Download Naira Pressure Continues

MONTHLY ECONOMIC NEWS AND VIEWS
Naira Pressure Continues
Presented at Lagos Business School
by
Bismarck J. Rewane
October 13, 2015
Outline
2
September Highlights
Global Economic Update
Domestic Economic Performance
Commodity Update
Capital Markets
Policy & Politics
Outlook for October
IT’S SHOWTIME
All the President’s men - Dream team or lightweights?
4

After 125 days Buhari submits a list of ministers to the
Senate

A few minutes to the September deadline

Delay was more from assuaging internal squabbles within
the APC

Aggrieved Senators have been waiting gleefully for their
pound of flesh

Screening of the ministers will be a circus
September Highlights – GDP is down and falling
5

Indications for Q3 GDP growth is that Nigeria is in
stagflation

GDP growth estimates are for 2.5%

Higher than initial consensus forecasts of 2%

Principally because of improved power supply

Agric. output is also expected to be strong in Q3
Power is up and stable
6

National grid output in September up to 4,500MW

Due to higher rainfall and hydro output

Also due to steadier gas supplies from Escravos and
other fields

Oil production in September averaged 1.86mbpd

This is 0.2% above the average in Q2

Combined with the 23.52% decline in oil prices this is a
major revenue blow
Government revenue holding up
7




Revenue shared by the 3 tiers of govt., FAAC, is holding
up strongly at N442.6bn
No new unemployment data, but estimates suggest higher
rural and urban unemployment
The FBN purchasing managers index which measures
investor confidence recovered to 51.6

Higher inventory levels due to forex availability fears

A reading above 50 signals growth
CBN Governor warned of a possible decline into a
recession
Oil price crosses $50 pb again
8

Brent oil price stayed below $50pb throughout
September at an average of $48.66pb

Average for August and September was $48.51pb

8.47% below the benchmark of $53pb

Meaning no accrual into the Excess Crude Account

External reserves declined by 3.03% to $30.3bn

External reserves cover was flat at 4.94 months
It’s Showtime
9

The naira firmed up at the forex cash market to N225/$

Transfers are trading at N240/$




The CBN disallowed banks from accepting dollar cash
deposits
And made the importation of 41 items ineligible for forex
transactions
Banks complained of significant delays by the CBN in the
settlement of forex transactions
Building up a backlog of arrears on letters of credit
Nigeria delisted
10

J.P Morgan delists Nigerian Bonds from the Emerging
Market Index

Broad Money Supply shrank by 2.23% in August

On an annualised basis, the Money Supply contracted by
3.34%

The Treasury Single Account sent shock waves through
the money markets
Naira saturation
11

The Interbank market froze for 2 days, sending interest
rates through the roof

The MPC promptly reduced the CRR from 31% to 25%

Unlocking approximately N700bn of sterilized bank
deposits

Bringing interest rates sharply lower to 0.5% p.a.

Inflation increased to 9.3% in August

Driven both by cost-push pressures and shortages of
banned imports
GLOBAL ECONOMIC UPDATE
Faltering global recovery
13




The international financial community gathers in Peru for
the World Bank meetings

Amidst fears of a faltering global recovery

And uncertainties as to when the Fed will start increasing U.S.
interest rates
The IMF in its fall report is forecasting a deceleration in the
global recovery
Has cautioned commodity dependent economies to adopt
market friendly policies
As a counterbalance for cyclical downturn
Emerging markets diverge
14

Emerging markets and advanced economies moving in
opposite growth directions

The Volkswagen emission control scandal leads to the
CEO being fired

Sending its stock price tumbling

Glencore, the commodity trading giant, saw its stock
price crash

After analysts warned about the debt level on its balance
sheet
Deflation in the EU
15

