Monthly Economic News and Views

at Lagos Business School

Executive Breakfast Meeting
The Public Sector Deposit Volcano Erupts
August 7, 2013
Presented by B.J. Rewane
Financial Derivatives Company Limited
1
Public Sector Deposit Saga- Facts
Financial Derivatives Company Limited 2
High powered money is another term for the monetary
base-the narrow definition of money
It is defined as the portion of commercial banks deposits
held with the Central Bank and vault cash held by banks
Wikipedia
It is not the same as money supply, the broader definition
of money i.e. M2
In June 1989, the military government ordered that all
government agencies transfer their deposits to the CBN
It caused a major financial sector upheaval
Irony of Fiscal Dominance and the
Threat of High Powered Money
Financial Derivatives Company Limited 3
In the end, a good number of banks failed and were
subsequently liquidated
It shows the vulnerability of the banking system to
dependence on Government deposits
And the corruption-riddled brokerage paid to
Government officials and bank staff
The Banks and Government are losers in this elaborate
and opaque spectrum
Definition of a Central Bank is the Bankers bank and the
Governments bank
Therefore Government deposits should naturally reside
at the CBN only
Irony of Fiscal Dominance and the
Threat of High Powered Money
Financial Derivatives Company Limited 4
In Nigeria, High powered money can be narrowed down
to bank reserves plus currency held by the public
CBNs new policy directive targets high powered money
50% CRR on Public Sector Deposits
Approximately N1trn debited from banking system
Short term impact:
Interest rates surge,
Naira appreciation,
Decline in ASI
Outline
Financial Derivatives Company Limited 5
Economic Highlights
Global Update
Domestic Economic Performance
Markets and Business Proxies
Political Risk Review
Outlook
Economic Highlights - Inflation on the rise
Financial Derivatives Company Limited 7
Inflation
Look out for an increase in the national headline inflation
for July
Forecast to increase from 8.4% to 8.77%
FDC urban CPI jumped to 11.57% year on year
The major catalyst being the depreciation of the naira; in
the inter-bank market by 2.55% to N161/$ and in the
parallel market by 2.52% to N163/$
Financial Derivatives Company Limited 8
Interest Rates
Interest rates rose in the inter-bank market in July
Average NIBOR for all maturities inched up to 12.02%p.a.
Open Buy Back (OBB):10.8%p.a.
Overnight :10.9%p.a.
Markets are in nervous anticipation of the full impact of
N900bn CRR debit
Coming on the eve of a 4-day weekend,
Treasurers are full of jitters as interest rates are projected to
reach record highs due to the CRR debit
Financial Derivatives Company Limited
Forex
The naira regained significant value as banks sold dollars
to cover short naira positions
External Reserves, which had lost 4.22% to $46.8bn, are
now back up to $48bn
Dollar demand at the WDAS market surged to $800m
per week
9
Financial Derivatives Company Limited
In the last week, demand tapered off because of the
naira drought
The settlement of outstanding sovereign debt notes
have pushed the petrol subsidy payments to the
N971bn level for 2013
Power supply dropped sharply in August in spite of
increased water level at the Kainji Dam
10
Financial Derivatives Company Limited
The US economy grew at an annualised rate of 1.7% in
Q2 2013
Compared to 1.1% in Q1
Companies increased inventory levels faster than
expected
The Federal Reserve expects growth to pick up, the fiscal
sequester notwithstanding
The US is changing the way it calculates GDP
12
Financial Derivatives Company Limited
GDP will now include intangibles like R & D spending and
will be backdated to 1929
This method is meant to capture the shape of modern
economies especially the service sector.
Output will likely increase by as much as 3.6%
US house prices rose by 12% year-on-year for the 20
biggest cities according to the S&P/Case-Shiller Index
13
Financial Derivatives Company Limited
162,000 new jobs were added in the US in July and
unemployment dropped to 7.4% from 7.6% in June
The millennial generation in the US consisting of those
born between 1980 95 now number 80m or 22% of the
population
They have $200bn of direct purchasing power, and
$500bn of indirect spending by influencing their parents
spending
14
Financial Derivatives Company Limited
The unemployment rate in the Eurozone was 12.1% in
June
This means 19.3m unemployed people which is 24,000
lower than in May
The IMF says that Greece will need approx. $14.5bn in
bail-out loans
Benchmark interest rates were unchanged at 0.5%p.a.
