air 10%

Others 8%

Aviation

• Emirates remains the leading network carrier out of Nigeria.

• It operates two Boeing 777s extended range aircraft’s daily on the Lagos-Dubai route

• Its fare structure is highly competitive and the connectivity to most other destinations is convenient for customers.

• On the domestic scene the BSP Deposit Insurance Scheme commences November 2009.

Aviation

In the West African regional market Nigerian

Eagle (Virgin Nigeria) dominates the field.

Virgin Nigeria35%

Arik15%

Air Ivoire10%

Aero10%

Other30%

Aviation

The domestic market grew by 21% between Jan and June 2009.

Dana is eating deep into the share of all other carriers as they add on capacity with a growth in market share from 3% to 6%.

If the amnesty deal works, there is anticipated growth in traffic into Port-Harcourt and a revival of the hospitality business

Oil Markets &

Production

Oil And Gas

• A study by the Royal Institute of International Affairs shows very interesting revelations.

• The Chatham house team led by Alex Vines produced a report-Thirst for African Oil, Asian National Oil companies in Nigeria & Angola

• There is a marked difference in the fortunes of Chinese and Indian firms in Angola and Nigeria

• It shows how Asian Companies are just as vulnerable to unpredictable domestic policy and business practice as their Western counterparts.

Oil And Gas

• It shows that neither Angola nor Nigeria fit

the stereotype of weak African states

being raped by resource hungry Asian

tigers.

• It cites the example of the “big man

politics” in Nigeria and how the Asian

stereotype was turned on its head under

Obasanjo.

• It shows how huge funds were diverted by

hungry politicians into private pockets

under the oil for infrastructure deals.

Oil Price & Production

Crude oil rose to $70pb after the stock

market rallied on a report showing that

U.S. service industries grew, after 11

months of contraction.

Dollar depreciation and increased demand

for crude also helped fuelled the price rally

The rally notwithstanding, the price of oil is

still 50% below its 2008 peak


• Afren Plc has announced the start of

drilling at its offshore Ebok field by its JV

partner Oriental Energy and Resources.

• A local company Anthonio Oil is to

relocate a 27,000bpd refinery from Cyprus

to Iwopin in Ogun State.

• The refinery was shutdown in Cyprus

since 2005 owing to lack of crude.

• The government of Ghana has selected

Ecobank as Adviser on the Financial

restructuring of Tema Oil refinery.


0

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20

30

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60

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80

8-J

an

13

-Jan

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22

-Jan

27

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eb

12-F

eb

18-F

eb

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ar

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ar

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ay

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ug

27-A

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3-S

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9-S

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ep

Oil Price In 2009 $/Barrel


• OPEC revised upward its forecast for

global oil demand in 2009 to 83.91mbpd

from an earlier estimate of 83.84mbpd.

• Most of the recovery in demand is

expected to come from non-OECD

countries, particularly China and India.

• The International Energy Agency (IEA)

recently raised its forecast of China’s oil

demand by 130,000bpd to 8.4mbpd in

2010.


Nigeria’s output averaged 1.94 mbpd, up

from 1.75mbpd in August

The increase can be attributed to the

cease fire in the Niger Delta region.

Rising oil production coupled with firming

oil prices will help boost government

revenue and external reserves.


The FG is in talks with several state run

Chinese oil firms looking to buy proven oil

reserves

China has made a proposal to buy 6 billion

barrels of Nigeria's crude oil reserves

The Chinese bid is probably being used as a

stalking horse in the negotiations with IOC’s

There are also concerns that the Chinese

transaction is being pursued in a less than

transparent manner, leaving room for abuse

Outlook

Crude oil is expected to continue to firm

up, supported by optimism about the

global economic recovery

Crude could reach $80pb by year end

Nigeria’s oil production to reach 2mbpd in

Q4

OPEC likely to leave quota unchanged

Inflation

Inflation

• Headline inflation eased from 11.1% in July to a 14-month low of 11% in August

• Inflation has been on a steady decline in the last 6 months

• The decline in inflation can be attributed to an increased supply of agricultural produce and a reduction in aggregate demand

• Reduction in income and unavailability of credit have led to contraction in consumer spending

0.0

5.0

10.0

15.0

20.0

25.0

Inflaton rate (yoy) % FDC Urban Index (yoy)

Inflation (Jan ’07 To Aug’09 %)

Inflation

• Money supply growth is decelerating

• Broad money (M2) grew by 10.2% on a year

on year basis, the lowest growth rate since

Feb. 2006

• This is a reflection of the credit squeeze and

reduction in net foreign assets (oil revenue)

• If the trend continues, it could be an

economic kiss of death

• Value of cheques cleared in the Lagos

metropolis, a proxy of velocity of money in

circulation is relatively flat at N1.7trn

Outlook

• We expect a reversal in the downward trend of headline inflation

• Increase in fuel prices, removal of subsidy and CBN’s quantitative easing are major threats to inflation

• Increased government spending as election period approaches will also stoke inflation

• Recent Naira appreciation should help reduce the risk of imported inflation

• Headline inflation to close the year at 12-13%

Money Market &

Interest Rates

Money Supply and Interest Rates

• There has been a slight improvement in

the liquidity condition at the inter bank

market

• Factors responsible include:

– Banks unwillingness to lend to the private

sector

– Disbursement of the N87bn excess crude

savings and payment of PPRA funds of N40bn

to petroleum marketers

– N60bn repayments of matured treasury bills.