The Eurozone dipped back into deflation as inflation fell
by 0.1%

Inflation has been below the ECB target of 2% for more
than 2 years

The European PMI shrank from 54.3 to 53.9 in
September
China flat-lining
16

Chinese economy on track to expand 7% in 2015







Slowest pace in 25 years
Slowing manufacturing and a depressed equity market
likely to limit Q3 growth to 6.4%
China is being advised to embrace a consumer driven
growth strategy
Chinese imports have fallen by 20.4% to $145.2 billion
Leading to softness in global commodities
Outlook for global economy dampened
Chinese growth to pick up in Q4

Stimulus measures and higher government spending to take
effect
SUB SAHARAN AFRICA
African growth shrinks
18

African growth likely to decelerate to 3.7% in 2015 amid
falling commodity prices – World Bank

From 4.2% initially projected and 4.6% in 2014

Will be the only developing region to miss global poverty
reduction targets

Terms of Trade deterioration estimated at 18.3%

About 40% for oil exporting countries
African growth shrinks
19

Lower oil price has helped reduce inflation

Policy adjustment to the adverse terms-of-trade shock will
be especially challenging in countries with depleted policy
buffers

Regional inflation is an average of 6.9%
Post Conflict Economies Growing Faster
20

Ethiopia, Ivory Coast, Mozambique, Rwanda and Tanzania
likely to achieve annual growth rates of above 7%

Driven by investments in energy, transport and consumer
spending

To mitigate impact of new shocks, World Bank
recommends

Improvement in efficiency of public expenditures

Strengthening tax administration
South Africa – Fears of a recession are real
21

Growth forecast revised downwards for the second
consecutive month by the EIU



Growth constraints include:






From 2% to 1.8% in 2015
And from 2.5% to 2.2% in 2016
Serious power shortages
Declining demand and prices for key mineral exports
Rising interest rates
Downturn in tourism – stringent new visa regulations
Policy uncertainty
Renewed concerns over Chinese economy weighing on
the rand

Has lost over18% so far this year
Ghana – Woes ahead of elections
22







GDP growth to remain subdued in 2015 at 3.4%
High inflation will dampen consumer and business
confidence
Annual inflation of 16.9% expected in 2015
The cedi will continue to suffer from volatility in the
coming months
Growing disillusion with economic situation main threat
to economic stability
The EIU expects further protests against the
government’s management of the economy
Presidential and legislative elections will hold in Dec
2016
COMMODITIES
Commodities
Commodity Prices in September
25

The Bloomberg Commodity Index (BCOM) declined by
2% in September from August

Volatility in oil prices driven by news from China and
production data from US
m-o-m change
PalmOil ($/tonne)
Rough rice ($/cwt)
Sugar (US cents/pound)
Silver ($/ounce)
Natural Gas ($/MMBtu)
WTI ($/b)
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
Commodity Prices
26

The EIU expects agricultural prices to stabilise in 2016

After falling for a 4th consecutive year in 2015

The food, feedstuffs and beverage price index will fall by
17.9% in 2015

When adjusted for the devaluation the impact on
domestic inflation is only 9%
Global Oil Prices remain Low
27

Brent crude declined 9.9% to an average of $48.66pb in
September

From $54pb at the end of August

Despite reports of slower drilling activities in the US

New fears from Russia and U.S. airstrikes on Syria

Weakness in China continues to linger

OPEC still struggling to battle for market share despite
widening fiscal deficit in member countries
Soft Commodities
28

Agric. commodities up 8% on average in September

Gains led by:


Sugar: 20.5% up m-o-m

Palm Oil: 9.4% up m-o-m

Wheat: 5.7% up m-o-m
Due to adverse weather conditions including drought in
India and haze in Indonesia

Increasing fears that supply of crops might be affected
Outlook and Impact - October
29


Low correlation between changes in commodity prices and
movement in stock prices of FMCGs
Stock prices have been driven majorly by negative investor
sentiments and weak corporate earnings
Share Price(N) as at
30th Sept. 2015
m-o-m (Aug/Sept)
YTD (Jan-Sept.)
869.99
3.57%
-12.62%
Cadbury
24
-15.97%
-40.00%
Guinness
156.51
12.61%
-5.32%
147
21.00%
-9.82%
9.84%
-22.54%
-8.03%
-43.25%
Nestle
NB
Honeywell
Flourmills
2.68
22.21
Outlook and Impact - October
30