15
Financial Derivatives Company Limited 16
Real GDP still under pressure, slowed to 7.5% in Q213
from 7.7% in Q113
Industrial output slowed by 0.4% to 8.9% in June
Growth in fixed asset investment slowed by 0.5% to 20.1%
Possibility of a shortfall below 2013s growth benchmark of
7.5%
Official Purchasing Managers Index (PMI) rose to 50.3 in
July from 50.1 in June, HSBC PMI fell to 47.7 from 48.2
Still one of the fastest-growing economies in the world
Financial Derivatives Company Limited
Bank of China injected $2.8bn into the money market to
avert a liquidity squeeze
Impact on markets was immediate
7-day bond repo rate fell 14bps to 4.98%
Shanghai composite index gained approx. 1%
17
Financial Derivatives Company Limited
Dollar gained against 16 of its peers on US Fed taper
prospects
Due to improved US economy
According to Bloombergs Correlation-Weighted Indexes
18
Currency Direction YTD
USD 5.6%
EURO 5.9%
YEN 9.4%
West Africa
Financial Derivatives Company Limited
West African Economic and Monetary Union (WAEMU)
set its lending-rate ceiling for commercial banks at 15%p.a
from 2014
An 8-member francophone speaking group
Share a common currency: CFA Franc, pegged to the euro
Maximum lending rate for other financial-service
providers will be set at 24%p.a percent from Jan. 1st, 2014
Inflation in the zone slowed to 2% in May from 2.8%
June figures for some member countries include:
Benin: 1.9%(May13)
Togo: 1.8%(May13)
Ivory coast: 2.9%(June13)
20
Financial Derivatives Company Limited
Benchmark interest rate was maintained at 16%p.a to
ensure price and exchange-rate stability
Ghanaian cedi depreciated by 7.8% ytd against the dollar
The exchange rate is GHS2.075/$
Inflation increased by 0.3ppts to 11.4% in June
Housing, water, power and gas costs increased
Outlook is for inflation to ease on the back of seasonalities
(harvest period)
Launched a $750m 10-yr euro bond issued at a yield of
8%
Well above the 6.63% yield of Nigerian $500m 10-yr bond
Proceeds may boost dollar reserves, providing support for the
cedi
22
Financial Derivatives Company Limited
Consumer price inflation spiked to 6% in July, an 11-
month high
From 4.9% in June
Driven by a 1% rise in transport costs and a 1% rise in
healthcare costs
Food prices moderated by 0.1%, supported by a satisfactory
rainfall in Q213
Inflation is projected to increase to approximately 7% in
2013
Steep rise in fuel prices
10% levy on financial services
Increased import levy of 1.5%
23
Financial Derivatives Company Limited
Naira depreciated marginally against the CFA franc and
Ghana cedi in July
Increasing cross border sale/ smuggling activities
Likely smuggling activities of some agricultural products
for better returns causing supply shortfall in Nigeria
24
Financial Derivatives Company Limited 26
With a population of 170.1m, Nigeria accounts for almost
half of West Africas population
A very young population with more than 40% under 15
years
Labour force approximately 53.8m
Gini coefficient of 48.8 higher than its peers
Signifies high income inequality
Ranked 153 out of 186 countries in the Human
Development Index which reflects:
Infrastructure and healthcare inadequacies
High fertility and infant mortality rates
Low life expectancy
Financial Derivatives Company Limited 27
Population projected to reach 193.3m in 2017
Growth rate of 2.6%
Rapid urbanization to put a strain on infrastructure,
service provision and housing
Unemployment expected to rise as young population
increases
Informal sector to be biggest employer
Growing middle class to boost demand for leisure goods
Indicators May13 June13 July13 Jun/Jul (%)
Oil Markets
Spot price ( end of month) 104.20 106.00 110.10 3.37
Spot price (avg $pb) 105.83 106.12 110.63 4.25
Production (mbpd) 1.90 1.86 *1.90 2.15
Money Markets (End Period)
OBB (%)p.a 11.38 10.25 10.58 33bps
Overnight (%)p.a 11.83 10.46 10.92 46bps
MPR (%)p.a 12.00 12.00 12.00 -
CPI ( %) 9.00 8.40 *8.77(+/-0.22) 0.37
External Reserves ($bn) 48.41 48.04 46.96 2.25
Exchange rate (End Period)
Official (N/$) 155.75 155.75 155.76 0.01
Inter-bank (N/$) 157.66 161.86 160.50 0.84
Parallel (N/$) 159.00 162.5 163.00 0.31
5ource: l4 ,lMu4, OPc, c8N, l5un, luc , {* lucs forecosts)
Financial Derivatives Company Limited 28
Financial Derivatives Company Limited 29
Oil price gained traction to $110.5pb in July
Rose 4.13% from $106.12pb in June
Oil production rose to 1.88mpbd in July
From 1.87mbpd in June
Headline inflation eased to 8.4% in June
8.77% estimated in July
Money supply growth still subdued
Marginal growth of 1.1% m-o-m in June to N15.59trn
Real interest rates positive at 3.2%
91- day T/Bill: 11.6% p.a.
Naira weakened by 1kobo and 50kobo in the official and
parallel markets respectively
Strengthened at the inter-bank market by 0.84%
Increased forex inflows from oil companies and corporates
External reserves declined by 1.74% to $46.85bn (Jul 26
th
)
On a rebound to $47.03bn as at Jul 30
th

30 Financial Derivatives Company Limited
FDCs Urban Index increased to
11.57%for the second consecutive
month in July
Rise influenced by a 0.91%increase
in food index
Guinea corn, yams, cereals, tomatoes,
and palm oil
Non-food index also increased by
0.14%
Due to higher prices of insecticides,
air travel and some building materials
Source: FDC Research
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
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NonIood
Index
Iood
Index
Financial Derivatives Company Limited 31
FDCs Urban Inflation Survey
Financial Derivatives Company Limited
June inflation moderated to 8.4%in
June as projected
Mays Inflation rate was 9.0%
Moderation influenced by 0.3%
decline in core index
Food index rose 0.7%faster than
previous month
High base-year effects
Sluggish growth in money supply
Impact of tight monetary conditions
9.0%
9.6%
8.6%
9.0%
9.0%
8.4%
8.77%
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
Headline Inflation Rate
32
Source: NBS, FDC Research
Financial Derivatives Company Limited
FDCs July inflation estimate
reviewed downward by 0.22%to
8.77%
Increased planting activities
resulting in tight supplies of food
items from farms
Higher demand for diesel as
alternative energy caused increase
in diesel prices
Led to higher transportation cost of
consumer goods to the markets
Initial July forecast was 8.99%
Forecasts 9.0%for August
12.80%
11.69%
8.77%
9.00%
7.80%
8.00%
8.20%
8.40%
8.60%
8.80%
9.00%
9.20%
9.40%
9.60%
9.80%
11.00%
11.20%
11.40%
11.60%
11.80%
12.00%
12.20%
12.40%
12.60%
12.80%
13.00%
Headline Inflation: 2012 vs 2013
2012 (LHS) 2013 (RHS)
33
Source: NBS, FDC Research
Financial Derivatives Company Limited
Market liquidity was high at an average
of N500bn daily
Increased upon N718.1bn FAAC receipts
Interest rates continue to move in
tandem with liquidity level
Average OBB eased by 118bps to
10.81%p.a in July from Junes 11.99%p.a.