– Decline in demand for forex

Money Supply and Interest Rates

• The bond market is benefiting from a flight

to safety

• Secondary market activity in the bond

market is gaining momentum

• CBN has removed the 10% cap earlier

placed on banks’ participation in sub-

national and corporate bond offers.

• We expect more states and corporate

bond issues in 2010

Outlook

We expect inter bank rates to continue to

moderate on the back of huge fiscal and

monetary injection

Lending rates to remain at elevated levels

as banks tightened lending conditions

CBN to issue more T Bills to mop excess

liquidity

Forex Market

Forex

• The Naira appreciated further by 72 kobo

to close N148.79/$ at the official market

• The appreciation can be attributed largely

to weak demand for forex and increased

supply of forex by CBN

• At last auction, CBN offered USD300m

compared to the USD73.97m demanded

• CBN has increased the amount of forex

sold at the auction to $300m from $200m

Forex

The consistent supply of dollars had

restored confidence to the market, leading

to reduction in speculative demand

Naira appreciation can be attributed to a

combination of factors, including

weak demand caused by a credit freeze by

banks to major importers and

Large forex inflows from oil majors which

increased dollar liquidity in the system

100

120

140

160

180

200

2-Jan 2-Feb 2-Mar 2-Apr 2-May 2-Jun 2-Jul 2-Aug 2-Sep

Parallel(N/$) Official(N/$)

FOREX Trend 2009

Spread between official and parallel rates has narrowed from 12% to 4.4%

Outlook

Naira expected to appreciate further due

to weak demand and as investor

confidence is being restored

External reserves accretion due to

increased oil production will enable the

CBN to continue to support the naira

Naira to trade at N148-150/$ region

Stock Market

Stock Market

• The CBN’s final audit report has been released

• Cleared 9 banks who were found to have adequate capital and liquidity

• Three banks were found to be in a grave situation

• In all 8 banks have been quarantined by the CBN

• Announced a plan to inject additional N200bn into the 3 banks

• Market response was muted, signaling the news was as expected or better than expected

Stock Market

The stock market continued on a downward

trajectory in September

The NSE ASI lost 4.1% closing the month at

22,065pts

Compared to 9.18% decline in August

Ended the month on a positive note gaining

2.85% in the last two weeks of September

Market cap declined by 2.73% to N5.13trn

Total volume and value traded was also

low, averaging 434m and 3.16bn respectively

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

19,000

21,000

23,000

25,000

27,000

29,000

31,000

33,000

ASI-MARKET CAP CHARTYear to date

NSE INDEX MARKET CAPITALISATION

• Looks like a W shaped recovery but the question remains: when will the tide turn and a lasting recovery begin?

Investor Perception

• Factors driving market sentiment are:

Market uncertainty in anticipation of Sanusi’s

audit

Selling off to cover margin calls

Credit freeze on new margin loans

Switching to alternative asset classes

Liability deposit mobilization for common year-

end purpose

Short Term Outlook

The CBN audit has helped restore

balance between the known unknowns

and the unknown unknowns

Tentative buying by institutional investors

Investors will be going for value before

growth

Interestingly, Oceanic and UBN topped the

gainers list last week

Fundamentals suggest that some sectors

are oversold

• Record low P.E. ratios in sectors such as Banking, Healthcare and Building Materials provide buying opportunities

• Value exists among cash rich, consumer goods producers and blue chip multinationals with foreign credit lines

• Institutional investors are looking for value & growth

Outlook Contd.

Banks announcing bond issue plans, are

mainly those that are subject to multiple

jurisdiction or have GDR programmes

The CBN had earlier lifted the 10% cap on bond

portfolio investment by commercial banks

There is speculation that the funding proceeds

will be used to improve their risk weighted

adjusted capital ratios due to pressure from

foreign regulators

Outlook Contd.

Some have said the proceeds are to be used for

opportunistic acquisitions

There is speculation that it is to foster the induced

mergers or schemes of arrangement of the

quarantined banks

Outlook for October

• Increased government spending on

infrastructure

• Headline inflation to increase in energy price

& declining value of the US$ against the

currency basket

• Moderation in interest rates

• Marginal appreciation in Naira due to falling

demand

• Real Estate market to sink further as fire sale

of assets continues

The meaning of ambivalence is watching your mother-in-law drive over a cliff with your new Cadillac. - David Mamet

Being a specialist is one thing, getting a job is another .

A man said armed robbers demand your life or your money, whereas women demand for both. - Samuel Butler

When a woman is not beautiful, people always say you have lovely eyes, you have lovely hair . - Anton Chekhov

Corporate Humour

If at first you don’t succeed, failure may be your style. - Quentin Crisp

Hubert Humphrey talks so fast that listening to him is like reading the playboy magazine with your wife turning the pages - Barry Goldwater

A lover said, do not put all of your eggs in one bastard.

Corporate Humour

Thank you for your attention

monthly economic news and views lagos business school … · 2019-10-04 · global economic...

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