Pacific Investment Management Co. (PIMCO) say that
the worst collapse of commodity price is probably over

In the first week of October, commodities experienced
biggest leap in prices since 2012

Bloomberg Index advanced 3.9% in the week starting on the
5th of October

The recent fall in commodity prices is not justified by
the fundamentals
Domestic Commodity Spot Prices Today
31
Commodity
Current Prices (50kg) Current Prices
LAGOS
(50kg)
KANO
Current Prices
(50kg)
ONITSHA
Cement
N1,700/bag
N1,650/bag
Cassava (Garri)
N6,000/bag
N5,000/bag
Maize
N2,650/bag
N2,300/bag
Flour
N6,000/bag
N6,300/bag
Sugar
N6,000/bag
N10,000/bag
Rice
N9,000/bag
N10,000/bag
N6,300/litre (25L)
N5,500/litre (25L)
Palm Oil


N6,800/bag
Domestic commodity prices were flat to falling in
September
Wheat flour increased in spite of falling world wheat price
DOMESTIC ECONOMIC PERFORMANCE
Commodities
Leading Economic Indicators
INDICATORS
33
Oil Markets
August’15
(Sep/Aug)%
change
September’15
Spot price (avg $’pb)
48.21
48.56
Production (m’bpd)
1.79(Jul)
OBB (%)p.a
October*
1.86(August)
0.73
3.91
48.50-49.00
1.89
8.5
5.42
308bps
5.25-5.50
Overnight (%)p.a
9.25
5.92
333bps
5.50-6.00
MPR (%)p.a
13.00
13.00
--
13.00
CPI ( %)
9.20(July)
9.30 (Aug)
External Reserves ($’bn)
31.32
30.37
0.1
3.03
9.4(Sept)
29.50
Inter-bank (N/$)
198.97
199.08
0.04
199.1
Parallel (N/$)
219.00
223.5
2.01
220.8
Market cap (N’trn)
10.21
10.73
5.09
11.00
FAAC N’bn)
511.8
442.6
13.5
350-400
M2 (N’trn)
18.43 (Jul)
18.51 (Aug)
FBN PMI
49.2
51.6
0.43
4.8
18.50-18.70
-
Vacancy Factor (Residential %)
39
40
1
40
Vacancy Factor (Commercial %)
30
31
1
30
Money Markets (End Period)
Exchange rate (End Period)
Other
FBN Purchasing Managers’ Index
34

FBN’s PMI reading increased
to 51.6 from 49.2 in August





Output sub-index rose strongly
from 43 in August to 55 in
September
Employment sub-index rose
marginally from 48 to 50
New orders sub-index rose
from 47 in August to 51 in
September
Suppliers delivery times subindex fell sharply from 61 to 50
Stock of purchases sub-index
rose from 47 in August to 52 in
September
Purchasing Managers' Index
70
60
50
40
30
20
10
0
August
September
LEIs – Oil
35

Average oil prices rose marginally to
$48.66pb





0.93% higher August’s average of
$48.21pb
2.25% below January’s average of
$49.78pb
50.06% below September 2014 average
of 97.44
Fiscal revenue is already feeling the
impact of lower prices
Oil production increased in August
to 1.86mbpd compared to July’s
1.79mbpd
Brent Oil Price ($)
52
51
50
49
48
47
46
45
44
Lower Interest Rates
36


Aberrational spike to 50% due to
implementation of TSA before
easing to 5% with FAAC
disbursement
Interest rates (%)
60
50
40
Average NIBOR (OBB, O/N and 30
30-day) closed lower at 8.53% p.a. 20
relative to 11.26% p.a. in August
10
Interbank interest rates are likely
to remain below 10% due to
system liquidity
0
01-Sep
03-Sep
05-Sep
07-Sep
09-Sep
11-Sep
13-Sep
15-Sep
17-Sep
19-Sep
21-Sep
23-Sep
25-Sep
27-Sep
29-Sep