O/N eased by 123bps to 10.99%p.a
from 12.22p.a.
Real interest rates remain positive
Interest rates expected to increase in
August due to
CBN new policy of a 50%CRR on public
deposits
Policy to take effect August 7
th
, 2013
10
11
12
13
14
15
16
17
01-Jul 06-Jul 11-Jul 16-Jul 21-Jul 26-Jul
NIBOR (%p.a.)
OBB ON 7-day 30-day
60-day 90-day 180-day 365-day
34
Source:FMDA, FDC Research
Financial Derivatives Company Limited
Naira weakened at the parallel and
official markets in July
Parallel market declined by 0.96%to
N163.2/$
Weakened slightly by 0.01%to
N155.76/$ at the official market
Inter-bank market strengthened by
0.84%to N160.5/$
Naira depreciation stems from the
steady decline in govt. revenue
Declining external reserves level
Increase in demand for the dollar by
foreign investors and oil firms
Currency sold at the WDAS was
$3.3bn from $2.95bn in June
155
156
157
158
159
160
161
162
163
164
165
02-Jan 02-Feb 02-Mar 02-Apr 02-May 02-Jun 02-Jul
N
/
$

Forex N/$
official parallel interbank
35
Source:FMDA, FDC Research
Financial Derivatives Company Limited
Nigerias external reserves declined
by 1.74%to $46.85bn
Before swinging back up to end the
month at $47.03bn
Recent accretion is short term, to
be supported by inflows from hot
money funds
Anticipated increase in interest rates
will attract capital flows
Fixed income investors took a short
position on the naira
In response to the US Quantitative
Easing programs
36
45.98
47.38
48.57
48.85
48.41
48.04
46.96
44.5
45
45.5
46
46.5
47
47.5
48
48.5
49
49.5
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
External Reserves ($'bn)
Source:CBN, FDC Research
Financial Derivatives Company Limited
Global oil prices gain traction in July
Bonny Light rose by approx. 4%to
$110.63pb from $106.38pb in June
Rebound was due to supply decline
from major OPEC producers
Renewed Eurozone fears and slow
global oil demand - OPEC
Traders sentiment on Egypt crisis
Controls Suez canal and pipeline, which
transports about 4 million barrels per
day
Premium between WTI and Brent
narrowed to $3.16 from $5.12 in
June
Domestic output estimated at
approx. 1.9mbpd
Still below capacity due to oil thefts,
vandalism, force majeure
95
100
105
110
115
120
1.75
1.8
1.85
1.9
1.95
2
2.05
2.1
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
Oil Production (LHS) Oil Price (RHS)
37
Source:OPEC, CBN, FDC Research
Financial Derivatives Company Limited
MPC maintained status quo on key policy rates
MPR: 12%p.a.
CRR: 12%
Liquidity ratio: 30%
NOP: 1% of shareholders funds
Introduced additional 38% CRR on public sector deposits
Bringing total CRR to 50% on public sector deposits
Key concerns include:
Excess structural liquidity
Possible inflationary pressures
Fiscal overdrive
Naira weakness in the forex market
39
Financial Derivatives Company Limited
National income identity:
C + I + G + X M = Y
$310.1bn= $166.6bn + $70.7bn + $48.4bn + $122.9bn +
$98.5bn
Gi= (Fi+Si+Li)
Where G= government, F= Federal, S= State and L= Local
G= CBN + DMBs
Government deposits with the CBN is estimated at
N2.6trn
Federal government deposits with DMBs is approximately
N1.3trn
State and local governments is approximately 20% of
N1.3trn
40
Inter-bank market
Interest rates will rise by approximately 3-4% p.a.
