Download 2015 Quarter 1 NIGERIAN SNAPSHOT

NIGERIAN
SNAPSHOT
2015 Quarter 1
Inflation - Inflation remained relatively stable and averaged roughly 8.1% in 2014, down from 8.5% in 2013. According to the National Bureau of Statistics
(NBS), Nigeria’s headline inflation increased for a third straight month in February. The rise in inflation should have been expected given the sharp
depreciation of the naira exchange rate. That said, the interbank exchange rate has remained relatively stable since February 18, when the Central Bank of
Nigeria (CBN) announced that its bi-weekly foreign exchange auctions had been suspended and that the foreign exchange market will henceforth be orderbased.
Growth - Nigeria’s real GDP growth at factor cost slowed to 5.94% y-o-y during 2014 Q4, down from 6.23% y-o-y in Q3. The economy will face several
headwinds this year in the shape of a weaker naira, higher inflation, tight monetary policy and lower fiscal spending growth. Nigeria’s real GDP growth is
forecast to decline from 6.3% in 2014 to 4.8% in 2015.
National development plan - Wide-ranging reforms in the agricultural and power sectors are ongoing. Agricultural reforms are centred on improving the
distribution of fertilisers, a scrapping of import duties on agricultural equipment, and easier access to credit for farmers. Elsewhere, the delay in the signing of
the Petroleum Industry Bill (PIB) continues to discourage investment in the hydrocarbons sector.
OPPORTUNITIES
STRENGTHS
Immense scope for gas production for domestic use as well as exports.
Privatisation of power sector is progressing well.
Africa’s most populous country; Africa’s largest Muslim population; biggest
economy on the continent.
Robust real GDP growth performance – recently overtook South Africa as
largest economy on the continent.
Growing middle class offers opportunities in the services sector.
The government has made progress with some key reforms in recent years.
One of the countries on the continent with the most opportunities for
commercial agriculture.
Nigerian oil is of a very high quality, and generally trades at a premium to
Brent crude, while the cost of unearthing the oil is relatively low.
Strong structural external position.
VULNERABILITIES
WHAT IS BEING DONE?
The fact that Mr Buhari has been voted as the next president bodes well in this
regard, but only time will tell if the situation is going to improve significantly.
The PIB was sent to Parliament in July 2012, but it will likely only be
Delays in passing the PIB have led to lower investment in the oil sector.
addressed after the new government has settled in.
There are no more large towns under Boko Haram’s control following the
Security, especially in the northern states, and the prospect of terrorism remain
successful regional military campaign. Nonetheless, Boko Haram will remain
major elements in political risk.
a dangerous terrorist organisation for some time to come.
The fiscal and external positions have a high vulnerability to lower oil
The government is aiming to better ring-fence its oil savings in its Sovereign
prices/output.
Wealth Fund, but progress has been slow.
Poor infrastructure, high cost of doing business, corruption.
MEGA TRENDS
Population
177,155,754 (July 2014 est.); Age 15 - 64: 53.7%
Population growth rate (%)
2.47% (2014 est.)
Life expectancy at birth
Total population: 52.62 years; male: 51.63 years; female: 53.66 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 3.17%; People living with HIV/AIDS: 3.2 million (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 59.6%; male: 69.2%; female: 49.7% (2015 est.)
and write)
Urbanisation
Urban population: 46.1% of total population (2013); Urban population growth: 4.7% (2013)
Population below national poverty line
70.0% (2010 est.)
Unemployment rate
23.9% (2011 est.)
Employment (% of total)
Agriculture: 39.7%; Industry: 10.8%; Services: 49.5% (2013 est.)
Labour participation rate (% of total
population ages 15+)
56.1% (2013)
Business languages
English, Hausa, Yoruba, Igbo, Fulani
Telephone & Internet users
Main lines in use: 360,537; Mobile cellular: 127.25 million; Internet users: 67.32 million (2013)
Sources: CIA World Factbook, World Bank, Trading Economics, ITU, UNAIDS, Nigeria National Bureau of Statistics & NKC Research
1
Total
Nigeria
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
175
136
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
144
127
Economic Freedom 2015 (1 most, 178 least free)
178
120
HDI Ranking 2013 (1 most, 187 least developed)
187
152
0
Source: NKC Research
189
170
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
B+/Stable
BB-/Negative
Ba3/Stable
Standard & Poor’s (S&P) decided to downgrade Nigeria’s sovereign credit rating on March 20. More specifically, the credit agency lowered Nigeria’s rating
by one notch, from “BB-” with a negative outlook (CreditWatch) to “B+” with a stable outlook. According to the agency, the decision to downgrade Nigeria’s
credit rating stems primarily from the impact of lower crude oil prices on the country’s external position. In this regard, S&P highlighted that, despite
authorities’ recent actions, the “exchange rate and monetary policy could continue to come under pressure due to the fall in oil prices, political risks, or
changes in investor risk appetite.”