OBB
O/N
30 day
Source: FMDQ, FDC Research
Inflation Inches Up Marginally
37

Inflation inched up to a 2year high of 9.3% in August
from 9.2% in July



Due to a rise in the prices of
Healthcare, Alcohol and
Tobacco, Transportation and
Leisure and recreational
activities
Cost push effect of
depreciation
September estimate: 9.4%
Inflation (%)
10.00
9.50
9.00
8.50
8.00
7.50
Forex Market
38




IFEM and IATA exchange rates
relatively stable at N200/$ &
N199.08/$
Depreciated 2.05% at the
parallel market to N225/$ this
week
Transfer dollars down to
N235/$
Exchange rate differential has
widened to N24.42 from
N20.03 in August
July
August
September
235
230
225
220
215
210
205
200
195
190
185
180
Interbank
IATA
Parallel
External Reserves – Depletion Continues
39

External Reserves $'bn
External reserves declined
3.03% ($950m) to $30.37bn in
31.46
September

31.32
Import cover of 4.94 months
of goods and services

30.37
Way below Emerging Markets’
29.80
average of 11months

Reserves depletion rate will
intensify if oil prices fall below
$45pb
July
Aug
Sep
Source: CBN, FDC Research
Oct**
Misalignment of the Naira
40
Naira to US Dollar Exchange Rate
250
230.5
200
150
150.7
158.3
157.3
157.3
220.5
169.7
N/$
100
50
0
2010

2011
2012
2013
2014
2015*
2016*
Misalignment when the value of a currency is outside the
equilibrium path

It could be arising temporarily or structurally due to balance
of payment shocks
* Economist Intelligence Unit forecasts
Deteriorating Trade Balance
41
50
45
40
35
30
25
20
15
10
5
0
43.8
40.9
31.8
35
26.8
4.6
2010
2011
2012
2013
2014
2015*
Trade balance (US$'Bn)

Down from a high of $44 billion to less than $6 billion

Due to falling oil revenues and sticky import dependence
* Economist Intelligence Unit forecasts
Net Foreign Direct Investment
42
9
8
7
6
5
4
3
2
1
0
8.1
5.6
5.2
4.4
3.1
2010
2011
2012
2013
2014
1.8
2015*
Net FDI (US$'Bn)

Net foreign direct investment sharply lower

From a peak of $8.1 billion to a projected $1.8 billion in
2015
* Economist Intelligence Unit forecasts
Economic Indicators
43
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
2010
2011
2012
Change in export prices (%)
2013
2014
2015*
Change in import prices (%)
S/N
Indicators
1
Change in export prices
% change
(37.7%)
2
Change in import prices
(-7.6%)
3
Terms of trade
30.1
4
Cumulative devaluation 2014/2015
(26%)
Required adjustment
5% (equal to N10)
* Economist Intelligence Unit forecasts
Economic Indicators
44
50
44.2
45
43.6
40
35
32.3
32.9
2010
2011
34.5
30.3
30
25
20
15
10
5
0
2012
External Rerserve (US$'Bn)
* Economist Intelligence Unit forecasts
2013
2014
Import/Payment Cover
2015*
What is the true value of the naira?
45
Rencap
230
Naira/$
Analysts’ Projections
EIU
220
Value as per PPP
Rencap (SA)
FDC
Rencap (UK)
340
217.91
185
B of A
220
What is the true value of the naira?
46
Oct-02
=N=
US $
PPP ('=N=/US$)
Bottle of Coke (50cl)
100
2.65
37.74
Heineken
350
2.82
124.11
Hamburger (Johnny Rockets Nigeria)
2,100
4.59
457.52
Uncle Ben's rice (S. Pkt)
1,585
3.79
418.21
16,950
430.68
Toyota Corolla
7,300,000
Bottled Water (1ltr)
100
1.43
69.93
Big Loaf Bread
300
2.51
119.52
Irish Spring Soap (1 cake)
300
1.31
190.84
Chicken Drumsticks ( 1 kilo)
800
5.65
141.59
Eggs
480
2.54
188.98
(One dozen)
217.91
Average PPP
199.05
Naira Price at IFEM
PPP (%)
Decision: Naira is
Overvalued
Spot Rate (Parallel)
Outcome: Compared to official spot rate of N199.05/$1, the Naira is overvalued by 9.48%
9.48%
225
What can $100 buy in Nigeria? - RenCap
47



