Good Morning Nigeria

FBNQuest Research: Good Morning Nigeria
 

Wheels up but still waiting for take-off

20th November, 2017
                                                                                          

The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. At its meeting in September it voted by six votes to one for no change in stance. Little has changed to warrant any other conclusion this week. The policy rate has been held at 14.00% since mid-2016, and we expect the same on a majority vote. We are disappointed that the CBN has not yet released members’ personal statements from September.
 
If those statements historically do show a common thread, it is the determination to fight inflation. The headline rate continues to fall at a slow pace, to 15.9% y/y and 0.8% m/m in October. The cumulative decline amounts to 283bps since January y/y, and 111bps since May m/m.

The stability of the fx rate in the various windows in recent months has clearly been a positive. If this is maintained, which is our expectation, we should see sharper falls in the headline rate y/y in H1 2018 as strong m/m increases from February to June this year drop out of the calculation. The monetary authorities could then return to the path of easing.

The committee likes to say that supply-side constraints are responsible for the pick-up in inflation and the (now-ended) recession. It could have added the CBN’s previous fx policies to its analysis. The culprit in the bigger picture is the slide in the oil price since mid-2014, which has exposed Nigeria’s macroeconomic frailties. The blame in this case cannot be laid at the door of the CBN or the MPC.

The MPC’s ability to encourage growth is constrained by the “disconnect” between its benchmark rate and those for the real economy, as well as by the high concentration of banks’ loan books both sectorally and in terms of company size. In contrast, fiscal policy has greater capacity to encourage growth.

Without wanting to suggest that the committee has been emasculated, easing by the MPC does not automatically benefit borrowers in the real economy. (When it hikes, the story is different.) Turning to FGN borrowing, there has been a welcome fall in yields but driven by CBN guidance rather than action by the MPC. At last week’s auction of NTBs, the yield on the 364-bill was 400bps lower than at end-August. The fall came largely at one auction (04 October), and rates have since stabilised.

Wheels up but still waiting for take-off

17th November, 2017
                                                                                          

Today we turn our attention to Nigeria’s aviation sector. Trends within the industry are often regarded as a sound private consumption indicator. Following the recent exit from recession (as seen in the Q2 national accounts), air transport grew by just 0.1% y/y. The sector has suffered from relatively low patronage due to softer demand. However, business travel continues to drive air passenger traffic across the country.

For domestic travelers, ticket fares doubled earlier in the year and have remained high. Passengers could then secure a return trip ticket for US$85 on the Lagos-Abuja route. However, the cost has now risen as high as US$175 on the current domestic providers (Arik Air and Air Peace). We expect even higher prices over the next month as we approach the festive season.

High operational costs lie behind the increased ticket fares. To give one example, aviation fuel accounts for about 40% of operational costs. Industry sources indicate that the price of aviation fuel currently stands at N265/l.

For international travel, fx sourcing issues had a severe negative effect on airline operators as they could not repatriate funds. Nigeria became less attractive for operators and a few airlines reduced the frequency of their flights. However, the CBN has managed to reduce the blocked funds to US$175m from the initial US$600m according to IATA.

GDP and Air Transport Growth Q1 2017 - FBNQuest Research

Nigeria’s aviation industry has the potential to become a pan-African hub similar to Kenya. However, the infrastructural deficit within the industry will not permit. The three major international airports in the country are undergoing renovation and expansion.

Another marginal decline in inflation

16th November, 2017
                                                                                          

The latest inflation report from the NBS shows headline inflation y/y at 15.9% in October. This was the ninth successive slowdown, albeit by just 7bps on this occasion. Our expectation, shared with wire service polls of analysts, was 15.9% y/y. Both core and food price inflation barely moved in the month, at 12.1% and 20.3% y/y respectively.

Policymakers will be encouraged by the fact that the m/m increase in the headline measure slowed for the fifth month in succession. The overall trends are positive yet the rate of the slowdown has been painful, at 283bps cumulatively since January y/y and 111bps since May m/m.

The CBN’s reference range for the headline rate has long been between 6.0% and 9.0% y/y. We do not see the attainment of this range before 2019. The range is not a binding target yet we doubt that the monetary policy committee, which meets next week, will cut its benchmark rate without a more substantial decline in inflation.

For imported food prices, October brought both m/m and y/y increases. Given the stability of the fx rate in the various windows in recent months and the much enhanced fx availability, the explanation probably lies in the dollar price of individual food commodities.

Consumer price inflation October 2017 - FBNQuest Research

Inflation has remained stubbornly high throughout the now-ended recession because of supply factors affecting food prices, notably the poor infrastructure, insecurity in the north east and a pick-up in food exports.

We see the headline rate falling gently to 15.8% in November.

Healthy growth at PFAs, coverage still thin

15th November, 2017
                                                                                          

The assets under management (AUM) of the Nigerian regulated pension industry increased by 20.2% y/y in September to N7.16trn (US$23.4bn), and by 1.0% m/m. They are growing at a decent rate yet, at just 7.1% of 2016 GDP, are running well behind many emerging markets.  The local media quote the regulator PenCom as saying that monthly inflows are averaging N30bn. At a recent real estate conference in Lagos, it was argued that the industry has somehow to accommodate the informal sector, which accounts for 83% of the national workforce.

This could, the argument ran, simultaneously make an impact on Nigeria’s huge housing deficit if contributors were able to allocate some of their monthly payments to a mortgage vehicle.

Holdings of FGN paper amounted to 71.8% of AUM in September, compared with 70.2% one year earlier. The share of NTBs was rising until August but then declined by 90bps in September as the CBN guided rates downwards. Yields on 364-day paper have fallen by 400bps since end-August.

PenCom’s latest data do not indicate a surge of investment in domestic equities. The NSEASI had risen by 25.1% y/y at end-September while AUM in the asset class increased by 18.3% over the same period.

AUMs of PFAs Sept 2017

Nigeria’s reformed pension industry, shaped by legislation in 2004 and 2014, has been a success story. Its expansion has benefited from the well-documented abuse under the defined benefits scheme. A bill in the House of Representatives seeks to remove employees of certain public agencies from the contributory pension scheme for reasons that are unclear.
 
We welcome the monthly data releases from PenCom. A next step could be independent industry analysis allowing investors to compare performance.

Rail transport on the FGN’s agenda

14th November, 2017
                                                                                          
Drawing on data provided by the Nigerian Railway Corporation, the National Bureau of Statistics (NBS) has released its maiden report on railway passenger traffic. The report estimates total traffic in Q2 2017 at 596,792 passengers, representing decreases of -22% q/q and -20% y/y.  Although increased efforts have been made by the FGN to improve rail transportation, infrastructural deficit still exists. The federal ministry of transportation projects a total of US$36bn to complete railway connectivity across the country.
                                                                                                                  
There was a total of 1,866 trips (passenger and freight) by rail in Q2 compared with 1,755 trips recorded in Q1. The Lagos mass transit train service (from Iddo/Apapa to Ijoko) recorded the highest number of passengers – 427,760 in total. Meanwhile, the Minna to Kaduna train service route recorded the lowest passenger traffic, just 573.  

Logistics have been cited as a drawback within the agriculture value chain as supply of farm products to end-users remains a challenge. During the period of review, freight traffic via rail recoded a total of 16,159 tons, with fertiliser accounting for 44% of the total while animal feeds represented only 3%.

We understand that the FGN plans to inject over 100 cargo trains into the rail transport system to boost product distribution across the country. Additionally, the government has secured a loan of US$1.5bn from the China Exim Bank to complete the construction of the Lagos-Ibadan railway network route.

Rail passenger traffic (total arrivals and departures_ '000s) - FBNQuest Research

Rail is not particularly popular in Nigeria when compared with other transport options. But it is necessary that the government continues to invest in / attract investment into the network. Although rail is unlikely to change the behaviour of certain segments of the population, it will reduce the burden on the road network, especially from heavy duty goods.

Improved fx access for petroleum marketers

13th November, 2017
                                                                                          
The National Bureau of Statistics (NBS) has released its latest premium motor spirit (PMS) price watch report. It shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In August it averaged N144.5/litre (l) for the 36 states of the federation and the FCT, and therefore was marginally below the fixed upper price limit for the retail pump price of N145/l set by the authorities.

The average price of gasoline in September represented a -1.2% y/y decrease, but increased by 0.1% m/m. Yobe State recorded the highest price for PMS at N149.7/l while Abuja recorded the lowest – N142.0/l.

A recent survey carried out by the NNPC revealed that for most stations, fuel prices reduced in line with the prevailing market situation in order to sustain the turnover of the business and to attract more motorists.

Additionally, the CBN’s increased fx interventions have led to improved fx liquidity. For petroleum marketers, the CBN recently approved access to its fx official windows, thereby allowing for a better fx blend as opposed to depending solely on the parallel market.

Actual gasoline pump prices vs fixed price (September 2017) - FBNQuest Research

The NNPC has begun resuscitating some of its critical pipelines across the country. This should assist with enhancing efficiency in distribution as well as push down prices of petroleum products.

There has been increased private sector interest in petroleum refining. The country’s current refining capacity utilisation is c.10%.  Earlier this month, the federal ministry of petroleum resources received applications for seven modular refineries in Edo State. Three of these applications are currently at the approval stage.

Decent monthly results in the circumstances

10th November, 2017
                                                                                          
In August the NNPC’s operating deficit halved from N11.9bn the previous month to N5.7bn (US$19m). Before central costs and ventures, a profit from production (N28.0bn) covered the losses from refineries (N4.6bn) and retail/marketing (N13.4bn). The corporation’s Financial and Operations Report for August notes a welcome pick-up in crude output (including condensates) in July to 2.01 mbpd from 1.95 mbpd. It attributes this latest increase to what it quaintly terms the “semblance of normalcy” in the delta and the resumption of activity at the Forcados terminal.
                                                                                                                  
The refineries reported another loss in August because of recurring production shutdowns. Warri processed 179,000 metric tonnes of crude in August while for Port Harcourt and Kaduna, the figure was zero.

The corporation again ensured availability of products across the country. In August 980 million litres of PMS (petrol/gasoline) and DPK (kerosene) were imported, 80 million litres refined domestically, and 870 million litres distributed and sold by the Pipelines and Products Marketing Company.

The deficit has declined to N66bn in January-August 2017 from N128bn in the year-earlier period. Without a legal framework for the industry and root-and-branch change at the refineries, further upside is limited. In the period sizeable operating surpluses were reported by the Nigerian Petroleum Development Company (N64bn) and the Nigerian Gas Processing and Transportation Company (N41bn).

NNPC Group financial operations - FBNQuest Research

The report notes that power plants generated 2,307 megawatts in August from gas supplied by the corporation, equivalent to 71% of total generation.

We have to conclude by noting the re-emergence of turf wars between the corporation and the FGN.

A sovereign downgrade from Moody’s

9th November, 2017
                                                                                          
Moody’s Investor Service has downgraded its sovereign rating for Nigeria from B1 to B2, and so falls into line with S&P. Fitch has the sovereign one notch higher at B+ (the equivalent of B1), albeit with  a negative rating. The downgrade is justified by Moody’s by the limited progress made the authorities in tackling the Achilles heel of the economy, namely its dependence on oil revenues. The progress has been limited although we would add that it has been patchy or worse over the past four decades.
                                  
Moody’s also highlights the dire position of revenue collection, noting that the budget deficit amounts to roughly half total general government revenue (not FGN revenue), which compares poorly with the median of its B-rated sovereigns.

It also sees the alarm bells ringing on debt service, which it puts at 38% of revenues in H1 2017. This ratio appears to be for FGN revenues, for which the IMF has a rather higher figure.

On capital expenditure, Moody’s queries whether in 2017 the FGN will be able to better the N1.2trn it reported for 2016. This reflects the struggle over revenue collection but, more substantially, its view that the budget cycle for 2017 will be six months because the new budget will be passed in January. We fear that this view understates the long-established tensions between the executive and the legislature.

The new rating has a stable outlook due to the improvement in the oil price, the relative stability in the Niger Delta, the return of the current account to surplus, the accumulation of official reserves and the net inflow of capital under the CBN’s multiple currency practices.

A ratings agency has to perform a delicate balancing act. In this case, Moody’s has termed the likelihood of a fresh external shock as low but proceeded with the downgrade nonetheless in view of the limited progress in overcoming the structural weaknesses of the economy.

Investors will form their own view on the balancing act when the FGN returns shortly to the Eurobond market. We suspect that the downgrade will not have a great impact in a market where other sovereigns have been able to sell rather weaker credit stories.

The agency’s forecasts for 2017 differ somewhat from our own: GDP growth of 1.7% (we have 2.0%); end-year inflation of 14.4% y/y (16.2%); and a current-account surplus equivalent to 1.8% of GDP (0.3%).

The beginning of the annual tussle

8th November, 2017
                                                                                          
President Muhammadu Buhari yesterday presented the 2018 budget to the National Assembly, and took the first step in the lengthy yearly process which weakens the ability of the government to govern. It follows the release last month by the Budget Office of the Federation of The 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper. We have already shared our thinking on the revenue and spending elements of the planning documents (Good Morning Nigeria, 25 and 30 October 2017).   

The core assumptions are those in the framework, namely: an unchanged average exchange rate of N305 per US dollar; oil production of 2.30 mbpd; an oil price of US$45/b; and GDP growth of 3.5%, which had been revised down from 4.8% in the Economic Recovery and Growth Plan 2017-20 of February this year.

Cursory media accounts of the presentation yesterday indicate some changes from the framework. Total FGN spending and the capital element remain N8.6trn and N2.4trn respectively. However, the accounts put the deficit at N2.0trn rather than the N2.9trn in the framework.

If they are confirmed, the FGN has either pushed up its revenue projections or trimmed the recurrent expenditure, or a combination of both. The former would be more likely because governments the world over tend to reduce the salaries, allowances and pensions of their employees as a last resort.  It would also be less plausible, given the uphill struggle to lift the FGN’s non-oil revenues from a pitiful 2.9% of GDP in 2016.

The media accounts also report that borrowing of N1.7trn will cover the greater part of the deficit. There is no detail about the non-debt creating sources of financing for the balance. These could be asset sales, signature bonuses and recoveries, for example.

In line with international practice, the budget would ideally be passed in time for its implementation in the New Year. This, however, would be little short of miraculous because of the assembly’s holiday in December and the obvious tensions between the executive and the legislature. The process has sometimes dragged into mid-year.

This accountant’s nightmare leads to delays in capital releases, prevents the correct monthly distributions from the federation account and creates confusion over deficit financing, not least for investors. In Q1 2017 the FGN raised US$1.5bn from Eurobond sales, which were deployed to cover the deficit in the 2016 budget year (that ran through to May this year due to the annual tussle).

Egypt 1 Nigeria 1 (match still in progress)

7th November, 2017
                                                                                          
As the Egyptian government looks to make its third drawing under its extended fund facility (EFF) worth the equivalent of US$12bn with the IMF, signed last November, we offer a view on the course of action that the FGN declined to follow. We last commented on the two alternative paths three months ago (Good Morning Nigeria, 14 August 2017). Egypt’s move to a more flexible exchange-rate regime and its cut in subsidies have fed into inflation (see chart). The Fund sees the headline rate at a little above 10.0% y/y by the end of the 2017/18 (July-June) fiscal year.

The EFF unblocked foreign lending such that public external debt increased by US$23bn to US$79bn in the 12 months to June 2017. The rise was largely made up of US$8bn from international and regional bodies (such as the Fund), US$5bn from Egyptian bonds (such as the Eurobond issue in January) and US$5bn in short-term capital. The stock of external debt is 33% of GDP.

Its public domestic debt amounted to EGP3.16trn (US$180bn) at end-June. If we narrow the stock down to Treasury paper, and so comparable to the Nigerian data, we still have a ratio above 90% of GDP.

There have been some promising developments on the external balance sheet. FDI inflows rose by 14% y/y in 2016/2017. Portfolio inflows reached US$16.0bn in the period, compared with –US$1.3bn the previous year. Tourism receipts were US$5.5bn in January-September 2017 despite the security issues, a healthy increase from the year-earlier US$1.3bn.

FBNQuest Research  - Headline CPI Nigeria and Egypt

Egypt has therefore racked up some early wins and can draw, unlike the FGN, on the backing of the Gulf states. The EFF has given it better access to international capital than Nigeria. Yet its fiscal challenges and debt burden are also far greater, so it has much less time to transform the economy by attracting investment and to put the public finances on a sustainable footing.

A further healthy rise in reserves

6th November, 2017
                                                                                          
Gross official reserves increased by US$1.33bn in October to US$33.83bn. Since the CBN stepped up its fx interventions in March by launching multiple currency practices (MCP) from sales previously of just US$1.5m per day, its reserves have risen by US$3.5bn. Higher oil exports have plainly been a factor but it would be churlish not to acknowledge that the unorthodox practices have also helped. By way of caution, we should stress that the figures provided by the CBN are gross and mask the swap transactions it has entered into with local banks.

The pick-up in oil production has been an obvious positive for accumulation. Officials are encouraging the view that it is back at, or close to the 2.0 mbpd level. Further, the FGN plans to raise US$2.5bn in Q4 2017 from additional Eurobond sales, for which the market has a good appetite. Separately, it is looking to refinance NTBs into short=term fx paper within a ceiling of US$3bn.

The CBN will be boosted by the positive signals from the investors’ and exporters’ window (NAFEX). Turnover (ie both sides of trades) from its launch in late April through to 03 November totals US$18.9bn.

The latest boost has been provided by the return of the offshore investor to local debt markets. We understand that the CBN’s fx supply to NAFEX is now negligible and we know that it has reduced its supply to other windows such as that for the retail segment for invisibles. These various positive developments tell us that gross reserves are heading towards the US$40bn mark, which level they last touched in February 2014.

Movement in official reserves October 2017- FBNQuest Research

In the past month the CBN’s position has strengthened and its confidence grown. We do not see a major change to its MCP either this year or next. The current arrangement suits the authorities, and they are no real domestic pressure to change tack.

Power for all; much work to do

3rd November, 2017
                                                                                          
Power shortages remain a primary challenge for businesses as well as households across Nigeria. The cost of self-generation continues to erode household pockets and weighs heavily on operational costs for businesses. The Transmission Company of Nigeria (TCN) has recently estimated generation capability as high as 7,000 megawatts (MW). However, we understand from industry sources that the national energy wheeling capacity through the transmission grid is limited to a maximum of 6,000MW, which clearly dilutes the impact of the headline.

The TCN has been able to secure US$1.55bn in funding from multilateral donor agencies. This should assist with building transmission capacity. Over the next four years, the FGN targets a wheeling capacity of 20,000MW from the transmission grid.

Gas constraints also contribute to the epileptic power supply. Data from Nigerian Electricity Supply Industry (NESI) show that on one day in mid-October only 1,360MW were generated. The reported gas constraint was 410MW while management constraints resulted in a further loss of 1,994MW. The industry lost N1bn in consequence.

There has been some traction in ramping up alternative sources of energy. Power generation from the three hydropower generation companies (Kainji, Jebba and Shiroro) now account for 26% of Nigeria’s daily power generation.

Power Generation Oct 2017 - FBNQuest Research

Given the frequency of attacks on gas pipelines and assets last year, the FGN’s steps towards diversifying the country’s energy sources are laudable. We note that the FGN targets 30% of national energy to come from renewables by 2030.

The potential impact on industrialisation in Nigeria of increased and steady power supplies is immeasurable. The onus is on the FGN to attract private capital towards infrastructural financing to explore the renewable energy segment so as to accelerate the process of attaining power for all.

Moving towards mid-table

2nd November, 2017
                                                                                          
The positive headline emerging from the World Bank Group’s Doing Business 2018 report is that Nigeria has climbed 24 places to no 145 out of 190 countries over the past year. It appears that the head of state set a target of a rise of 20 places. For the first time Nigeria has joined the ranks of the top ten improvers, measured by the introduction of reforms to business regulations. This would have been unthinkable in the recent past, and sees Nigeria rubbing shoulders with the likes of India.
 
The rankings are published alongside a country’s distance to frontier score, which captures the gap between current performance for the set indicators and best practice for the same across all economies. Nigeria’s score of 52.03 was 3.85 points above the previous year’s. It therefore achieved an improvement in absolute terms and relative to other economies surveyed. 

Two economists involved in the report have calculated that a ten percentage point (pp) rise in this score can be equated with a two pp reduction in the economy’s poverty rate, which is measured by the number of adults earning less than US$1.90 per day.

Among the ten areas which together make up the overall ranking, the most striking is Nigeria’s no 6 slot for getting credit. The report is not assessing the availability of credit, for which the ranking would be far lower, but movable collateral laws and credit information systems. It has identified specific reforms introduced in both areas.

The presidential enabling business environment council, formed by the head of state in July 2016 and chaired by the vice-president, has been an influence behind the climb towards mid-table respectability. It is now pushing hard on its second 60-day national action plan. This is the 15th report in the series, and we believe that it is among those most monitored by foreign investors.

To its credit, Doing Business 2018 publishes the names of its respondents and their companies, or at least those prepared to be acknowledged individually. The vast majority are employed by government agencies, lawyers, accountants and consultancies. These may well be the most reliable respondents but, if we wanted to be difficult, we could say that are likely to  have a similar mindset.

No two indices are the same, and we have often said that there are too many of them. For the record and for the context, however, we note that The Global Competitiveness Report, 2017-18, released in September by the World Economic Forum, placed Nigeria at no 125 out of 137 countries while noting that its score had fallen each year since 2012.

PMI reading no 55: higher and higher

1st November, 2017
                                                                                          
Our manufacturing Purchasing Managers’ Index (PMI), the first in Nigeria, surged in October to 64.8 from the previous month’s 58.5. Our partner, NOI Polls, has gathered and compiled the data. The index is a data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment in all economies, and have the proven capacity to move financial markets in developed economies. To reinforce the point, the latest national accounts cover the second quarter (April-June) and the latest PMI the first month of the fourth.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013, the last in January this year.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which arise when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

All five sub-indices picked up in October: the lowest was an impressive 59.5 (employment). The headline reading has been above 50 since March and is now the second highest since we launched.

The principal driver has been the use of multiple currency practices (MCP) by the CBN; not in the textbook but they have transformed fx liquidity. Manufacturers, or indeed any users of fx, now have access through the various windows. This transformation can be seen not only in PMIs but also inflation data, listed company results and, on the margins, the national accounts.

The positive impact of MCP has gained momentum since July. A more recent boost has been the seasonal rise in demand for the year-end celebrations.  This featured in several responses to trigger questions for the October report.

This is, by any criteria, a very strong report. To contain the exuberance, we should stress the seasonality of demand and the trend for a reversal in readings in January. Secondly, a PMI for the services sector could tell a less festive story.

Fine to borrow but with tangible benefits

31st October, 2017

Fine to borrow but with tangible benefits
                                                                                          
The FGN’s domestic debt service payments have soared in line with issuance from N354bn in 2010 to N1.20trn in 2016, and are set to continue their upward trend due to its expansionary fiscal stance. We can see from our chart that service of NTBs is steady while that of FGN bonds fluctuates with semi-annual coupon payments. The outturn for H1 2017 shows that domestic payments accounted for 94% of total debt service. Given the interest rate differentials and allowing for devaluation risk, the strategy is to boost the external share of the FGN debt stock.
 
The expansionary stance is set out most recently in the 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper. This has total debt service picking up from N1.66trn in 2017 to N2.03trn next year, N2.37trn in 2019 and N2.56trn in 2020.

The documents, as we have previously noted, have ambitious targets for revenue collection. If these targets are met, the debt service/total revenue ratio peaks at 37.5% in 2019 before easing fractionally the following year to 37.4%. In H1 2017 the figure was already 38.2% (vs a full-year target of 32.7%).

We have no quarrel with the FGN’s expansionary stance provides that it generates growth, taxable employment and lasting infrastructural development. The stance may well deliver but not at the pace sought by the authorities.

Fine to borrow but with tangible benefits - FBNQuest Research

The four-year electoral cycle does not help. The next elections are due in February 2019, and fiscal slippage ahead of polls is a well-documented phenomenon in different forms in developed and developing economies.

The recurring challenge of capital spending

30th October, 2017

The recurring challenge of capital spending
                                                                                          
Having already commented on the revenue side of the 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper, we now look at the expenditure and financing projections. Total FGN spending is projected to rise from N7.44trn in this year’s budget to N8.60trn in 2018. The outturn of N3.10trn in H1 2017, according to the Budget Office of the Federation, was well short of the target of N3.72trn: an overshoot on salaries was more than outweighed by an absence of capital spending.
 
This sad state of affairs on the capital side can be explained by the delayed passage of the 2017 budget, which was only signed off in June.

The projection of N2.38trn capital spending in 2018 looks fanciful when we consider the slow growth of revenue collection.

On the recurrent side, personnel spending is forecast to rise from N1.88trn to N2.12trn. The outturn in H1 2017 was N1.49trn.

The FGN again allocates N350bn for its special interventions, unchanged from 2017 (although there had been no disbursements by end-June). These are essentially the programmes pledged in the 2015 election campaign.

Those concerned about the vulnerability of oil output to sabotage in the Niger Delta will be pleased to learn that the framework sets aside N65bn for the presidential amnesty programme in 2018, rising to N70bn in each of the two following years. 

We note the allocations in the paper of N220bn in each of the three years towards a sinking fund to retire local contractors’ bonds. We are unsure whether these relate to the mountain of arrears accumulated under the previous administration, unearthed in late 2016 and estimated by different sources at +/- N3trn.

The deficit in 2018 is projected at N2.95trn, equivalent to 2.6% of forecast GDP and 52.2% of forecast FGN revenue. The framework has 2018 as the low point fiscally in the period: thereafter the core ratios improve, supported by stronger revenue collection and GDP growth.

There is an interesting section drawing attention to the negative consequences of Nigeria’s transition to middle income status in 2014. The FGN is losing access to the soft-loan windows of partners such as the World Bank and the African Development Bank, and will have to find alternative funding for the substantial vaccination programme. It is therefore working on an aid transition strategy to cushion the impact.

A decline in FAAC payout

27th October, 2017

A decline in FAAC payout
                                                                                          
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government amounted to N558bn (US$1.82bn) in October (from September revenues), representing a 13% decline when compared with N638bn recorded in the previous month. The decline was partly linked to the 8.2% decrease in average crude oil prices during the period compared with the previous month.
 
However, the commentary from the federal finance ministry disclosed that there was an increase in revenue from export sales due to improved oil production.

The payout from the statutory allocation was N424bn. There was an additional N83bn from VAT payments, compared with N87bn the previous month. Furthermore, N51bn generated from the forex equalisation account was added to the distribution. 

The payout to state governments, independent of the 13% derivation bonus of N35bn for oil-producing states, amounted to N100bn. Most state governments are still struggling with financial stability and remain overly dependent on the monthly FAAC payout. A fiscal sustainability index recently launched by BudgIT shows Rivers, Lagos, Ogun, Kano and Akwa Ibom emerging as the top five states (Good Morning Nigeria, 26 October 2017.)

A decline in FAAC payout - FBNQuest Research

The balance in the excess crude account (ECA) currently stands at US$2.31bn.

We have taken the latest payout from the local media. The accountant-general’s office provides the revenue numbers up to December 2016, distributed in January, and the National Bureau of Statistics through to July, shared in August.

Rivers now the state of states

26th October, 2017

Rivers now the state of states
                                                                                          
We attended yesterday the London launch by BudgIT of the 2017 edition of its State of States report. The headline is the fiscal sustainability index in which, based upon 2016 data, the five leading states in descending order are: Rivers, Lagos, Ogun, Kano and Akwa Ibom. The league tables are eagerly awaited by the state governors, as the World Bank Group’s Ease of Doing Business indices are closely monitored by the FGN. Protests at poorly-received index placings by the injured parties are common.
 
The ratios for recurrent expenditure/total revenue, recurrent expenditure/internally generated revenue (IGR) + 13% derivation + VAT, and total debt stock/recurrent revenue have weightings of 50%, 35% and 15% respectively in the compilation of the index.

The Lagos State rating is weakened by its debt stock of N735bn, which is more than four times that of any other state. We would suggest a refinement of the methodology to distinguish between naira and fx debt. In the case of Lagos, the fx debt accounts for N423bn of the total. This is all provided at concessionary terms by lenders such as the World Bank. Further, it is necessarily guaranteed by the FGN and is subject to more rigorous analysis than that of the banks for naira loans. 

This is an index of record without a forward-looking element. The report offers useful sections on each state, identifying the sectors with the most potential and projects likely to boost IGR in the years ahead.

It shows the limitations of federalism, Nigerian-style. “True federalism”” provides fiscal autonomy. In this case the slide of the oil price in mid-2014 highlighted the dependence of states on the monthly payout, leading in most states to the emergence of salary and pension arrears.
The index is the work of an independent research body, and enjoyed the support of the Bill and Melinda Gates Foundation.

Our well-known pedantry obliges us to comment upon data sources. The BudgIT table on page 77 cites the Office of the Accountant General of the Federation, the National Bureau of Statistics and the Debt Management Office as its external sources.

For state government finances, we have generally quoted the older data supplied by the CBN for its longer historical series. In the ideal world, all sources would draw upon audited fiscal statements from the states. It would appear that this is not always possible. At least one state has complained at the figure provided for IGR. 

Soundness of non-oil revenue forecasts

25th October, 2017

Soundness of non-oil revenue forecasts
                                                                                          
The presidency last week submitted the 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper to the National Assembly. Total FGN revenue is projected to rise from N5.08trn in this year’s budget to N5.65trn in 2018. The outturn of N2.43trn in H1 2017, according to the Budget Office of the Federation document, is not far short of the projection on a pro rata basis. In days to come we will comment on the expenditure and financing projections.
 
The outturn for FGN revenue for H1 2017 looks better than the narrative from official sources might suggest. Over the six months oil and non-revenue collections were N100bn and N340bn behind projections respectively, the latter due largely to a dire record on companies’ income tax. The aggregate figure for FGN revenue was boosted by refunds, exchange-rate gains and an unexplained one-off N530bn transfer to the Consolidated Revenue Fund.

Turning to the underlying assumptions for 2018, the framework has average oil production of 2.30 mbpd (vs 2.20 mbpd in 2017), an average oil export price of US$45.0/b (vs US$44.5/b) and an unchanged exchange rate of N305 per USD. 

We have no issue with the assumptions. The budget planners have run with their familiar combination of a figure for output that may look a little optimistic and a conservative projection for the price. On the exchange rate, our view is that the authorities will maintain multiple currency practices at least until end-2018.

In view of the weak performance ytd, we can see why non-oil revenue is forecast as broadly flat next year (N1.39trn vs N1.37trn). The framework assumes an unchanged standard rate of VAT but leaves open the possibility of a rise in the medium term. It has high hopes of efficiency gains.

It has FGN revenue from fines, recoveries and the tax amnesty combined at N600bn in 2018, compared with N570bn in the current year’s budget. This is a grey area in which analysts would appreciate rather more colour. We know that recoveries and fines are regularly challenged in the courts, and that the monies cannot immediately be “banked”. We would, however, like to be told the basis of the projected tax amnesty proceeds of just N90bn.

We hear criticism that the presidency has submitted the documents to the assembly only four months after the sign-off of the 2017 budget. There are set procedures and the FGN should not be faulted for following them in the hope that the 2018 budget might be approved at, or at least nearer, the start of the new calendar year.