On March 30, Fitch Ratings affirmed its sovereign credit assessments on Nigeria. As a result, the long-term foreign currency issuer default rating (IDR) was
kept unchanged at “BB-”. However, the outlook on the rating was revised from stable to negative, primarily on account of the impact of lower crude oil prices
in addition to higher political risk stemming from the election and the potential for government transition issues. That said, Fitch notes that “violence was very
limited on election day and challenges were largely technical in nature,”while the progress made in the fight against Boko Haram was also positive.
On 7 November 2012, Moody’s Investors Service assigned an inaugural foreign currency credit rating of “Ba3” – equivalent to a “BB-” rating on the other
agencies’ scales – to the sovereign of Nigeria, more recently affirmed on 14 November 2014. The outlook on the rating is stable. According to Moody’s,
Nigeria’s “Ba3” rating “balances the economy’s robust growth prospects and the government’s limited debt levels against low per capita income, weak
institutions, slow progress in executing structural reforms, and an acute fiscal vulnerability to adverse oil price shocks.”
Infrastructure
Diversity of
the Economy
Banking
Sector
Continuity
of Economic
Policy
GDP Growth
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Very weak
Oil dominates
exports
Improving
Reform progress
has been slow
and mixed
Strong
Twin deficits
Strong
Low
Sufficient,
though under
pressure
Stock Market
Listed Companies
Nigeria Stock Exchange
199 (primary listings only)
(NSE)
Liquidity
Market Cap
Dominant Sector
Very liquid in African
context
$57.9bn
(April 13)
Banks
Daily Trading
Volume
541 million shares
(April 13)
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Advanced in African
context
Very liquid in African
context
91-day to 20-year
Yes
Yes
Macro-economic overview
Nigeria’s real GDP growth performance over the past decade has been strong, driven by the non-oil sectors. While the crude oil industry remains vital in
relation to Nigeria’s external and fiscal balances, it only contributed roughly 10.6% to factor-cost GDP in 2014. Growth in the crude oil industry has been
disappointing in recent years, mainly due to an escalation in oil theft and infrastructure damage in addition to delays in finalising the Petroleum Industry Bill
(PIB). As a result, economic growth has primarily been driven by non-oil sectors, including manufacturing, telecommunications, construction and merchandise
trade. Real GDP growth averaged roughly 5.2% p.a. during the 2011-14 period. Even so, the incidence of poverty has not declined by much over this period.
This indicates that economic growth has not been inclusive enough. Possible reasons for this include regional and income disparities; terror risk in northeastern states and sectarian violence; low productivity in the agricultural sector; limited non-oil exports; very low value added; and high levels of corruption.
Furthermore, we believe that the government’s policy of protecting local industry by having high import duties (and prohibitions in a number of cases) on
several goods harms the welfare of Nigerians.
The Nigerian economy will face several headwinds this year. Firstly, lower crude oil prices are not likely to have a significant impact on Nigeria’s oil
production levels, since the country is a low-cost producer. That being said, we do not expect a significant increase in Nigeria’s oil output in the short to
medium term either. This is however not due to lower oil prices but rather ongoing long-term structural issues in the industry that have resulted in large-scale
divestment taking place in recent years, while future projects have been delayed. The most important issue in this regard is the delay in signing the PIB. The
transmission mechanism of markedly lower crude oil prices to the real side of the economy will stem predominantly from current account pressures and the
associated impact on the naira exchange rate and the conduct of monetary policy. A depreciating naira will adversely impact both the productive and consumer
sides of the Nigerian economy. In relation to the former, higher input costs will squeeze profit margins which could result in a decline in reinvestment and
limit expansion in industries such as manufacturing – the main economic growth driver in 2014. Firms manufacturing goods for foreign markets will however
benefit from the revenue side.
2
Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
20.6%
Service/GDP
53.3%
Industry/GDP
26.0%
Meanwhile, higher inflation will adversely impact consumer purchasing power, and demand will further be stifled by tight monetary policy. Although the
effect thereof will not be as pronounced as in certain other oil producing nations – the size of government relative to the economy is comparatively small – a
decline in government spending will also adversely impact economic growth in Nigeria, especially when considering the sharp decline in capital expenditure
envisaged in the 2015 fiscal budget. This will adversely impact the performance of the construction industry when public work projects are delayed or even
scrapped. We forecast real GDP growth will decline to 4.8% in 2015.
Real GDP Growth & Net FDI/GDP
3.0
6.5
Source: NKC Research
6.0
2.5
5.5
2.0
5.0
1.5
4.5
1.0
4.0
0.5
2009 2010 2011 2012 2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
Note: The NBS is yet to release GDP growth figures for 2010 and further back.