According to Renaissance Capital, $100 buys almost 50%
less in Nigeria than in SA
Analysis based on a 31 food and groceries basket, fuel and
two services (a cinema ticket and cable TV)
Price variance is due to the fact that most items in the
basket where imported and the fact that the naira is
expensive


In addition, poor infrastructure inflates the cost of production
and transportation
Lagos is as expensive as UK, but wages and per capita GDP
in the UK is13 fold that of Nigeria
What can $100 buy in Nigeria? - RenCap
48
Source: Rencap
Nigeria’s Daily PMS Consumption - FBN Capital
49
Source: FBN Capital
Amount spent on Subsidy
50
Source: FBN Capital
MAJOR POLICY CHANGES
Commodities
Monetary Policy - Outlook
53







Fair value of the naira was the “Elephant in the Room”
at the MPC meeting
The CBN continues to use administrative measures to
manage the currency
However, it cannot control the price of crude oil
Oil prices have stayed below $50pb for 6 out of the last
7 weeks
External reserves are down to $30.37bn
A currency adjustment more likely if oil price stays
below $50pb through October
Forex demand will spike as soon as cabinet is in place
BUSINESS PROXIES
Commodities
FAAC Allocation Down in September
55

FAAC allocation shared was
FAAC (N'bn)
600
N442.6bn in September

13.5% lower than
N511.8bn in August

540
Expect further loss based on
$8pb decline in oil prices
442.6
435
409
420
388
between June/July

518.5 511.8
480
Revenue loss of $8.6m due to
$5pb decline in oil prices
522.05
500.13
360
300
between July and August
Source: FMF, FDC Research
55
Ships Awaiting Berth Down
56

Ships awaiting berth in Lagos
ports declined sharply to 34 in
September



From 59 in August
No of Ships Awaiting Berth
70
61
60
51
50
49
46
49
30
policy
20
Goods likely to be diverted to
10
59
49
40
Adverse effect of CBN forex
Lome and Benin
57
34
0
Source: NPA, CBN, FDC Research
56
Rig Count Down
57

Active rigs in Nigeria not following the global trend

Increased to 9 in August from 8 in the previous month

US rigs down by 5% to 640 in the same period
1800
450
1600
400
1400
350
1200
885
1000
800
300
250
200
208
600
400
150
100
200
9
0
Jan-15
Feb-15
Mar-15
US
Apr-15
May-15
Canada
Jun-15
Jul-15
Aug-15
Nigeria
Source: Baker Hughes
50
0
Power Generation Up but Becoming
Unreliable Again

Average power output from
the national grid rose to
4,500MW




2.3% higher than 4,400MW in
August
Peak: 4,735MW
Lost about 1,000MW this 1st
week of October

Distribution issues

Chaos in Egbin station
Power outages now frequent
in Ghana and South Africa
Average Daily Power Generation (MW)
5000
4735
4500
4000
4073.75
3926
3500
3000
2500
2000
16-Jan
25-Jan
3-Feb
12-Feb
21-Feb
2-Mar
11-Mar
20-Mar
29-Mar
7-Apr
16-Apr
25-Apr
4-May
13-May
22-May
31-May
9-Jun
18-Jun
27-Jun
6-Jul
15-Jul
24-Jul
2-Aug
11-Aug
20-Aug
29-Aug
7-Sep
16-Sep
58
Source: Nigeria Power Reform
RETAIL INDUSTRY
Commodities
2015 Global Retail Development Index (GRDI)
60