The hard slog of boosting non-oil exports

24th October, 2017

The hard slog of boosting non-oil exports   
                                                                                          
Data in the CBN’s Quarterly Statistical Bulletin for Q2 2017 on monthly merchandise exports fob show totals for the 12 months to June of US$30.1bn for oil, US$5.5bn for gas and US$3.2bn for non-energy products. On this basis the progress towards export diversification would appear negligible although we are probably not allowing time for the policies and incentives of this administration to take effect. We have ducked the challenge of trying to reconcile this data with the series on a customs basis cif in other statistical sources.
 
The data do not support the statement by the CBN governor after the last meeting of the monetary policy committee that the newest fx window (NAFEX) had proved highly popular with non-oil exporters.

Nor do they underpin the theory, aired in discussion of stubbornly high food price inflation, that many farmers had started to supply sub-regional rather than domestic markets with their food crops.

The CEO of the Nigerian Export Promotion Council said last month that the FGN had approved the release of N20bn in the 2017 budget to meet the settlement of current claims under the export expansion grant. Given its size, this allocation has to be seen as a starting gesture. The scheme was abandoned in 2013 due to widespread abuse.

The hard slog of boosting non-oil exports   - FBNQuest Research

Evidence of non-oil export diversification is elusive. We fall back upon the list of the top non-oil exporters, their sales, their products shipped and the destinations in the CBN annual reports. The latest list (for 2015) for the top 10 exporters shows cocoa beans, sesame seeds, cigarettes, cashew nuts, dried hibiscus flowers, leather and ammonia. Only the cigarettes and the ammonia were shipped to African destinations.

Job done by the DMO yet still more to do

23rd October, 2017

Job done by the DMO yet still more to do  
                                                                                          
The DMO approaches this week’s regular auction of FGN bonds from what appears a position of strength. It has already met its target of N1.25trn in domestic financing of the 2017 FGN budget deficit. It has collected N1.26trn (gross) from the nine monthly auctions held to date, and is looking to raise a further N100bn from the reopening of the five and ten-year benchmarks (Jul ‘21s and Mar ‘27s). This will be a challenge since generally the bid has been strongest for the 20-year paper, which is not on offer this month or indeed for the rest of the quarter.
 
In the secondary market, the yields on the two issues on offer this week have declined by about 110bps since the last DMO auction, to 14.88% for the Jul ‘21s and 14.81% for the Mar ‘27s on Friday .The authorities will be hoping that the bid will be healthy and conceivably match September’s (N395bn), with a strong offshore element.

While the DMO has bought itself some room for manoeuvre due to its textbook front-loading of issuance, it knows that it may have to raise additional funds because the deficit is almost certain to overshoot the projected N2.36trn in view of poor non-oil revenue collection.

At the same time, it may have to adjust its strategy for the uncertainties surrounding the attainment of the target of N1.07trn (US$3.5bn at the budget rate of N305) for external financing of the deficit. It seeks to raise US$2.5bn from the sale of Eurobonds this quarter in favourable market conditions.

Job done by the DMO yet still more to do  - FBNQuest Research

We await patiently the National Assembly’s go-ahead for these sales and for the FGN’s planned debt restructuring (Good Morning Nigeria, 15 August 2017).

Enhancing broadband penetration

20th October, 2017

Enhancing broadband penetration
                                                                                          
The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 92.2 million in August, representing a y/y contraction of -1.4%. The figure implies density of 50% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. In August there were 800,000 new internet subscriptions recorded, compared with a loss of 200,000 recorded in the previous month.
 
The m/m increase recorded in internet subscriptions could be loosely linked to increased patronage of dual-SIM mobile phones. In light of the economic challenges, this proves more cost effective for consumers. However, to ensure uninterrupted internet access, sometimes both SIMs are connected to separate data packages.

MTN again accounted for the largest share (35%) of total internet subscriptions. Airtel had the fastest m/m growth at 2.8%. Meanwhile, we noticed a -1.8% m/m reduction in subscriptions to 9Mobile’s network (formerly Etisalat), likely reflecting the issues the operator is facing.

The FGN recently reiterated its commitment to attain broadband penetration of 30% by next year. It currently stands at 21%.

Enhancing broadband penetration - FBNQuest Research

Although the growth in subscriptions is slowing, Nigeria is still an attractive market for telcos; comments by the syndicate of banks that took over 9Mobile confirm this point. A sale is expected by the end of this year.

Based on recent remarks from the executive vice chairman of the NCC, Umar Garba Danbatta, the commission has started the process of licensing the 5.4GHz spectrum band. Although this is movement towards the broadband penetration target, we are unclear about the progress on sales of the eight remaining slots on the 2.6 GHz spectrum.


 

Investment flows in need of a major lift

19th October, 2017

Investment flows in need of a major lift
                                                                                          
On Monday we commented on the current account in the balance of payments (BoP) for Q2 2017. Today it is the turn of the capital/financial account, and the investment flows in particular. These are gross flows (ie those in the reporting economy before investment by Nigerian residents offshore). Direct, portfolio and other investment were again positive on this basis in Q2. The chart shows portfolio flows peaking above US$4bn in Q2 2013, when Nigeria was still basking in the glow of its inclusion in the JP Morgan indices for local currency, emerging sovereign debt.
 
Direct investment in 2016 amounted to US$4.5bn, equivalent to 1.1% of GDP. This is pitifully low. The numerous structural flaws in the economy and the investment climate are barriers for the direct investor although they are not always the preoccupation of the offshore portfolio community.

The short-term prospects are better for the two other components. The Eurobond issuance, we assume, explains the improvement in other investment in Q1 2017, and is set to be repeated this quarter. We should shortly see the impact of the NAFEX experiment on portfolio investment.

When we adjust for the assets on the capital account (Nigerian investment offshore) in Q2, all three components remain positive on a net basis: direct investment of US$580m, portfolio investment of US$1.48bn and other investment of US$2.58bn.

Investment flows in need of a major lift - FBNQuest Research

We focus on the investment components because they provide a narrative. For the record, the broader picture in Q2 2017 shows a current-account surplus of US$1.41bn, a capital/financial-account surplus including the movement in reserves of US$4.34bn, and net errors and omissions (negative) of –US$5.75bn. The last item, which is effectively the balancing item, is often revised: an outflow of -US$1.63bn in Q1 is now shown as -US$4.09bn.

A further decline in m/m inflation

18th October, 2017

A further decline in m/m inflation
                                                                                          
The latest inflation report from the NBS shows headline inflation y/y at 16.0% in September: this was the eighth successive slowdown, albeit by just 3bps on this occasion. Our expectation, shared with wire service polls of analysts, was an uptick to 16.3% y/y. Core inflation slowed from 12.3% in August to 12.1% y/y while food price inflation was 7bps higher at 20.3% y/y.
 
Policymakers will note that the m/m rate for all three measures declined in September for the third month in succession: by 19bps for the headline measure, by 13bps for core inflation and by 27bps for food prices. They can therefore conclude that there is a movement towards general price stability.

The CBN’s reference range for the headline rate, for what it is worth, is a y/y target of between 6.0% and 9.0%. We do not see the attainment of this range before 2019.

For imported food prices September brought both m/m and y/y increases. Given the stability of the fx rate in the various windows in recent months, the first probably reflected rises in the dollar price of individual food commodities.

A further decline in m-m inflation - FBNQuest Research

As for the stance of the monetary policy committee (MPC), the communique after its meeting in late September noted several reasons for stubbornly high food price inflation including a weak harvest. The MPC also indicated that it did not anticipate significant gains on GDP growth (higher) and inflation (lower) much before Q1 2018.

We see the headline rate at 15.9% in October. 

A woeful performance from the refineries

17th October, 2017

A woeful performance from the refineries
                                                                                          
In July the NNPC’s operating deficit doubled from N5.2bn the previous month to N11.9bn (US$39m). A profit before central costs and ventures from production (N15.4bn) was inadequate to cover losses from refineries (N8.5bn) and retail/marketing (N7.2bn). The corporation’s Financial and Operations Report for July notes a pick-up in crude output (including condensates) in June to 1.95 mbpd from 1.88 mbpd the previous month. It attributes this latest increase to the FGN’s engagement with stakeholders in the delta and the resumption of exports from the Forcados terminal.
 
The refineries moved into loss in July because of familiar production shutdowns. Port Harcourt processed 215,000 metric tonnes (MT) of crude in July, Warri 10,000 MT and Kaduna none.

The report says that the corporation again ensured availability of petroleum products across the country. In July 1.17bn litres of premium motor spirit were imported, 48 million litres refined domestically, and 1.00bn litres distributed and sold by the Pipelines and Products Marketing Company (PPMC).

The deficit has declined to N60bn in January-July 2017 from N116bn in the year-earlier period. Without a legal framework for the industry and root-and-branch change at the refineries, further upside is limited. In the period sizeable operating surpluses were reported by the Nigerian Petroleum Development Company (N44bn), the Nigerian Gas Processing and Transportation Company (N34bn) and the Port Harcourt Refining Company (N28bn).

A woeful performance from the refineries - FBNQuest Research

The commentary notes that power plants generated 2,655 megawatts in July from gas supplied by the corporation, equivalent to 77% of total generation.

Our note would not be complete if we did not mention the territorial differences that have emerged between the corporation and the FGN. 

Lower current-account surplus due to MCP

16th October, 2017

Lower current-account surplus due to MCP

The balance of payments for Q2 2017 shows that the current-account surplus narrowed from the equivalent of 3.2% of GDP to 1.6%. The explanation lies in a decline in the trade surplus from 2.7% to 2.4% of GDP, along with a larger widening of the services outflow from 2.4% to 3.8%. Fx availability has been enhanced by the CBN’s multiple currency practices (MCP). Importers have benefited, which is evident from manufacturing PMIs, and retail has also been able to meet its requirements. In a forthcoming daily note we will examine trends on the capital account.
 
The share of oil and gas exports in GDP crashed from 25.0% in Q1 2012 to just 9.6% in Q4 2016. A modest recovery to 10.9% in both Q1 and Q2 is attributable to a pick-up in oil production and the contraction in GDP.

Merchandise imports increased by US$1.0bn q/q in Q2: if we strip out oil and gas, the increase rises to US$1.3bn. This underpins our point about fx availability and masks any benefits from the FGN’s import substitution policies.

The same is self-evident when we drill down into the outflow on services in Q2 2017. The debits on travel and other business services rose by US$900m and US$400m q/q respectively. Fx ix available at the CBN’s various windows if the user is comfortable with the price.

Net current transfers, which are overwhelmingly workers’ remittances, have held up better than expected, at more than 5% of GDP for four successive quarters.

Lower current-account surplus due to MCP - FBNQuest Research

We are comfortable with the smaller surplus on the current-account because offshore investors have returned to local equity and debt markets, and because the FGN is to revisit the Eurobond market this quarter.

Credit allocation to favour the few

13th October, 2017

Credit allocation to favour the few
                                                                                          
Although Nigeria’s economy has emerged from its technical recession, its macro challenges have not dissipated. As such, a cautiously optimistic approach has been adopted by banks on lending. The CBN’s Quarterly Statistical Bulletin for Q2 2017 shows total private sector credit by banks’ contracting by –0.5% q/q and expanding by just 1.1% y/y. The slowdown in loan growth is partly due to banks’ preference for the elevated yields well in excess of 20% for longer tenors that were recently available on the NTB market. However, those yields have started to dip in response to the CBN’s signal of lowering the stop rates at its auctions.
 
There was a marginal decline in the banks’ favoured sector, oil and gas. Lending to the sector contracted by -4.8% q/q but increased by 2.6% y/y. The q/q contraction is not surprising when we consider that, given the slide in oil prices since mid-2014, many operators have had to restructure existing loans.

Agriculture, which has been identified as a growth engine for the economy by the FGN and the consensus of development economists, received just 3.3% of DMB’s credit allocations at end-Q2.

Meanwhile the Quarterly Statistical Bulletin shows a marginal pickup of 3.7% q/q in total credit allocated to the manufacturing sector in Q2. The credit status of manufacturers has been enhanced by the CBN’s multiple currency practices since their access to imported inputs has been transformed.

Credit allocation to favour the few - FBNQuest Research

A recent analysis of Nigeria’s credit allocations, based upon official data,  showed that 83% of total lending was allocated to credit lines above N1bn. This is scenario of limited financial inclusion, in which the obvious losers are start-ups and SMEs.

We doubt that loan growth will pick up significantly in the near-term as most banks continue to tread cautiously regarding non-performing loans.

Healthy growth at the PFAs

12th October, 2017

Healthy growth at the PFAs
                                                                                          
The assets under management (AUM) of the Nigerian regulated pension industry increased by 20.2% y/y in August to N7.09trn (US$23.2bn). Market valuations were not the principal driver. This is a healthy increase when we consider the arrears in pension (and salary) payments to employees of state governments and public agencies. The FGN’s several initiatives to bolster state government finances notwithstanding, one reputable independent research body has estimated that at least 20 states were in arrears of some description as of June this year.
 
Holdings of FGN paper amounted to 72.1% of AUM in August, compared with 69.3% one year earlier. There has however been a subtle shift: the share of FGN bonds has declined in line with a reported sharp fall in the PFAs’ bid at the monthly auctions while that of NTBs has risen from 12.1% to 18.6%.

The PFAs were finally drawn to the stop rates of more than 22% that the CBN was setting at the time at its primary auctions and open market operations (OMO).  The market has recently turned, guided by the CBN.

PenCom’s latest data capture the first three months of the surge on the stock market, driven by new money from offshore investors.

Healthy growth at the PFAs - FBNQuest Research

Nigeria’s reformed pension industry, shaped by legislation in 2004 and 2014, has been a success story. As such, we should not be surprised by moves to undo the good work in the National Assembly and by calls from officials for the AUM (the legal property of savers under contributory schemes) to be invested in government programmes.

We welcome the monthly data releases from PenCom. We would also welcome independent industry analysis allowing investors to compare the performance of the pension funds.

Uptick in the Fund’s global growth forecasts

11th October, 2017

Uptick in the Fund’s global growth forecasts
                                                                                          
The IMF’s new World Economic Outlook (WEO) has raised its global growth forecasts for this year and 2018 marginally from three months ago to 3.6% and 3.7%. Among the country contributions, the forecasts for the US have been lifted from 2.1% in both years to 2.2% and 2.3%. We note the assumption that official policies will be unchanged (ie there will be no fiscal stimulus). Elsewhere, compared with July, the latest outlook has stronger growth both years in the Eurozone, Japan, Brazil, Russia and China. India still has the fastest growth next year, at 7.4%.
 
Short-term risks are seen as broadly balanced, medium term tilted to the downside.

The latter are: a sizeable tightening in global financial conditions; financial turmoil in emerging economies, notably China; persistently low inflation in developed economies; a reversal of financial regulation; protectionism; and non-economic and geopolitical factors.

The price assumptions, based on the futures markets, for the Fund’s basket of three crude blends (including UK Brent) are now an increase of 17.4% this year to US$50.3/b and a small decline for 2018 to US$50.2/b.

The outlook’s forecasts for growth in Nigeria this year and next are again unchanged at 0.8% and 1.9%. In what amounts to a commentary on the FGN’s policymaking, projections in the WEO show GDP growth per caput on a PPP basis negative through to 2022.

Uptick in the Fund’s global growth forecasts - FBNQuest Research

Nigeria is expected to emerge from recession this year due to a recovery in oil output and some positives in agriculture. Predictably, the Fund continues to view the CBN’s multiple currency practices, which it terms market segmentation in the fx market, as a barrier to broader recovery.

The NSEASI still on a roll

10th October, 2017

The NSEASI still on a roll
 
Since our last look at three stock market indices in sub-Saharan Africa (SSA), the Lagos all-share has continued to outperform both Nairobi (NSE 20) and Johannesburg (all-share). In local currency terms it has gained 37.1% ytd, compared with 16.5% for Nairobi and 13.0% for Jo’burg. It was still in negative territory ytd in early May but has surged, driven largely by the offshore investor response to the fx window for investors and exporters (NAFEX). The Q2 reporting season also brought some strong results from leading banks and non-banks.
 
This surge in five months has not been a stampede. Turnover ytd has averaged just US$12.2m equivalent at the interbank rate, and US$18.2m since the watershed on 09 May. The trend is downward. Foreign investors’ share of transactions ytd is little changed from 2016. NSE data does show, however, that they committed N123bn (net) to the market in August.

The NSE has benefited from a “sweet spot”. The oil price is off the floor, reserves accumulation has been impressive and the FGN has made some positive steps on deficit financing.  Longer term structural reforms have been slow in coming.

The NSEASI still on a roll - FBNQuest Research

These markets and others tend to react to major political events, rather than form a view on them in advance. Nairobi barely flinched ahead of the elections held on 08 August. The judiciary then took the unprecedented step of ordering a re-run of the presidential polls, which have been scheduled for 26 October. Neither candidate accepts the possibility of losing the new election. Some depressing scenarios have arisen.

Similarly, the JSE has steadily firmed despite the unfolding drama around Bell Pottinger, McKinsey and KPMG. In December the ruling ANC is to vote on a new leader (effectively its presidential candidate post-Zuma). Perhaps investors are convinced that the outcome will be market-friendly.

Some relief for petroleum marketers

9th October, 2017

Some relief for petroleum marketers
                                                                                           
The National Bureau of Statistics (NBS) has released its latest report in its premium motor spirit (PMS) price watch series. The report shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In August it averaged N144.4/litre (l) for the 36 states of the federation and the FCT, and therefore now below the fixed upper price limit for the retail pump price of N145/l set by the authorities. We attribute this decline partly to the CBN’s stepped up interventions which have resulted in reduced port charges.
 
The average price of gasoline in August represented a -2.5% m/m decrease. Plateau State recorded the highest price for PMS at N146.4/l while Nasarawa recorded the lowest with N143.0/l.

It seems the CBN’s efforts to boost fx liquidity have yielded some positive results in the downstream sector. Initially, oil marketers depended solely on the parallel market rate to settle their port charges. However, through a recent circular, the CBN has approved access to its official windows.

Banks can now accept requests for the payment of port charges and forward them to the CBN’s fx window, which amounts to a welcome and sizeable saving.

Some relief for petroleum marketers - FBNQuest Research

Given the FGN’s intention to reduce PMS imports considerably over the next two years, the NNPC has begun its own plans for the rehabilitation of the existing refineries. Industry sources suggest that the total rehabilitation cost is US$1bn.

Nigeria’s current refining capacity utilisation is c.13%

Continuing surge in reserves

6th October, 2017

Continuing surge in reserves
                                                                                           
Gross official reserves increased by US$670m in September to US$32.5bn. Since the recent low at end-October there has been an accumulation of US$8.5bn. The more telling figure is the increase of US$2.2bn since end-March, when the CBN stepped up its fx interventions under its multiple currency practices (MCP). When we allow for the sharp fall in imports in the recession, the buffer is now comfortable. By way of caution, we should stress that the figures provided by the CBN are gross and mask the swap transactions it has entered into with local banks.
 
The pick-up in oil production has been an obvious positive for accumulation. Officials are encouraging the view that it is back at, or close to the 2.0 mbpd level. Further, the FGN plans to raise US$2.5bn by November from additional Eurobond sales, for which the market has a healthy appetite (Good Morning Nigeria, 05 October 2017).

The CBN will also be boosted by the positive signals from the investors’ and exporters’ window (NAFEX). Turnover from its launch in late April through to 04 October totals US$14.5bn.

The latest boost has been provided by the return of the offshore investor to local debt markets. We understand that the CBN’s fx supply to NAFEX is now negligible and we know that it has reduced its supply to other windows such as that for the retail segment for invisibles. These various positive developments tell us that gross reserves are heading towards the US$40bn mark, which level they last touched in February 2014 (before the most recent slide in the crude oil price).

Continuing surge in reserves - FBNQuest Research

Given this cushion of reserves, we do not see a major change to the CBN’s MCP either this year or next. The current arrangement suits the authorities, and they are no real pressure to change tack.

Hurrah, back to the Eurobond market

5th October, 2017

Hurrah, back to the Eurobond market
                                                                                           
The Debt Management Office (DMO) last week announced plans to raise US$2.5bn by mid-November from the sale of Eurobonds, with perhaps an element of diaspora paper to bulk out the exercise. This would cover the greater part of the projected external financing of N1.07trn (US$3.5bn) in the 2017 budget. The FGN is well placed to tap a receptive market, not least because its external debt at end-June amounted to just 3.9% of estimated 2017 GDP.  We fully endorse this initiative.
 
The DMO has a medium-term target of 60/40 for the blend of its domestic and external obligations. The ratio stood at 72/28 at end-June. If we add the Eurobond issuance plus the FGN’s proposal to convert maturing NTBs into short-term USD instruments up to a ceiling of US$3bn, we arrive at a ratio of about 65/35.

Some analysts may be uncomfortable with this shift. However, we point out the substantial interest rate differential in favour of external borrowing. Nor, in the boldness of our position, have we overlooked the normalisation of US monetary policy in the months ahead.

The Eurobond plans have to be endorsed by the National Assembly, as is the case with the proposed debt restructuring.

These planned changes in the currency mix of the debt help to explain the narrowing of yields on FGN naira bonds of up 200bps in the middle and long end of the curve. We learn from the DMO’s provisional issuance calendar for Q4 2017 that it is to offer its in-demand ten-year benchmark (Mar ‘27s) in all three months.

USD denominated Eurobond issues by frontier/emerging market sovereigns are highly popular in the market. In early September Tajikistan issued for the first time, raising US$500m for ten-year paper at 7.125%. The issue pushes its external public debt/GDP ratio up to 50%, and was rated B-.by S&P (one notch below Nigeria).

Earlier this week Jordan came to the market for the second time this year, raising US$1bn for 30-year paper at 7.375%. Its public debt ratio stands at around 90% of GDP. Demand is also strong for higher quality debt. Saudi Arabia has raised US$12.5bn, with the 30-year tranche priced at just 180bps over USTs.

Yet on the grounds that the window of opportunity can close suddenly, we urge the FGN to secure the necessary approvals and push ahead with haste.

An unexpected revival in the FAAC payout

4th October, 2017

An unexpected revival in the FAAC payout
                                                                                           
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government recovered in September (from August revenues) to N638bn (US$2.08bn) from N468bn. It is difficult to understand the swings over the past three months in the chart. It may be that coverage and compliance have suddenly improved. Another possibility is that the collection agencies have achieved unexplained one-off gains. We are not alone in calling for rather more colour in the official narrative.
 
The commentary from the federal finance ministry noted a substantial rise in the take from companies’ income tax (CIT) and petroleum profits tax. We can understand the latter but struggle over CIT since we were informed one month earlier that the deadline for filing tax returns had expired.

The FGN’s payout was N261bn from the statutory allocation and an additional N12bn from VAT payments. Even when we adjust for its sizeable independent revenue, we are well short of the projection in the 2017 budget of a monthly average of N429bn from all sources.

The payout to state governments, independent of the 13% derivation bonus of N42bn for oil-producing states, amounted to N132bn as well as N42bn from VAT. Most are struggling with their finances due to the slide in the oil price three years ago and, in many cases, poor management. An independent survey in June estimated that at least 20 states were still in arrears on salaries, pensions and allowances despite the FGN’s relief programmes.

An unexpected revival in the FAAC payout - FBNQuest Research

We have taken the latest payout from the local media. The accountant-general’s office provides the revenue numbers up to December 2016, distributed in January, and the National Bureau of Statistics through to July, shared in August.

PMI reading no 54: a pause for breath

3rd October, 2017

PMI reading no 54: a pause for breath
                                                                                           
Our manufacturing Purchasing Managers’ Index (PMI), the first in Nigeria, is a little weaker in September at 58.1, compared with the previous month’s 58.5. Our partner, NOI Polls, has gathered and compiled the data. The index is a data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment in all economies, and have the proven capacity to move financial markets in developed economies. To reinforce the point, the latest national accounts cover the second quarter (April-June) and the latest PMI the third month of the third.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013, the last in January this year.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which arise when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Three of the five sub-indices picked up in September and all were in positive territory. The headline reading has been above 50 since March.

Among the sub-indices, we find a small improvement in output and a particularly strong reading of 60 for new orders. For employment there was a decline: this is the most stable reading, with close to four-fifths of respondents consistently reporting no change.

Nigeria has finally emerged from recession. Both GDP and manufacturing expanded by 0.6% y/y in Q2. At its recent AGM, the Manufacturers Association of Nigeria endorsed the FGN’s policies for the sector, noting improved access to fx (including the quarterly allocation of US$20,000 to SMEs) and the lifting of the ban on the export expansion grant.

The holiday weekend allows us to place Nigeria in the context of manufacturing PMI index readings for September elsewhere: 50.9 for Brazil, 51.0 and 52.4 for China (Caixin and official), 51.9 for Russia, 58.1 for the Eurozone and 60.7 for the US (ISM).

Competition for places

29th September, 2017

Competition for places
                                                                                           
Governments are wary of country league tables and indices, and the FGN will not be pleased with the findings of The Global Competitiveness Report, 2017-18, which was published this week by the World Economic Forum (WEF). Nigeria has moved two places up the league to no 125 (out of 137) but the report notes that its score has declined every year since 2012. This is a diplomatic way of saying that enough other countries have performed worse than Nigeria to enable it to rise up the table.
 
The WEF conducted a survey this year to determine the most problematic factors for doing business. In Nigeria’s case, in descending order the four leading factors were: inadequate infrastructure, fx regulations, access to financing and corruption. None come as a surprise although we wonder at the inclusion of fx regulations if respondents had witnessed the latest changes.

The success of such indices can be measured by the level of responses from governments. The previous administration set targets for Nigeria’s position in selected league tables. In our view governments can be distracted by the large number published, which often overlap. The WEF’s reports cover much of the same ground as the World Bank Group’s Ease of Doing Business reports.

Governments can claim that they are already responding to issues raised. This week the presidential enabling business environment council in Abuja approved a new national action plan, known in the industry as NAP 2.0. The plan sets out 60 priority objectives to address many of the weaknesses identified in the WEF and World Bank reports. The weaknesses include securing construction permits, starting a business, getting electricity and getting credit.

Would-be investors have to feel comfortable with their host authorities. China’s Huajian Group has invested heavily in shoe manufacturing in Ethiopia and is said to be considering a similar plant in Abia State. In Ethiopia it proceeded from its initial talks with the government to its first production at breakneck speed. Can it achieve the same (or close to it) in Nigeria?

Of course there are some positives in the report to share, and we highlight some stronger rankings within the 12 pillars that make up the overall ranking: strength of investor protection (within institutions) at no 31, government debt (macro environment) at no 8, prevalence of non-tariff-barriers (goods market efficiency) at no 36, redundancy costs (labour market efficiency) at no 7 and domestic market size index (market size) at no 21.

An auction for the DMO to savour

28th September, 2017

An auction for the DMO to savour
                                                                                           
The DMO can be satisfied with yesterday’s monthly auction of FGN bonds. It offered N135bn, raised N244bn (US$800m) and attracted a total bid of N395bn, the highest for at least four years. The bid for the five-year benchmark, which has created some marketing headaches of late at the DMO, was the best since February. Further, the stop rates for the three reopened issues on offer were between 81bps and 98bps lower than the previous month. All falls in issuance costs are welcome at the FGN, which is struggling under a domestic debt service mountain.
 
The DMO has now raised N1.26trn from sales of bonds at auction in just nine months and so reached the target of N1.25trn for domestic financing of the 2017 budget deficit. It can therefore approach the remaining auctions in 2017 from a position of relative strength.

Yet it may have to raise additional funds at auction because the deficit may overshoot in view of poor non-oil revenue collection and because there are uncertainties surrounding the attainment of the target of N1.07trn (US$3.5bn at the budget rate of N305) for external financing of the deficit.

The FGN bonds are no longer the only element in the financing target. The DMO can look to modest contributions from its retail savings bonds and last week’s maiden sukuk (Islamic bond) launch.

An auction for the DMO to savour - FBNQuest Research

As well as this latest auction, the DMO can take satisfaction from the fact that the N100bn sukuk offer was modestly oversubscribed.

Institutional demand for FGN paper has been boosted by a change in the CBN strategy at OMOs and by the return of offshore investors. For the sake of context we note that bond yields are back where they were in Q4 2016.

Hazy path to homeownership

27th September, 2017

Hazy path to homeownership
                                                                                           
Homeownership in Nigeria remains a struggle. Given the choppy macro terrain, purchasing power has been severely subdued, making it difficult for income earners to purchase houses. The cost of property development in Nigeria is relatively high, with around 70% of building materials imported. The alternative to outright purchase, mortgage financing, is arduous and far from budget friendly as the cost of borrowing in Nigeria is expensive due to volatile and high interest rates.
 
According to the Centre for Affordable Housing Finance in Africa, Nigeria’s homeownership rate in 2016 was estimated at 25%.

Meanwhile, industry sources suggest that the ratio of mortgage loans to total GDP remains extremely low at 0.5%, compared with 80% in the UK and 31% in South Africa.

Given that the job market remains fragile, we do not expect Nigeria’s mortgage loans to GDP ratio to double in the near term as the number of potential mortgagors would have declined on the back of increasing unemployment.

In an attempt to boost mortgage financing through the National Housing Fund, the Federal Mortgage Bank of Nigeria has made strategic moves towards accessing the database of the Federal Inland Revenue Service. The thinking is to ramp up compliance by ensuring that companies make their mandatory contributions to the fund.

An FGN initiative geared towards boosting homeownership is the Family Home Fund (FHF), which has recently kicked off in eleven states. This fund falls under the government’s social investment programme and is worth US$100m. The World Bank and AfDB are core contributors.

The FHF was designed to cater to low-income earners. A monthly salary earner of N30,000 qualifies. We assume the mortgage loan through this fund will be single-digit.

Another homeownership scheme (My Own Home) was introduced recently by the CBN. It is designed to promote mortgage and financing literacy. The scheme is to have a tenor of 15 to 25 years, depending on the age of the borrower and their income level.

There are also public-private partnership initiatives geared towards boosting affordable housing units. The “Easy Home” initiative of Lafarge Africa is one such: 30,000 nationals have benefited from the scheme since it kicked off.

We have indicated several challenges within the mortgage industry. Unless bottlenecks like the high cost of funds and limited provision of longer duration loans are tackled, we doubt that Nigeria’s mortgage industry will pick up significantly over the near term.

Continuing revival by the PFAs

26th September, 2017

Continuing revival by the PFAs
                                                                                           
The assets under management (AUM) of the regulated Nigerian pension industry increased by 20.6% y/y in May to N6.73trn (US$22.0bn). This is a decent annual increase when we allow for the arrears in pension (and salary) payments to employees of state governments and public agencies. The FGN’s several initiatives to bolster state government finances including the refund of Paris and London Club overpayments have made an impact. It is clear, however, from reprimands delivered by the FGN that not all states have cleared the mountain of arrears.
 
Holdings of FGN paper amounted to 73.1% of AUM in May, compared with 67.9% one year earlier. Data from the DMO highlight the bid at auction from the PFAs for the long bonds, which they favour for matching purposes. We can see a sharp rise in positions in NTBs, to 16.7% of AUM from 8.5%.

We see this steep rise as the PFAs’ belated recognition that they had been missing out on the stop rates of more than 22% that the CBN was setting at the time at its primary auctions and open market operations (OMO).

PenCom’s latest data capture only the very start of the surge on the stock market, driven by new money from offshore investors. The share of domestic equities in AUM actually declined to 8.0% in May from 9.5% one year earlier.