The recent decline in international crude oil prices has raised some concern in relation to foreign investment in the hydrocarbons industry moving forward, as
margin pressure might force multinational oil companies to postpone investments to improve cash flow. On February 4, an executive at Total confirmed that
major oil projects underway in some of the company’s African locations – Nigeria being amongst the locations mentioned – will not be affected by the decline
in crude oil prices, as such projects will assist Total with reaching its long-term production targets, according to Business Day. However, on March 10,
Bloomberg reported that Chevron has decided to postpone the envisaged completion date of the Sonam project – the project is part of Nigeria’s drive to
expand natural gas production – by one year to 2017. Another factor that continues to discourage foreign investment in the hydrocarbon sector relates to the
delay in finalising the PIB. The business environment also remains extremely challenging. According to the World Bank’s Doing Business 2015 report,
Nigeria has the 170th worst business environment out of the 189 countries covered in the index. We forecast net FDI will decline from $4.5bn in 2014 to $4bn
this year. FDI is expected to recover gradually over the medium term.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
Main Imports: % share of total
2016F
Oil & gas
Vehicles other than railway, tramway
2014E 2015F
2016F
Oil & gas
22.83
16.12
16.08
Vehicles other than railway, tramway
12.96
13.54
13.20
Machinery & boilers
10.04
10.99
11.28
Electrical & electronic equipment
6.52
7.14
7.32
Machinery & boilers
Electrical & electronic equipment
Crude oil
Main Exports: % share of total
Natural gas
2014E 2015F
2016F
Crude oil
82.08
72.38
73.58
Natural gas
11.96
16.45
14.74
Cocoa & cocoa preparations
0.86
1.33
1.31
Rubber & articles thereof
0.21
0.35
0.36
Cocoa & cocoa preparations
Rubber & articles thereof
Source: NKC Research
0.0
20.0
40.0
60.0
80.0
Nigeria’s external balances are highly dependent on the hydrocarbons sector. Crude oil accounted for roughly 82.1% of total exports in 2014. The sharp drop
in global crude oil prices is bound to hold significant implications for Nigeria’s external balances this year. Furthermore, given the broadly held consensus that
crude oil prices will only recover gradually over the medium term, Nigeria’s external balances might remain under pressure for some time. In this regard, it is
paramount for the country to prevent crude oil production from declining in 2015. Owing to the sharp fall in the oil price, we forecast crude oil exports will
decline from $72.7bn in 2014 to $44.4bn in 2015. However, the outcome might be even worse depending on corruption and theft.
When turning to imports, it is important to note that fuel and gas-related products represent the largest share of Nigeria’s total import bill. As a result, the sharp
decline in crude oil prices should also drive down fuel import costs. We forecast imports will decline slightly to $60.5bn in 2015. As a result, we believe the
trade balance will remain in positive territory and record a surplus of $0.9bn in 2015. That said, we forecast the current account balance will turn negative and
record a deficit equivalent to 2.9% of GDP in 2015, primarily driven by the significantly narrower trade surplus.
3
Current Account & Budget Balance
(% of GDP)
6.0
2.0
Source: NKC Research
4.0
0.0
2.0
-2.0
0.0
-4.0
-2.0
-6.0
-4.0
-8.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
On February 25, Nigeria’s Senate passed a revised 2015 budget to be presented to the National Assembly for final approval. The benchmark crude oil price
was lowered to $52/bbl in the revised budget, while the exchange rate was raised to N190/$. According to Reuters, the Senate also increased capital
expenditure by 10% and cut the fuel subsidy bill further to just N100bn. The fact that the budget is being reviewed to better reflect the current economic
environment is certainly positive. Also, the budget in itself seems prudent enough given the sharp decline in crude oil prices, and the decision to lower fuel
subsidies further to bolster the capital expenditure budget is also encouraging. That said, adherence to the budget will represent the real challenge. This is
especially the case at state and local government levels. Extra budgetary spending and the possibility of election-related slippages also remain key concerns. In
general, we remain less optimistic in relation to whether authorities will be able to rein in expenditure by as much as is required given lower revenues. We
forecast the fiscal deficit will widen from 2.7% of GDP in 2014 to 3.4% of GDP in 2015.
Average CPI (% change, y-o-y)
15.0
Source: NKC Research
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
The most pressing matter on the monetary front still relates to the exchange rate and the Central Bank of Nigeria’s (CBN) decisions in this regard moving
forward. The current ‘artificial’ foreign exchange market is unsustainable in our view, as it only serves to sour investor sentiment and risks Nigerian bonds
being ejected from the JP Morgan Emerging Market Bond index. Hopefully, the CBN will provide more information in this regard now that the elections have
been concluded in a relatively peaceful manner. Turning to the interest rate outlook, we maintain our view that the monetary policy rate (MPR) will have to be
raised over the short term to ward off inflationary pressure stemming from the official and de facto devaluations.
Inflation remained relatively stable and averaged roughly 8.1% in 2014, down from 8.5% in 2013. According to the National Bureau of Statistics (NBS),
Nigeria’s headline inflation increased for a third straight month in February. More specifically, headline inflation increased to 8.4% y-o-y in February, up from
January’s reading of 8.2% y-o-y. The reading on the food sub-index increased from 9.2% y-o-y in January to 9.4% y-o-y in February, while the so-called core
(all items less farm produce) sub-index recorded inflation at 7% y-o-y, up from 6.8% y-o-y a month earlier. The fact that inflation trended higher in February
suggests that the effects of the weaker naira are still filtering through to higher prices. We believe inflation will trend higher this year, predominantly on
account of the depreciation of the naira exchange rate. We forecast inflation will average 10.8% in 2015. A moderation to roughly 10% is projected for the
following year.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Seyi Bickersteth – designation is Partner
Tel +234 1 462 0045
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
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