A.T. Kearney says SSA will be the big story by 2040

The region presents opportunities just starting to open up

Three SSA economies ranked in this year’s Global Retail
Development Index
2015 Rank
1
2
3
4
18
23
30
Country
China
Uruguay
Chile
Qatar
Botswana
Nigeria
Angola
GRDI Score
65.3
65.1
62.3
59.1
49.8
47.1
44
Global Retail
61
Botswana

Total retail sales estimated at $6.3bn

CAGR (2010 -2014): 7.2%

It is one of Africa’s most stable countries both politically
and economically

Features fairly well-established infrastructure
Global Retail
62
Angola

Retail sales estimated at $41.9bn

CAGR (2010 -2014): 10.3%

Widespread informal sector still dominates

Local production facilities are limited

Infrastructure is underdeveloped

But locally owned retail networks are expanding rapidly
Global Retail
63
Nigeria

Retail sales estimated at $135bn

CAGR (2010 -2014): 12.7%

Still dominated by traditional and informal formats

But becoming more organised and modernised

A growing number of Nigerians order goods online
Domestic Retail
64

Domestic retail sales up in September mainly due to
back-to-school shopping

Sale of stationeries increased

Stores also increased their inventory levels slightly in
anticipation

Prices of goods remained relatively unchanged

Retailers struggle to pass on costs to consumers
Domestic Retail
65

Weekend traffic increased slightly

Cash-to-card ratio unchanged at 65:35

Appointment of ministers will bring some clarity to fiscal
policy

Expect increased retail investments as investors re-enter
the market
REAL ESTATE
Commodities
Real Estate – Domestic
67

A lot of vacant properties across Lagos

Casualty of transparency and money laundering

Combination of liquidity constraint and fear of probe




Money has not been released into the sectors with no
ministers
Treasury Single Account also contributed to liquidity
constraint
Now a buyer’s market as sellers crash property prices
Some people selling off their properties in Eko Atlantic to
clear off debts
67
Real Estate – Domestic
68

Residential vacancy factor sharply up in Lekki to 63% in
September


From 58% in August

Vacancy mainly in Agungi, Oniru
Commercial vacancy factor in Lekki up to 58%


From 57% in August
No significant recovery expected this year until 1st half of
2016
68
Vacancy Factor Up
69
Victoria Island
70%
60%
50%
40%
30%
20%
10%
0%
Residential Vacancy Factor
Source: FDC Research
Commercial Vacancy Factor
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Feb-15
Jan-15
Lekki
Apr-15
Ikoyi
40%
35%
30%
25%
20%
15%
10%
5%
0%
Mar-15
40%
35%
30%
25%
20%
15%
10%
5%
0%
AVIATION UPDATE
Commodities
Aviation – Financial Results Weaken
71

Airline shares fell 5% in August compared to the 4%
boost in July

Markets were impacted by developments in the Chinese
economy

Airlines in Asia Pacific were most impacted with a loss of
15%

Passenger yields remain weak globally

Average global fares were down 13% in US $ terms in
Jan-July’15 relative to corresponding period in 2014
Aviation - Load Factors
72



Global load factor reaches record level of 84.7%
Passenger load factor in July 2015 was 71.2 % in Africa
compared to 87.6% in North America
Global load factor for August and September expected to
have increased, as many return to school/work
Aviation - Profits
73

Global airline industry net posttax profit for 2015 is $29.3
billion

$8.27 per departing passenger

Compared to $177 profit Apple
made on each product sold in Q1
Airline News
74

Government of Mozambique has stepped in to rescue
state owned Linhas Aéreas de Moçambique (LAM)

LAM in bad financial shape despite monopoly status and high
prices

Prime minister requests independent audit of the airline
which relies on government for financial sustainability
Airline News
75

Lufthansa Group will serve 261 destinations in 101
countries


2014: 260 destinations in 100 countries
Air France cuts 2,900 jobs

Including 1,700 ground staff, 900 cabin crew and 300 pilots

Part of effort to cut costs and cope with pressure from low-
costs competition in Europe and the Middle East
Airline News
76