Continuing revival by the PFAs - FBNQuest Research

Subsequent monthlies from PenCom will reflect this surge on the stock market since mid-May. We also witnessed last week the start of what might develop into a rally in the FGN debt market following a new CBN strategy on NTBs.

We welcome the monthly data releases from PenCom. We would also welcome independent industry analysis allowing investors to compare the performance of the pension funds.

On hold on a majority vote expected

25th September, 2017

On hold on a majority vote expected
                                                                                           
The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. In July it reached a split decision, with six members in favour of no change and two for easing. In the members’ personal statements, more than one member considered the case for tightening to attract offshore portfolio investors (Good Morning Nigeria, 21 September 2017). This week we again expect no change in the 14.00% policy rate on a majority vote.
 
We have seen one argument in circulation that the committee may be tempted to ease this week because of the decline in core inflation, from 18.1% y/y in December to 12.3% in August. It has some weight because monetary policy does influence core inflation.

The notional reference range for inflation of between 6% and 9%, however, seems on the horizon, and applies to the headline measure for food and non-food items combined. The rate for this measure has declined for seven months in succession with help from positive base effects. This decline has been unspectacular, amounting to less than 300bps in total, and is unlikely to gain momentum until next year in our view.

Among the other arguments for easing, we pick out the putative impact on growth and the government’s borrowing costs. The textbooks tell us that lower interest rates attract new borrowing and so provide a boost to growth. Yet in the Nigerian context the banks may not pass on the full benefit of any policy rate cut to their customers. Further, they lend on scale to a handful of sectors that tend to be capital, rather than labour intensive. Their loans are heavily concentrated on large companies.

The MPC’s exhortations over countless meetings have had minimal impact on the banks’ lending practices. This is unlikely to change for well-documented reasons. A far greater boost, as the committee has routinely argued, would come from labour and other structural reforms, which are the FGN’s and not its remit.

There is a little more merit in our view to the argument for easing for the sake of the government’s borrowing costs. Per the 2017 budget, the FGN’s debt service is projected at about 35% of its revenues. The outturn for the first few months indicated a ratio around 40%, and threatens to increase.

The borrowing costs are more likely to ease through offshore portfolio investment in local currency debt instruments through NAFEX. Last week was highly promising in this respect.

Q/q rebound in air passenger traffic

22nd September, 2017

Q/q rebound in air passenger traffic
                                                                                           
Drawing on data provided by the Federal Aviation Authority of Nigeria, the National Bureau of Statistics (NBS) has released its latest report on air passenger traffic. The report estimates total traffic in Q2 2017 at 3.0 million passengers, representing an increase of 21% q/q and a decline of -19% y/y. For most households, spending patterns have been adjusted to reflect the current economic realities. Although some signs of economic growth have emerged, purchasing power and consumer confidence remain subdued.
 
The narrative is not completely gloomy. The pickup recorded when compared with the previous quarter amounts to increased air ticket demand. According to the report from the NBS, 71% of total air passengers in Q2 were domestic travellers.

Domestic air traffic increased by 27% q/q in Q2 to 2.1 million passengers. Given that Lagos is the commercial hub of the country, there are no surprises that the MMA Lagos domestic airport accounted for the largest share (41%) of domestic passengers during the quarter under review. 

The Abuja domestic airport accounted for 28% of the total, and Port Harcourt 6.9%.

Q-q rebound in air passenger traffic - FBNQuest Research

As for international travel, air passenger traffic grew by 9% q/q but declined by -14% y/y.

There were averages of 60 passengers on each domestic flight in Q2 and 83 passengers per international flight.

We understand that the International Air Transport Association (IATA) has revised the fx rate on ticket sales geared towards flights departing from Nigeria. The rate was revised last month to N326/US$1 from the previous N305, the CBN’s official rate. This has resulted in a 7% surge in ticket fares on most international airlines.

Some cracks emerging in the group of eight

21st September, 2017

Some cracks emerging in the group of eight
                                                                                           
The personal statements of members of the monetary policy committee (MPC) following their meeting in late July do not have one unified message. This is to be expected since the committee was split on the policy rate of 14.00%: six of the eight present voted for no change and two for easing, with one specifying a 200bps cut. One member rehearsed the case for tightening. The statements, published ahead of the committee’s meeting next week, are restrained in their praise of the various fx windows.
 
The communique in July noted that the FGN deficit in H1 2017 had reached a provisional N2.51trn and so more than the projection for the full year. Since the committee correctly expects the FGN to be fiscally responsible, we struggle to see how some of its members could call for full implementation of the expansionary Economic Recovery and Growth Plan.

One member cited studies confirming that Nigeria and some other countries in sub-Saharan Africa had the potential to improve their tax revenue/GDP ratios by between 3% and 6%. We note that an increase of 6% in Nigeria’s case would still leave it well behind Ghana, Kenya and South Africa. 

Another referred to the “quantitative easing stance” adopted by the CBN (ie its financing of the FGN deficit). He said that since December the CBN’s claims on the FGN had risen twentyfold (to N814bn) while those of the commercial banks had grown by just 0.4% to N4.6trn.

Members had much to say on the pressures in the banking sector. Several commented on the growth in NPLs, with one noting that they are factored into banks’ pricing models and therefore limit the banks’ capacity to support economic recovery.

Another member railed against the excessive concentration in their assets, which he illustrated with some choice figures. Big players borrowing more than N1bn accounted for more than 81% of aggregate loan portfolios, and small enterprises borrowing N1m or less for just 1.3%. Firms best placed to ratchet up output and create jobs receive very low allocations of credit, and at high cost

For the “off-message” argument in the statements, we choose the theory of one member that Kenya presents the model for ensuring that interest rates and spreads do not destroy the productive base of an economy. In this case the legislature, encouraged by the president, passed a law capping spreads in the face of opposition from the Central Bank of Kenya, not to mention the banks themselves and the offshore portfolio investors. The cost base of the Nigerian banks and their NPLs could not support such legislation.

The CBN’s new confidence in fx policy

20th September, 2017

The CBN’s new confidence in fx policy
                                                                                           
Our chart captures exchange-rate movements over the past two years, marked initially by the fx scarcity triggered by the oil price slide in mid-2014. The differential between the rates (official and bureaux de change) initially narrowed with the liberalization of June 2016 that was not to be, but widened again until the CBN’s adoption of what we might loosely term multiple currency practices (MCP) in March. The potential game-changer has been the investors’ and exporters’ fx window (NAFEX). The local media no longer routinely quotes parallel rates from a well-known website.
 
The IMF’s Annual report on exchange arrangements and exchange restrictions for 2016 shows Nigeria among countries said to operate a stabilized arrangement with a monetary aggregate target. The footnotes add that it had a de facto exchange-rate anchor with the USD.

We have since moved on in the sense that the CBN operates MCP including NAFEX. 

The monetary authorities have a spring in their collective step. They can legitimately point to the upward trend in reserves despite the CBN’s supply to its fx windows, the rise in manufacturing PMIs and the contentment of retail with much improved access to fx for invisibles.

If we are looking for negatives, we single out the potential for abuse of MCP and anecdotal evidence that some investors will stay away because of them.

The CBN’s new confidence in fx policy - FBNQuest Research

Taking a pragmatic view, the CBN is under limited domestic pressure to change tack. Portfolio investors can argue that the adjustment has already happened because they cannot trade fx at the official rate of N306. 

Reserves holding up very well

19th September, 2017

Reserves holding up very well
                                                                                           
Gross official reserves increased by US$980m in August to US$31.8bn. Since the recent low at end-October there has been an accumulation of US$7.9bn. The more telling figure is the increase of US$1.5bn since end-March, when the CBN stepped up its fx interventions under its multiple currency practices (MCP). When we allow for the sharp fall in imports in the recession, the buffer is now comfortable. By way of warning, we should stress that the figures provided by the CBN are gross and mask the swap transactions it has entered into with banks.
 
The pick-up in oil production has been an obvious positive for accumulation. Officials are encouraging the view that it is back at, or close to the 2.0 mbpd level. Further, the FGN may well return to the Eurobond market this year. The heavily-oversubscribed Iraqi sovereign issue last month without US guarantees was a reminder of the strength of the market.

The CBN will also be boosted by the signals from the investors’ and exporters’ window (NAFEX). Turnover from its launch in late April through to 15 September totals US$11.2bn. If this market was to take off as a result, for example, of an offshore investor plunge into Nigeria’s local currency debt markets, we would be approaching the required critical mass and would have to revise our expectations of MCP. 

Given this cushion of reserves and the fact that sectors such as manufacturing are benefiting from the interventions, we no longer think that the CBN will be revising its fx policy this year (such as by the unification of rates). We almost have an open mind as to whether it will make changes in 2018.

Reserves holding up very well - FBNQuest Research

On the basis of the balance of payments for 2016, reserves at end-August provided 10.8 months’ merchandise import cover. When we add imports of services, the cover is still 8.1 months.

A welcome decline in m/m inflation

18th September, 2017

A welcome decline in m/m inflation
                                                                                           
The latest inflation report from the NBS shows headline inflation y/y at 16.0% in August: the seventh successive slowdown. Our expectation shared with wire service polls of analysts was an uptick to 16.3% y/y. The rise in the core measure rose from 12.2% to 12.3%. Meanwhile, food price inflation was more or less unchanged at 20.3% y/y; the rounding off masks a decline of 3 bps.
 
Food price inflation has remained stubbornly above 20%. We blame logistical issues due to the relatively harsh weather conditions (seasonal rains). Additionally, the flooding crisis in specific northern states has resulted in lower agricultural output, in turn affecting food prices.

Imported food prices rose marginally to 14.4% y/y from 14.1% recorded in July. There has been improved fx liquidity since the introduction of the NAFEX window in April. NAFEX turnover amounted to US$3.7bn in August according to FMDQ. 

The m/m increase in headline inflation slowed from 1.2% in July to 1.0%. This suggests a movement towards general price stability; the stable fx environment has been supportive. The trend is also consistent with the softening of household demand.

A welcome decline in m-m inflation - FBNQuest Research

We doubt that the monetary policy committee will be quick to make any decision on the policy rate until a steady downward m/m trend is observed. An unchanged stance is more likely. The committee is scheduled to meet next on 25 and 26 September.

For September, we project headline inflation at 16.3% y/y.

A stellar release on external debt

15th September, 2017

A stellar release on external debt
                                                                                           
The latest data for the FGN’s external debt obligations are again comforting. Total obligations at end-June amounted to US$15.05bn, equivalent to 3.8% of 2016 GDP. The increase over Q2 amounted to US$1.2bn, consisting of World Bank disbursements of US$800m, diaspora bond sales of US$300m and an additional US$100m from the Exim Bank of China. H2 2017 should see a further increase in exposure, given the FGN’s intention to return to the Eurobond market and, perhaps, the release of US$400m from the African Development Bank for deficit financing.
 
External debt service in Q2 2017 was US$60m. If we take the interest and fee payments of US$30m, we arrive at an annualised average interest rate of just 0.9%. This compares with 2.6% in Q1 but we note that there were no Eurobond coupon payments due in the latest quarter under review.

The optimal blend of the FGN’s domestic/external debt obligations is 60/40 according to the DMO’s medium-term strategy. The ratio for the FGN at end-June was 72/28. The improvement of four percentage points in the quarter (ie movement towards the optimal blend) came from the very small increase in the FGN’s domestic debt. 

The FGN’s fiscal strategy has the deficit largely covered by external financing with effect from next year. The possibility of further exchange-rate adjustments also suggests a step towards the optimal blend.

A stellar release on external debt - FBNQuest Research

Nearer term, the FGN has launched a debt restructuring initiative which would also favour the blend (Good Morning Nigeria, 15 August 2017). Subject to the go-ahead from the National Assembly, it would refinance domestic into external obligations up to a ceiling of US$3bn.  

Rare stability in domestic debt stock

14th September, 2017

Rare stability in domestic debt stock
                                                                                           
The FGN’s domestic debt stock amounted to N12.03trn (US$39.3bn) at end-June, equivalent to 11.9% of 2016 GDP. We view the modest increase of N60bn in Q2 in the context of the DMO’s slowdown in gross issuance at auction from N535bn over the previous quarter to N315bn. The domestic debt stock/GDP ratio is very healthy for a sovereign rated B+/B. It is a core element of the FGN/DMO narrative on roadshows. Investors will see, however, that the stock has nonetheless grown quickly and will be looking for assurances as to the quality of its utilisation.
 
To expand federal into public domestic debt, we have to add: the bank borrowings of state governments, which the DMO estimated at N2.96trn at end-December, their outstanding bonds, the bonds issued by AMCON, and the debts of the NNPC and other public agencies.

There is also the grey area of FGN debts to contractors and other private- sector players incurred by the previous administration and unearthed by the finance ministry in December. The total was initially estimated at N2.2trn although we have seen figures up to N3.4trn. These claims are to be verified and then securitized. Their inclusion would push up the public domestic debt stock to around 25% of 2016 GDP.

This is the worst-case scenario. In line with established practice, it excludes the CBN’s many credit lines and the FGN’s contingents such as guarantees.

Rare stability in domestic debt stock - FBNQuest Research

The authorities will be disappointed by the take-up of the FGN’s savings bonds for the retail segment. The DMO raised less than N3bn from these sales in Q2 but will be anticipating a far better response to its maiden sukuk (Islamic bond), for which it has held a roadshow across the country.

Aquaculture in need of a leg-up

13th September, 2017

Aquaculture in need of a leg-up
                                                                                           
The FGN has rolled out several reforms for the agriculture sector over the past 24 months, some of which have been geared towards the fisheries industry. There has been a pick-up in local fish supply; the FGN said in Q2 2017 that production was 71% higher at 1.2 million metric tons (mmt). Nigeria’s annual fish demand is estimated at 3.3mmt, only 36% of which is supplied domestically. In 2015 the fish import bill was US$700m.
 
The FGN has been steadily reducing fish importation quotas and may now halt them in the name of backward integration. The annual fish import baseline set in 2015 was 500,000mt.

The improved production figures reported by the federal ministry of agriculture and rural development do not sit comfortably with the recent output figures released by the NBS.

The latest GDP figures (Q2 2017) show that fisheries accounted for just 2% of total agriculture GDP and contracted by -2.7% y/y. We suspect that poor access to finance continues to constrain the fish farmers, resulting in difficulty in boosting output.

Aquaculture in need of a leg-up - FBNQuest Research

The high cost of fish feed has been cited as a core reason for low aquaculture yields. We gather that fish feed accounts for c.75% of the total cost of production. Perhaps the reforms within the fertiliser industry will assist with pulling fish feed prices downwards as most farmers attribute the high cost of fish feeds to fertiliser costs.

To encourage increased local fish production, the FGN has announced plans to train 500 youths in aquaculture next year. Although this is commendable, the segment would also benefit largely from increased financial intervention vehicles. The CBN has set up a few, however, these have had minimal effect on the fisheries segment.

Limited upside for NNPC finances for now

12th September, 2017

Limited upside for NNPC finances for now
                                                                                           
In June the NNPC’s operating deficit picked up slightly from N3.5bn the previous month to N5.2bn (US$17m). Profits were generated by production (N8.6bn) and refineries (N3.3bn) before deductions for central costs and ventures. Products marketing and retail were again lossmaking. The corporation’s monthly Financial and Operations Report for June notes a pick-up in crude output (including condensates) in May to 1.88 mbpd from 1.79 mbpd the previous month. OPEC data for end-August indicates output of about 2.0 mbpd on the same combined basis.
 
The corporation highlights the improvement in the availability of petroleum products, if not the profitability of their distribution. In June 860 million litres of premium motor spirit were imported, 141 million litres refined domestically, and 1.08 billion litres distributed and sold by the Pipelines and Products Marketing Company (PPMC).

PPMC sales have averaged 33,000 litres per day over the past year.

The report notes 77 pipeline breaks due to vandalism in June. These were mostly in the delta but include 13 along the Kaduna-Zaria line.

The corporation’s operating deficit has declined to N48bn in H1 2017 from N92bn in the year-earlier period. Without a legal framework for the industry and radical change at the refineries, further upside is limited. In the six-month period three Group units reported reasonable operating surpluses: the Nigerian Petroleum Development Company (N37bn), the Port Harcourt Refining Company (N31bn) and the Nigerian Gas Processing and Transportation Company (N28bn).

Limited upside for NNPC finances for now - FBNQuest Research

The report notes that power plants generated 2,969 megawatts in June from gas supplied by the corporation, equivalent to 84% of total generation.

Towards the DMO’s 60/40 FGN debt target

11th September, 2017

Towards the DMO’s 60/40 FGN debt target
                                                                                           
The DMO’s medium-term strategy for 2016-19 has a target for a 60/40 mix for the FGN’s domestic and external debt obligations. Over the four years through to December 2016, the ratio has moved ten percentage points towards the target, to 76/24. This move is due more to naira exchange-rate depreciation than changes in the currency of issuance. Our chart does not capture the DMO’s latest data release for end-June 2017, which is partial and includes the naira debt of state governments in the domestic total.
 
H1 2017 saw the return of the FGN to the Eurobond market and the issuance of a diaspora bond to raise a further US$300m. This would have pushed the mix of the FGN’s obligations closer towards the 60/40 target set by the DMO.

In May the director-general of the budget office, Ban Akabueze, said that the FGN was looking to borrow US$3.5bn externally for financing of the 2017 budget deficit. This was a restatement of the N1.07trn projection set in the approved budget, and tacit recognition of the fact that the issuance in H1 was allocated towards financing of the 2016 deficit.

Akabueze added that the US$3.5bn would consist of US$2.0bn on concessionary terms and US$1.5bn from the commercial market including Eurobonds. Talks with the World Bank on concessionary lending appear to have faltered although a disbursement of US$400m from the African Development Bank may be forthcoming.

Towards the DMO’s 60-40 FGN debt target - FBNQuest Research

The FGN gave a further boost to the attainment of the target with its proposals for a debt restructuring (Good Morning Nigeria, 15 August 2017).

Flying at a low altitude

8th September, 2017

Flying at a low altitude
                                                                                           
Today we turn our attention to Nigeria’s aviation sector. The industry has struggled because its performance is strongly tied to consumers’ confidence, which remains relatively soft. There has been a considerable surge in domestic airline fares, which appear as a luxury expense for most households that have restructured spending patterns to reflect the current economic realities. Business travel continues to stick out as the primary reason for travel across Nigeria as opposed to leisure.
 
Based on our channel checks, a few international airlines have experienced reduced patronage on their premium classes from Nigerian nationals. Increased traffic for economy tickets is the new trend.

In March there were reports of conversations around Ethiopian Airlines acquiring Nigeria’s Arik Air. These reports have been denied by the Asset Management Corporation of Nigeria (AMCON).

The airline industry is heavily dependent on imports. Industry sources suggest an annual import bill of US$2bn for technical expertise, aircraft maintenance, spare parts and aviation fuel.

Flying at a low altitude - FBNQuest Research

The average external maintenance check is estimated to cost US$1m per aircraft. Due to these and other financial strains, we understand that for the eight larger local airlines, only 48 aircraft are operational out of a combined total fleet of 78.

The airlines could reduce the import bill if the maintenance checks were carried out locally by newly trained technicians. As is often the case, the challenge would be to make the investment so as to enjoy the subsequent saving. The recent national accounts released by the NBS show that air transport grew by just 0.1% y/y in Q2 2017.

In search of sectoral trends

7th September, 2017

In search of sectoral trends
                                                                                           
From the national accounts for Q2 2017 we highlight the five best performing sectors. We cover only those sectors accounting for at least 1% of GDP at constant basic prices, and exclude other services. The data show agriculture expanding by 3.0% y/y and industry by 1.5% while services contracted by -0.9%. Industry returned to positive growth because of crude petroleum and natural gas, which expanded by 1.6% y/y after six quarters’ contraction. The performance of agriculture was the weakest for more than two years, and a disappointment in view of the reforms.
 
There are no steady performers in the non-oil economy (other than agriculture), indicating that there is no momentum for a strong recovery. Transportation and storage, the strongest performer y/y in Q1, contracted. Its place has been taken by financial and insurance, which posted very modest growth in Q1. The information and communications sector contracted. We cannot therefore identify sectors set to deliver a recovery.

We talk of a tentative recovery because trade, the second largest sector of the economy, again contracted, as it has every quarter since Q1 2016. It is the most reliable measure of demand across all income levels.

Manufacturing was boosted by the 2.7% y/y growth of its largest segment (food, beverages and tobacco). The segment has benefited more than most from the greater availability of fx under the CBN’s multiple currency practices. We do not see any dramatic improvement in demand: rather, the sector has been able to restore output with its access to more, and more competitively priced imported inputs.

In search of sectoral trends - FBNQuest Research

For the challenge to explain public administration’s first growth for more than two years, we suspect that the headcount has been stable and productivity has marginally improved.

Finally, an end to the recession

6th September, 2017

Finally, an end to the recession
                                                                                           
The NBS has released the national accounts for Q2 2017 to show an end to the recession with growth of 0.6% y/y (after a downward revision to -0.9% for the previous quarter). Our expectation was GDP growth of 1.6% y/y in Q2 on the basis of some recovery in both the oil and the non-oil economies. That for oil did materialize but the data for the non-oil economy gave mixed signals. These include a contraction in telecommunications and information, and growth in public administration, which were both firsts for at least two years.
 
The GDP data for Q1 was adjusted because oil output has been revised downwards from 1.83 mbpd to 1.69 mbpd. Just three months ago, the NBS lowered its output figures for the four quarters of 2016. Any criticism should be levelled not at the bureau but at the failure of the authorities to produce a single trusted data series for oil output. We do not think this is too demanding an ask.

Oil’s share of real GDP amounted to 8.9% in Q2 2017 and is now only the fifth largest in the economy: it is topped in descending order by agriculture, trade, information and communications, and manufacturing. Through its linkages across other sectors, however, the indirect oil economy may be as large as 40% of GDP.

 The expenditure-based GDP series only runs to Q3 2016. Listed company reports and anecdotal evidence, however, point to still soft household demand.

Finally, an end to the recession - FBNQuest Research

Turning to the Q3 2017 data, we see positive base effects: Q3 2016 was the low point in the recession of five quarters and saw particularly low oil output of 1.61 mbpd, at least according to the latest revised figures. We are looking for GDP growth of at least 1.3% y/y in the current quarter.

PMI reading no 53: a sixth above water

5th September, 2017

PMI reading no 53: a sixth above water
                                                                                           
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a healthy improvement from 56.3 in July to 58.5. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment in all economies, and have the proven capacity to move financial markets in developed economies. To reinforce the point, the latest national accounts cover the first quarter (January-March) and the latest PMI the second month of the third.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which arise when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Four of the five sub-indices picked up in August and all were in positive territory. The headline reading has been above 50 since March.

Among the sub-indices, we find employment above water for the third successive month, and a strong reading of 58 for new orders.  The adoption of unfashionable multiple currency practices by the CBN has transformed fx availability, squeezed the parallel market premium and boosted imports of manufacturing inputs. Additionally there are tentative signs of an improvement in both confidence and consumption.

The economy is finally emerging from recession. Manufacturing posted positive growth of 1.4% y/y in Q1, the first since Q3 2015. We see a recovery in GDP growth to 1.6% y/y in Q2 2017.

The long holiday weekend allows us to place Nigeria in the context of manufacturing PMI index readings for August elsewhere: 50.4 for Brazil, 51.2 for India, 51.6 and 51.7 for China (Caixin and official), 57.4 for the Eurozone and 58.8 for the US (ISM).

A recovery in capital imports in Q2

31st August, 2017

A recovery in capital imports in Q2
                                                                                           
The headline figure in the NBS report on Nigerian Capital Importation for Q2 2017 is an increase from US$910m to US$1.79bn. The trend over several quarters, as with the CBN balance-of-payments series through to Q1 (Good Morning Nigeria, 16 August 2017), is of stable direct investment alongside pronounced swings for portfolio and other investments. Portfolio imports more than doubled in Q2 to US$770m in response to the launch of the investors’ and exporters’ fx window (NAFEX). Weekly data from FMDQ confirm the pick-up in turnover at the window.
 
Equities provided US$610m of the portfolio imports, money market instruments US$100m and bonds US$60m. Turnover on NAFEX has been led by dedicated Africa and frontier equity investors.

Predictably, Lagos State accounted for 97% of all capital imports in Q2. It hosts the NSE, the headquarters of DMBs and the principal manufacturing plants in Nigeria.

A recovery in capital imports in Q2 - FBNQuest Research

We expect that the Q3 report on capital importation will reflect similar trends: stable if uninspiring direct investment, a surge in portfolio investment (led by equities with some fixed-income support) and healthy other investment (driven by imports of loan capital).

The report draws on CBN data derived from software capturing banking transactions from all registered financial institutions in Nigeria. Additionally, it draws on customs declarations for imports of physical capital.

The uphill battle for IGR collection  

30th August, 2017

The uphill battle for IGR collection
                                                                                           
Our look today at state governments’ internally generated revenue (IGR) shows a decline in the aggregate collection from N801bn to N756bn in 2015. Collection as a proportion of total revenue improved but perhaps the more important trend is that a minority of states is moving away from the rest. Both Ogun and Enugu joined Lagos in achieving a ratio for IGR/total revenue above 50% in 2015. One other state (Rivers) managed 40%, three 30% (Kano, Oyo and Abia) and five 20%.
 
We are working with the data provided in the CBN annual reports, and sourced from the states themselves as well as the office of accountant-general of the federation. Although not the most recent data, we stick with the CBN series for the sake of historical comparisons

States’ own figures quoted in the local media may not always be consistent with the CBN series. Enugu is reporting IGR of N12.4bn in H1 2017, compared with a statutory allocation for the same period of N13.4bn and IGR of N14bn for 2016 (12 months).

The narrative from the Enugu state government is that it has been rewarded for prudent management and cooperation between its various collection agencies. Others have chosen different routes to generate wealth and employment. Kaduna is privatizing state-owned companies, selling state housing and borrowing from the World Bank, having already overhauled its revenue service. An alternative is borrowing from government bodies, an example being a N4bn MoU signed by Ebonyi state government and the Bank of Industry.

States have received a one-off boost from the Paris/London club refunds for overpayments dating back to 2005. A first distribution of N523bn was made in December, conditional upon an undertaking by the states to allocate 50% of receipts for salaries and pensions, and a second of N244bn has followed. Delta State has pledged to disburse half its latest refund accordingly, with the balance for priority projects and the payment of contractors. Some distributions by states have attracted negative comments.

Babatunde Fowler, chairman of the Federal Inland Revenue Service and of the Joint Tax Board, has called upon state governments to devolve more authority to their revenue agencies. We endorse his call, which requires state governors to take a broader view of their obligations.

While a minority of states is ahead of the field in racing terms, more than one third (13) collected less than 10% of total revenue in 2015. These are not all states one would regard as resource-less and impoverished.

Uptick in food price inflation
 
29th August, 2017

Uptick in food price inflation
                                                                                           
The latest inflation report from the NBS shows headline inflation y/y at 16.1% in July - the sixth successive slowdown. The rounding off masks a decrease of just 5bps when compared with the previous month. Our expectation shared with wire service polls of analysts was a marginal uptick to 16.2% y/y. The growth in the core measure slowed from 12.5% to 12.2%, its lowest level since March 2016. In contrast, food price inflation accelerated from 19.9% to 20.3%.  The bureau’s commentary notes higher prices for all staples.
 
Food inflation is now above 20%. We assume this is largely driven by logistical constraints and pest infestations. Anecdotal evidence also points towards an increased preference of farmers to export their produce as opposed to supply domestically. Additionally, seasonal effects are probably contributing to the steady increase; as the harvest (November) nears, there could be a considerable slowdown in the sub-index.

The fx interventions by the CBN have had a positive impact on imported food inflation. Imported food prices slowed to 14.1% y/y from 14.2% recorded in June. Meanwhile, NAFEX turnover amounted to US$2.3bn in July according to FMDQ.

The m/m increase in headline inflation has now slowed from 1.6% in June to 1.2%. This trend is consistent with the softening of household demand. However, m/m inflation remains above 1.0%, indicating traces of pressure on prices.

Uptick in food price inflation - FBNQuest Research

The latest communique by the monetary policy committee (MPC) noted that the committee is pleased with the downward trend in inflation. However, it remains concerned over loosening as this could exacerbate inflationary pressures. The committee is scheduled to meet next on the 25 and 26 September.

We see an uptick in headline inflation to 16.3% y/y in August.

Whither the oil industry?
 
28th August, 2017

Whither the oil industry?
                                                                                           
While the core agenda of the FGN is to diversify the economy away from oil, in the short term it depends upon the industry for the generation of wealth and taxes. The outlook has improved with the authorities’ more conciliatory approach in the Niger Delta. The incidence of sabotage has declined, but not ended, and the authorities will now see what they have to deliver in addition to the restoration of allowances to the said militants. Output less condensates is said officially to be back near 1.8 mbpd.
 
In July OPEC accepted a reported offer by the FGN to cap Nigerian production at 1.8 mbpd (excluding condensates) in line with its policy of restraint. This is consistent with the budget assumption of 2.3 mbpd in 2013, the balance consisting of condensates.

There are some output gains to report. Last week Shell announced the start of gas production from the second phase of its Gbaran-Ubie project in the delta, expected to deliver a peak of 190,000 b/d oil equivalent in 2019. Next year should bring the beginning of production from Total’s offshore Egina field with 200,000 b/d crude. We should add ExxonMobil’s discovery in its Owowo field and the talk of an addition of one billion barrels to crude reserves.

Greater investment should come from the much-awaited passage of the industry bill. The Senate has passed the Petroleum Industry Governance Bill, which is part of a larger overhaul.

While we await action from the House of Representatives, we note that the FGN has released a draft national petroleum fiscal policy. We understand from the local media that the petroleum profits tax will be dropped, and operators would be liable under the draft to a Nigerian hydrocarbons tax and the companies’ income tax. This would make a combined ceiling of 70%, compared with the previous 85%, in addition to a levy on capital gains.

In his two years as minister of state for petroleum, Ibe Kachikwu has been active: the NNPC’s costs have been reduced by an estimated 30%, the FGN’s fuel subsidy costs have been slashed, the supply of products has dramatically improved, an overhaul of the joint ventures is underway, and the corporation is in the habit of sharing information.

Finally we have to mention crude prices. US oil inventories have fallen for eight successive weeks and the approval of conventional projects such Kaikias in the Gulf of Mexico on brownfield sites is picking up. More telling perhaps and supportive of the FGN’s price conservatism are reports that shale producers are hedging WTI contracts for 2018 at around the US$50/b mark.

An uncomfortable auction for the DMO
 
25th August, 2017

An uncomfortable auction for the DMO
                                                                                           
The DMO’s review of Wednesday’s monthly auction of FGN bonds is likely to focus on the lowest total bid since November and the increase in marginal rates on the level of the previous month. When it drills down into the results, it may ask why the bid for the long bond (Apr ’37) slumped to a record low of N33bn and whether the PFAs, the core players in the auctions, have developed fatigue. The late FAAC payout was probably a contributory factor. For the record, the offer at the auction was N135bn and the total bid N64bn, while sales amounted to N56bn (US$180m).
 
The DMO’s review will likely also dwell on its position of relative strength, given its front-loading of issuance. It has now raised N1.02trn in eight months towards the target of N1.25trn for domestic financing of the 2017 budget deficit. The FGN bonds are the principal element in the financing although the DMO can look to the retail savings bonds and the planned sukuk for modest contributions.