Banks will cash in on their AMCON bonds
Sell down OPL
Reduction in OMO auctions
Credit Market
Reduction in loan availability
Loan to deposit ratio: 40.7%
Impact of CRR: 10% of total loans
Loan re-pricing by 2-4%
Financial Derivatives Company Limited 41
Forex Market
Naira will appreciate by 1-2% to N159/$ at the inter-bank
market due to increased forex supply
Official market rate to remain flat at N155.76/$
Parallel market to remain flat at N163.5/$
Reduction in WDAS funding
Short term inflow of hot money funds
Approximately $1-2bn increase
Slowdown in external reserves depletion pushing
reserves back up to $48bn
Financial Derivatives Company Limited 43
Capital Market
Reverse in bull run in equities
Approximately 5% correction in stock market
Fund managers will be attracted to high yielding fixed-
income securities that have lower risk
May sell down or forgo stock investments
New bond issues by corporates and states
Existing bond prices will decline
Financial Derivatives Company Limited 44
Real Estate
Values and rents to decline
Vacancy factor in residential Lagos will increase in the
short run
Financial Derivatives Company Limited 45
Financial Derivatives Company Limited
Legislators finally passed the Budget 2013 amendment bill
No significant difference between the new bill and the
initial appropriation act
Total budget: N4.987trn
Recurrent expenditure: N2.42trn
Capital expenditure: N1.59trn
We expect more funds to be released for capital projects
now that the bill has been passed
Only N600bn has been released for Q113 and Q213 (37.74%
of total CAPEX)
46
Federation allocation disbursed in July for
the month of June was N718.10bn
15.7%higher than N620.66bn shared in the
previous month
Increase in allocation reflects the higher
gross revenues earned during the month
We expect the federal allocation in August
to fluctuate around the H113 average of
N640bn
Possible increase in the federal allocation as
analysts predict a rise in oil price
Increase in oil price would positively affect
revenues
Source:Ministryof Finance
Financial Derivatives Company Limited 48
S7S
888.4
S19
S31.33
620.2S
718.10
0
100
200
300
400
300
600
700
800
900
1000
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IAAC (N' bn)
Money supply rose by N0.17trn to
N15.59trn in June
N15.42trn recorded in May
Increase attributed to the 0.38%increase
in net domestic credit
Despite a 4.04%decline in net foreign assets
Money supply would likely hover around
its current level
Since we expect federal allocation to remain
relatively the same
Source:CBN,FDC Research
Financial Derivatives Company Limited 49
14.90
15.00
15.10
15.20
15.30
15.40
15.50
15.60
15.70
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13
15.17
15.56
15.59
15.62
15.42
15.59
Money Supply Growth (N'trn)
Volume of cheques rose to N4.86trn
in July
22.73%higher than N3.96trn in June
Value of cheques rose by 4.76%to
2.42trn
From 2.31trn recorded in June
Implies CBNs restriction on third
party cheques is yet to fully settle in
Financial Derivatives Company Limited 50
Source:CBN,FDC Research
2.98
3.27
3.43
3.60
3.86
3.96
4.86
1.85
1.67
1.73
1.88
2.04
2.31
2.42
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
Volume of cheques (trn) Value of Cheques (N'trn)
Volume & Value of Cheques
Number of ships awaiting berth
declined to 78 in July
25%lower than the 104 ships recorded
in June
Implies reduction in congestion at the
ports
Decline may be attributed to
depreciation of the naira which led to
reduced imports
We expect an increase in August as
the naira strengthens
92
71
89
91
104
78
0
20
40
60
80
100
120
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No of Ships Awaiting Berth
Financial Derivatives Company Limited 51
Source:NPA,FDC Research
Oil rig count declined to 27 in July
from 29 in June
Increase in onshore rigs and decline in
offshore rigs
Onshore: 8 in June ; 11 in July
Offshore: 21in June ; 16 in July
According to Baker Hughes, rig count
declined to 20 in June from 22 in May
We expect the rig count in July to
remain close to the H113 average of
19
Security challenges especially in the
Niger delta may negatively affect the
number of rigs
0
5
10
15
20
25
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13
19
18
15
22 22
20
Baker Hughes Rig count
Financial Derivatives Company Limited 52
Source:Baker Hughes, FDC Research
Power generation in August has
declined by 67%to 2,628mw
Despite increased water level at the
Kainji Dam
In July, average power generation was
3,245mw
Power output remains below
10,000mw projected for Dec13
A major challenge is disruption of gas
supply in several generating stations
Price of diesel rose slightly by 2.05%to
N149/liter
From N146/liter in June
Power generation expected to remain
relatively unchanged in August
Unless underlying issues are resolved
Source: BusinessDay
53
3,805.80
3,827.00
2,132.00
2,887.90
3,209.90
3,245.46
-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
June July
Highest Power Generation Lowest Power Generation
Monthly Average
Power Generation (mw)
Financial Derivatives Company Limited
Business Proxies - Power Generation
Retail I ndustry
3% increase in retail trade driven mainly by FMCGs
FMCGs rose by approximately 2% while white products
sales declined by approximately 50%
Huge impact on white products as retailers discontinued
discounts and promotional sales
Card-based transactions remained relatively unchanged
at 17%
Approximately 83% of transactions are cash-based
Network challenges continue to hinder wide adoption of
cashless policy
55 Financial Derivatives Company Limited
Retail Industry
56
9% increase in inventory levels
Food prices in sample basket remained relatively
unchanged
Prices of white products declined by approximately 60%
E.g. refrigerators
Weekend traffic remains higher than weekday traffic
No significant change in consumer spending pattern
Consumers are brand loyal
Financial Derivatives Company Limited
Retail Industry
57
Oxford Business Group (OBG) Review
Nigerias retail sector attracted over N200bn worth of
investment in two years
Involves both domestic and foreign investors
The major drivers of investment are:
Rising purchasing power
Huge growth potential in the economy
Large population with strong appetite for consumer goods
Lagos has been the major recipient of these investments
Recorded the highest investment in shopping malls
Increase in clothing luxury brands
Financial Derivatives Company Limited
Retail Industry
58
OBG expects increased investments in the retail sector
On the back of projected positive macroeconomic indicators
Further increase in the number of shopping malls
Shoprite plans to open more stores
Expected to boost employment
Risks
High borrowing costs
Short duration of bank financing
Cumbersome access to land
Financial Derivatives Company Limited
Retail Industry
Carrefour, a France-based retailer intends to open stores
in 8 African countries by 2015
Nigeria, Ghana, Cameroon, Congo, DRC, Gabon, Senegal, Cote
dIvoire
Working in partnership with CFAO South Africa to take
advantage of CFAOs presence in the continent
CFAO is a distributor and a big supplier of cars, trucks and
pharmaceuticals in Africa
Retail Industry
Carrefour to provide formal grocery services
Customers can buy items kept fresh through modern
advancements like refrigeration
Instead of shopping for fresh items in traditional markets
Huge potential in Africa as top cities are projected to
have a combined spending power of $1.3trn by 2030
Retail Industry
In August, retail sector growth dependent on FMCG
We expect increase in sales as a result of the two-day
Muslim holiday
Increased demand for goods
Average inventories expected to rise as retailers stock
up for the holidays
Increase in shopping traffic during the two-day holiday
Increase in impulse buying and weekly needs
Network challenges need to be addressed to further
improve card-based transactions
61 Financial Derivatives Company Limited
Retail Industry - Outlook
Financial Derivatives Company Ltd.