Arik Air denies bankruptcy allegations previously
published by online site

Claims that it maintains over 100 flights per day, and is
expanding operations to other African cities including Abidjan
and Cotonou

Airline has also resumed flight services from Lagos to
Monrovia, Liberia following the end of the Ebola plague in the
country
Emirates launches $20 million global ad campaign with
new cheeky commercial

Featuring Hollywood's A-lister, Jennifer Aniston
Domestic Aviation
78

International air traffic declined by 27.93% in Q2,
according to the National Bureau of Statistics

Reduced public sector travelling due to Buhari Administration

Reduction in the use of private jets

Domestic travel increased marginally by 0.71% to 2.37m

Domestic flight passengers represented 69.37% of the
Nigeria’s total air traffic in Q2
Domestic Aviation
79

Murtala Muhammed Airport recorded the highest number
of passengers

39.4% of total domestic air traffic and 69.43% of international
air travel passengers


Challenges facing the industry include:

Poor airport infrastructure

Cost of operation and fuel

High interest rate on credit facility from banks
The national carrier will be another dead on arrival project
Steals & Deals
80

Lufthansa great value premium economy flights to :
New York
$1,206
Washington
$1,218
Chicago
$1,245
Boston
$1,253
Toronto
$1,171
Vancouver
$1,453
Dublin
$622
Madrid
$630
Geneva
$644
London
$765
Flight Fare Promos
81
Airline
Destination
Price (N)
South African Airways
Johannesburg
from 124,380
Etihad Airways
Dubai
from 129,999
Qatar Airways
Dubai
from 142,500
Virgin Atlantic
London
from 198,768
British Airways
London
from 198,768
Delta Airlines
New York
from 240,500
Outlook
82


Global GDP for 2015 is projected at $760 billion in 2015
Translating into higher profits and returns on capital for
airlines


Predicted 7.5% returns on capital for airlines in 2015
Air fares are expected to fall as supply increases
STOCK MARKET
Commodities
Global Equity Markets
84



Emerging markets indices
drop as traders dump
emerging market equities
Shrinking global growth and
economic slowdown in Asia
drag the S&P 500 down by
4.47% - worst quarter since
2011
NSE ASI outperforms major
indices around the world
Nigerian Stock Market Review
85
Scottfree BC30 Index
NSE ASI
31,000.00
30,500.00
30,000.00
29,500.00
NSE ASI
29,000.00
01-Sep-15
03-Sep-15
05-Sep-15
07-Sep-15
09-Sep-15
11-Sep-15
13-Sep-15
15-Sep-15
17-Sep-15
19-Sep-15
21-Sep-15
23-Sep-15
25-Sep-15
27-Sep-15
29-Sep-15
28,500.00
Source: Solactive, FDC Research



Source: NSE, FDC Research
Market trades sideways on local and foreign news
BC30 index gained 8.52% in September as against 8.97% in
August
Scottfree’s average P/E ratio was 7.06x


30 day volatility was 26.59%
Dividend yield 3.90%
September 2015 Highlights
86



NSE ASI gained 5.16% during the month, -6.69% in Q3, and 9.92% YTD
Market capitalization increased by 3.78% from N10.21tn to
N10.59tn
Diageo announces intent to increase equity stake in
Guinness Nigeria to 70%

Treasury single account took effect

Neutralized by reduction of CRR to 25% from 31%

JP Morgan delists Nigeria from its government bond index
Sectoral Performance
87

All sectors recorded positive performance except for Oil
& Gas

Consumer goods sector propped up by NB, Guinness &
Unilever despite rising inflation
Corporate Earnings in September
88
UBA PLC
Net Interest Income
PBT
Net Interest Margin (Annualized)
Earnings Per Share (Kobo)
Total Assets
Loan Loss Provision
Total Expenses

H1 2015
65,658
39,046
7.23%
0.94
2,929,278
3,500
73,820
N'000mn
H1 2014
55,211
22,856
9.60%
0.71
2,762,573
2,049
63,947
% Change
18.92
70.83
-24.69
32.39
6.03
70.82
15.44
UBA H1 2015 result mirrored performance of its tier 1
counterparts