Yet it cannot rest on its laurels because the deficit may overshoot in view of poor non-oil revenue collection and because there are uncertainties surrounding the attainment of the target of N1.07trn (US$3.5bn at the budget rate of N305) for external financing of the deficit.

An uncomfortable auction for the DMO - FBNQuest Research

The marginal rates were the highest since January. In part, this reflects the poor total bid. Once the FGN’s debt restructuring proposal is approved and launched, we hope to see a narrowing of yields on the FGN’s naira-denominated paper, starting with the NTBs.

The provisional issuance calendar for Q3 2017 has the same three bonds on offer in September.

A disappointing FAAC payout
 
24th August, 2017

A disappointing FAAC payout
                                                                                           
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government retreated in August (from July revenues) to N468bn (US$1.53bn) from N652bn. The payout in July, the highest for 12 months, now seems in the distant past, and the high hopes of a turnaround in non-oil revenue collection have been deflated. We have often noted how the FGN is pinning its plans for capital spending and social interventions on such a turnaround. The debt service burden also threatens to soar out of control.
 
The commentary from the federal finance ministry noted a sharp fall in the take from companies’ income tax (CIT), citing the expiry of the deadline for filing tax returns. This would suggest that the one-off seasonal boost lasted just one month (the surge in collection announced in June revenues), rather than the usual two (in July and August revenues in 2016).

The FGN’s payout was N193bn. Even when we adjust for its sizeable independent revenue, we are well short of the projection in the 2017 budget of a monthly average of N429bn from all sources.

The figures for mineral revenue tell a marginally better story. The commentary observed that the average crude price had inched upwards from US$50.3/b in June to US$51.1/b, and crude export volumes for the account of the federation by 1.2 million barrels.

The payout to state governments, independent of the 13% bonus of N32bn for oil-producing states, amounted to N131bn.

A disappointing FAAC payout - FBNQuest Research

We have taken the latest payout from the local media. The accountant-general’s office provides the revenue numbers up to December 2016, distributed in January.

Imperative to boost non-oil revenue
 
23rd August, 2017

Imperative to boost non-oil revenue
                                                                                           
In the 12 months through to May 2017, gross flows into the federation account amounted to N3.01trn from oil revenue and N3.17trn from non-oil revenue. Over the period, oil revenue was the higher of the two in six months, and non-oil revenue the other six. The monthly averages of N251bn (oil) and N264bn (non-oil) compare poorly with what the CBN commentary terms the monthly budgets of N450bn and N445bn respectively. Taken together, this gives a full-year projection of N10.74trn for federally collectible receipts.
 
These are not to be confused with FGN revenue collection, which the 2017 proposals from the federal budget and national planning ministry set at N4.94trn (N1.99trn from oil and N2.95trn from non-oil).

We have some concerns with the CBN’s monthly budget figure for non-oil collection because it includes N150bn for VAT. Both official briefings and our conversations indicate a determination not to raise the standard 5% rate for the tax with the possible exception of luxury goods.  Monthly collection of the tax is running at +/-N80bn.

We should wait to see the size of the seasonal boost to companies’ income tax (CIT) in July and August. The subdued state of household demand is not encouraging. However, we recall that the FAAC payout in July (from June revenue) was the highest for 12 months, and that the accountant-general singled out robust CIT collection (Good Morning Nigeria, 27 July 2017).

Imperative to boost non-oil revenue - FBNQuest Research

The FGN is not pinning its hopes on an oil price recovery anytime soon. Non-oil revenue collection therefore becomes critical for the delivery of the FGN’s capital programmes, its ability to make its promised social interventions, the containment of the mounting debt service burden and the broader agenda of diversification of the economy away from oil.

Footsteps of Nigeria’s e-commerce
 
22nd August, 2017

Footsteps of Nigeria’s e-commerce
                                                                                           
The growing appetite for mobile data usage as well as increased network coverage has increased the potential of Nigeria’s e-commerce market. Based on data from the Nigerian Communications Commission (NCC), mobile network coverage is currently estimated at 77% on the basis of 185 million as the country’s population. However, internet data penetration via GSM is lower, at 50%. The potential impact of a thriving e-commerce market is improved trade activity as it provides a cost-effective method of connecting producers and merchants directly to customers.
 
Industry sources suggest Nigeria’s e-commerce market value could hit US$50bn over the next decade. A recent EIU report valued Jumia (a leading online retail platform) at US$1bn in February. The company operates in ten other African countries.

Meanwhile, Konga, its major competitor, has expanded operations by launching a groceries segment. This is similar to models established in the UK such as Sainsbury’s and Tesco. However, logistics challenges across the country could threaten the shopping experience as delivery of products may be delayed.

According to Konga, the e-company has a customer pool of 750,000. However, there are only 200,000 active customers. The number of active customers fluctuates with seasonalities. We note that the rural population accounts for only 10% of its total active customers. This could be directly correlated to low internet penetration in rural areas as well as modest income levels.

Footsteps of Nigeria’s e-commerce - FBNQuest Research

The e-commerce industry has also witnessed reduced patronage due to increased pressure on household pockets in the current downturn.

We expect a token return to positive territory for GDP as a whole this year. Our GDP growth projection for 2017 is 1.6% y/y. Nevertheless, for e-commerce to attain its full potential, infrastructural issues as well as e-fraud challenges need to be tackled.

Plentiful activity in the power industry
 
21st August, 2017

Plentiful activity in the power industry
                                                                                           
While the separate elements in the conventional energy chain like to blame each other for the many shortcomings of the power industry, the Transmission Company of Nigeria (TCN) has secured close to US$2bn from the donor community for the rehabilitation and expansion of the national grid. Its managing director told a meeting of stakeholders in Kano last week that the funded works could raise the system’s total capacity to 20,000 megawatts (MW) over three years.

In June the Niger Delta Power Holding Company had said that eight of its ten national integrated power projects (NIPPs) under construction had been completed, and would together supply 2,000 MW to the national grid. This is mostly restored, rather than new capacity. The TCN’s programme is to improve the transmission links between the ten gas-fired plants in the delta.

In March the federal minister of power, works and housing was present at the unveiling of a new 115 MW turbine by Transcorp Power in Delta State. The owner said that the turbine would lift capacity at its Ughelli plant to 620 MW and that it had a target of 815 MW for end-year.

We have to add a general health warning about expansion plans for the industry. From time to time, the local media reports that little known companies are to invest an improbable number of dollars for an implausible boost to generation capacity worldwide.

At best, we can say that the industry is taking two steps forward for each step backwards. One particular challenge is intra-industry indebtedness including: the debts of government agencies to the distribution companies (DISCOs); the debts of the DISCOs and service providers to the Transitional Electricity Market; and debts predating the privatization of generation and distribution, some covered by the CBN’s intervention fund for legacy arrears.

One route actively being pursued is a mix of clean energy (Good Morning Nigeria, 09 August 2017). The FGN has set a target for renewables to provide 16% of total energy generated by 2030, with contributions from hydro and solar of 7.1% and 5.9% respectively. General Electric alone plans to establish an additional 2,000 MW in hydro capacity.

Another route open to the authorities is unclean power. Bart Nnaji, former power minister and founder/chairman of Geometric, has estimated that the coal deposits in the Anambra basin could sustain generation of more than 4,300 MW per year for 20 years. The development of the deposits would not qualify for funding from the World Bank and many multilaterals.

Local refining, the obvious solution
 
18th August, 2017

Local refining, the obvious solution
                                                                                           
The National Bureau of Statistics (NBS) has released its latest report in its premium motor spirit (PMS) price watch series. The report shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In June it averaged N150.3/litre (l) for the 36 states of the federation and the FCT, and so above the fixed upper price limit for the retail pump price of N145/l set by the authorities.
 
The average price of gasoline in June represented a 1.2% y/y increase. Yobe State had the highest price for PMS at N168/l while Abuja, Edo, Ogun, and Osun each recorded the lowest with N145/l.

The June inflation report shows that for the core sub-index, the highest price increases y/y were recorded in liquid fuels (PMS inclusive).

According to the NBS, last year 18.8bn litres of petroleum estimated at N2.01trn were imported.

Furthermore, based on CBN data, the oil sector accounted for 34% of fx utilisation in 2016; we assume refined petroleum products contributed heavily to imports recorded in the oil sector.

Local refining, the obvious solution - FBNQuest Research

Local refining is the solution to reliable and competitively-priced petroleum supply. However, Nigeria’s current refining capacity utilisation is c.23%.

The FGN has provided about 30 refinery licenses to private investors. However, access to finance to develop the refineries is a major challenge. Based on industry sources, the cost of constructing a 20,000 bpd modular refinery is estimated at US$250m

More work for the DMO at auction
 
17th August, 2017

More work for the DMO at auction
                                                                                           
The DMO looks to raise N135bn from next week’s monthly auction of FGN bonds, and is offering the same five, ten, and 20-year benchmarks as in the past four months. Its record has been exemplary this year, having raised N960bn in seven months towards the target for net domestic financing in the 2017 budget of N1.25trn. We might think that the DMO will therefore halt its auctions towards the end of the year. Far from it, it is preparing itself for some bond maturities and has to keep an eye on progress with external financing of the projected deficit of N2.36trn.
 
We understand that the Eurobond sales of US$1.5bn in Q1 are considered financing of the 2016 budget deficit. The treatment of the US$300m diaspora bond sales is unclear so it may be that external financing of the 2017 deficit is currently nil.

The total bid has trended downwards this year. July’s of N129bn was less than the offer of N135bn. The shortfall was limited to the Jul ‘21s. for which the DMO offered .N35bn and the bid was just N9bn.

It will be watching out for the broader market impact of the FGN’s proposal to refinance maturing NTBs with USD-denominated instruments of up to three years’ tenor. If approved, the restructuring would be subject to a ceiling of US$3bn. It would also have a fairly rapid impact, given the tenor of the debt instruments being refinanced (NTBs). Taken in isolation, the tightening of the supply of NGN-denominated paper should bring downward pressure on yields. The stock of NTBs at end-March was the equivalent of US$11.8bn.

More work for the DMO at auction - FBNQuest Research

The DMO will be hoping, having increased its rates, to step up its sales of the two and three-year FGN savings bonds. Its allotment in the August issue was just N740m, and the average successful application N960, 000.

Investment flows in need of a boost
 
16th August, 2017

Investment flows in need of a boost
                                                                                           
In today’s chart we highlight the investment flows on the balance of payments. These are gross flows (ie those in the reporting economy before investment by Nigerian residents offshore). Most striking is the strength of portfolio flows in H1 2013, when Nigeria was still basking in the glow of its inclusion in the JP Morgan government bond indices (since withdrawn). These have fallen dramatically since the slide in the oil price in mid-2014 and the resulting fx scarcity (since cured).
 
Direct investment picked up from US$3.1bn to US$4.5bn in 2016, equivalent to 4.4% of GDP. If Nigeria is to rise up the league table of world economies, it will have to do much better. China, which is not the most appropriate measure, regularly achieved double-digit ratios in its surge to become the second largest global economy.

The short-term prospects are better for the two other components. The Eurobond issuance, we assume, explains the improvement in other investment in Q1 2017, and is likely to be repeated. The launch of the NAFEX window by the CBN in late April augurs well for portfolio investment.
 
When we adjust for the assets on the capital account (Nigerian investment offshore) in Q1, all three components are still positive on a net basis: direct investment of US$530m, portfolio investment of US$440m and other investment of US$740m.

Investment flows in need of a boost - FBNQuest Research

We have focused on the investment components because they tell a story. For the record, the broader picture in Q1 2017 shows a current-account surplus of US$2.91bn, a capital/financial-account deficit including the movement in reserves of –US$1.28bn, and net errors and omissions (negative) of –US$1.63bn. The last item is subject to above-average revision.

A welcome initiative on debt restructuring
 
15th August, 2017

A welcome initiative on debt restructuring
                                                                                           
Last week the FGN announced plans for a restructuring of its debt obligations and revealed that the Federal Executive Council had approved the Medium Term Expenditure Framework 2018-2020. The market and the local media was more interested in the restructuring although both will have to be approved by the National Assembly. The proposal is to refinance maturing NTBs with USD-denominated bonds up to three years’ tenor within an apparent ceiling of US$3bn.
 
The weak point of the FGN’s debt burden has long been its service rather than its stock. In May it spent N91bn on debt service, which represented 49% of its retained revenue. The ratio is running ahead of (ie worse than) official projections. The Economic Recovery & Growth Plan 2017-2020 has an annual average of 41%.

The rationale for the restructuring is to lower the servicing cost, and extend the average maturity of the FGN’s debt obligations. The thinking cannot be faulted: the federal finance minister, Kemi Adeosun, pointed out in an interview on Wednesday that the FGN had borrowed externally this year at around 7% and was paying up to 18% on NTBs.

The proposal is in line with the DMO’s medium-term debt strategy to achieve a 60/40 split for the FGN’s domestic and external obligations. Its own data show a 74/26 split in March. If we make an adjustment for the US$3bn ceiling, we get nearer the target, at 68/32.  The FGN may well return to the Eurobond market in H2, which would improve the ratio. We are converting at N306 since we assume the FGN is servicing its debt at that rate. 

Among other advantages of the restructuring, we highlight: the accumulation of reserves; the expected easing of pressure on yields for NTBs; its relatively quick impact, given the short-term tenor of NTBs; and peace of mind for the DMO.

These can only be enjoyed once the assembly gives its go-ahead. It is currently on holiday but the FGN will have to flesh out its marketing and distribution plans for the new USD-denominated bonds.

The one said positive from the exercise that we consider overstated is the impact on lending to the real economy. The ceiling of US$3bn is not a game-changer in the context of the stock of banks’ loans to the private sector of N16.3trn (US$53.5bn) at end-May. We are also wary of official policies intended to encourage such lending, having lost count of the number of times the calls of the monetary policy committee in this respect have gone unheeded in the past two years.

Egypt 1 Nigeria 1 (before extra time)
 
14th August, 2017

Egypt 1 Nigeria 1 (before extra time)
                                                                                           
We recall the drawing of parallels with Nigeria in November when Egypt agreed an extended fund facility worth the equivalent of US$12bn with the IMF. Within what the Fund generously termed a “homegrown” programme, the Egyptian authorities have introduced a more flexible exchange-rate regime, launched VAT, raised the benchmark interest rate by seven percentage points, and twice made reductions to energy subsidies. The FGN will not borrow from the Fund due to the attached conditionality, prompting the question of whether it has missed a trick.
 
In certain respects, the Egyptian macro picture is worse than the Nigerian. In July 2016-March 2017 general government subsidies consumed EGP77bn, equivalent to 11% of total spending. This was after the first round of cuts: after the second, more recent round, the retail cost of gasoline/petrol is still only between 20 and 30 US cents/litre. The greater burden of subsidies in Egypt (and the new fx regime) explain why inflation has surged above 30% y/y although by most accounts it is close to its peak in the current cycle.

Egypt’s public finances are in worse shape: for the 2016/17 fiscal year (July-June), the authorities project a deficit equivalent to 10.8% of GDP. Gross government indebtedness is far higher, at 94.7% of GDP in March 2017.

Since signing the IMF programme, Egypt’s gross official reserves have increased by US$12bn and the government has tapped the Eurobond market.  The offshore portfolio community has returned to local financial markets. 

The FGN can claim the same achievements without borrowing from the IMF.

Egypt 1 Nigeria 1 (before extra time) - FBNQuest Research

We cannot judge the long-term success of the programme in Egypt until we see the size of FDI inflows, the boost to spending on the social safety net as a result of fiscal savings and the response from domestic investment. For now, the jury has to stay out. 

Harnessing Nigeria’s creative industries
 
11th August, 2017

Harnessing Nigeria’s creative industries
                                                                                           
Nigeria’s creative industries (arts and entertainment) are slowly breaking new ground. New trends have led us to consider it potentially as a sound private consumption indicator. According to the national accounts for Q1 2017, the entertainment industry grew by 12% y/y. However, we emphasize that this is from a very low base as the sector accounts for just 0.3% of total GDP. Nollywood is said to be the second largest employer in Nigeria after agriculture.
 
The Nigerian film industry (Nollywood) is recognised as the second largest globally and has been identified as a priority sector in the FGN’s Economic Recovery and Growth Plan 2017-2020. The industry is projected to generate US$1bn from export revenue over the next three years.

The success of the industry hinges partly on the development of cinemas and multiple distribution platforms.

We understand that the industry produces 50 films per week. Given the high frequency of production, the quality and content of most of these movies are variable. However, from a trend perspective, there has been increased demand at cinemas for local films which take after global standards. 

In 2015 one such movie grossed over N95m from cinema ticket sales. However, last year another movie, which captured the culture of Nigerian weddings, broke that record by grossing over N450m.

The FGN has granted most segments within the creative industries including Nollywood conditional access to pioneer status incentives (Good Morning Nigeria, 10 August 2017). These include holidays from the payment of companies’ income taxes as well as withholding tax on dividends from pioneer profits for an initial period of three years. This duration could be extended by two additional years. 

As with most sectors across the economy, poor access to finance poses as an obstacle to sustained growth across the film industry’s value chain. The federal ministry of information and culture recently created a US$1m venture capital fund to assist with better access to finance for stakeholders within the industry.

The Bank of Industry has launched the N1bn (US$3.3m at the official rate) Nollyfund to support film makers.

Generally, the film industry has made significant strides. On a macro note, it has engaged the youth population and, as such, generated jobs. Furthermore, we believe that increased investment within the sector would have a significant impact on GDP growth.

The FGN’s pursuit of investment
 
10th August, 2017

The FGN’s pursuit of investment
                                                                                           
The FGN has this week named 27 industries as eligible for pioneer status incentives. Their principal benefit is exemption from companies’ income tax for three years, with a possible extension for one or two years. Monitoring of the scheme is to be the responsibility of the Nigerian Investment Promotion Council, which will maintain a list of qualifying companies on its website. The FGN is also developing its plans for six special economic zones (SEZs), one for each geopolitical zone.
 
The two initiatives are driven by the FGN’s determination to attract investment. Nigeria has some catching up to do. Investment amounted to just 14.8% of GDP in 2015. We recall an old donor rule-of-thumb estimate that a steady investment ratio of 25% generates about 5% GDP growth. Nigeria requires rather higher growth, not least because its population is said to be growing by 2.8% annually.

We read that an industry or company may be designated pioneer if its development is viewed as in the public interest. We hope that this will not be interpreted as an invitation to push national prestige projects.

An opportunity has emerged for Nigeria and other low-wage economies. An estimated 85 million manufacturing jobs are being relocated from China due to rising labour costs including 20 million in textiles and clothing. The textile worker in China is paid US$700 per month, rather more than the proposed national minimum wage in Nigeria of N45,000 (US$150) per month. 

Free zones have delivered some impressive results. In the 1980s there was Mauritius, and much more recently Ethiopia. In June Nigerian government advisors witnessed the opening of the country’s fifth zone, reserved for textiles and clothing and set to create 65,000 jobs.

The example of China is Ethiopia writ large, and it is no coincidence that investors from the first are prominent in the Ethiopian zones. The first four zones were established in south-east China in the 1980s. According to data cited by the Abuja Chamber of Commerce and Industry, zones accounted for 22% of Chinese GDP and 50% of its FDI in 2007. 

The FGN’s initiatives have a negative impact on revenue collection. The authorities can argue that an initial sacrifice will yield far greater fiscal benefits over time. However, the FGN is under acute fiscal pressure, judging from the CBN governor’s recent statement that the deficit in H1 was a provisional N2.51trn (compared with the full-year target of N2.36trn). In these circumstances it may want to redouble its efforts to scrutinize the tax exemptions granted by the previous administration.

Clean energy in the policy mix
 
9th August, 2017

Clean energy in the policy mix
                                                                                           
Today we turn our attention to Nigeria’s energy sector. Power shortages continue to stifle growth and are regarded as the primary drawback for operations across all company sizes. The cost of self-generation of energy is often cited as a heavy strain on the cost of doing business. Additionally, it gulps a considerable amount from household pockets. Nigeria depends heavily on gas for its energy requirements. Given the frequent gas shortages, power supply across the country is usually epileptic.
 
Based on the most recent data from the federal ministry of power, works and housing, peak generation was 4,283MW on Monday (last week). Its lowest generation on the same day was 2,833MW. 

The FGN estimates national energy demand at 17,720MW. However, generation capacity from the national grid is only 7,518MW. In an attempt to improve this capacity, we understand that the Transmission Company of Nigeria (TCN) has secured US$1.5bn from donor agencies to finance power transmission projects across the country.

Official thinking on power is tilting towards developing alternative sources. The FGN has produced a national renewable energy action plan. It targets an energy contribution from renewables to total energy generated at 16% by 2030; with hydropower accounting for 7.1% and solar energy 5.9%.

The FGN’s proposed green bond worth N50bn should also be a positive for the renewable energy industry. It is to be project tied in collaboration with the federal ministry of the environment; renewable energy projects are to be included.

There has been some traction in ramping up solar energy across the country as a few partnerships have sprung up. One such is the Abiba 50MW solar project in Kaduna State. Access Quaint (an asset development & consultancy firm) has secured a US$1.25m convertible loan agreement for this project. This proposed plant is expected to generate electricity for about 600,000 households annually.

Furthermore, Total Nigeria recently signed a Solar Home Solution distribution agreement with Blackbit Limited. This partnership is expected to result in increased distribution of solar inverter kits in Lagos and Abuja. We assume that the solar panels within this kit will be imported rather than manufactured domestically.

There is also some forward movement in hydro-power. We understand that construction of the 3,050MW Mambilla hydroelectric plant kicked off last month. Once completed, this should result in improved productivity from SMEs.

Based on our estimates, if “full power” is attained and made routinely available to businesses and households, it could add two percentage points to annual GDP growth.

The continuing surge of the NSEASI
 
8th August, 2017

The continuing surge of the NSEASI

Since our last look at three stock market indices in sub-Saharan Africa (SSA), the Lagos all-share index has surged further ahead of both Nairobi (NSE 20) and Johannesburg (all-share). It has gained 39.6% ytd, compared with 19.8% for Nairobi and 10.5% for Jo’burg. It was still in negative territory ytd as recently as 09 May but has since soared, driven largely by the response of the offshore portfolio community to the CBN’s new fx window for investors and exporters (NAFEX). The current Q2 reporting season has brought some strong results from non-banks.
 
This surge in just three months has not been a stampede. Turnover ytd has averaged just US$12.8m equivalent at the interbank rate, and US$21.5m since the watershed on 09 May. 

The NSE’s latest monthly report shows that foreign participation was 46.1% of turnover in June, and 46.0% ytd. The foreign/domestic split is not radically different from 2016 and does not suggest a pattern of the offshore players taking their profits and the local institutions taking their place.

We should watch closely for the forthcoming Q2 results for the leading banks. If these perform ahead of market expectations, the surge may well have further legs. The large offshore investment houses which have been deterred by the workings of NAFEX could be persuaded to join the party.

The continuing surge of the NSEASI - FBNQuest Research

We had expected more of a sell-off on the Nairobi market ahead of today’s elections. Opinion polls suggest that the contest between the two principal presidential candidates, both scions of Kenyan political dynasties, is very close. There is therefore the possibility of the loser crying foul and of violence in at least the main election battlegrounds in the country. This was the chain of events in 2007. The market seems to have judged that the 2010 constitutional referendum changed Kenya at election times for the better.

Reserves holding up despite fx interventions
 
7th August, 2017

Reserves holding up despite fx interventions
                                                                                           
Gross official reserves increased by US$550m in July to US$30.8bn. Since the recent low at end-October there has been an accumulation of US$6.9bn. The more telling figure is the increase of US$0.5bn since end-March, when the CBN stepped up its fx interventions under its multiple currency practices (MCP). When we allow for the sharp fall in imports in the recession, the buffer is now comfortable. By way of warning, we should stress that the figures provided by the CBN are gross and mask the swap transactions it has entered into with banks.
 
The pick-up in oil production has been an obvious positive for accumulation. Officials are encouraging the view that it is back at, or close to the 2.0 mbpd level. Further, the FGN may well return to the Eurobond market this year. The heavily-oversubscribed Iraqi sovereign issue last week without US guarantees was a reminder of the strength of the market. 

The CBN will also be encouraged by the early signals from the investors’ and exporters’ window (NAFEX). Turnover from its launch in late April through to 21 July totals US$4.9bn. If this market was to take off as a result, for example, of GEM funds taking the plunge, we would be approaching the required critical mass and would have to revise our expectations of MCP.

Given this cushion of reserves and the evidence that core sectors such as manufacturing are benefiting from the regular fx interventions, we no longer think that the CBN will be revising its fx policy this year.

Reserves holding up despite fx interventions - FBNQuest Research

When we compare this data with the CBN’s series on its net fx flows through to May (Good Morning Nigeria, 02 August 2017), happily we find the same pronounced movements: healthy accumulation in December, January and February, and a marked decline in May.

More sweep required on e-payment platforms

4th August, 2017

More sweep required on e-payment platforms
                                                                                           
Over the past five years, there has been considerable growth in electronic payment platforms in Nigeria. This payment ecosystem has introduced a new level of convenience for customers and in most cases, a pickup in patronage for retailers. However, these electronic payment options are exposed to electronic fraud. The latest annual Nigeria Electronic Fraud Forum (NeFF) report from the CBN captures views from DMBs in 2016. According to the report, the banking services industry was able to block 49.7% of total attempted fraud within the system last year.
 
There was a sharp increase of 82% y/y in attempted fraud cases in 2016. However, a marginal decline of 3% y/y was recorded in actual losses due to fraud, which stood at N2.1bn (US$5.7m). 

The report suggests that the increase in fraudulent activities mirrors the country’s economic downturn. Technically, the recession kicked in last year. To put this in context, the macro challenges have resulted in job losses and a squeeze in household pockets which could encourage e-fraud.

Automated teller machines (ATM) recorded the highest volume (49.5%) of total fraud while mobile platforms were the second largest, accounting for 19.9% (see chart below).

More sweep required on e-payment platforms - FBNQuest Research

Based on CBN data, there were 1,020 beneficiaries of e-fraud transactions. However, only 21% were placed on the Nigeria Inter-Bank Settlement System watch-list as the system is yet to receive bank verification numbers for the remaining 79% from specific commercial banks. This delay is hindering the sweep out of fraudsters within the system.

We expect robust growth in e-payments. On a macro note, it bodes well for public financial transparency and by extension fiscal revenue. However, cyber security needs to remain a priority to encourage patronage of electronic payment platforms.

The unspectacular growth of RSAs

3rd August, 2017

The unspectacular growth of RSAs
                                                                                           
We are indebted to the NBS for its recent report on the distribution of retirement savings accounts (RSAs). We learn that the total in Q2 2017 was 7.59 million, divided by employment as shown in our chart. The total in Q1 was 7.49 million, and the increase of 100,000 over three months shared between the private sector (80,000), the FGN (10,000), and state and local governments (also 10,000). This division is understandable, given the pressures on public finances. We are surprised that the state governments registered any increase at all.

The total in Q1 represented 10.9% of the working-age population at end-2016. We have to remember that subsistence agriculture and informal trade probably account for at least 50% of all employment in Nigeria. 

Divided by age, just 1.9% of all holders in Q2 were over 65, and 38.5% aged between 30 and 39 years. The demographics in Nigeria favour the PFAs in terms of matching inflows from contributions with outflows for pension payments.

When we match the data from the NBS for Q1 with the assets under management (AUM) for March as shown by the National Pension Commission, the source of the bureau’s raw data, we find that the average account was worth N640,000.

The AUM of RSAs accounted for 75% of total AUM in Q2, compared with 62% five years earlier. Their share has risen at the expense of the defined benefit schemes.

The unspectacular growth of RSAs - FBNQuest Research

Local media reports note that the FGN has not met its obligation under 2014 legislation to make an increased 10% contribution to all employees’ pensions.

Step-up in fx outflows through the CBN

2nd August, 2017

Step-up in fx outflows through the CBN
                                                                                           
The net fx flows through the CBN were negative by US$760m in May but positive over the 12-month period to the tune of US$5.12bn. Inflows through the CBN, which consist of monies from the oil economy and the non-oil public sector, declined from US$2.87bn to US$2.26bn in May. Outflows, in contrast, rose from US$2.16bn to US$3.02bn in the same month, which the commentary attributed to inter-bank utilization, external debt service, drawings under letters of credit and an unspecified “fx special payment”.
 
The surge in inflows to US$5.06bn in February coincides with the sale of Eurobonds to international investors. 

The pick-up in outflows through the CBN in the chart since February coincides with the CBN’s multiple currency practices. We recall that May was the full month of operation for the investors’ and exporters’ window (NAFEX).

We are not comparing apples with apples but we note that the net inflow through the CBN of US$5.12bn over the 12 months is consistent with the increase in gross official reserves of US$3.94bn over the same period.

The data also capture flows through the economy as a whole (autonomous and CBN transactions). They show autonomous inflows of US$3.52bn in May. Remittances alone are running at close to US$2bn per month according to the balance of payments. Autonomous outflows amounted to just USS160m in the month. So the net inflow for May was US$3.36bn for autonomous funds and US$2.60bn for the economy (adjusted for the CBN).

Step-up in fx outflows through the CBN - FBNQuest Research

The data from the CBN are provisional and subject to change. We suspect that the revisions are greatest for inflows outside the CBN.

PMI reading no 52: a fifth month above water

1st August, 2017

PMI reading no 52: a fifth month above water
                                                                                           
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a modest improvement from 55.9 in June to 56.3. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment in all economies, and have the proven capacity to move financial markets in developed economies. To reinforce the point, the latest national accounts cover the first quarter (January-March) and the latest PMI the first month of the third. 

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

Three of the five sub-indices picked up in July and all were in positive territory. The headline reading has been above 50 since March.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Explanations for changes in output in July cite the rainy season as both positive and negative. Not surprisingly, one respondent explains a rise in stocks as the consequence of naira appreciation and the lower cost of imported raw materials.

Since March the CBN has stepped up its sales of fx to importers, SMEs and retail (for invisibles). Two positive consequences for the sector have been far greater availability of raw materials and naira appreciation (see above bullet). The food and beverages segment has been the main beneficiary.

The economy is finally emerging from recession. In Q1 2017 its contraction narrowed from -1.7% y/y the previous quarter to -0.5%. Manufacturing posted positive growth of 1.4% y/y, the first since Q3 2015. We see a recovery in GDP growth to 1.6% y/y in Q2 2017.

 

 

Deepening internet penetration

31st July, 2017

Deepening internet penetration

The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 91.6 million in June, representing a y/y contraction of -1.9%. The figure implies density of 50% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. In June, there were only about 34,000 new internet subscriptions when compared with the previous month.

MTN again accounted for the largest share (35%) of total internet subscriptions. Meanwhile, we noticed a -2.3% m/m reduction in subscriptions on 9Mobile’s network (formerly Etisalat). For the latter, this may be related to its recent debt servicing issues. 

Data consumption is steadily rising. We suspect internet service providers are increasing their market share, hence the sluggish pickup in subscription for the mobile network operators.

On a broader note, we believe that the sustained squeeze on household wallets has resulted in a reduction in multiple subscriptions per individual.

Deepening internet penetration - FBNQuest Research

To deepen broadband penetration and by extension boost internet subscriptions, the NCC is still in the process of concluding the sale of the eight remaining slots on the 2.6 GHz spectrum. MTN had secured six slots last year. Market participants have suggested that these slots be sold at the same exchange rate used during the auction of the previous six slots. Given the current economic realities however, we do not expect this request to be given any serious consideration.  