Global Aviation
Airlines Back in the Black
IATA revised its 2013 net profit outlook for the global
airlines upwards by almost $1bn
Riding on improved financial performance in 2013
Airline cost-cutting actions and improved industry structure
Slightly higher economic growth and slightly lower fuel prices
Predicts that airlines will carry 3.1 billion passengers in 2013
Breaking through the 3 billion mark for the first time in history
Load factors expected to hit a record 80.3%
Despite improvements, global net profit margin is forecasted
to be just 1.3%
Growth will need to be sustained
Financial Derivatives Company Limited 64
Global Aviation
Airlines Back in the Black
US airlines continue to improve their profitability
North American airlines expected to report combined net
earnings of $4.4bn in 2013, up from a previous forecast of
$3.6bn
Performance in Asia-Pacific is mixed
Experiencing a weakness in the cargo market
but overall profitability has not deteriorated
Performance has improved in Europe
Partly driven by demand for transatlantic flights especially from
Air France-KLM, British Airways and Lufthansa
Airlines are still expected to break even with operating margins
of about 1.3%
Second-worst level of profitability after Africa
Financial Derivatives Company Limited 65
Global Aviation
Ameri can Ai rl i nes Showi ng Si gns of Recovery
Reports Q2 earnings of $220m ahead of merger with US
Airways
Reversed from a net loss of $241m in Q212 and $286m in
Q211
Has been under bankruptcy protection since 2011and has been
able to restructure
Merger is still being reviewed by antitrust regulators and is
expected to be concluded by August
Post-merger American Airlines expected to be a formidable
rival to United and Delta
Will combine its strength in Central North America and Latin
America with US Airways' larger presence in the East and its
additional European destinations
Financial Derivatives Company Limited 66
Global Aviation
Etihad Airways and Korean Air sign Codeshare Agreement
Members of Etihads Guest and Korean Airs Skypass
loyalty programs will enjoy full benefits
Lounge access, priority check-in and excess baggage allowances
for top tier program members, earning frequent flyer points on
both airlines flights
Brings the number of code shares operated by Etihad to
46
The collaboration comes as a result of:
Rapid growth in travel, trade and investment between the UAE
and Korea
Increased and rapidly-expanding demand for business and
leisure travel between Korea and the UAE, Middle East and
Africa
Financial Derivatives Company Limited 67
Domestic Aviation
J et A1 fuel shortage Whos to Blame
Has persisted for about 3 weeks
Cause is yet to be determined
Several airlines have been forced to divert to other
routes to enable them fuel
Some operators have been forced to fly to Accra
Has led to several delays in domestic and international flights
across the country
No increases in fares have been recorded
If the scarcity persists, fuel prices would inevitably increase and
air fares should rise as well
Financial Derivatives Company Limited 68
Domestic Aviation
Ethiopian Air to commence flights from Enugu
Will launch 4x weekly flights from Addis Ababa effective
from August 24
Enugu airport currently caters for only domestic flights
from Arik Air
Eastern traffic is expected to increase significantly
For Eastern travellers, this provides a more efficient alternative
to Lagos and Abuja
Implies loss of business for Etihad, Emirates, Lufthansa and
British Airways
Financial Derivatives Company Limited 69
Domestic Aviation Potential Price Wars
Dana Air has slashed its fares to as low as N7,200 to all
its destinations
About a third of the standard fare
In a bid to boost its customer base and re-establish itself as a
safe and reliable operator
Notable improvement in schedules
Improved customer service
Expected to last for six months
Financial Derivatives Company Limited 70
Domestic Aviation Potential Price Wars
Med View airlines has responded by reducing its fares
If the price slash persists, even big airlines like Arik Air,
and Aero Contractors may be forced to lower fares
Could result in a price war in the sector
Passengers may benefit from lower prices, but the risk of
safety being sacrificed for profit may overshadow any of such
benefits
Financial Derivatives Company Limited 71
Domestic Aviation
Summer period load factors
Inbound: 82%
Outbound: 93%
Expected to decline by late August
After the summer holiday period
Air Fares (Business Class)
Lagos- Atlanta: $7,023 (exclusive of taxes)
Taxes: $1,223
Accra- New York: $4,998
Taxes: $1,449
Financial Derivatives Company Limited 72
Real Estate
Forbes reported a decline in real estate stocks in Q213
as the U.S. dollar strengthened against foreign currencies
Real estate activities in Lagos boosted by foreign
investments
Increased foreign interest in Lekki-Ajah area
Major attractions are the Lekki free trade zone, airport and
seaport
Some estate developments already seeing increased
patronage
E.g. Royal Gardens, Lekki Scheme
74 Financial Derivatives Company Limited
Real Estate
Increased occupancy rate especially for block of flats (2 or
3 bedroom) demanded by the foreign investors
Ikoyi, V.I and Lekki are the preferred residential locations for
security reasons
Recent Developments
Heirs Holdings takes over Falomo shopping mall
Chaired by Tony Elumelu
Signed an agreement with the Lagos State Development
Property Corporation (LSDPC)
The mall to be redeveloped into shopping mall, office
complex and residential apartments
75 Financial Derivatives Company Limited
Real Estate
Government is promoting transparency in the
sector
Estate surveyors now expected to forward details of
transactions to EFCC
Surveyors also expected to register with the Financial
Reporting Council Of Nigeria (FRCN)
Fraud and money laundering expected to be kept in
check
New relaxation spot and flying boat services to be
provided under Falomo bridge
76 Financial Derivatives Company Limited
Real Estate Vacancy Factor - August13
Vacancy
Factor -
Flats
Vacancy
Factor -
House
Total Vacancy
Factor
Weighted
Average
Vacancy
Factor
IKoyi
Cooper Road 72% 13% 85% 47.9%
Raymond Njoku 67% 4% 71% 13.1%
Cameron Road 0% 20% 20% 10.3%
Average 46.20% 12.39% 23.78%
V.I.