Loan loss provision up 70.82%

Earnings Per Share of N0.94

Declared interim dividends of N0.20

Payout ratio of 21.3%
Corporate Earnings in September
89

Rising inflation and reduced disposable income hits the
consumer goods

Guinness and PZ Cussons report declining PBT and EPS

No respite in sight for Q3 results
Corporate Earnings in September
90

Decline in GPI - Reflection of economic activities

Reduced operating cost boosted underwriting profits

Standard Alliance’s PBT augmented by increase in
investment income
Reallocation of Asset Mix
91
Analysis of Asset Mix
92

A gradual shift from supranational bonds as their yields
become less attractive

Asset managers dump equities as poor corporate results
and volatility erode market capitalization

A significant shift away from real estate
Equity Market Outlook for October
93

Poor Q3 results may weigh on the markets and wipe out
gains

JP Morgan index delisting implementation will hurt
equities in October

Trade volumes and market capitalization to pick up on
renewed interest in the market

Trial of oil barons will hit banking stocks

Exchange rate uncertainty will hurt market sentiment
POLITICAL RISK ANALYSIS
Commodities
Political Outlook/Cabinet Anticlimax
95
The army you have and not that you wish to have

Six months after the election

Five months since the transition committee

Buhari releases names of his dream team

Critics called it a downer and some light weights

Realists said the wait was not worth it
Energy/Integrity Economic Output Matrix
Reveals the bulk of the team in the upper right quadrant,
lower level
More
likely
Great
to have!
INTEGRITY
Good to have!- Median
score
Minority
LOW
AGE
HIGH
Suboptimal
outliers
Undesired
LOW
ENERGY
AGE
HIGH
Positive
Economic
Output
Political Outlook/ Cabinet Anticlimax
97



High physical energy, satisfactory mental energy, astute
political skills
Those with medium integrity can be controlled and
managed
Stated priorities






War against insurgency
War against corruption
Blocking leakages
Stabilizing economy
Stimulating recovery
Reform
OUTLOOK Commodities
The Economic Reality
100
According to the EIU October 2015 report




“Expect significant upheaval as the patronage networks
of the outgoing administration are dismantled
Economic policy announcements are likely to be
ambitious
Actual policy reform- particularly in the vital oil industrywill be slow
The politicization of economic policy will also slow the
reform agenda”
The Economic Reality
101
According to the EIU October 2015 report

“Fiscal expenditure will remain dominated by recurrent
spending, despite efforts to boost capital investment

Growth will remain below potential

Hit by troubles in the oil sector and by the country's
crippling infrastructure deficit”
The Economic Reality
102
According to the EIU October 2015 report

“Inflation will ease after a rise related to currency
weakness in 2015

The naira will fall sharply in 2015, reflecting lower oil
earnings

The current account will slip into a deficit in 2015-16

Owning to the oil price slump”
Outlook – Reality will set in
103

The World Bank meeting in Peru has shed some light on
policy direction

Sustained lower oil prices will push monetary policy
towards currency adjustment

Petroleum subsidies will have to be reviewed in
November/December

The trial of the Senate President will be adjourned

As the Senate approves most of the Ministers
Outlook – Reality will set in
104

More Federal appointments will be announced to
compensate the states not in the cabinet

The Interpol, EFCC dragnet will take down major
casualties in the private sector

Reputation, financial and market risks will escalate and
bring down banking stocks

Simmering systemic risks associated with oil scandals will
affect the banking system
Outlook – Reality will set in
105

Inflation in September will inch up marginally to 9.5%

Elections will be annulled in most oil producing states

The risks of violence in the bye elections and Bayelsa is
very high

APC clamour for electoral compensations and IOU’s will
put pressure on Buhari

The President will stay steadfast
106
Bismarck J. Rewane, MD/CEO
Financial Derivatives Company Ltd.
Lagos, Nigeria
01-7739889