Notwithstanding, we see the proposed auction generating substantial interest from investors given the demand at the last auction. This could be a boost towards attaining the FGN’s broadband penetration target of 30% by next year.

 

Forward movement in local substitution

28th July, 2017

Forward movement in local substitution
                                                                                           
There are conflicting figures on Nigeria’s food import bill. According to newswires, the country’s annual food import bill was as high as N1.5trn (US$4.1bn) last year. Import substitution has remained one of the FGN’s primary focus areas, with agriculture serving as a potential catalyst. Over the past eight quarters, agriculture has posted uninterrupted growth. In Q1 2017, crop production remained the largest contributor to agriculture GDP, accounting for 87% of the total. Meanwhile livestock farming accounted for just 9%.

Based on CBN data, importation of food products accounted for 8.9% of fx utilisation in Q1 2017 compared with 9.5% recorded in the previous quarter. 

The latest inflation report also points towards a reduction in imported food items. The impact of the CBN’s stepped up fx interventions on parallel market rates has been a contributing factor to the latest decline in imported food price inflation which slowed to 14.2% y/y in June from above 21.0% throughout Q4 2016.

There are a few investments within the sector which should drive sustainable local substitution of food. One is the dairy industry. Local milk production is less than 1% of Nigeria’s annual demand, estimated at 1.45bn litres. However, the dairy industry is set to receive a boost with the Dangote Group’s proposed injection of US$800m to breed 50,000 cows. This should translate into annual production of 500 million litres of milk.

Forward movement in local substitution - FBNQuest Research

Another boost for agriculture will come from the recently inaugurated Indorama fertiliser plant. The plant has a daily production capacity of 4,000 metric tons (MT) of nitrogenous fertilisers. The potential impact will be a reduction in fertiliser pricing which generally feeds into food product costs.  

These investments should reduce the country’s food import bill considerably and push Nigeria closer to its self-sufficiency goals.

Finally, a steep rise in the FAAC payout

27th July, 2017

Finally, a steep rise in the FAAC payout

The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government picked up strongly in July (from June revenues) from N462bn to N652bn (US$2.13bn). This is the highest distribution since the N692bn shared in July 2016, and consistent with the recent commentary emerging from the Federal Inland Revenue Service. Encouragingly, the accountant-general, Idris Ahmed, noted after the committee meeting that non-mineral revenue had risen from N181bn the previous month to N339bn.

He singled out the healthy growth in receipts from companies’ income tax (CIT) and petroleum profits tax. Historically, June is the start of the seasonal  surge in CIT collection. Data from the CBN for 2016 show receipts of N74bn in June, N233bn in July and N122bn in August. 

The FGN’s payout was N289bn. When we add its sizeable independent revenue, we are approaching the projection in the 2017 budget of N5.08trn from all sources over 12 months.

The figures for mineral revenue tell a less healthy story. Ahmed observed that the average crude price had declined from US$55.2/b in May to US$50.3/b, and crude volumes for the account of the federation by 3.2 million barrels.

The payout to state governments, independent of the 13% bonus for oil-producing states, amounted to N179bn. Within the recent second distribution under the Paris Club “overpayments”, some states received as much as N10bn.

Finally, a steep rise in the FAAC payout - FBNQuest Research

We have taken the latest payout from the local media. The accountant-general’s office provide the revenue numbers up to December 2016, distributed in January. We use the data for gross distributions while the local media cite a combination of gross and net payouts to the three tiers. 

In search of the trickle-down effect

26th July, 2017

In search of the trickle-down effect

Lagos was the fourth wealthiest city in Africa in 2016. The measure is of net private wealth held by individuals resident in the city and excludes “government funds”. This is the finding of a report by New World Wealth, a Johannesburg-based market research firm, in conjunction with AfrAsia Bank, which has a presence in South Africa and Mauritius. Lagos (US$120bn), not surprisingly, has the no 4 slot behind Jo’burg, Cairo and Cape Town, and is well clear of the no 5 (Nairobi, with US$55bn).

The report estimates that Lagos had 6,800 dollar millionaires, 360 multi-millionaires and four billionaires. This information may whet the appetite of would-be wealth managers. We would caution that they will find a crowded market with domestic players and international investment banks, both present in the city and on regular visits to target clients.

In search of the trickle-down effect, we recall the 2016 survey by Enhancing Financial Innovation and Access (EFInA). This showed that the South West (including Lagos State) was the only geopolitical zone to have achieved a decline in financial exclusion between 2012 and 2016, and the only one set to hit the official target of a ratio below 20% by 2020 (Good Morning Nigeria, 10 July 2017).

This is not compelling evidence of the trickle-down effect, rather a reflection of the depth of the banking sector in the zone. There are several reasons to conclude that the middle-income segment has been squeezed, including: that the growth of e-commerce has stalled; that the skyline of the major cities has a large number of unfinished buildings; and that the products of consumer goods manufacturers are now often available in smaller sachets/packets.

Most, if not all, successful models of economic development assume a rapid growth in the middle class. This process has seemingly been reversed in Nigeria.

Another element of the models is lifting people out of poverty. China is due to achieve high-income status, defined in this context as GDP per head above US$15,000, in 2020, and to have lifted 600 million people out of poverty in the process. For its part, the FGN, supported by the World Bank, is developing a social welfare programme based on the conditional cash transfers in Brazil’s Bolsa Familia. Its ambitious target is to reach five million households within five years.

Abuja occupies the no 17 slot in the league table for 2016. Its net private wealth is estimated at US$14bn with 800 millionaires and 40 multi-millionaires.

Tweaking by the Fund on global growth

25th July, 2017

Tweaking by the Fund on global growth

The IMF’s new World Economic Outlook Update (WEO) has left its global growth forecasts for this year and 2018 unchanged from three months ago at 3.5% and 3.6%, yet revised the country contributions. For the US, the outlook now has 2.1% growth for both years, compared with 2.3% and 2.5% in April, because it has lowered its expectations of the promised fiscal stimulus. At the same time, it has raised its projections for China and the Eurozone (both years), and for Japan and Brazil in 2017. Short-term risks are seen as balanced, medium-term tilted to the downside.
 
The outlook raised its forecasts for China on the basis of strong Q1 2017 GDP. It may have to repeat the exercise now that the Chinese authorities have released more robust data for Q2 of 6.9% y/y.

The Fund assumes that the authorities will delay the required fiscal adjustment in China beyond 2018 and so maintain high public investment. This would augur well for exporters of commodities, if not for the public debt mountain.

The underlying price assumptions, based on the futures markets, for the Fund’s basket of three crude blends (including UK Brent) have been revised since April to increases of 21.3% this year to US$51.9/b and 0.2% for 2018 to US$52.0/b.

The outlook’s forecasts for growth in Nigeria this year and next are unchanged at 0.8% and 1.9%.

Tweaking by the Fund on global growth - FBNQuest Research

Advice directed by the Fund at Nigeria (among others) is that it should allow exchange rates to buffer shocks, introduce growth-friendly measures within fiscal consolidation and diversify its sources of growth over time. The FGN will not quarrel with the second and third policy measures but is in no hurry to move on the first, which would require exchange-rate unification.


No change expected in monetary policy

24th July, 2017

The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. We again see no change in stance. The committee has emerged from about 18 months’ despair with growing confidence. The trigger, of course, has been the investors’ and exporters’ fx window (NAFEX), which is evident from a reading of members’ personal statements from their meeting in late May (Good Morning Nigeria, 07 July 2017).

That confidence will since have grown. One member noted that the gap between the interbank and the bureaux de change (BdC) rates had narrowed to 23%. His calculation was based upon the then BdC rate of N380 per US dollar.

 The committee and the CBN can see that gross official reserves have stabilized despite the step-up in fx interventions. They can also see that manufacturers have greater access to imported raw materials, and that the retail segment can buy fx to meet its demand for invisible payments.

 NAFEX may not yet have attracted the major players in the offshore portfolio community but the committee will surely urge patience. We may well see the catch-phrase “fine tuning” in the communique.

 Its take on the national accounts for Q1 2017 is likely to be that the non-oil economy returned to positive y/y growth (of 0.7%) and will have continued to expand in Q2. We expect overall GDP growth to be positive, at 1.6% y/y, not least because oil production suffered badly from losses/leakages in Q2 2016.

 The trend in y/y headline inflation has been downward for five successive months (through to June). Positive base effects have been sizeable, which we could translate into the marked appreciation of the naira on the parallel market over the period. There is still, however, the notional reference range of between 6% and 9% y/y, and the headline rate of 16.1% in June is nowhere near it.

The committee seems made up of oil price bears. It does therefore not expect a transformation of the FGN’s finances on the revenue side. The improvements are set to be incremental, and the obvious casualty in our view will be the very ambitious projection of N2.24trn for capital expenditure. This makes structural reforms all the more important, and the committee is likely to call again for their acceleration. In conclusion, we see a degree of self-congratulation from the committee, tempered with a call for patience.

Welcome uptick in non-oil exports in Q1

21st July, 2017

Welcome uptick in non-oil exports in Q1
                                                                                           
The latest quarterly Economic Report from the CBN puts non-oil exports provisionally at US$0.87bn in Q1 2017, indicating a substantial rise of 86% q/q. However, they declined by 15% y/y. The q/q surge was attributed to a significant increase in receipts from food and agricultural products. Additionally, according to the trade statistics report by the National Bureau of Statistics, the exportation of agricultural goods grew by 82% in Q1.
 
The sectoral breakdown shows that proceeds from agricultural products stood at US$340m in Q1, representing 39.5% of total non-oil export proceeds. Meanwhile food products, manufactured products and industrial goods counted for 10.8%, 16.9% and 10.9% respectively.

We note that food inflation has risen steadily over the past few months (January – March inclusive). One likely reason, although anecdotal at this stage, is the increasing preference of farmers to export their produce as opposed to supplying domestically.

In our view, this preference can be linked to the fact that the currency has depreciated by 56% from N196/US$ on the interbank market over the period in question (i.e. Q1 2017 vs Q1 2016).

The FGN has announced its intention to boost export activities through payment of the export expansion grant (EEG). The EEG was suspended in 2014. However, N20bn was set aside for its revival in this year’s budget.

Welcome uptick in non-oil exports in Q1

The Manufacturers Association of Nigeria, following discussions with the authorities, thinks that the new grant may have lower rates than previously, be robustly designed to prevent abuse by applicants and reward exporters for value addition.

Current account comfortably in surplus

 
20th July, 2017

Current account comfortably in surplus
                                                                                           
We observe from the balance of payments for Q1 2017 that the current-account surplus eased gently from the equivalent of 3.5% of GDP to 3.4%. This recovery from the earlier deficits is explained by a rebound in oil exports, a further compression in merchandise imports and stronger inward transfers. We see the classic lag between the initial slump in oil export revenues and the crash in imports. Merchandise exports fell sharply from Q4 2014, and the nosedive in imports began in Q4 2015. In a forthcoming daily note we will examine trends on the capital account.
 
The share of oil and gas exports in GDP has crashed from 18.5% in Q4 2012 to just 9.6% in Q4 2016. A modest recovery to 10.8% in Q1 is attributable to a pick-up in oil production and the further contraction in GDP.

The compression of import demand does point to some success for the FGN’s substitution policy, one example being rice cultivation. However, the greater influence would have been what we term involuntary substitution.

Drilling down into the outflow on services in Q1 2017, we find a sharp decline in business travel outflows to US$61m from US$655m two years earlier. Similar trends are discernible for health and education related expenditure. The picture should change now that the CBN is making fx regularly available for the retail segment.

Net current transfers, which are mostly workers’ remittances, have held up better than expected, at more than 5% of GDP for three successive.

Trends on the balance of payments - FBNQuest Research

We see current-account surpluses representing 3.1% of GDP this year and 1.2% for 2018, when imports are expected to recover. The forecasts of the IMF from April are 1.0% in both years, and those of Fitch Ratings from March are a deficit of -0.7% this year and a surplus of 0.9% in 2018.

A further decline in the NNPC deficit
 
19th July, 2017

A further decline in the NNPC deficit

In May the NNPC reduced its operating deficit from N5.3bn the previous month to N3.5bn (US$12m), its best performance since the token profit in May 2016. Profits were generated by production (N10.6bn) and refineries (N2.7bn) before deductions for central costs and ventures. The corporation’s Financial and Operations Report for May notes a pick-up in crude output in April to 1.79 mbpd from 1.60 mbpd the previous month. Its commentary adds that production was then still being lost due to shut-ins at the Yoho, Qua Iboe, Bonny, Bonga and Usan terminals.
 
The combined capacity utilization of the three refinery companies in May reached 23.1%, led by Port Harcourt which achieved 34.3%. The Warri was closed for the month due to power failures.

The FGN and NNPC are adamant that, while they will accept private-sector financing for the four ailing refineries, they will not consider their sale or concession agreements. The corporation will continue to run the operations although Vice-president Osinbajo has warned official labour that they would soon become obsolete without wholesale reform.

It is also pursuing greenfield investors. The local Agip company has a 150,000 b/d refinery in OPL 245 on the drawing board and near the MoU stage. With the Dangote project in Lagos State in mind, the NNPC has a target of end-2019 for self-sufficiency in premium motor spirit (petrol/gasoline).

The corporation’s operating deficit has declined to N175bn in the 12 months to May from N239bn in the year-earlier period. Without a legal framework for the industry and radical change at the refineries, further upside is limited.

A further decline in the NNPC deficit - FBNQuest Research

The report notes that power plants generated 3,095 megawatts in May from gas supplied by the corporation, equivalent to 82% of total generation.

Sticky food price inflation yet again

 
18th July, 2017

The latest inflation report from the NBS shows a fifth successive decline in the headline inflation y/y, to 16.1% in June from 16.3% the previous month. (This was our expectation, shared with the wire services.) The growth in the core measure slowed from 13.0% y/y to 12.5%, its lowest level since March 2016. In contrast, food price inflation accelerated from 19.3% y/y to 19.9%. The report overall is a mixed blessing for policymakers, who will correctly focus on the supply-side constraints.

 
Core inflation slowed for the seventh successive month in June. The NBS commentary singled out clothing and footwear, which has a 7.7% weighting in the index, as the segment with the highest y/y inflation (of 15.7%). The trend in core inflation overall is surely a reflection of the softening of demand in a recessionary/low growth environment.

The impact of the CBN’s stepped up fx interventions on parallel market rates has also been a positive. This helps to explain the latest decline in imported food price inflation to 14.2% y/y in June from above 21.0% throughout Q4 2016.
  
Consumer price inflation - FBNQuest Research
 
The headline rate remains high because of stubbornly high food price inflation, which is driven by logistical constraints, pest infestations and, quite possibly, an increasing preference of farmers for exporting their produce.

The monetary policy committee (MPC) meets next week. In its communique in late May, it welcomed the downward trend in the headline rate, which, however, sat far above the reference band of between 6% and 9%. The committee therefore is unlikely to cut rates in the short term.

The run of positive base effects has now come to an end. We see a small uptick in the headline rate to 16.2% y/y in July on a m/m increase of 1.3%.

Continuing struggle over non-oil revenue

 
17th July, 2017


We again offer commentary on non-oil revenue collection because it will prove the litmus test for the FGN’s economic policy agenda and because we have an additional three months’ figures from the CBN. The data show collection of N220bn in May and N1.13trn for the first five months of the year. In both cases revenue generation is well short of what the CBN terms the 2017 monthly budget of N445bn.   When we add the said monthly oil revenue target of N450bn, we arrive at a full-year projection of N10.74trn for federally collectible receipts.
 
These are not to be confused with FGN revenue collection, which the 2017 proposals from the budget and national planning ministry set at N4.94trn (N1.99trn from oil and N2.95trn from non-oil).

We do have a concern or two about the CBN’s monthly budget figure for non-oil collection because it includes N150bn for VAT. Both official briefings and our conversations point to a determination not to raise the standard 5% rate for the tax with the possible exception of luxury goods (Good Morning Nigeria, 12 July 2017).  Monthly collection of the tax is running at +/-N80bn.

We should wait to see the size of the seasonal boost to companies’ income tax in July and August. At this point, however, the omens are not good and the likely loser will be the FBN’s ambitious plans for capital spending this year.

Federally collectible non-oil revenue (gross; N bn) - FBNQuest Research

AFitch Ratings expressed similar opinions in its full report dated March 2017. Its projections show general government revenue (ie all three tiers) growing slowly from its estimate of 5.1% of GDP last year to just 7.9% in 2018. The ratio for 2016 compares with 19.2% for Kenya (also rated B+) and 23.4% for Angola (B). Fitch’s commentary stresses the “struggle in increasing VAT and corporate tax compliance”.
 

No visible relief for petroleum marketers

 
14th July, 2017


No visible relief for petroleum marketers
                                                                                           
The National Bureau of Statistics (NBS) has released its latest report in its premium motor spirit (PMS) price watch series. The report shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In May it averaged N150.7/litre (l) for the 36 states of the federation and the FCT, and so above the fixed upper price limit for the retail pump price of N145/l set by the authorities.
 
The average price of gasoline in May represented a 0.5% m/m increase. Gombe State had the highest price for PMS at N172.5/l while Abuja, Delta, Ekiti, Katsina, Ogun, Osun and Lagos each recorded the lowest with N145.3/l.

The May inflation report shows that for the core sub-index, the highest price increases y/y were recorded in fuels for personal transport such as PMS among others.

According to the Major Oil Marketers Association of Nigeria (MOMAN) the FGN is currently owing petroleum marketers N800bn in subsidy arrears owed on imports over the past three years. This is debatable.

Actual gasoline pump prices vs fixed price (N per litre; May 2017) - FBNQuest Research

Although fx liquidity has improved, local refining still remains the solution to increased petroleum supply across the country. Nigeria’s current refining capacity utilisation is c.25%. We anticipate some relief for petroleum marketers once the Dangote refinery becomes fully operational; planned refining capacity is 650,000bpd.
 

Lagos now well ahead of the pack

 
13th July, 2017


Lagos now well ahead of the pack
                                                                                           
Our occasional look at three stock market indices in sub-Saharan Africa (SSA) places Lagos well ahead of both Nairobi (NSE 20) and Johannesburg (all-share). The NSEASI has gained 22.7% ytd, compared with 14.0% for Nairobi and 4.5% for Jo’burg. It was still in negative territory ytd as recently as 09 May but has since surged, driven largely by the launch by the CBN of the fx window for investors and exporters (NAFEX). A telling factor will be the imminent Q2 reporting season, for which we have high hopes (particularly for the banks).
 
In our excitement at this surge in little more than two months, we should not lose sight of the low trading volumes. Turnover ytd has averaged US$9.9m equivalent at the interbank rate. This compares with US$11.7m in the similar period of 2016 although we have to allow for the exchange-rate “liberalization” in mid-June. Turnover has picked up since the launch of NAFEX but from a low base.

The NSE’s latest monthly report shows that foreign participation was 46.3% of turnover in May, and 46.0% ytd. There is some evidence in the May data that domestic institutions followed offshore investors into the market.

We are at a potential watershed. If the Q2 results meet our expectations, notably for the most-traded household names, we could see buying by the large offshore investment houses which have been deterred by the workings of NAFEX.

Performance of three SSA market indices, 2017 (% chg ytd, local currency units) - FBNQuest Research

We include Jo’burg because it is easily the largest bourse in SSA in terms of market capitalization. The many setbacks for investors in South Africa include uncertainty ahead of the contest for leadership of the ruling African National Congress, the appointment of a relative novice to the post of finance minister and an orchestrated attempt to challenge the autonomy of the central bank.
 

Non-oil revenue already below budget

 
12th July, 2017


We return today to the paucity of non-oil revenue collection. CBN data show flows into the federation account in February of N252bn, which were 49% below the projection in the 2017 budget proposals. (In stark contrast, inflows from oil of N293bn were less than 1% below the provisional target.) Our understanding is that this underperformance was extended through to April.  If this trend was to continue until year-end, there would be obvious implications for capital spending since recurrent items, notably salaries, cannot easily be cut.
 
We highlight VAT separately in the chart because it has generated steady revenue in the recession. A doubling of the standard rate of 5% would generate an additional N800bn, assuming that ability and willingness to pay did not suffer.

The FGN is very reluctant to increase the rate other than perhaps for luxury goods. Its preference is to strengthen administration and compliance, and make better use of IT in collection. This requires MDAs to become more “joined-up” and share data between themselves.

A rise in customs and excise duty would be less sensitive. A rigorous look at exemptions would help. The lifting of the list of 41 banned import items and its replacement with high import levies has been debated officially.

Non-oil revenue already below budget

The FGN has announced a tax amnesty and hopes to raise US$1bn equivalent this year. On the surface the target seems modest, given the weak culture of paying tax. However, amnesties must convey the message that non-payers will only have the one chance of forgiveness. The evidence from Turkey and elsewhere is that receipts fall well short of expectation and that governments then repeat the exercise. Each amnesty generates less revenue than the last.
 

A DMO calendar under a little less pressure

 
11th July, 2017


The DMO has released its provisional issuance calendar for Q3 2017. It seeks to raise between N360bn (US$1.18bn) and N450bn (US$1.47bn) from the sale of FGN bonds. Provisional issuance is flat over the three months, and all bonds at auction are to be reopenings of existing issues. The DMO has a little flexibility on its side since it has already raised N850bn (gross) from auctions in H1 and the 2017 budget projects total net domestic financing of N1.25trn. In June it raised less than its offer and was able to set marginal rates below the level of the previous month.
 
This flexibility has its limits, being contingent upon the ability to meet the target for net external financing of N1.08trn (US$3.5bn at the assumed exchange rate of N305 per dollar).

Eurobonds and diaspora bonds have raised US$1.8bn ytd. However, talks with the World Bank on deficit financing are proceeding at best slowly although the African Development Bank may decide to disburse the US$400m balance of its budget support. The distinct possibility exists, therefore, that the FGN will return to the Eurobond market later in the year and take advantage of the global appetite for sovereign paper from emerging/frontier markets.

Of the three reopened issues, institutional demand is comfortably the softest for the five-year benchmark, which will have just three years and ten months to maturity in June. In contrast, the long bond (Apr ’37) is a natural fit for the PFAs, which are looking to match their long-term liabilities (to pensioners) to their assets.

A DMO calendar under a little less pressure

The DMO has other strings to its bow than the staple FGN bonds. One is the FGN savings bond for retail investors, which raised only N2bn in Q1 2017. Another is the proposed N100bn sukuk (Islamic bond).
 

An alarming north-south divide

 
10th July, 2017


While every economy has regional disparities in income and wealth, Nigeria’s are particularly striking. The Access to Financial Services 2016 Survey shows the best ratio for the South West and the worst for the three northern zones. Only the South West meets the official target of financial exclusion below 20% by 2020 with a ratio of 18% in 2016. For the North East and the North West, the rates were as high as 62% and 70%. Across the country the survey of 23,000 adults shows a rate of 41.6%.
 
The survey is the work of Enhancing Financial Innovation and Access (EFInA) in conjunction with the National Bureau of Statistics. It divides the financially served between the banked, those with access to other formal services (10.3% of the total in 2016) and the balance tapped into informal financing (9.8%). We had not thought that as many as 38.3% of adults (of 18 years’ age and above) surveyed were banked.

This was the only positive finding of the survey. Other than the South West all zones saw an increase in financial exclusion between 2012 and 2016. This amounted to seven percentage points for the North Central, six for the North West and two for the North East.

The share of informal financing ranged from 4% in the South West to 14% in the North East, the North Central and the South South.

Two other statistics we have lifted from the EFInA survey are that 58.3% of adults were under the age of 35 and just 2% had access to insurance.

The deterioration in financial exclusion over the period covers the economic slowdown in 2015 and the recession in 2016. The unemployment rate rose steadily to 14.2% in Q4 2016.

All zones other than the South West bore the footmarks of the Achilles heel of the economy. The slide in the oil price has brought a fall in government revenues, employment and export earnings, leading to a squeeze on incomes.

The response of the FGN, which we can see in successive budgets and its Economic Recovery and Growth Plan, has been to encourage the diversification of the economy and establish safety nets for the poorest through its social interventions. Another route, albeit sensitive, would be to revisit the basis for the monthly distributions from the federation account.

Finally we should make the point that public disorder and violent anti-government protest are likely to breed where exclusion in all forms, including the financial variety, is widely felt.

The MPC now walking tall

 
7th July, 2017


When we read the personal statements of members of the monetary policy committee (MPC) following their meeting in late May, we noticed a distinct rise in their confidence. Their mood in the previous 12 months could be described as one of despair. In layman’s language, the prevalent view was that they were not responsible for the contraction in the economy or the surge in inflation and that somebody else (ie the FGN) had to pick up the pieces. The game changer, of course, has been the new fx policy.

The new confidence is in danger of developing into exuberance. One member accepted that “the economy is not entirely out of the woods”. The confidence, however, has legitimately grown since the last meeting. The investors’ and exporters’ window (NAFEX) has gained in momentum.

Members lauded the convergence of fx rates. One estimated that the margin between the interbank and bureaux de change (BdC) rates had narrowed from 150% in Q4 2015 to 23%, while noting that a margin of 5% was sustainable in most jurisdictions. Another argued strongly that multiple currency practices should be retained and made the point that the then BdC rate of N380 per US dollar was a little off his estimated PPP rate of N350.

On inflation, we isolate the view that the rate is far above the level that could be viewed beneficial to growth. Another member warned of the threat from another hike in the electricity tariff, which he termed inevitable in view of the structural crisis in the industry.

Members are without exception oil price bears. A typical view cited reports that oil majors are to invest US$10bn in shale oil prospects in the US in the hope of driving production costs down to US$20/b.

Another theme is the build-up of pressures in the banking sector. One member cited data showing that its assets had declined in US dollar terms by 27.4% in 2016 due to fx “depreciation”. NPLs had increased while credit extension growth (other than to government) had fallen sharply. A better informed member acknowledged that a few banks had let the side down.

For the “off-message” argument in the statements, we choose a strong case put forward against the CBN’s expanded developmental role. This argument pointed to the negative impact on money supply, inflation and the banking industry of the CBN’s many sector-based credit interventions. It suggested that the interventions amounted in some cases to the application of sticking plaster to very large problems, and queried their legitimacy since the National Assembly is supposed to approve all appropriations.

Housing, still on the priority list

 
6th July, 2017


Housing, still on the priority list
                                                                                           
Nigeria’s housing market has suffered from the persistent macro challenges. Affordable housing seems unobtainable and given the squeeze in consumers’ purchasing power, demand has remained soft. Mortgage financing in the country is still underdeveloped and for income-earners engaged in homeownership schemes via mortgaging, the process can be expensive due to volatile high interest rates. We struggle to see how the FGN will bridge the country’s housing deficit over the medium-term.

Data from the Nigeria Deposit Insurance Corporation suggest that as at February, c.55% of mortgage loans were non-performing. Given the volatility of the labour market, there is a high possibility that more defaulters will be recorded as job losses rise. According to the NBS, the unemployment rate stood at 14.2% in Q4 2016.
 
We believe that the high average cost of mortgages of above 20% is also a contributory factor to the weak asset quality positions of mortgage firms.
 
On a brighter note, the FGN recently launched a N1.3bn refinancing loan in collaboration with the Nigerian Mortgage Refinancing Company for civil servants.
 
The first phase is expected to capture 5,635 civil servants. Effective implementation of this scheme will also depend on state governments for swift land approvals.
 
Furthermore, last month the World Bank set aside a US$300m fund to assist with Nigeria’s mass housing projects. The fund will be facilitated by the Nigeria Housing Finance Programme.

A recent market intelligence report projects an annual expansion of 14.6% in mortgaged households in Nigeria this year. The same report estimates expansion of 16.3% y/y and 18.9% y/y for Algeria and Egypt respectively in 2017.

Efforts from the private sector include the “Easy Home” initiative of Lafarge Africa. Over the past three years, 30,000 nationals have benefitted from this scheme.

Lagos State has keyed into the scheme and aims to deliver 200,000 housing units over the next five years; the housing deficit in Lagos is estimated at three million.
 
In addition to the increased prices of building materials, property developers have cited the lack of skilled labour in construction as a major issue.
 
In anticipation of the capital releases from this year’s budget, we expect a pickup in activities within the construction sector as well as visible results from the FGN’s housing projects. According to the budget, N57bn has been allocated for capital expenditure to the housing sector.

The decent buffer of reserves

 
5th July, 2017


The decent buffer of reserves
                                                                                           
Gross official reserves declined by just US$40m in June to US$31.3bn. Since end-October there has been an accumulation of US$6.3bn although the past two months have brought a combined decrease of US$580m. In the context of the sharp fall in imports in the recession, and allowing for the CBN’s steady fx interventions in its various windows since March, the buffer is now comfortable. By way of caveat, we should add that the figures provided by the CBN are gross and that the size of the swap transactions it has entered into with banks is unknown.
 
The reopening of the Forcados oil export pipeline adds about 250,000 b/d to production, and provides accretion to reserves through the NNPC’s stake in the joint ventures.
 
Further, the monetary authorities will be encouraged by the early signals from the Investors’ and exporters’ window (NAFEX). Turnover (both sides of trades) since its launch in late April totals US$3.7bn. Supply is provided by the CBN, non-oil exporters and the offshore portfolio community. We are seeing the frontier and Africa-dedicated funds at the window. If the GEM funds were to take the plunge, we would be approaching the required critical mass and would likely have to revise our views about multiple currency practices.
 
If, however, the pick-up in momentum does not materialize and reserves were to fall steadily over several months, the CBN would scale back its interventions and rethink its fx policy.

The decent buffer of reserves
 
Sources: CBN; FBNQuest Research

The data for reserves includes the balance in the excess crude account of US$2.3bn. It does not yet include, we assume, the US$300m proceeds of the recent maiden bond issue for the diaspora.

Minimal growth in private-sector lending

 
4th July, 2017


Credit is one of the several inputs in short supply in Nigeria. Private-sector credit extension at end-2016 represented just 21.9% of GDP, compared with 75.0% in South Africa. Nor is there impressive growth to suggest that the gap is narrowing. CBN data from a different series to that shown in our chart highlight an increase of 19.4% y/y in December in naira terms: we should note, however, the large share allocated to the oil and gas sector and the weight of those loans denominated in fx. The increase would otherwise have been negligible.
 
One aim of monetary policy in 2016 was to persuade the deposit money banks (DMBs) to boost their lending to what the CBN termed job-creating and productive sectors such as agriculture and manufacturing. Neither lectures nor incentives worked.
 
DMBs’ lending to agriculture has risen from about 1% to about 4% of their total loan books over three years. This will not bring about the rapid growth in agro-industry underpinning the FGN’s strategies of import substitution and economic diversification, and explains why the CBN has launched three subsidised credit schemes for the sector in the past decade.
 
In February the average prime and maximum lending rates of the DMBs were 17.1% and 29.3%. At the time, FGN bonds were yielding more than 16% and longer tenor NTBs more than 22%.
 
Faced with this choice and allowing for the sizeable risk attached to most credit applications from the real economy outside the blue chips, it is little surprise that the DMBs have accumulated very large positions in FGN paper.

Minimal growth in private-sector lending

Sources: CBN; FBNQuest Research

Until those yields retreat substantially and credit applications improve, we do see not much change.
 

PMI reading no 51: four months above water

 
3rd July, 2017


Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows another improvement from 54.0 in May to 55.9. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Four of the five sub-indices picked up in June and all were in positive territory. The headline reading has been above 50 since March.