Elsie Femi Pearce 53% 5% 58% 25.7%
Akinolugbade 72% 9.09% 81% 37.5%
Karimu Kotun 40% 16% 56% 26.7%
Average 55.19% 10.03% 29.96%
Real Estate
PH & Abuja
Major challenges to real estate in PH are theft and
insecurity
Discourages foreign investors
House of Assembly crisis still unresolved
Luxury apartments are the worst hit with only 20%
occupancy rate
While small apartments have 80% occupancy rate
Occupancy rate in Abuja also remains low: between
35-45%
78 Financial Derivatives Company Limited
Real Estate - Outlook
We expect increased foreign investments in Lagos
Increased demand for office space and block of flats
Lekki-Ikoyi Toll bridge to have a long-term impact on the
residential-commercial distribution of properties in Ikoyi
and Lekki
In favor of commercial properties
Real estate in PH will likely remain unchanged unless
underlying security issues are resolved
79 Financial Derivatives Company Limited
Stock Market Review
The market reversed the losses of June by gaining 4.84%
in July, closing on 37,914.32 points
Market capitalization also closed above N12trn after
falling below the mark in June
Market was mainly driven by improving corporate
earnings
Half-year revenue of listed companies set to surpass N1trn
Financial Derivatives Company Limited 81
Stock Market Review
Market was more volatile than the chart suggests
We are of the view that volatility must now be priced
into asset prices
Total Value traded for the month was N74.89bn with
a daily average turnover of N3.25bn representing a
month-on-month decrease of 48.3%
Financial Derivatives Company Limited 82
Stock Market Review
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23,000.00
28,000.00
33,000.00
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18,000.00
19,000.00
20,000.00
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22,000.00
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NSL Index erformance Ianuary - Iu|y
nSL lnuLx 2012 nSL lnuLx 2013
Financial Derivatives Company Limited 84
Source: FDC, NSE
Highlights
2012
Uncertainty about banking sector
earnings kept investors at bay
UBA and FCMBs profit warning
rocked the market
Increased demand for fixed income
securities (bonds)
Average bond yield was in the 15
16%range
Index gained less that 5000 points
in the first seven (7) months of the
year
Majority of the gain was achieved in
the seventh month
Market gripped by Schizophrenic
attack as SEC DG is sent on leave
and new President resumes at NSE
2013
Index gained 10,000 points in the
first seven (7) months of the year
Improved market performance
driven by better company
performance
Banking sector paid out record
dividend following a strong 2012
earning
Okomus special dividend and bonus
share drove the Agric sector
Deal wrap-up for UACN (Livestock
and Portland Paints)
Capital raising: from inactivity to
activity
Increase in trading band from 5%to
10%
Financial Derivatives Company Limited 85
J uly - Activity and Events
Average daily turnover declined by 55% in July to
N3.26bn
The decline in turnover is 24% after discounting for PICs
purchase of Dangote cement
The decline in activity could be associated to the
uncertainty about the value of naira and the outcome of
the MPC
Seasonality effect (summer) could also affect portfolio
inflows into the market
X-Gen to launch in September, opening the market up to
more investors
X-Gen will enable the NSE to have the fastest trading
engine in Africa
Financial Derivatives Company Limited 86
Corporate Earnings Rising
Average increase in PBT across the market of results
released is 26.7%
Average profitability of building materials companies has
increased by 24.3% Y-o-Y
Food and beverages companies have grown revenue by
7% while profitability increased by 53%
Growth in banking and financial services sector
profitability has been lower than last year as a result of
the high base effect
Average profitability of banks that have released results
so far is 79.6%
Financial Derivatives Company Limited 87
Corporate Earnings Rising
9
42
7
10
17
13
7
14
6
-30
80
4
24
27
23
33
19
41
-40
-20
0
20
40
60
80
100
8LvLnuL C8CW1P 8Cll1A8lLl1? C8CW1P
Financial Derivatives Company Limited 88
Source: FDC, NSE
Top 5 Gainers and Losers
Gainers
Champion Breweries remains loss making but plans to re-finance its
existing debt
97.06% appreciation in IPWA Plc share price due to massive speculative
activity by investors
IPWA is the most diversified paint manufacturing company
Oil and gas sector driven by FGN disbursement of outstanding subsidy
Losers
Decreased earnings from increase operating and financing costs.