Answers to the questions for three of the sub-indices cited an improvement in power supplies. This may prompt skepticism in some quarters although we point out that our respondents are spread across all six geopolitical zones.

Since March the CBN has stepped up its sales of fx to importers, SMEs and retail (for invisibles). Two positive consequences for the sector have been far greater availability of raw materials and naira appreciation on the parallel market. The food and beverages segment has been the main beneficiary.

In our view the economy is emerging from recession. In Q1 2017 its contraction narrowed from -1.7% y/y the previous quarter to -0.5%. Manufacturing posted positive growth of 1.4% y/y, the first since Q3 2015. We see a recovery in GDP growth to 1.6% y/y in Q2 2017.

The official manufacturing PMI report for China in June shows a rise from 51.2 to 51.7. State-owned enterprises have a substantial weighting.
 

A smaller NNPC deficit and warning to labour

 
30th June, 2017


In April the NNPC reduced its operating deficit from N5.6bn the previous month to N5.3bn (US$17m), its best performance since the token profit of N0.3bn in May 2016. Profits were generated by production (N2.0bn), refineries (N1.6bn) and retail activities (N1.6bn) before deductions for central costs and ventures. The corporation’s Financial and Operations Report for April notes a sharp fall in crude output in March to 1.60 mbpd from 1.82 mbpd the previous month due to leakages, force majeure and maintenance. Most of these obstacles have since been removed.
 
The combined capacity utilization of the three refinery companies in April reached 24.6%, led by Kaduna which achieved 31.3%.
 
Earlier this week a speech made on behalf of Vice-president Osinbajo pledged that the corporation would continue to manage the four refineries, whatever agreements were reached on equity injections and concession deals. However, it also warned the audience of labour union officials that the FGN favoured greenfield investment by the private sector and that the NNPC plants would soon become obsolete without wholesale reform.
 
Between April 2016 and April 2017 the NNPC’s export proceeds totaled US$2.50bn, of which US$2.29bn was transferred to the joint ventures (jvs) for cash call payments. This was well short of what was due to the jvs (more than US$8bn).
 
Under an agreement with the oil majors, a haircut has been applied to the corporation’s arrears, a first repayment has been made, and the ventures are to become incorporated and self-financing.

A smaller NNPC deficit and warning to labour
Sources: NNPC, Financial and Operations Report, March 2017; FBNQuest Research

The report notes that power plants generated 2,787 megawatts in April from gas supplied by the corporation, equivalent to 77% of total generation.
 

Plenty of movement down the road

 
29th June, 2017


Ghana elected a new president in December. Nana Akufo-Addo had contested the two previous elections unsuccessfully, in 2008 and 2012, and   promised that his New Patriotic Party (NPP) would launch a series of reforms. His campaigning offered a familiar narrative on governance but did not pledge a change agenda in as many words. However, we attended the UK-Ghana Trade and Investment Forum 2017 in London yesterday, and noted the many parallels to draw with Nigeria.
 
The NPP plans to improve the business environment by creating incentives and removing what it calls front-loaded costs. Ghana currently occupies the no 108 slot out of 190 countries in the World Bank Group’s Ease of Doing Business index, and Yofi Grant, the chief executive of the Ghana Investment Promotion Centre, is looking to lift the ranking by 50 places.

Another focus is land reform. The digital mapping of the country is due for completion this year.

A target is food self-sufficiency. Annual food imports are running at US$2.2bn.

Economists are familiar with the correlation between fiscal slippage and the electoral cycle in Ghana. The government is looking to enshrine fiscal discipline in law. In this instance Nigeria has already acted with the Fiscal Responsibility Act of 2007.

The NPP government is cementing its economic ties with China. A delegation has recently returned from Beijing, having signed MoUs for US$15bn.

Yaw Osafo-Maafo, the senior minister, noted that a transporter of goods from Accra to Nigeria had to pass through 78 checkpoints. All but one of the ten obstacles in Ghana have been removed. The Economic Community of West African States (ECOWAS) has 350 million consumers, and the minister was keen for the organization to add economic integration to its successes in peacekeeping.

The impact of the commodity price downturn has been less severe than in Nigeria. GDP growth of 3.6% last year was the worst performance for 20 years but the authorities see a recovery to 6.3% this year and an average of 7.5% over the next five years.  Grant was keen to cite the EY Attractiveness Index 2017, which has Ghana at no 1 in West Africa and no 4 in the continent.

We should mention a policy initiative from the Ghana government with a competitive edge. This is to create a sub-regional hub in Accra with a particular focus on pharmaceuticals, air transport, tourism and ECOWAS.
 

 

Another subpar FAAC payout

 
28th June, 2017


The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government picked up in June (from May revenues) from N419bn to N462bn (US$1.51bn). The federal finance ministry noted a healthy increase in receipts from companies’ income tax. This was a revealing statement since these receipts generally peak in July and August. The ministry also reported a decline in crude output of about 30,000 b/d, which, in line with prevailing convention, we take to refer to the level three months earlier.
 
The statutory distribution of N317bn was supplemented by VAT of N80bn and an exchange-rate gain of N65bn. The ministry confirmed that the NNPC had settled its final monthly payment of N6.3bn under the agreement with the committee in 2011 to clear its then said indebtedness of N450bn.
 
We do not have enough detail from the approved 2017 budget to quote the projected net distributions from the federation account and the VAT pool.
 
That said, the pro rata monthly average of N477bn combined in the 2016 budget will surely be higher this year: the FGN is assuming a firmer oil price and weaker naira than in 2016. For the sake of comparison with the budget projection, the latest payout has to be stripped of one-offs such as the exchange-rate gain and is therefore well short of budget expectations.
 
The ministry said that the balance in the excess crude account stood at US$2.30bn.

Another subpar FAAC payout

We have taken the latest payout from the local media. The accountant-general’s office provide the revenue numbers up to December 2016, distributed in January. We use the data for gross distributions while the local media cite a combination of gross and net payouts to the three tiers.
 

A bond auction to satisfy the DMO

 
23rd June, 2017


The DMO may view Wednesday’s monthly auction of FGN bonds as a success. While it raised N99bn (US$320m) rather than its offer of N140bn, it was able to set marginal rates for all three bonds below the level of the previous month. It was operating from a position of strength due to its successful front-loading of issuance. It has now raised N850bn (gross) in the half-year and is well on its way to the N1.25trn projection for the domestic financing of the 2017 budget. It has other, smaller strings to its bow such as the FGN savings bonds.
 
The DMO may justifiably feel that it has “done its bit” towards budget deficit financing with these auctions as well as the sales of the sovereign Eurobonds and the diaspora issue. It would feel more comfortable with tangible evidence that the multilateral contribution from the World Bank and the African Development Bank is forthcoming. We note that these partners were to have helped finance the 2016 deficit.
 
Demand was again poor (N13bn) for the five-year benchmark. We understand that the paper is trading higher in the secondary market.

A bond auction to satisfy the DMO

Sources: Debt Management Office (DMO); FBNQuest Research

The DMO has additional flexibility in its issuance in the months ahead since it has announced it is to launch Nigeria’s first sovereign sukuk (Islamic bond) in naira to raise N100bn.

Broadband penetration in need of a leg-up

 
22nd June, 2017


The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 90.1 million in April, representing a y/y contraction of -1.2%. The figure implies density of 49% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. On a m/m basis, internet subscriptions picked up marginally by 0.2%. However, given the persistent macro challenges in Nigeria, we doubt that the FGN will hit its broadband penetration target of 30% over the next 18 months.

The dynamics within the broadband industry have changed particularly due to fx volatility over the past eight quarters as the industry depends heavily on imported infrastructure. The operating costs for telecommunications operators have spiked and the inflow of fresh investment has been minimal.  Broadband penetration currently stands at 21%.

In April MTN emerged as the leading operator in terms of internet subscriptions, accounting for 34% of the total, while Globacom was the second largest with a 30% market share. Meanwhile, Etisalat had the lowest share with only 12.7 million internet subscribers.

We note that the latter is currently facing loan repayment issues. Its US$1.2bn loan, which was accessed in 2015 when the naira was trading at N197 to the dollar, is now more expensive in naira terms. Etisalat also faced challenges converting its revenue from naira to US dollars as fx illiquidity plagued the market up until February this year. The regulator insists that subscribers within the network will continue to experience quality service.

Broadband penetration in need of a leg-up
Sources: Nigerian Communications Commission (NCC); FBNQuest Research

Data speed in Nigeria remains relatively slow. A recent report by Akmai Technologies (a media and software content delivery company) shows that Nigeria’s average internet speed in Q1 2017 stood at 3.9Mbps, compared with the global standard of 7.2Mbps.

Unless increased investments are recorded within the broadband segment, the telecommunications sector may not be able to repeat the successes it recorded in mobile telephony.

Another string to the DMO’s bow

 
21th June, 2017


The local media has reported the sale of Nigeria’s first diaspora bond on the international capital market. The US$300m issue has a tenor of five years and pays a coupon of 5.625%. It was approved both by the SEC in the US and the UK Listing Authority. Final subscriptions amounted to about 130% of the offer. The issue had been on the drawing board for a few years. However, the marketing channels have now been opened and the Debt Management Office (DMO) has a formula that can be repeated.
 
The diaspora bond issue follows sales of Eurobonds this year to raise US$1.5bn. The 2017 budget has an external financing target of N1.07trn or US$3.5bn at the assumed exchange rate of N305 per US dollar.
 
It would appear that the DMO has already raised more than half the target for the year. However, the approved 2016 budget projected external financing of N640bn or US$3.2bn at the assumed rate of N197. That rate was, of course, liberalized in June. The only financing secured in 2016 was a disbursement of US$600m by the African Development Bank. The authorities may consider the 2016 deficit financing chapter closed since the stock of outstanding FGN bonds last year increased by as much as N2.22trn.
 
This success in tapping the commercial market does not spare the FGN the ordeal of talks with the multilaterals. Borrowing from the IMF is unacceptable politically to a Nigerian government but the FGN needs to persuade the World Bank to disburse a budget loan. Whatever the sticking point, the exchange-rate regime perhaps, the authorities need to reach an agreement.
 
The growth in borrowing at commercial rates obviously brings increased servicing costs. However, we are talking of an increase from a low base. Our calculations suggest average FGN borrowing costs in 2016 of 2.1% for external obligations and 11.6% for domestic. (The latter will have since risen dramatically.)
 
Projections by Fitch in its latest full rating report from March this year flag up the strength of Nigeria’s external balance sheet. It sees gross general government debt/GDP rising from 17.4% last year to 26.2% in 2026. Its sensitivity analysis of public debt points to a ratio above a still manageable 30% if the FGN is unable to reduce its primary budget deficit or suffers a rise of 250 bps in its servicing costs.
 
The DMO has other initiatives in play to diversify funding sources. It is selling FGN savings bonds to retail, albeit with a slow start, and, together with the SEC in Abuja, is preparing for the country’s first sukuk (Islamic bond) in local currency.

Tall order of non-oil revenue targets

 
20th June, 2017


We comment today on gross non-oil revenue collection in the 12 months to February in the context of the projections for this year per the federal budget and national planning minister’s presentation to the National Assembly in mid-December. Sadly the comparison is not seamless because the 12-month outturn (see chart) shows gross flows into the federation account while the projections are for FGN retained revenue. Also the aggregate totals in the budget were slightly revised in the bill signed off at the start of last week (Good Morning Nigeria, 14 June 2017).
 
The gross figures have companies’ income tax at N990bn, and the FGN projections at N810bn. This is a federal tax so the projection appears unusually cautious.
 
On the same basis, VAT amounted to N830bn gross while the FGN projection is N240bn. The state governments are the principal beneficiary of distribution from the VAT pool although it is quite clear there are no plans to hike the standard rate of the tax.
 
The projections are striking for the targets of N810bn for FGN independent revenue, and N560bn for recoveries and fines without providing supporting details. These underpin the projection of total FGN retained revenue of N4.94trn: without them the outturn is set to be highly disappointing.

Tall order of non-oil revenue targets

The Federal Inland Revenue Service, the largest collection agency which is responsible for most non-oil taxes as well as the petroleum profits tax, has acknowledged the steady decline in its take from N5.01trn in 2002 to N3.30trn last year. While pleading the deterioration in the macroeconomic environment, it has highlighted the many initiatives in progress to turn around its performance.

Decent growth posted by the PFAs

 
19th June, 2017


The assets under management (AUM) of the regulated Nigerian pension industry increased by 21.1% y/y in April to N6.49trn (US$21.2bn). This is a decent annual increase when we allow for the arrears in pension (and salary) payments to employees of state governments and public agencies that emerged in the campaigning for the elections in 2015. It would appear that the FGN’s several initiatives to bolster state government finances have made an impact. Certainly the monthly distributions by the Federation Account Allocation Committee have not picked up.

Holdings of FGN paper amounted to N71.4% of AUM in April, compared with 67.5% one year earlier. We can see a sharper rise in positions in NTBs, to 15.7% from 8.6%. The pension funds have a particular interest in the long bonds for matching purposes. More generally, they may feel that they had been missing out in the NTBs market, where the CBN has been setting the stop rates at more than 22% since August at primary auction and open market operations (OMO).

The industry’s holdings of FGN bonds at end-March represented 45.7% of the stock of the paper.

The data does not capture the recent surge on the stock market, to which offshore investors have returned with new money (in addition to recycled dividends) and some domestic institutions have followed their lead. The share of domestic equities in AUM actually declined to 7.4% in April from 8.7% one year earlier.

Decent growth posted by the PFAs

Sources: National Pension Commission (PenCom); FBNQuest Research

We welcome the timely monthly data releases from PenCom. We would welcome even more independent industry analysis allowing investors to compare the performance of the pension funds.

Stubborn inflationary pressures
 
16th June, 2017


The latest inflation report from the NBS shows a fourth successive decline in the headline inflation y/y, to 16.3% in May from 17.2% the previous month. The growth in the core measure slowed from 14.8% y/y to 13.0%, its lowest level for more than one year. Meanwhile, food inflation was unchanged at 19.3% y/y; the rounding off masks the 3bps decline. The  bureau’s  commentary  notes  higher  prices  for  most  staples  as  well  as  wine  and  spirits,  clothing,  motor cars, lubricants for personal transport equipment and air transport.
 
It seems the fx interventions by the CBN have had a positive impact on imported food inflation. We note the recent convergence between the NAFEX window and the parallel market as the naira is trading at about N365/US$ on both markets. Imported food price inflation slowed to 15.0% y/y from 17.0%; this is the only index component made up solely of imports.
 
Food inflation remains high. In addition to the poor infrastructure, supply-side constraints may have been partly triggered by some farmers’ preference for exports as opposed to domestic supply.
 
The headline rate increased by 1.9% m/m in May (the highest recorded this year), compared with 1.6% recorded in the previous month.

Stubborn inflationary pressures

Sources: National Bureau of Statistics (NBS); FBNQuest Research

In its latest communique, the monetary policy committee (MPC) viewed the steady slowdown in y/y inflation as unsustainable, given that the limit to the positive base effects may have been reached. The committee’s focus is on m/m trends, and they provide no reason whatsoever for easing.
 
Looking ahead to June, we see a marginal uptick in the headline rate to 16.4% y/y.
 

Unemployment steadily rising
 
15th June, 2017


The latest unemployment/underemployment watch from the National Bureau of Statistics (NBS) reveals that the labour force (population of working age between the ages of 15 and 64) increased to 108.59 million in Q4 2016 from 108.03 million recorded in Q3. At the same time, the unemployment rate accelerated to 14.2% from 13.9% recorded in the previous quarter. The unemployment situation mirrors the country’s persistent macro challenges.
 
Within the labour force, 28.6 million people were either unemployed or underemployed, compared with 27.1 million in Q3 2016.
 
The youth population recorded the highest rate of unemployment. During the period under review, the unemployment rate for Nigerians within the ages of 15-25 was 25.2%.
 
We notice that graduates are still struggling to secure decent paying jobs. According to the NBS, only 58% of Nigerians within this group were fully employed in Q4.
 
To drive down the unemployment rate, policymakers have identified entrepreneurship as a solution. However, the country’s business climate is not conducive to start-ups to thrive, particularly those that require heavy capital injections.
 
President Buhari’s 2017 budget speech reiterated the FGN’s commitment to addressing the country’s unemployment. Its plans to diversify the economy are expected to create more jobs in agriculture, manufacturing and the solid minerals segment.
 
Additionally, the FGN intends to prioritise human capital development. To this end, it has expressed its willingness to collaborate with the private sector to establish and operate technical and vocational education institutes across the country.
 
Furthermore, the Economic Recovery and Growth Plan 2017-20 prioritizes job creation through the deepening of the existing N-Power Jobs Creation programme as well as launching new.
 
The dearth of robust data poses a risk to proper implementation of the FGN’s job generating programmes.
 
Globally, the highest unemployment rates in data shown in this NBS report include Djibouti (54.0%) and Kenya (40.0%) while the lowest include Qatar (0.2%), Cambodia (0.5%) and Thailand (1.2%).
 

We have lift off!
 
14th June, 2017


On Monday the vice president, Yemi Osinbajo, signed the 2017 Appropriation Act (budget) into law, more than one month after it had been passed by the National Assembly. At this point only the aggregate figures are available from the local media. When we compare the totals with those in the president’s speech to the assembly in December and the federal budget minister’s overview shared in the same month, we find that the deficit is unchanged at N2.36trn. Aggregate revenue and spending have been increased in the intervening five months by just N140bn.

The FGN’s fiscal stance is characterised as expansionary. In real terms the projected increase of 23% in spending over the 2016 budget is ahead of average annual inflation, which is currently running at 18% y/y.
 
So we have a modestly expansionary budget but one with limited firepower. The ministry’s overview estimated aggregate spending at 6.7% of projected 2017 GDP, which it compared with ratios for 2015 showing 19.2% for Ghana and 20.7% for South Africa. The comparison is a little distorted by Nigeria’s federal structure because state and local government spending is excluded. The broader point is that the impact of FGN spending is blunted by its feeble revenue collection.
 
In the overview capital outlays are projected at N2.24trn. This would mark an impressive increase on the N1.20trn the FGN has reported for the 2016 fiscal year extended through to early May.
 
The overview also shows personnel spending contained to N1.88trn.

We have lift off!

Sources: Budget Office of the Federation; Federal Ministry of Budget and National Planning; FBNQuest Research

The vice president told the media that the assembly had substituted some of the FGN’s priority capital programmes for its own. This does not encourage hopes that the budget process will become smoother henceforth.

NNPC’s need of a stability dividend
 
13th June, 2017


In March the NNPC reduced its operating deficit from N14.1bn the previous month to N5.6bn (US$18m), its best performance since the token profit of N0.3bn in May 2016. The driver was the Nigerian Petroleum Development Company (NPDC), the corporation’s most profitable unit, which pushed its revenue up by 86% to N41.3bn and its operating profit by 196% to N25.9bn. The company is particularly vulnerable to sabotage in the Niger Delta. It produced just 40,000 b/d in February although it has a target of 250,000 b/d. The peace dividend is substantial.
 
A lesser bright spot in the corporation’s Financial and Operations Report for March is the operating profit of N3.4bn posted for March by the refineries (or by Kaduna and Port Harcourt, to be precise). Under their new business model of merchant plant, the refineries purchase the crude themselves and sell products for their own account.
 
The refineries are to remain state-owned although private capital may be injected. They will be joined by the 650,000 b/d Dangote project in Lagos State, which is scheduled for its first production in 2019 and for listing.
 
Between March 2016 and March 2017 the NNPC’s export proceeds totaled US$2.50bn, of which US$2.29bn was transferred to the joint ventures (jvs) for cash call payments. The amount due to the jvs over the period per the 2016 appropriation, however, was US$8.64bn.
 
Under an agreement with the oil majors, a haircut has been applied to the corporation’s arrears, a first repayment has been made, and the ventures are to become incorporated and self-financing.

NNPC’s need of a stability dividend

Sources: NNPC, Financial and Operations Report, March 2017; FBNQuest Research

The report notes that power plants generated 3,056 megawatts in March from gas supplied by the corporation, equivalent to 75% of total generation.

The better news on external debt
 
12th June, 2017


In stark contrast to the challenging burden of its sovereign domestic debt service, the data for Nigeria’s external obligations are comforting. Total obligations at end-March amounted to US$13.81bn, equivalent to 3.4% of 2016 GDP. The increase in Q1 amounted to US$2.4bn, consisting of Eurobond sales of US$1.5bn as well as higher borrowings of US$260m and US$600m from the World Bank and African Development Bank respectively. Q3 should bring another rise in market borrowings since the FGN is about to embark on a roadshow for its US$300m diaspora bond.
 
This breakdown of additional external borrowings points to a rising burden of external debt service. Its cost, as we have often noted, is a fraction of that of servicing the FGN’s domestic debt. Looking ahead, the FGN has plans to increase its external borrowings, subject to the go-ahead from the National Assembly: further Eurobond sales, the long-running talks with the World Bank on budget deficit financing and loans from China (including those for public agencies such as the NNPC, guaranteed by the FGN).
 
External debt service in Q1 2017 was US$130m. If we take the interest and fee payments of US$90m, we arrive at an annualised average interest rate of 2.6%.
 
The optimal blend of the FGN’s domestic/external debt obligations is 60/40 according to the DMO’s medium-term strategy. The ratio for the FGN at end-March was unchanged at 76/24.

The better news on external debt


Sources: Debt Management Office (DMO); FBNQuest Research

However, the FGN’s fiscal strategy has the deficit largely covered by external financing with effect from next year. The likelihood of further exchange-rate adjustments also suggests a step towards the optimal blend.
 

A hiccup in reserves accumulation
 
9th June, 2017


A hiccup in reserves accumulation
                                                                                           
Gross official reserves declined by US$540m in May to US$31.3bn. This first monthly decline since October (see chart) has to be seen in the context of the acceleration in the CBN’s fx interventions through the several windows it operates, the latest being NAFEX for portfolio investors and exporters. The broader picture shows a rise of US$6.4bn since end-October, for which there are several plausible explanations: a disbursement by the African Development Bank, Eurobond sales of US$1.5bn, rising oil production, improved fx management and swap transactions.
 
The decline in May is not a cause for alarm against the broader trend. Additionally, we note the repair of the Forcados oil export pipeline after more than one year out of operation. This amounts to a sizeable increase in oil earnings.
 
Further, we see that the early indications from NAFEX are promising. Offshore portfolio investors are accessing the window (on both sides of the trade). At this point, we are seeing the frontier and Africa-dedicated funds at the window: the more widespread the participation, the less the CBN has to draw upon its reserves.
 
If, however, the decline in reserves was repeated over a few months, the CBN would scale back its interventions and rethink its fx policy.

A hiccup in reserves accumulation

Sources: CBN; FBNQuest Research

We could offer more insight if we had access to more information. The South African Reserve Bank, for example, publishes a breakdown of gross reserves by gold, SDR holdings and fx reserves. It then deducts foreign currency deposits and adds the forward position to give what it terms the international liquidity position.
 

Soaring cost of domestic debt service
 
8th June, 2017


While yesterday we commented upon the still exemplary ratio for domestic debt stock/GDP, today we note the alarming rise in domestic debt service (see chart). Payments have soared from N354bn in 2010 to N1.23trn last year. We focus on the domestic payments because they comprise more than 90% of the total burden, and because the FGN’s external debt obligations are mostly concessional and far less costly than its naira borrowing. There is a point at which this domestic debt service burden becomes unsustainable, and we are not a million miles away from it.
 
Total debt service in the 2016 budget represented a projected 35.4% of total FGN revenue. The ratio was so dire, of course, because the record of revenue collection has been poor. In practice, collection was even poorer than forecast and the actual ratio was above 60%.
 
The cost of issuing NTBs has soared, to the benefit of the commercial banks (the main buyers). Since August 2016, the yields on the 364-day paper at auction have settled above 22% (and more than doubled over 12 months).

Soaring cost of domestic debt service

Sources: Debt Management Office (DMO); FBNQuest Research

 There are grounds for hope on the horizon. In the short term, the DMO’s front-loading of issuance this year has resulted in sales of FGN bonds at auction totaling N750bn over five months. The still-to-be-signed-off 2017 budget projects net domestic borrowing of N1.25trn.
 
Secondly, the Economic Recovery and Growth Plan 2017-20 sets out a shift in borrowing strategy in line with the DMO’s medium-term paper on the subject. It has financing of the deficit largely external from next year, rising from 66% of the total in 2018 to 72% at the end of the plan period in 2020.

Soaring cost of domestic debt service
 
8th June, 2017


While yesterday we commented upon the still exemplary ratio for domestic debt stock/GDP, today we note the alarming rise in domestic debt service (see chart). Payments have soared from N354bn in 2010 to N1.23trn last year. We focus on the domestic payments because they comprise more than 90% of the total burden, and because the FGN’s external debt obligations are mostly concessional and far less costly than its naira borrowing. There is a point at which this domestic debt service burden becomes unsustainable, and we are not a million miles away from it.
 
Total debt service in the 2016 budget represented a projected 35.4% of total FGN revenue. The ratio was so dire, of course, because the record of revenue collection has been poor. In practice, collection was even poorer than forecast and the actual ratio was above 60%.
 
The cost of issuing NTBs has soared, to the benefit of the commercial banks (the main buyers). Since August 2016, the yields on the 364-day paper at auction have settled above 22% (and more than doubled over 12 months).

Soaring cost of domestic debt service

Sources: Debt Management Office (DMO); FBNQuest Research

 There are grounds for hope on the horizon. In the short term, the DMO’s front-loading of issuance this year has resulted in sales of FGN bonds at auction totaling N750bn over five months. The still-to-be-signed-off 2017 budget projects net domestic borrowing of N1.25trn.
 
Secondly, the Economic Recovery and Growth Plan 2017-20 sets out a shift in borrowing strategy in line with the DMO’s medium-term paper on the subject. It has financing of the deficit largely external from next year, rising from 66% of the total in 2018 to 72% at the end of the plan period in 2020.

Expected surge in domestic debt stock
 
7th June, 2017


The FGN’s domestic debt stock amounted to N11.97trn (US$39.2bn) at end-March, equivalent to 11.7% of 2016 GDP. We should view the steep increase of 8% or N910bn in Q1 in the context of the DMO’s deliberate front-loading of issuance, which totalled N535bn over the three months. This was a repeat of the pattern over the two previous years. The domestic debt stock/GDP ratio is very healthy for a sovereign rated B+/B. It remains so when we allow for the unrecorded debts of N2.2trn of the FGN which the administration unearthed in mid-December.
 
To expand federal (sovereign) into public domestic debt, we have to add: the bank borrowings of state governments, which the DMO estimated at N2.82trn at end-September, their outstanding bonds, the bonds issued by AMCON, and the debts of the NNPC and other public agencies.
 
When we include the debts unearthed in December, we have a public domestic debt stock of around 25% of 2016 GDP. We stress that this is the worst-case scenario. Our figure excludes the many credit lines extended by the CBN. In line with established practice, it also excludes contingents such as government guarantees.

Expected surge in domestic debt stock
 
The authorities will be disappointed by the take-up of the FGN’s new savings bonds for the retail segment. The DMO raised just N2bn in Q1.

Once the 2017 budget has been signed off by the presidency, the FGN will be looking to secure the balance of the projected N1.08trn external financing for the year. To date, it has raised US$1.5bn from the sale of Eurobonds.

Decline in air passenger traffic
 
6th June, 2017


Drawing on data provided by the Federal Aviation Authority of Nigeria, the National Bureau of Statistics (NBS) has released its latest report on air passenger traffic. The report estimates total traffic in Q1 2017 at 2.5 million passengers, representing decreases of 31% q/q and 35% y/y. Household pockets continue to be squeezed due to the lingering macro challenges; as such weaker demand for air travel is not surprising.
 
Domestic air traffic fell by -32% q/q in Q1 and accounted for 67% of the total. This was partly due to the Abuja airport closure that lasted for six weeks in Q1; compared with the previous quarter, there were 311, 261 fewer domestic passengers that travelled through Abuja.
 
Although passengers were temporarily diverted to Kaduna airport, some regular fliers opted to stay put until the Abuja airport was re-opened. Airport traffic through Kaduna declined by -56% q/q. It is worth pointing out some statistical glitches in the series: the NBS did not receive the complete data set for a few airports (including Kaduna).
 
Despite the closure, Abuja airport remained the second largest domestic airport. It accounted for 29.6% of total domestic air traffic.
 
There was also a drop in international air passenger traffic, although not as steep as that of domestic passenger traffic. It declined by -18% q/q. The Lagos international airport recorded the highest number of passengers (627,406) in Q1.

Decline in air passenger traffic

Sources: National Bureau of Statistics (NBS); FBNQuest Research

The CBN's fx interventions kicked off in February and the impact on fx liquidity became pronounced in early Q2. This most likely had a positive impact on airport traffic data for Q2.
 
Despite the decline in air passenger traffic, the national accounts for Q1 show that air transport expanded by 1.5% y/y. However it represented just 7.3% of total transportation.

Q/q dip in capital importation
 
5th June, 2017


The NBS recently released its latest report on Nigerian Capital Importation, which covers Q1 2017. The data was obtained from the CBN and compiled using information on banking transactions. The total value of capital imported into Nigeria in Q1 2017 was estimated at US$908m, representing an increase of 28% y/y. However compared with the previous quarter this was a 41% decline. January posted the lowest inflow at US$200m.
 
Other investments category was the largest component of imported capital, accounting for 42% of the total. However, on a q/q basis it declined considerably by 58%.
 
Portfolio investment accounted for the second largest component with inflows worth US$314m (35% of the total); representing increases of 10% q/q and 16% y/y. The CBN’s fx interventions had a role to play in the increased inflows, during the period under review there was some level of stability in the fx market.
 
Money market instruments increased significantly by over 100% to US$212m and accounted for the largest share (67%) of portfolio investments. In stark contrast, portfolio equity inflows remained subdued at US102m; this component suffered a 42% q/q decline. We assume seasonality contributed to this decline.
 
FDI was the lowest contributor to capital importation in Q1 with inflows worth US$211m; there was a 39% q/q decline. We have mentioned on a few occasions that an increased steady flow from FDI rests upon the authority’s ability to solve the structural issues within the country.

Qq dip in capital importation


Source: National Bureau of Statistics (NBS); FBNQuest Research

In terms of origination of inflows, the United Kingdom had the largest share at US302m accounting for 33% of the total. Meanwhile, the US, Singapore and Mauritius represented 24.1%, 8.1% and 7.9% respectively.
 
Based on trading activities so far this quarter, we expect the Q2 report when published to show a marked q/q increase in portfolio flows in particular. Beyond Q2, much will depend on how further the fx reforms go e.g. additional transparency on NAFEX.
 

ATM transactions still in the driving seat
 

2nd June, 2017

Data from a new report series from the National Bureau of Statistics in collaboration with the CBN reveal that 304 million transactions valued at N22trn were recorded on electronic payment channels in Q1 2017. As expected, ATM transactions dominated with a volume of 179 million. Internet subscriptions directly correlated with electronic transactions stood at 90 million in March 2017 according to the Nigerian Communications Commission. This translates to a penetration of 49%.
 
Based on data from the Nigeria Interbank Settlement Systems (NIBSS), total active bank accounts in the country amounted to 67 million in February.
 
Although there was a 13.2% y/y increase, only 35% of the country’s population is currently exposed to electronic payment transactions. Financial inclusion is still far from its optimal level.
 
Mobile payments stood at N461bn in Q1 2017, representing a y/y growth of 93%. However, it accounted for just 4% of total electronic transactions under the review period.


ATM transactions still in the driving seat
 
Sources: National Bureau of Statistics (NBS); FBNQuest Research

The unbanked population could be brought into the banking system quicker through mobile banking services, especially with greater collaboration between banks and telecommunication operators.
The volume of Point-of-Sale (PoS) transactions shows the impact of the cashless policy on the economy. The NBS data show that 27 million PoS transactions were recorded in Q1 2017; when compared with the corresponding period in 2016, this represented a 125% increase.
 
Increased electronic transactions results in better transparency and efficiency gains in both the public and private sector. However, one downside is the threat that cybercrime poses. According to industry sources, N2bn was lost in 2016 to cybercrime.

PMI reading no 50: lower but still above water
 

1st June, 2017

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a decline from 58.9 in April to 54.0 in May. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies.
 
In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013, including five in 2016.
 
Our sample is an accurate blend of large, medium-sized and small companies.
 
We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.
 
Four of the five sub-indices declined in May. However, only workforce fell into negative territory while delivery times was the strongest at 64.
 
Among the answers to the trigger questions, we note seasonal effect (rainy season) as a primary reason for lower production. Large and medium-sized firms recorded significant declines in their stocks of purchases.
 
Following the release of its circulars in late February, the CBN has improved its sale of fx to retail (for invisibles) and to importers. This has resulted in a pickup in business confidence. However, macro challenges still persist and household pockets remain squeezed; as a result, demand is generally still soft.
 
The economy is emerging from recession. In Q1 2017, the contraction of the economy narrowed from -1.3% y/y in the previous quarter to -0.5% while the manufacturing sector expanded by 1.4% y/y from a contraction of -2.5% in Q4 2016. Looking ahead to Q2 2017, we see growth of 1.6% y/y.

Transforming agric’s optics via Nollywood
 

31 May, 2017

Our final coverage of the AfDB annual meetings in Ahmedabad last week focuses on the “Changing perceptions on Agriculture: The role of the Entertainment Industry” session. Undoubtedly, the perception of agriculture across Africa has been that of survival for the rural poor (i.e. subsistence farming). Over the years, agriculture has evolved and multiple job opportunities within the sector’s value chain have emerged. However, it is still largely perceived as an area of expertise suitable for just the rural population.
 
Given that visuals play a key role in shaping perceptions, the entertainment industry could have a direct impact in transforming agriculture into a ‘cool’ profession.
 
Nigerian actress, director and producer, Omoni Oboli, highlighted the need to showcase agriculture through roles created by script writers. Typically, agriculturists are represented as struggling farmers and often regarded as less privileged.
 
Oboli also expressed that while movie creators should have economically-focused movies in the market, this should be approached cautiously to avoid draining out the entertainment aspect in favour of a documentary. This could defeat the purpose of content restructuring as a wide range of viewers may not be reached.
 
Based on anecdotal evidence, Nollywood is currently the second largest employer in Nigeria while agriculture remains the top job generator across the country.
 
According to Nigeria’s national accounts for Q1, the entertainment industry grew by 12% y/y. However, we emphasize that this is from a very low base as the sector accounts for just 0.3% of total GDP. Meanwhile agriculture grew by 3.4% y/y in the same quarter and represents 21% of total GDP.
 
Omotola Ekeinde, a well-known Nigerian actress and philanthropist, noted that poor access to finance is a constraint in the entertainment industry. It is difficult convincing financiers on the bankability of storylines for movies. As such, the whole value chain within the movie industry needs to be fully educated on the potential of agriculture to allow financiers and other supporting personnel buy into movie projects geared towards boosting agriculture.
 
Nigeria’s Bank of Industry was identified as one financier that has supported the entertainment sector by providing funds for movie production. The BOI has a N1bn fund (Nollyfund) engineered to support film makers.
 
In his concluding remarks, Mr. Raney, a Bollywood film director and producer expressed his intent to collaborate with Nollywood and assured delegates that communication processes which will assist agricultural development would be tackled at various meetings involving stakeholders.

Rags, and sometimes riches
 

26 May, 2017

At the AfDB annual meetings in Ahmedabad this week, we attended a session on “Creating Wealth through Fashionomics”. The panelists agreed that rapid expansion of incomes requires large-scale industrialisation. Just two countries (South Korea and Taiwan) have migrated from low to high income in the past 30 years, and a third (China) is set to join them in 2020. GDP per head in China in 1978 of US$154 was below sub-Saharan Africa’s yet reached US$7,500.
 
Labour costs in China have risen in tandem. Helen Hai, the prime mover behind the Huajian shoe factory outside Addis Ababa, said that 85 million Chinese jobs are being relocated. This includes 20 million in textiles and garments. The Chinese textile worker is now earning about US$700 per month.
 
Huajian is not the only new manufacturer in the segment in Ethiopia. An industrial park, the country’s fifth, is to be built this year. It is reserved for textile and garment companies, and due to provide 65,000 jobs.
 
Nick Earlam, the chief executive of the Plexus Cotton Group, noted that textiles have industrialised the world. Africa produces 1.5 million tonnes of raw cotton per year, 85% of which is exported unprocessed. Plexus has opened an integrated textile and garment operation in Uganda. Cotton valued at US$60m is transformed into finished goods sold for US$700m.
 
Vlisco Group, the manufacturer of Dutch wax prints, has two factories and more than 30 retail stores in Africa. David Suddens, its chief executive, said that the company signed a MoU with the Nigerian government in 2015 and is training tailors in the country. It plans to open its third factory in Nigeria.
 
The industry is a good example of changing trade patterns towards the celebrated south-south axis. Apparel consumption currently stands at US$500bn per year in Europe and the US, and US$300bn in China, India and South East Asia. Within ten years, the balance is expected to shift to US$700bn and US$750bn. The trend is also discernible in investment, which we noted in our commentary on the African Economic Outlook 2017.
 
Panelists disagreed on incentives. Earlam stressed their value and cited subsidised electricity in Uganda. Hai suggested that the host government’s good intentions and the company’s drive counted for rather more.
 
On a less euphoric note, Sidahmed Alphadi, whose designs are worn by a host of African leaders, bemoaned the lack of suitable labour. The Abidjan-based designer called for government support to train cutters, tailors and distributors. 



Transport by far the best performer
 

25 May, 2017

From the national accounts for Q1 2017 we highlight the five best performing sectors. Although the economy was still contracting in Q1, we are covering the better performers because we see that a modest recovery is underway. We cover only those sectors accounting for at least 1% of GDP at constant basic prices. The data show agriculture expanding by 3.4% y/y, and industry and services contracting by -4.2% and -0.2%. Industry was dragged down by the -11.5% y/y contraction in mining and quarrying, which is dominated by oil and natural gas.
 
We talk of a modest recovery because trade, the second largest sector of the economy, declined by -3.1% y/y. Trade is the most reliable measure of demand across all income levels.
 
The fast growing sector y/y was transportation and storage. The road transport component, comfortably the largest in the sector, expanded by 12.4% y/y. Given what we have observed with trade, what we see are the fruits of the FGN’s capital spending.
 
This administration broadly shares the same reforming agenda for agriculture as its predecessor. It is therefore disappointing that the sector’s growth was the weakest since Q1 2016.
 
Probably the most encouraging development was the return of manufacturing to growth after seven quarters of contraction in the previous eight. We would like to identify a pick-up in consumption but the latest national accounts by demand date from Q2 2016. More likely, we are seeing the early impact of the CBN’s new fx interventions, which began in March.

Transport by far the best performer

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Information and communications, dominated by mobile telephony, maintained its steady run of uninterrupted growth.
 



An end to the recession in sight
 

24 May, 2017

The NBS has released the national accounts for Q1 2017 to show negative growth of -0.5% y/y (after -1.7% the previous quarter). The economy has now contracted for five successive quarters on a y/y basis. Our expectation was modest GDP growth of 0.2% y/y in Q1 on the basis of some recovery in the non-oil economy. That recovery did materialise but our forecast was undone by further contraction in the oil economy (of -11.6% y/y). The NBS has revised downwards its data for oil output, and therefore oil GDP and total GDP for the four quarters of 2016.
 
Oil’s share of real GDP amounted to just 8.9% in Q1 2017 and is now only the fifth largest in the economy: it is topped in descending order by agriculture, trade, information and communications, and manufacturing. Through its linkages across other sectors, however, the indirect oil economy may be as large as 40% of GDP.
 

The non-oil economy expanded by 0.7% y/y in Q1. A weakness in the data is that the output of the trade segment declined q/q, which was not a surprise in view of seasonal factors, but also y/y.
 
In search of evidence of the fiscal stimulus, we note steady q/q growth in both construction and road transport.

An end to the recession in sight

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Looking ahead to the Q2 2017 data, we see growth of 1.6% y/y and a belated exit from the recession. We expect non-oil growth of 1.0% y/y, along with a rebound in the oil economy. The revised NBS figures show crude oil output as low as 1.61 mbpd in Q2 2016.

Looking further ahead, a step-up to real growth on a per head basis requires a continuing fiscal stimulus, rising household consumption and a further decline in sabotage in the Niger Delta.
 



Whither Africa? Gently recovering
 

23 May, 2017

The African Economic Outlook 2017 charts a slow recovery in African growth from an estimated 2.2% in 2016 to 3.4% this year and 4.3% in 2018. The outlook, which was launched yesterday at the annual meetings of the African Development Bank (AfDB) in Ahmedabad, thoughtfully charts the growth without Nigeria: 3.0% last year, rising to 3.6% this year and 4.1% in 2018. The projections are not comparable with the IMF’s for example, since the latter covers North Africa with the Middle East.

The outlook expects only a small increase in external financial flows to Africa this year, from US$178bn to US$180bn. It sees remittances as providing US$66bn, FDI US$58bn and official development assistance (once known as aid) US$51bn, with portfolio investors supplying the balance. 

Given their size, it is surprising that more African governments do not energetically chase and facilitate remittances. One exception cited in the report is Ethiopia, which provides discounted airfares and duty incentives for entrepreneurs from its diaspora. It has also issued yellow cards which give the diaspora the same rights and benefits as domestic investors. Remittances to Ethiopia have increased by a factor of 12 since 2000, compared with an average sixfold rise elsewhere in Africa.

The outlook, which is a joint collaboration of the AfDB, the OECD and the UN Development Programme, identifies a shift in external flows from aid to what it terms blended finance. It sees this trend deepening with contributions from state revenues, pension funds and even sovereign wealth funds. 

The outlook’s special theme and sub-title is Entrepreneurship and Industrialisation. It cites market research showing that 75% of Africans view entrepreneurship as a “good career choice” and that 42% are potential young entrepreneurs.

However, 40% of Africans surveyed abandon entrepreneurship out of necessity. Further, those that persevere tend to work in retail, which requires limited credit.

Procurement can often account for as much as 50% of public spending. The law in Algeria, Morocco and Tunisia stipulates that at least 20% of public procurement is reserved for SMEs.

In our view the most revealing table in the outlook shows the top investing companies in Africa by capital investment for 2015-16. Outside the energy sector there is not one familiar Western multinational. Companies from Asia and the Middle East predominate.
 



Monetary policy set to remain on hold
 

22 May, 2017

The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. We see an unchanged stance. In its decisions it has to allow for an economy which has contracted y/y for four successive quarters and inflation which has remained stubbornly high in m/m terms. It has argued over several meetings that it has little, if any responsibility for either trend. We admit to some sympathy with its position.

The committee will have access to the national accounts for Q1 2017, which are now due for release tomorrow. The data may or may not show an end to the recession, however marginal. The governor has sought to dampen hopes: we see token growth of 0.2% y/y. 

More importantly, the committee has been wary of easing, arguing that on the rare occasions it has cut the policy rate, the beneficiaries of the additional liquidity were not productive sectors such as agriculture but traders with substantial fx needs. This analysis rings some familiar bells but is also a reflection on bank supervision and regulation.

The MPC looks to the fiscal side to drive the economic recovery. Now that the 2017 budget has been finally approved by the National Assembly, we expect a call from the committee to close the process for the year and begin the capital releases.

Its last communique was dismissive of the positive base effects responsible for an improvement in the y/y rate in February and concentrated on the pick-up on a m/m basis. Supply-side constraints remain extensive: power, fuel and, it appears anecdotally, some food stuffs. The medium-term outlook for inflation is reasonable, however, and in these circumstances a rate cut would also come as a surprise. 

On exchange-rate policy, we expect plenty of commentary. The CBN’s step-up in its fx interventions has had some positive results. The naira has appreciated on the parallel market and manufacturers are enjoying improved access to imported raw materials. Retail sentiment has been lifted and there have been stirrings from a few offshore portfolio investors. The committee may conclude that some fine-tuning is required. We question how far the CBN can expand its interventions without the depletion of reserves that it is determined to avoid.

The CBN released the personal statements from the meeting in March on Friday. This was one day sooner than two months previously but does not      provide the market with the necessary guidance on members’ thinking.
 



Scope for the DMO to pick and choose
 

19 May, 2017

The DMO may have mixed feelings about the outcome of the fifth monthly auction of FGN bonds of the year, which it held last week. It sought to raise N140bn but managed just N105bn (US$340m). For the three-year benchmark (Jul ‘21s), it collected N10bn rather than its target of N40bn, such is its determination to contain the FGN’s borrowing costs. The marginal rate on the instrument was still 31bps higher than the previous month. However, the DMO’s successful front-loading of issuance in Q1 has given it some welcome room for manoeuvre.

In five months it has raised N750bn (gross) from its auctions of the bonds. While we have to wait for the sign-off by the acting president (or the president), it appears that the 2017 budget approved last week by the National Assembly has left unchanged the N1.25trn projection for net domestic borrowing. 
 
Other than February, it has become a challenge to sell the three-year paper at auction. More attractive returns are available for almost all NTBs. Additionally, the step-up in fx interventions by the CBN since March has reduced banks’ free funds to invest in debt markets.

More generally, we note the stirrings on the NSE in the past two weeks. The PFAs have been selectively among the buyers.

Scope for the DMO to pick and choose


Sources: Debt Management Office (DMO); FBNQuest Research

That said, we expect the DMO to meet its target for the year without great difficulty, and with limited contributions from other FGN debt products such as the retail savings bond. Its front-loading has again been vindicated. Our assumption is that the balance of the projected US$3.5bn net external borrowing in 2017 will materialize (the multilateral lending under discussion).
 



Mixed outlook for petroleum marketers
 

18 May, 2017

On Tuesday the National Bureau of Statistics (NBS) released the latest report in its premium motor spirit (PMS) price watch series. This shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In April it averaged N149.9/litre (l) for the 36 states of the federation and the FCT, and so above the fixed upper price limit for the retail pump price of N145/l set by the authorities.

The average price of gasoline in April represented a 0.3% m/m increase. Kebbi State had the highest price for PMS at N160.5/l while Abuja, Ekiti, Kaduna, Ogun and Osun had the lowest with N145/l. 

In most states, PMS is generally sold above the upper limit set by the authorities. We assume this is as a result of petroleum marketers attempting to maintain reasonable profit margins.

Given the increased fx liquidity due to interventions by the CBN, the re-entrance of independent marketers is a possibility. Based on our estimates, petroleum products account for c.30% of Nigeria’s fx utilisation.

Mixed outlook for petroleum marketers

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Additionally, a fall in international refined product prices this year has improved margins for the marketers in Nigeria.

Boosting local refining capacity would push the cost of petroleum products downwards. Nigeria’s current refining capacity utilisation is c.37%. The latest resuscitation of government-owned refineries is underway. Furthermore, the FGN has a plan to convert illegal refineries (particularly in the Niger Delta) into modular refineries.

Notwithstanding, increased local refining capacity does not automatically translate into healthier margins for petroleum marketers. Without genuine deregulation, pricing is subject to government policy.


Another inflation report to disappoint
 

17 May, 2017

The latest inflation report from the NBS shows a third successive decline in the headline inflation y/y, to 17.2% in April from 17.3% the previous month. (Our expectation, shared with the wire services, was 17.2%.) The growth in the core measure slowed from 15.4% y/y to 14.8%, its lowest level for one year. In contrast, food price inflation accelerated from 18.4% y/y to 19.3%. The report overall is a disappointment for policymakers since it highlights still pronounced supply-side constraints.

We struggle to see much positive impact of the naira appreciation on the parallel market other than on imported food prices (see chart). The improvement in the supply of fx has not been replicated in power, for example. 

One possible explanation for the stubbornly high food price inflation (of 2.0% m/m in April) is an increasing preference of farmers for exporting their produce. It is anecdotal, and not yet corroborated by any other data such as non-oil exports.


Another inflation report to disappoint

Sources: National Bureau of Statistics (NBS); FBNQuest Research

This latest inflation report, like the last, is unlikely to be a driver in the market for naira-denominated FGN securities.

The monetary policy committee (MPC) meets next week. In its communique in late March, it was adamant that it would not consider a policy rate cut without a clear trend of m/m declines in the headline rate. We doubt that the committee will be impressed with this latest inflation report, and do not see much joy in the months ahead. The policy rate may well be stuck at 14.00% throughout the year.

The run of positive base effects comes to an end this month (May), for which we see a marked decline in the headline rate to 15.8% y/y on a marginally lower m/m rate of 1.5%.


Go out and spend it!
 

16 May, 2017

Our chart today shows the breakdown of the FGN’s monthly expenditure through to January. We have included transfers in recurrent spending although they have a capital component. By this definition, the capital share of the total over the 12 months amounts to 11%, and so well short of the 30% target in FGN plans and speeches. Again by this definition and from this data source (the CBN), the 12-month total for capital outlays of N0.61trn falls short of the official figure of N1.2trn for the full 2016 budget year, which admittedly ran through to 06 May.

The newly approved 2017 budget meets the 30% target on paper: capital and total FGN expenditure are projected at N2.24trn and N7.44trn respectively. 

The challenge, once the president has signed off the budget, becomes to   make the capital releases as soon as possible, while bettering the record of past administrations for delivering value for monies spent.

A breakdown of the ministry’s total of N1.2trn for 2016 shows that the power, works and housing ministry was the largest beneficiary, receiving N0.31trn. We can see this priority again in the approved 2017 budget, in which the same ministry is set to receive N0.55trn.

Go out and spend it!

Sources: CBN; FBNQuest Research

From the CBN’s Economic Report for January, we see that the non-debt and debt elements of recurrent expenditure in the month totaled N175bn and N157bn respectively. Once we make allowances for overheads and other recurrent items, it appears that the FGN was on track in its determination to hold personnel costs at around N1.8trn annually.


An end to the budget process in sight
 

15 May, 2017

On Thursday the National Assembly approved the 2017 budget, which sets total FGN revenue at N4.94trn and total spending at N7.44trn (US$24.3bn) including capital outlays of N2.24trn and debt service of N1.66trn. At this point we depend upon the local media for the figures but note that three of those cited above can be found in President Muhammadu Buhari’s speech to the assembly on 16 December. Total revenue appears to have been pushed up from N7.30trn.

The assumed average oil price has been lifted from US$42.5/b to US$44.5/b. The other core assumptions are unchanged from December (average crude output of 2.20 mbpd and exchange rate of N305 per US dollar). Since total revenue is also unchanged, the implication is that the FGN has sensibly trimmed its expectations of earnings from the non-oil economy. 

The authorities have no choice but to use the current interbank exchange rate as their assumption in the budget. If this rate was adjusted towards or beyond the several other rates currently in operation, there would be gains for oil revenue and customs duty to be set against (smaller) budget losses for external debt service and official imports.

The projection for capital spending should be viewed in the context of the total of N1.2trn for the 2016 budget year (through to 06 May) reported on Friday by the federal finance ministry. The minister, Kemi Adeosun, said in March that releases for 2016 had reached a record N1.0trn (Good Morning Nigeria, 29 March 2017).

While we see the fiscal stimulus as a principal driver of Nigeria’s expected emergence from recession this year, we acknowledge its limitations. Total FGN spending in 2017 is forecast at just 6.3% of GDP in the Medium-Term Expenditure Framework. This ratio is low for a frontier/emerging market. Unless it boosts its revenue from the oil and non-oil economies, it cannot hike its spending and remain fiscally responsible (which it does).

The local media reports an allocation of N77bn for the amnesty programme, which we compare with the figure of N65bn in Buhari’s speech to the assembly in December. In our view this will be money well spent. It seems clear that the incidence of sabotage in the Niger Delta has eased since the FGN adopted a more conciliatory stance.

The media coverage refers to borrowing of N2.36trn this year. The aggregate numbers cited imply a FGN deficit of N2.50trn so we assume that the authorities will collect the small balance from asset sales, recoveries and the like.


Improved flexibility from PENCOM
 

12 May, 2017

Despite the reported rise in pension fund redemptions sparked by job losses over the past year, the assets under management (AUM) of the regulated pension industry increased by 19.0% y/y to N6.30trn (US$20.0bn) in February. The breakdown by asset class shows that the share of FGN securities (bonds and NTBs) rose from 66.9% to 72.4% of the total over the period while that of domestic equities narrowed from 8.6% to 7.4%. The outperformance of fixed income instruments is partly responsible.

Last month the national pension commission (PENCOM) released a memo with some amendments allowing pension fund administrations (PFAs) greater flexibility as far as their investment options are concerned. 

We highlight the introduction of the RSA multi-fund structure which seeks to align investments of RSA holders’ contributions with their perceived risk appetite. There are four funds; the first applies to young contributors who are less risk adverse. This fund has a relatively high exposure to equities. The upper and lower limits allowable in non-fixed income instruments are 75% and 20% respectively.

Improved flexibility from PENCOM

Sources: National Pension Commission (Pencom); FBNQuest Research

In February, investments in infrastructure funds grew by 65% y/y, but from a very low base given that this investment vehicle accounts for less than 1% of the total asset value.

The amendments also allow PFAs to invest in stalled government infrastructure projects. Generally, funds allocated for infrastructure projects by the FGN are not sufficient. Therefore, this should bode well for the economy.

As PFAs begin to respond to these amendments by diversifying their investment portfolios, the proportion of FGN securities in the total mix should reduce gradually.


Moody’s thoughts on macro and Nigerian banks
 

11 May, 2017

We attended a briefing in Lagos yesterday, hosted by Moody’s Investors Service. The agency’s projections for Nigeria’s economy are favourable. Following the -1.5% y/y contraction in GDP last year, it projects GDP growth at 2.5% y/y in 2017 followed by 4% y/y in 2018. The growth forecast is on the back of positive base effects for the oil economy, government measures to expand specific non-oil sectors, the FGN’s commitment to fund large infrastructure projects post-2017 budget passage as well as expected uptick in global oil prices.
 
Moody’s oil price projection for 2017 is between US$40/b and US$60/b. We see Bonny Light at an average of US$57/b this year. 

As for inflation, the rating agency’s projections for 2017 and 2018 are 17% y/y and 13% y/y respectively. Increased supply of fx was cited as the primary reason for the 2018 inflation forecast. These forecasts compare with our estimates of 16.7% and 13.5% y/y respectively.

Moody’s made the point that the current fx liquidity in the market is more cyclical than structural, driven mainly by a recovery in oil earnings and to a lesser extent international borrowings. If oil earnings should fall again, it believes that the CBN is more likely to reduce FX sales than run down reserves in order to preserve creditworthiness – essentially a return to the strategy that prevailed through most of last 12-15 months.

Moody’s publicly rates six commercial banks which represent 65% of total assets in the Nigerian banking system. The ratings agency’s view on the Nigerian banking sector is that it is challenged but resilient; its outlook on Nigerian banks is largely stable.

This stable outlook reflects the agency’s expectation that acute fx shortages will ease gradually as Nigeria's oil and gas export revenues stabilise. However, it expects loan risks to remain high.

The agency expects the sector’s non-performing loans (NPL) ratio to rise marginally to 14-16% from 14% at end-2016. These ratios are close to the levels seen in 2010, but below the recent peak of 33% in 2009 when the sector was effectively under water. It expects the increase to be driven by exposures to the oil and gas sector, import-dependent borrowers as well as from foreign-currency loans.

Its current rating for Nigeria is B1 with a stable outlook. An upward revision is not on the cards at least for the next 12- 18 months.

Some downside risks for Nigeria’s sovereign rating as cited by Moody’s include oil price volatility, continued erosion of debt affordability, rising political risk and the lack of sound governance and transparency.
 



Forward steps with affordable housing
 

10 May, 2017

Today we turn our attention to Nigeria’s housing market. The housing deficit is currently estimated at 17 million housing units, with Lagos and Abuja accounting for 15% and 10% respectively of the total deficit. In both states, several completed residential buildings remain vacant as affordable housing is not readily available. This has worsened following the squeeze in consumers’ purchasing power on the back of the country’s macro challenges.

Historically, mortgage financing has been expensive in Nigeria. Based on industry sources, the ratio of mortgage loans to total GDP remains extremely low at 0.5% compared with 80% in the UK and 31% in South Africa. 

Last month the FGN signed a mortgage refinancing agreement worth N13bn with the Federal Government Staff Housing Loan Board (FGSHLB) and the Nigeria Mortgage Refinancing Company. We understand that there are already 30,000 registered qualified off-takers.

Through the national housing scheme 1,500 additional housing units have been developed across seven states in the country, namely Taraba, Kwara, Enugu, Ebonyi, Imo, Nassarawa and Niger.

The Lagos State government through its rent-to-own scheme has provided 500 additional housing units over the past three months. Furthermore, Lagos has entered into public private partnerships to increase the affordable housing stock within the state.

GDP and real estate sector growth (% chg; y/y)

Forward steps with affordable housing

Sources: National Bureau of Statistics (NBS); FBNQuest Research

The weakening of the naira over the last few years has presented Nigerians in the Diaspora with opportunities to invest in the country’s property market.

Last year, real estate contributed 7% to total GDP and contracted by -6.9% y/y. We hope to see increased activity across the property market (both demand and supply sides) as the economy slowly recovers and moves back into growth.
 



Boost in domestic fish production
 

09 May, 2017

The agriculture sector continues to play an important role in Nigeria’s economy, and is a key part of the government’s plans to attain sustainable economic growth. Within the sector, the fisheries segment delivered a growth rate of 5.9% y/y in 2015. However, in Q2 2016 it contracted for the first time in over five years. This is not surprising given that the country’s macroeconomic challenges resulted in a general slowdown across all sectors. The latest GDP figures (Q4 2016) show that fisheries has recovered: it grew by 0.8% y/y.

Data from CBN show that artisanal production accounted for around 76.8% of the 1.04 million tonnes of fish produced in 2015. Meanwhile, industrial (trawling) fish farming accounted for only 8% of the total, indicating that commercial fisheries is still largely untapped. 

More recent data from the ministry of agriculture and rural development reveal that annual national supply has increased to 1.1 million metric tonnes (mmt) from 800 metric tonnes. The supply gap has reduced slightly to 1.0 mmt.

Based on our estimates, Nigeria’s annual fish import bill has now declined by 42%. We attribute the boost in annual fish production to the progress made as a result of the FGN’s import substitution policy.

GDP, fisheries and agric growth (% chg y/y)

Boost in domestic fish production

Sources: National Bureau of Statistics (NBS); FBNQuest Research

To assist with improving fish farming activities, the CBN provided a N2bn long term facility under the Commercial Agriculture Credit Scheme to Triton Aqua (an Indian aquaculture firm operating in Nigeria). We understand that Triton Aqua has partnered with a few state governments to provide the necessary technology that would encourage aquaculture.

The forward steps towards self-sufficiency in fisheries are laudable. However, structural issues such as power shortages, poor access to finance and challenges with logistics amongst others still exist.


Drop in internet subscription on GSM platforms
 

08 May, 2017

The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 90.0 million in March, representing a y/y contraction of -2.5%. The figure implies density of 48.6% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. We notice that internet subscriptions have dropped steadily for the past six months. We assume that the clampdown on unregistered SIM cards by the NCC is a primary reason for the steady decline.

Furthermore, apart from the revision of spending patterns by most consumers due to the current squeeze on household pockets, we suspect that the y/y contraction may also be due to other internet subscription operators such as SMILE, Spectranet, Swift amongst others gradually gaining market share. These operators seem to offer better data speed as well as more data options. 

In March MTN secured the highest number of internet subscriptions via GSM with 34% of total market share. However, when compared with the corresponding period in 2016, the operator has lost 7.7 million internet subscribers.

Broadband penetration is currently at 21%. The FGN’s target of 30% over the next one year is still attainable but dependent on investments into the sector. We gather that the FGN recently inaugurated a new National Broadband Council to assist with attaining its 2018 target.

Monthly communications data (millions)

Drop in internet subscription on GSM platforms

Sources: Nigerian Communications Commission (NCC); FBNQuest Research

For Nigeria to transition into a smart economy, huge investments into telecommunications infrastructure is required. Last week the NCC disclosed that Nigeria currently has less than 50,000 base stations. To put this into context, the United Kingdom has about 60,000 telecom base stations despite having one-third of Nigeria’s population.

According to the industry regulator, at least 80,000 telecommunications base stations are required to effectively deploy 4G as well as 5G networks across the country.


Surge in non-oil exports in Q4 2016
 

05 May, 2017

The latest monthly Economic Report from the CBN puts non-oil exports provisionally at US$1.1bn in Q4 2016, indicating substantial rises of 128% q/q and 367% y/y. This surge was due to increases recorded in the export of goods within the manufacturing and industrial sectors. It would be revealing to see a breakdown by product rather than by sector. On an annualised basis, non-oil export earnings stood at US$3.2bn in 2016 and, based on our estimates, represented just 0.8% of GDP for the year.

Although a steep rise was recorded in proceeds from manufacturing and industrial exports in Q4 2016, a stark contrast was observed in receipts from food products, agricultural goods and minerals, which declined by 42% q/q, 54% q/q and 0.3% q/q respectively. 

Fx illiquidity at the time resulted in a reduction in imported inputs, thus hampering non-oil exports. Last month the CBN introduced a special fx window for investors and exporters. The indicative closing rate in this window yesterday was N383.2 per US dollar, compared with the interbank rate of N305.7. It is premature to judge the success of this initiative.

The FGN plans to reintroduce the export expansion grant (EEG) and has set aside N20bn for its revival in the form of tax credits.

Non-oil export earnings by sector, Q4 2016 (% shares)

Surge in non-oil exports in Q4 2016

Sources: CBN; FBNQuest Research

We also gather that as a prerequisite for the reintroduction of the EEG scheme, the Nigerian Export Promotion Council (NEPC) has started processing baseline data. Last month non-oil exporters were required to submit the data for 2013 to 2016 to enable the NEPC to calculate applicable EEG rates. The grant was scrapped under the previous administration due to widespread abuse.

We hope to see a pickup in export-oriented activities once the EEG is finally relaunched and by extension a considerable rise in non-oil revenue.


More accumulation, more CBN confidence
 

04 May, 2017

April brought the sixth successive monthly rise in official reserves, to US$31.0bn. The increase since end-October now amounts to US$7.0bn and restores the total to a level last seen in August 2015. Among the reasons for the welcome recovery, we can point to a disbursement of US$600m by the African Development Bank in November and more recent Eurobond sales of US$1.5bn. There has also been a significant recovery in oil production over the period. With less certainty we can speculate about improved fx management and possible swap transactions.