Financial Derivatives Company Limited 89
Dangote Sugar, Okomu and Presco
A case of Two Commodities
The global price of sugar Y-o-Y declined by 19.89% to
close at $0.17 per pound
The global price of CPO on the other hand increased by
26.49% to close at $909.49 per metric ton
Dangote sugar has benefited from the decline in average
sugar prices
The companys cost of sales has decreased by 2.51%,
boosting profitability by 12.07%
Financial Derivatives Company Limited 90
Dangote Sugar, Okomu and Presco
A case of Two Commodities
Okomu and Presco, commodity sellers, have been heavily
hit by the sharp decline in crude palm oil prices
Despite maintaining sales, the companies are experiencing
a decline in revenue
Inability to change their manufacturing process and affect
the cost of production biting harder into profitability
Financial Derivatives Company Limited 91
Dangote Sugar, Okomu and Presco
A case of Two Commodities
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2012 2013
Financial Derivatives Company Limited 92
Source: FDC, Index Mundi
Sector Performance
Sectors Performance PE Ratio Drivers of Performance
Oil & Gas 31.99% 31.03x FGN disbursement of N48bn for fuel subsidy payments
Reduction of PMS importers to 40
Improved earnings of oil marketing companies
Profitability of listed marketers up by 41%
Healthcare 7.10% 16.23x Speculative activity on corporate earnings and capital
raising
Industrial Goods 6.55% 16.47x Improved earnings as a result of capacity increase
Tax holiday for the biggest two players in the sector
Banking 5.76% 7.14x Improved overall performance in the banking sector
Corporate actions
Consumer 5.32% 25.21x Lack of accessibility to key markets in the Northern
markets have resulted in slow revenue growth
Increased financing cost impacting profitability
Conglomerate -0.07% 16.99x Sector performance highly impacted by low cap players
Major companies in the sector (UACN and Transcorp)
have positive returns
Agriculture -4.40% 18.31x A case of global commodity price takers
Financial Derivatives Company Limited
MPC Decision What the Numbers Say
Total sum of money to be quarantined is N890bn
Percentage of total debits (N890bn) to M2 is about 5.7%
Percentage of total debits (N890bn) to total deposits is
about 6.4%
Average interest rates are expected to rise as liquidity is
tightened
Financial Derivatives Company Limited 94
MPC Decision What the Numbers Say
Portfolio rotation from fixed income to equity originally
anticipated for the year, may be reversed
Dividend yield on the index ranges between 2-5%
Capital appreciation could cushion low dividend yield
However, there is little room for companies to increase
dividends in the future
Financial Derivatives Company Limited 95
MPC Decision Banks & Stock Market
Banks will be forced to sell some treasuries (bills and
bonds) in order to meet up with this CRR
Yields are expected to rise if this path is followed
Inflation will remain down as liquidity is reduced in the
economy
Foreign investors who are driven by real returns will
keep the hot funds rolling into the economy and
dampening the pressure on naira in the process
Financial Derivatives Company Limited 96
Banks could follow the alternative route through repo of
maturing AMCON bonds to CBN
Banks will be expected to take one-off losses of N1bn
N5bn on this position depending on the size of their public
sector fund
Either way will lead to a squeeze in banks net interest
margin
Banking stocks are expected to be discounted further as
earnings capacity declines
Net effect: reduction in consumer power, local currency
stability, dampening interest in stock market.
MPC Decision Banks & Stock Market
Financial Derivatives Company Limited 97
Sector Vulnerability to Market Trends
Trend
Financial
Services Agriculture Conglomerates Construction
Stronger naira
Currency
Reduced interest
on foreign
borrowings
Less foreign
exchange risk
Reduced interest
on foreign
borrowings
Cheaper
imports
Reduced interest
on foreign
borrowings
Reduced cost of
raw materials
Reduced
interest on
foreign
borrowings
Credit Contraction/
Increased Interest
Rates
Less interest
income
Marginal growth
in assets
Increased
financing cost
Less credit
access
Reduced growth
Increased
financing cost
Reduced growth
Increased financing
cost
Reduced
growth and
profitability
Increased
financing cost
Higher Government
Spending
Increased
Liquidity
Increased
inflationary
pressures
Increased
inflationary
pressures to
impact on
commodity prices
Increased
purchasing power
of consumers
Infrastructural
development
Financial Derivatives Company Limited 98
NSE Against Other Equity Markets
The performance of the Kenyan & Ghanian Stock
Exchanges were boosted by the outcome of 2013
elections
The 29.94% YTD performance of the Nigerian Stock
Exchange was boosted by improved company valuations.
The World index was boosted by an increase in liquidity
from easing monetary policies.
The performance of the Johannesburg SE was dwarfed by
a weaker Rand.
A weak REAL and slowing economic growth had an
impact on the Brazilian stock exchange.
Financial Derivatives Company Limited 99
NSE Against Other Equity Markets
14.39
64.06
3.40
-7.74
39.94
32.81
-21.93
9.27
-2.41
-6.76
39.83
20.38
-30
-20
-10
0
10
20
30
40
30
60
70
Financial Derivatives Company Limited 100
Source: FDC, Bloomberg
Impact of CRR hike on the Stock Market
50% of Public Sector deposits quarantined by the
CBN at zero interest rates
Total deposits in the economy currently at N13trillion,
of which 6.4% of total deposits is to be quarantined
with the CBN
Quarantined funds will be non-interest earning
Banks average NIM expected to shrink to about 5.1%
from 7.1%
Financial Derivatives Company Limited 101
Impact of CRR hike on the Stock Market
Liquidity gap to be closed by strong drive for deposits
from private sector at higher costs
Bank Loan Portfolio expected to shrink due to trade off
between liquidity and profitability
46% average increase in PBT in Banks profits in H113 is
estimated to slowdown by 15% - 20%
Increased borrowing cost to companies will squeeze
profit margins
Financial Derivatives Company Limited 102
Impact of CRR hike on the Stock Market
Implications:
Increase in average interest rates by about 3% in the
short term.
Average company and bank earnings projected to decline
in H2 2013
Credit crunch as few can afford to borrow at high rates,
hence slowing growth
Possibility of rise in NPLs as default risk on existing loans
increase
Performance of most active sector on NSE increasingly
threatened - a concern for the economy and bourse.
Financial Derivatives Company Limited 103
Outlook Not All Clear
The magnitude of the impact of the recent MPC policy on
the banking industry is uncertain
Market outlook remains bleak as it is certain funds will flow
out to the fixed income market
Banking stocks are trading at a discount but the discount
might be justified if the policy remains for the remainder of
the year
Oil and gas, building materials, and consumer goods sector
may provide much needed stability
Financial Derivatives Company Limited 105
Outlook Not All Clear
We expect a bearish trend for the next few months,
following a slight correction in the prices of banking stocks,
consumer stocks and industrial stocks
Expected H2 earnings and likely interim dividend payouts
seen as the only clear reasons to drive the market up
NSE may swing southwards by about 1% - 1.5% in the
month of August
Financial Derivatives Company Limited 106
Stock Market Outlook
A difficult period for earnings
Stock prices have increased in 2012/13 by over 36.84%
Average profitability has only increased by 6.29%
NB up 6.64%
Nestle up 13.47%
Guinness down 18.17%
FBN up 23.23%
Average P/Es have increased from 9 to 13.52%
Financial Derivatives Company Limited 107
Merrill Lynch in its August report is upbeat about the
Nigerian market
It believes Nigerian pension funds will reach 50% of
market cap by 2020
Nigeria is a risky frontier market
The nascent and fast-growing pension industry will be a
stable source of market funding
The pension funds will account for 25% of the free float
by 2020
It will drive equity upside and absorb new issues
Stock Market Outlook -Merrill Lynch 2020
Financial Derivatives Company Limited 108
Less than 6m people enrolled out of a 70m workforce
Merrill Lynch expects more than $5bn in net equity
purchases by 2020
In the short run, we expect a correction in August-
September
On the back of higher funding costs and portfolio
rotation in favour of cash and bonds
Stock Market Outlook - Merrill Lynch 2020
Financial Derivatives Company Limited 109
Mini Convention The Treacherous Road Ahead
According to Eurasia the leading political risk analysts
An unsettled political climate and deteriorating oil
production will increase the challenges of the Jonathan
administration
Consolidation of the power base and control of the party
machinery has become more complicated than expected
Financial Derivatives Company Limited 111
Anenih - Splash the Cash
The birthday extravaganza of the party boss is no
guarantee of unity
The mini convention will be a trial run of what is likely to
be a hotly-contested primary and acrimonious battle in
2014
The emergency meeting of the FEC turned out to be an
anti-climax
The President failed to pull the trigger, fuelling speculation
of the lack of adrenalin
Financial Derivatives Company Limited 112
Political Outlook
Governor Amaechi and the aggrieved North have
distracted the President
They have gone viral appearing on Hard Talk and other
high-profile TV shows
Amaechi has become a unifying figure for the adversaries
of the administration
Last month, we forecast that Amaechi was a necessary
evil in the PDP
Financial Derivatives Company Limited 113
Political Outlook
You are damned if you strike it and you are drained if you
dont
The Ministers in the Presidents cabinet who are
interested in seeking Governorship positions will have to
quit
The President is reluctant to fire them but will have no
choice
The APC has now been registered and is suddenly
appearing a credible opposition
Financial Derivatives Company Limited 114
Political Outlook
This group is likely to run into its own leadership
squabbles
The CBN move against high-powered money and
government deposits is a sting in the tail of the political
class
This will increase the brazenness and raiding of the
government tills at both state and federal levels
With oil revenue dwindling and CBN quarantining 50% of
government deposits, we expect increased desperation
for political donors
Financial Derivatives Company Limited 115
Outlook for August
Outlook for August
Increase of money market and lending rates by 300-400
basis points
Equity prices will correct, losing at least 5-6% in August/
September
The naira will appreciate in the inter-bank market to
N158 and to N160 in the parallel market
Real estate vacancy factors and rents will be depressed
further in Q3
We expect a slight decline in oil prices to $108/bbl
External reserves will be flat at $48bn
Financial Derivatives Company Limited 117
Corporate Humour
Financial Derivatives Company Limited
118
What your wife said
We need
Its your decision
Do you want?
We need to talk
I am not upset
You are so manly
This kitchen is so
inconvenient
I want new curtains
What your wife means
I want
The correct decision
You will pay for this later
I need to complain
I am upset, you moron
You need to shave
I want a new House
Also carpeting, furniture
Corporate Humour
Financial Derivatives Company Limited
119
Mans biggest mistake is to believe that he is
working for someone else.
To meditate is to labour, to think is
to act.
- Victor Hugo
Between two evils I always pick the one I never
tried before
Nashua Cavalier
Mae West klondike Annie
Corporate Humour
Financial Derivatives Company Limited
120
Chase your passion not your pension.
Expect the best, prepare for the worst., capitalize
on what comes.
Beauty without intelligence is an illusion that is
close to disenchantment.
Darius Waitley
- Zig Ziglar
- Unknown Author
Corporate Humour
Financial Derivatives Company Limited
121
Work banishes the three great evils
Boredom, Vice & Poverty.
Money is the poor mans credit card.
I had my credit card stolen, but I did not report it because
whoever stole it is spending less than my wife.
- Marshall Mc Luhan
- Henny Youngman
- Unknown Author
Why is there so much month left at the end
of the money.
- Johnny Barrymore
Financial Derivatives Company Limited 122
Bismarck J. Rewane, MD/CEO
Financial Derivatives Company Ltd.
Lagos, Nigeria
01-7739889