The positive surprise has been that the upward trend in reserves has continued, albeit more slowly, since the CBN stepped up its fx interventions (sales) in earnest at the beginning of March. The steady accumulation makes it less, not more, likely to adopt the fx reforms sought by the market. 

There is no sign that the CBN plans to slow its sales, which for wholesale transactions alone are now close to US$3bn: rather, it launched its latest window (for investors and exporters) only last month.

The macroeconomic damage from the latest period of oil price weakness, which is now approaching three years, could have been manageable if a fiscal buffer against external shocks had been functioning.

Legislation passed in 2011 created such a buffer, Nigeria’s own ring-fenced sovereign wealth fund, but the opposition of state governors has prevented its effective operation.  The accumulation from 2011 through to the start of the oil price slide in August 2014 would have been substantial.

More accumulation, more CBN confidence

Sources: CBN; FBNQuest Research

Nigeria’s import cover at the end of April has strengthened to close to ten months for merchandise goods.


The struggle to collect non-oil revenue
 

03 May, 2017

Kemi Adeosun, the federal finance minister, reminded a faith meeting in Lagos on Monday that federally collectible revenue, expressed as a proportion of GDP, was among the lowest in the world. CBN data imply a ratio for last year of just 5.6% for total revenue (net, after the deduction of collection costs), which can be compared to the minister’s estimate of 15% for Ghana. The ratio of non-oil revenue on the same basis is just 2.9%. Until recently, the authorities made little effort to collect taxes from the non-oil economy.

They have stepped up their efforts but were frustrated by the recession last year. Non-oil collection declined from N3.08trn to N2.98trn in 2016 despite several initiatives by the FGN. 

The success of the FGN’s expansionary fiscal agenda will rest upon its ability to release funds for capital programmes. Adeosun acknowledged that non-oil revenue is not at a level to cover such programmes and that the FGN has therefore increased its external borrowing. Nonetheless the target in the president’s 2017 budget speech of N1.37trn for the FGN looks hopeful.

With the exception of luxury items, the ministry is reluctant to raise the 5% standard rate of VAT, preferring to focus its attention on coverage. We hope that it hikes rates and broadens coverage (Good Morning Nigeria, 11 April 2017), and so brings acceptable collection ratios that much closer.


The struggle to collect non-oil revenue

Sources: CBN; FBNQuest Research

In the same speech the minister noted that just 214 individuals paid tax above N20m. Clearly, there are more than a few gaps in the list of large taxpayers. Under the “progressive” systems in developed economies, the wealthy shoulder most of the burden. In the UK, for example, 10% of taxpayers provide 90% of income tax receipts..


PMI reading no 49: a surge with fx to thank
 

02 May, 2017

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a surge from 52.8 in March to 58.9. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.

PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies. 

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A headline reading of 50 is neutral. We have posted nine negative readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

All five sub-indices picked up in April and all were in positive territory. We highlight the reading of 55 for employment, its highest since November 2015. 

Among the answers to the trigger questions, we note a common theme of an improvement in supplies of raw materials, as well as an uptick in demand. The surge in April was led by large companies (with more than 200 employees), which would logically have been the main beneficiaries of the greater availability of inputs.

Since its circulars of late February the CBN has stepped up its sales of fx to retail (for invisibles) and to importers. One consequence has been naira appreciation on the parallel fx market. We are not sure whether the appreciation has further legs to run but readily acknowledge the impact of the measures on at least part of the manufacturing sector.

According to our narrative, the economy is emerging from recession. In Q4 2016, the contraction of the economy narrowed from -2.2% y/y the previous quarter to -1.3%, and that of manufacturing from -4.4% y/y to -2.5%. We see token positive GDP growth of 0.2% y/y in Q1 2017.


Potential uptick in oil production
 

28th April, 2017

Last year the FGN’s fiscal position was severely constrained by oil production losses. However, towards the end of Q1 2017 output picked up. Industry sources suggest that oil production was about 1.90 million barrels per day (mbpd) in February. Based on data from the NNPC, this level is 7% lower than the 2.04 mbpd recorded in February 2016. We note that the current production level is considerably higher than the 1.58 mbpd recorded in December, the low point of 2016 other than August (see chart).

On Wednesday the Bonga deep-water oilfield was reopened following a one month shutdown for maintenance purposes. This is expected to increase daily production by c. 200, 000 b/d. This could shore up total oil production and push it closer to the projection of 2.20 mbpd in the FGN’s budget proposals. 

Piracy continues to pose a security issue for deep-sea production as regular occurrences of siphoning crude oil from tankers are still reported.

However, the latest oil production level (1.90 mbpd) suggests that the FGN’s efforts in tackling security issues surrounding oil assets in the Niger Delta region have been somewhat successful.  According to the NNPC, the cost to the government from pipeline vandalism amounted to N2.1trn from January until September last year.

Potential uptick in oil production


Sources: NNPC, Financial and Operations Report, January 2017; FBNQuest Research

Apart from production, revenue for the FGN is also a function of oil prices. In Q1 2017 the oil price averaged US$54/b, compared with US$35/b recorded in the corresponding period of 2016. The improvement in oil receipts can be cited as one reason for the CBN’s recent fx interventions, which have brought some level of liquidity into the market.


Calling the end of the recession
 

27th April, 2017

Although the national accounts for Q1 2017 are not due until late May, we have had some guidance from two prominent individuals. The statistician-general, Yemi Kale, insisted last week in an interview that “the numbers suggest things are improving”. He added that the figure would be close to last year’s, whether positive or negative”. (This was an apparent reference to the -0.4% y/y contraction in the economy in Q1 2016.) Kale highlighted improved oil production and factory output, along with farming and telecoms performance, in support of his case.

On Tuesday CBN Governor Emefiele told the local media that he saw the economy emerging from recession by the end of the second quarter, or latest the third. This less optimistic take than Kale’s was based on naira appreciation on the parallel market, reserves accumulation and the easing of inflationary pressures. 

An acute shortage of activity indicators complicates any attempt to make a call. For example, there are no worthwhile measures of manufacturing output, housing starts or retail sales. Further, there is no unified official data source for oil production.

Our own manufacturing PMI shows a neutral reading for February and a move into sound positive territory in March (52.8).

We are more bullish than the governor. At the very least, positive base effects from the oil economy should make the difference: oil production in Q2 and Q3 2016 was as low as 1.81 mbpd and 1.63 mbpd respectively.

Calling the end of the recession

Sources: National Bureau of Statistics (NBS); FBNQuest Research

For the full year, the IMF has 0.8% y/y growth, S&P Global Ratings forecasts 1.5% and we expect 2.1%. The reform scenario in the FGN’s Economic Recovery and Growth Plan assumes 2.2% y/y.


More, not fewer exchange rates
 

26th April, 2017

The IMF called for an end to multiple currency practices (MCP) in Nigeria in its recent 2017 Article IV consultation with the FGN. Now a former governor of the CBN, Charles Soludo, has made the same call in an economic debate in Lagos on Monday. He is not alone: the monetary authorities are alone in that they do not have support outside officialdom. However, they are the decision-makers and show no sign of changing tack. Rather, they are extending MCP and moving further away from a unified rate.
 
This week’s addition has been the new window for investors and exporters, for which the FMDQ quoted an indicative rate yesterday afternoon of N375 per US dollar. It joins the other windows in operation, including: the CBN’s wholesale transactions; its sales to SMEs; banks’ sales to the retail segment for invisibles at no more than N360; the interbank rate of N306; and sales by the bureaux de change, which are also supplied by the CBN. 

We have to add the parallel market, for which the most-tracked website is showing a sell rate of N388. The monetary authorities can argue that the naira has appreciated strongly on this market in the past six weeks since the CBN stepped up its fx interventions, although not to the maximum 5% premium over the official (interbank) rate sought by Soludo.

They can also argue that official reserves have continued to increase, albeit at a slower pace, despite the sharp rise in fx sales by the CBN. They can point out that demand has fallen short of the offer at some recent interventions.

We stress that the monetary authorities are not acting in isolation within officialdom. The favoured scenario in the FGN’s Economic Recovery and Growth Plan 2017-2020 has growth at 7.0% at the end of the plan period and a fall in the unemployment rate of five percentage points over the four years. It assumes wide-ranging reforms but is vague on the foreign-exchange regime. There is no mention of unification, let alone of a floating rate. 

The offshore portfolio investors are central to the success or failure of the MCP. A sizeable increase in their inflows would transform the market and allow the CBN to take a step back. Currently they are buyers of fx (so that they can exit the market) rather than sellers (as intended by the CBN in the latest window). It is possible that, if they find the repatriation of sales proceeds smoother and faster, and if they decide that MCP are to stay, their thinking could change.

We still feel, however, that the CBN will have to move towards a unified rate (without a float) because its various windows will not attract the required autonomous inflows.


Ample scope to boost remittances
 

25th April, 2017

In 2016 Nigeria was the sixth largest beneficiary of migrant remittances among developing countries. The total according to the World Bank declined by 2.4% to US$429bn, and Nigeria’s inflows by 7.3% to US$19bn. These inflows represented an estimated 4.6% of GDP, making Nigeria much less dependent on remittances than other countries in the subregion such as Liberia (29.6%) and the Gambia (20.4%). For this year and next, the bank forecasts modest rises in total remittances to US$444bn and US$459bn respectively, with small gains for Nigeria.

Remittances to developing countries are now larger than official development assistance (aid in dated parlance) and more stable than private capital movements. It is curious therefore than governments do not devote more time to smoothing payments channels and offering incentives. 

A dip in remittances to Nigeria in 2016 was to be expected when we allow for the far better rates available on the parallel market. The CBN’s many interventions since late February have changed the playing field to an extent. The new Investors’ and Exporters fx Window includes personal home remittances as eligible transactions. Yesterday’s indicative closing rate was N377.1 per US dollar, compared to N306.0 on the interbank market.

Remittance costs in sub-Saharan Africa are the highest in the world. They averaged 9.8% in Q1 2017 and so are far above the 3.0% target which is one of the sustainable development goals. The poor network of correspondent banking relationships in many countries and anti-money laundering legislation are partly to blame.

Ample scope to boost remittances - Good Morning Nigeria

The World Bank’s estimate for 2016 is broadly consistent with the figure for current transfers in the CBN’s balance-of-payments once we exclude the small contribution from general government transactions.


Sound asset growth of the PFAs
 

24th April, 2017

The assets under management (AUM) of the regulated pension industry increased by 16.1% y/y to N6.16trn (US$20.1bn) in December. We view the increase as creditable when we consider the softness of FGN bond prices over the period, and the arrears in contributions by some state governments and public agencies. The breakdown by asset class shows no substantial change: the share of FGN securities (bonds and NTBs) rose from 66.4% to 72.2% of the total over the period while that of domestic equities narrowed from 10.0% to 8.1%.

Fund managers do not like telling retail investors, who numbered more than 7.3 million at end-September, that the value of their portfolios has fallen over the last month. This would have been the message for much of the past three years if equities had dominated their portfolios. The NSEASI fell for three successive years (2014-16), and is also down 6% ytd. 

The PFAs held 48.5% of the stock of FGN bonds at end-December. They are also the anchor buyers at the monthly auctions of FGN bonds to finance the budget deficit. The DMO has raised N918bn in the first four sales of the year towards the FGN’s proposed target of N1.25trn for net domestic borrowing for the year. This includes N426bn in the long bonds (Mar ‘36s), which are popular with the PFAs for matching purposes.

Sound asset growth of the PFAs


Pencom last week released its amended Regulation on Investment of Pension Fund Assets, which has been approved by the presidency. We note two of the changes: that companies which are themselves the result of mergers (such as bank holding companies) are now eligible investments; and that non-interest bearing capital markets products (such as sukuk) are also eligible.

Sadly, there are no industry comparisons of the PFAs by performance.
 



Modest pick-up in air passenger traffic
 

21th April, 2017

Drawing on data provided by the Federal Aviation Authority of Nigeria, the National Bureau of Statistics (NBS) has released its latest report on air passenger traffic. The report estimates total traffic in 2016 at 15.2 million passengers, representing an increase of 6.3% y/y. Given the macro challenges Nigeria has faced over the past several quarters, the general expectation was for a slowdown in demand for air travel. We assume the y/y pick-up in passenger traffic was partly due to positive base effects.

Domestic air traffic accounted for 72% of the total. We note, however, that the bureau has now included passenger data from four additional airports (Bauchi, Eket, Gombe and Uyo). Combined, these airports accounted for 667,900 passengers in 2016. 

Domestic air travel is predominantly for corporate or business purposes. Abuja airport is a recipient of this category of travelers and was recently reopened after a six weeks’ shutdown for runway repairs. Passengers were temporarily diverted to Kaduna airport.

As for international travel, passenger traffic contracted by -2.5% y/y in 2016, compared with a contraction of -9.0% recorded in 2015. The sustained contraction is not surprising, given that international airline operators were hit by fx sourcing challenges.

However in Q3 2016 there was an increase in international passenger traffic to 1.2 million passengers from 1.0 million passengers. Summer vacations fall within the third quarter, so the increase recorded in Q3 could well be due to a seasonal pick-up.

Modest pick-up in air passenger traffic

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Fx illiquidity resulted in repatriation challenges for international airline operators. This led to increased air fare tickets and in some cases a reduction in the number of weekly flights (thus adversely affecting air passenger traffic). We assume that airlines are gaining some respite on the back of the CBN’s recent fx interventions.
 


Downside risks to the Fund’s outlook
 

20th April, 2017

The IMF’s new World Economic Outlook (WEO) has pushed its global growth forecast for this year up marginally to 3.5% and left its 3.6% projection for 2018 unchanged. It has made sizeable upward adjustments for this year and next from three months ago for Russia to 1.4% (from 1.1% and 1.2%), Japan for 2017 to 1.2% (from 0.8%) and China for 2018 to 6.2% (from 6.0%). This WEO again sees the balance of risks titled towards the downside, citing a trend towards protectionism, faster-than-expected rate hikes in the US and a lightening of financial sector regulation.
 
Another risk cited is the vulnerability of China’s financial system to rapid credit growth. This week has brought the release of Q1 data from China for GDP, industrial production and retail sales, all pointing to a robust economy. 

The WEO calls for credible strategies in many countries to place public debt on a sustainable footing and adjust to lower commodity prices. The Fund made just this point in its recent 2017 Article IV consultation with the FGN.

The underlying price assumptions, based on the futures markets, for the Fund’s basket of three crude blends (including UK Brent) have been revised since January to an increase of 28.9% this year to US$55.2/b and a marginal fall of 0.3% for 2018 to US$55.1.

The forecast for growth in Nigeria this year is unchanged at 0.8%, and that for 2018 trimmed from 2.3% to 1.9%. These are the forecasts in its baseline scenario in the consultation documents, which assumes only limited reforms.

Trends in world output growth - FBNQuest Research
 
The WEO expects challenges in macroeconomic adjustment for all the leading oil producers in sub-Saharan African. It sees lukewarm growth ahead for Angola, Gabon and Chad as well as Nigeria.
 


Not so many differences with the Fund
 

19th April, 2017

The IMF has now released the full report of its 2017 Article IV consultation with the FGN. The document has rather more substance than the anodyne press release that preceded it (Good Morning Nigeria, 04 April 2017). It offers baseline and adjustment scenarios for Nigeria through to 2020. The former has growth this year at 0.8%, inching up to 1.8% at the end of the forecast period. It is based upon few, if any changes to the current fiscal and monetary stance, and limited structural reforms.

In marked contrast, the adjustment scenario forecasts growth in 2017 of 2.2%, rising to a respectable 4.5%. The assumptions include a front-loaded fiscal consolidation equivalent to a 1.6% improvement in the non-oil primary balance; monetary expansion restricted to nominal GDP growth, without any quasi-fiscal activities from the CBN; and the immediate removal of fx restrictions, and a move to a more flexible fx regime. 

The FGN’s Economic Recovery and Growth Plan 2017-2020, praised by the Fund for its vision, offers three scenarios. The first of “do nothing” has the economy contracting in 2020, and the second of “introduce basic macroeconomic reforms” has growth that year of 3.8%. The third of implementing the plan is comparable to the Fund’s adjustment scenario, and has growth at 7.0% in 2020 and a fall in the unemployment rate of five percentage points over the four years. This is the only option in the plan’s words if Nigeria is to achieve sustainable and inclusive growth.

The FGN argues that increases in tax rates would be politically difficult in the current circumstances, the Fund notes. We learn from the consultation that the authorities would consider such hikes from 2018 in VAT on telecoms and luxury items, along with asset sales and a continuing widening of the tax net.

The Fund estimates that CBN financing of the government through overdrafts and bond conversion amounted to N2.3trn in 2106.

The document highlights the status of core recommendations made in the 2016 exercise: among those not implemented was a call for an independent mechanism for the setting of fuel prices. We would welcome such a change along the lines of the system operating in South Africa and Kenya because it would “depoliticize” a highly sensitive area, make hundreds of officials available for redeployment and mark a large step towards full fuel deregulation.

From the very full consultation, we have extracted just one comparative indicator for future reference: the Nigerian authorities value the infrastructure stock at 35% of GDP, which would be half that of peer emerging markets.
 

 


An inflation report to disappoint
 

18th April, 2017

An inflation report to disappoint
 
The latest inflation report from the NBS shows a second successive decline in the headline inflation y/y, to 17.3% in March from 17.8% the previous month, due to positive base effects. (Our expectation, shared with the wire services, was 16.6% y/y.) A rather different story emerges from the m/m data, which reveal a second successive rise, from 1.5% to 1.7% in March. The report is disappointing because it highlights what we take to be the impact of supply-side factors.
 
Household demand remains weak: the economy has been contracting, at least until Q4 2016, and listed companies in the consumer goods space have not always been able to pass on the rise in their own imported input costs. The supply constraints have been felt most strongly in food inflation. 

The NBS commentary notes sharp increases for most food staples. Among components of the core (non-food) index, the prices of housing, water, electricity, gas and other fuels, which have a 16.7% weighting in the headline measure, soared by 18.8% y/y. The commentary also detected in the data the early effects of a strengthened naira without citing the supporting evidence.

An inflation report to disappoint

Sources: National Bureau of Statistics (NBS); FBNQuest Research

We can also see the negative influence of supply factors when we note that the composite urban index accelerated by 18.3% y/y in March, and its rural counterpart by 16.5%.

The communique following the meeting of the monetary policy committee in late March was not impressed with the m/m increases in the previous inflation report for February. It was adamant that the committee would not consider a policy rate cut without a clear trend of m/m declines in headline inflation.

We see another slowdown in the y/y headline rate in April, to 17.0% y/y.
 


Promising signs from the refineries
 

12th April, 2017
 
The NNPC trimmed its operating deficit in January from N17.0bn to N14.3bn (US$47m). The improvement can be traced to a stronger performance by its Nigerian Petroleum Development Company and greater efficiencies achieved by its three refining companies. The target of consistent profitability in its budgets will remain elusive as long as the industry struggles with sabotage of its infrastructure. The largest of several disruptions in December was the loss of about 330,000 b/d due to the closure of the Trans Forcados Pipeline throughout the month.

The bright spot in the corporation’s Financial and Operations Report for January is the strongest result from the refineries for more than one year. Output of finished products reached 395,000 metric tonnes, and their combined capacity utilization 36.7%New engineering software has been installed, and the NNPC has set a utilization target of 60.0% for end-2017. 

Under their new business model of merchant plant, the refineries purchase the crude themselves and sell products for their own account.

The refineries are to remain state-owned although private capital may be injected. They will be joined by the 650,000 b/d Dangote project in Lagos State, which is formally scheduled for completion in 2019 and for listing.

Between January 2016 and January 2017 the NNPC’s export proceeds totaled US$2.57bn, of which US$2.50bn was transferred to the joint ventures (jvs) for cash call payments. The amount due to the jvs over the period, however, was US$8.55bn. Under an agreement with the oil majors, the corporation is to clear its arrears over five years with a first payment proposed this month.

Promising signs from the refineries


Sources: NNPC, Financial and Operations Report, January 2017; FBNQuest Research

The report notes that power plants generated 2,047 megawatts in January from gas supplied by the industry, equivalent to 68% of total generation.
 



Time surely to revisit non-oil tax rates
 

11th April, 2017
 
Gross federally collectible revenue from oil declined by -28.2% in 2016 to N2.70trn, and that from the non-oil economy by -0.3% to N2.35trn. The fall in oil revenue can be explained by the supply disruptions in the delta and, to a lesser extent, by a modest easing in the average annual oil price. It might appear that the attainment of flattish non-oil revenue in a year of recession was a reasonable effort. However, this would ignore very poor coverage. (We stress that the revenue cited above is that of all tiers of government, and not just the FGN.)

The collection agencies have a long road ahead of them. Turning briefly to the FGN, its 2016 budget projected an interest payments/total revenue ratio of 35.4%. The IMF has noted an actual figure of 66%, which highlights the scale of the shortfall in revenue (Good Morning Nigeria, 04 April 2017). 

Our chart shows the seasonality in non-oil revenue. The peaks in July/August/September in both years coincide with the concentration in the collection of companies’ income tax. In July 2016, unusually, non-oil revenue exceeded oil revenue. In Nigeria’s ideal fiscal world, this would be the norm rather than the exception.

 Time surely to revisit non-oil tax rates


Sources: CBN; FBNQuest Research

Gross VAT receipts rose by 4.1% in 2016 to N811bn. In a developed economy with high coverage, this would be a decent performance in a year of GDP contraction. However, where compliance is poor, as in Nigeria, the improvement in receipts in 2016 is probably the result of efficiency gains.

The FGN has resisted the temptation of increasing the 5% standard rate of the tax but may make an exception for luxury items. Its heady targets for non-oil revenue through to 2020 are likely to remain elusive if it is not prepared to raise tax rates as well as extend coverage.
 



FGN deficit 50% higher in 2016
 

 

10th April, 2017
 
The FGN deficit widened from N1.50trn to N2.35trn (US$930m) in 2016, and so was comfortably within the 3% of GDP threshold set in the Fiscal Responsibility Act of 2007. Retained revenue was 10.1% lower than the previous year at N2.97trn, and total spending 10.7% higher at N5.32trn. The deterioration has several origins: we would focus on the challenge of collecting non-oil revenue in a recession. The data are published in the CBN’s Quarterly Statistical Bulletin for Q4 2016, and drawn from the Office of the Accountant General of the Federation.

On a calendar year basis, capital expenditure increased from N818bn in 2015 to N919bn. The FGN has already noted the rise in such spending in the 2016 budget year, which started late and is still running due to the impasse in the National Assembly (Good Morning Nigeria, 29 March 2017). 

The FGN managed one small monthly surplus of N84bn in January. There was no seasonal pattern to the deficits, which peaked in February (N406bn), April (N369bn) and December (N383bn).

The Economic Recovery and Growth Plan 2017-20 projects revenue of N4.68trn, expenditure of N6.92trn (including N1.95trn on capital items) and a deficit of N2.23trn.

FGN deficit higher in 2016

 
Sources: CBN; FBNQuest Research

Viewed from the outturn in 2016, these are heady targets for revenue generation and capital releases.

One local newspaper chose last week to comment upon the FGN public finances for 2016 as cited by another CBN source, the Financial Stability Report. This showed a much higher deficit of N3.21trn, which breached the 3% threshold in the 2007 law.
 

 



Urgent need to bolster states’ IGR
 

 

7th April, 2017
 
CBN data for 2015 reveal that internally generated revenue (IGR) provided 26.4% of the total revenue of the 36 states and the Federal Capital Territory, compared with 21.8% the previous year. Aggregate IGR, however, declined to N756bn from N801bn in 2014. Again, Lagos State emerged as the leading state, achieving an IGR/total revenue ratio of 69%. Enugu was next in line with 53% while Ogun, Rivers and Abia managed ratios of 50%, 44% and 32% respectively. We stick with the CBN series for ease of comparison although it is dated and several individual states show different (generally higher) percentages.

For over 24 months, the need to bolster IGR collection has been a topic on the front burner due to the slide in the oil price. There have been pronounced swings, predominantly downwards, in the total monthly payout by the Federation Account Allocation Committee (FAAC). Very few analysts anticipate a strong recovery in the oil price in the year ahead. 

Value-added tax (VAT) receipts stood at N381bn, representing 13.3% of total revenue in 2015. This compared with N389bn posted the previous year.

Given that Lagos State is the commercial hub of the country, it is no surprise that it accounted for 19% of total VAT in 2015.

According to the DMO, states’ domestic debt (excluding bonds) at end-2015 amounted to N2.5trn. Delta State was the largest debtor among the states, with total domestic obligations of N320bn.

Urgent need to bolster states’ IGR

Sources: CBN; FBNQuest Research

The FGN has launched a few relief programmes to bail out some state governments, and settle arrears on salaries and pensions. These include the conversion of states’ bank borrowings into FGN long bonds.

The onus is on the state governors to boost their revenues. They could look to the non-oil economy (such as agriculture and mining), and widen the tax net to cover more of the informal sector. 
 



Current account back into surplus
 

 

6th April, 2017
 
We can see from the balance of payments for Q4 2016 that the current account changed direction from a deficit equivalent to -0.1% of GDP to a surplus of 3.3%. The main influences were a recovery in oil exports, a further compression in merchandise imports, a fall in the net outflow on services and stronger inward transfers. There is invariably a lag between the initial slump in oil export revenues and the compression of imports. In Nigeria’s case merchandise exports started to fall sharply from Q4 2014, and the slump in imports was evident from Q4 2015.

The share of oil and gas exports in GDP has crashed from 22.6% in Q4 2012 to just 7.4% in Q3 2016 and 9.2% in Q4. This modest recovery is due to higher production and, to a lesser extent, prices. 

The compression of import demand does point to some success for the FGN’s substitution policy, one example being rice cultivation. However, the greater influence would have been what we term involuntary substitution, where consumers buy the local product because they no longer have the choice.

Drilling down into the reduced outflow on services in Q4 2016, we find a net inflow of US$100m on personal travel, which has health, education and other components, compared with an outflow of US$800m in Q4 2015.

Net current transfers, which are mostly workers’ remittances, have held up well. The inflow improved in Q4 from 5.3% of GDP to 5.5%, or in US dollar terms more impressively from US$4.6bn to US$5.3bn. We had expected greater use of the parallel market in fx.

Current account back into surplus

Sources: CBN; FBNQuest Research

A current-account surplus representing 0.6% of GDP in 2016 compares with a deficit of -3.2% the previous year, and highlights our point about the lag in import demand compression.


Rubicon crossed, what next?
 

 

5th April, 2017
 
March saw the rise of official reserves above US$30bn for the first time since November 2015, closing the month at US$30.3bn. It was, in sporting parlance, a match of two distinct halves, with steady accumulation in the first and marginal depletion in the second. The threshold of US$30bn makes a good headline and the authorities will have been pleased to have passed it. However, it has no other significance. In our view, accumulation makes the CBN less likely to adopt the exchange-rate reforms advocated by most offshore investors and the IMF.

The gentle depletion in the second half reflects the pick-up in fx sales by the CBN to the banks both for the retail segment for invisibles, and for business in spot and forward transactions. Such sales on Monday alone amounted to US$240m according to the CBN. 

Between end-October and mid-March, reserves increased by about US$6.8bn. A disbursement of US$600m by the African Development Bank in November and US$1.0bn in Eurobond sales in February were contributory factors.

The official explanation has centred on the rise in crude production as result of the improvement to security in the Niger Delta. If we optimistically assume an increase of 400,000 b/d for the four and a half months through to mid-March, the state’s share that would accrue at the CBN could explain another US$1.3bn. For the still large balance of the accumulation, the best we can offer is a combination of tighter fx management, recoveries and swap transactions.

 Rubicon crossed, what next?

Sources: CBN; FBNQuest Research

Nigeria’s import cover at the end of March has strengthened to 9.5 months for goods and 7.1 months once we include services, based upon the balance of payments for the 12 months through to September 2016.


The IMF’s formal position on fx
 

 

4th April, 2017
 
On Thursday the IMF released a press release on its recent Article IV consultations with the FGN. The short statement, which ends with core macro forecasts through to 2018, calls on the authorities to remove the remaining fx restrictions and multiple currency practices. The Fund is pushing for a unified fx market. There is no mention of the word float in the release, just as there was no mention of the word devaluation in the liberalisation of the fx regime unveiled by the CBN in June 2016.

While we can speculate whether the Fund favours a float, we can say with confidence that the CBN wants no such arrangement (unless it is managed according to its own definition). 

The press release acknowledges the recent CBN interventions and its removal of prioritised allocations of fx, while making clear that it would like the authorities to go much further. The CBN, in contrast, is pleased with the appreciation of the naira on the parallel market and likely to continue providing liquidity to the fx market. An external observer might conclude that, since the CBN’s daily sales at the interbank rate are now a small part of overall fx turnover, the unmentionable adjustment has taken place.

On the fiscal side, the Fund covers the consolidated public finances rather than those of the FGN, and sees the deficit rising from 4.7% to 5.0% of GDP this year.

In the context of revenue shortfalls, it notes that the FGN’s interest payments amounted to 66% of its total revenue in 2016. When we consider that the 2016 budget projected a ratio of 35.4%, the size of those shortfalls becomes clear.

The Fund calls for an increase in the rate of VAT and excise taxes. The FGN’s focus is to improve VAT coverage. However, when it sees the slow progress on compliance, it might just change its mind on the current rate of 5%. Turning to excise rates, there has been talk within the federal finance ministry of replacing the CBN’s administrative measures covering the 41 banned import items with fiscal measures.

The Fund’s forecasts have very severe import compression last year, and the current account therefore returning to a small surplus in 2016.

In time, we will all have access to the full report on the Article IV consultations, once the FGN has given the go-ahead for its release. The longer document tends to be more revealing and dispense with the platitudes.


PMI reading no 48: fx influence for the good
 

 

3rd April, 2017
 
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a modest increase from 50.0 in February to 52.8. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.

PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies. 

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted nine negative headline readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Four of the five sub-indices picked up in February. Among the answers to the trigger questions, we note a common theme of naira appreciation and a resulting improvement in supplies of raw materials.

This appreciation on the parallel market has been the direct result of the CBN’s measures in late February to improve fx liquidity for retail (for invisibles) and for importers. The recovery in the headline reading is not dramatic and we are not sure whether the appreciation has further legs to run. Yet we have to acknowledge the impact of the measures on at least part of the manufacturing sector.

According to our narrative, the economy is emerging from recession. In Q4 2016, the contraction of the economy narrowed from -2.2% y/y the previous quarter to -1.3%, and that of manufacturing from -4.4% y/y to -2.5%.

The expansionary fiscal stance is set to be the leading driver of the recovery. The turnaround in the private sector will be gradual: our reading for employment was again negative in March (49) and has moved within a range of 42 to 52 since January 2016.


Who’s who in development finance
 

 

31th March, 2017
 
The CBN has come to play an increasing role in development finance in areas where deposit money banks have been reluctant to tread. These include agriculture and micro, small and medium enterprises (MSMEs). Its disbursements had reached N732bn as at November. It is not alone in this field among public bodies, and we mention some other players: we exclude those for individual sectors such as housing as well as the Africa Finance Corporation because it invests in infrastructure across the continent.

The Development Bank of Nigeria (DBN) has now received a licence for wholesale development finance from the CBN, subject, it appears, to a N100bn minimum capital requirement. The bank will be able to draw from funding pledges totaling US$1.3bn from the World Bank, the African Development Bank, and German and French state development funds. The European Investment Bank is expected to provide additional support. 

The DBN is mandated to provide medium and long-term finance across the economy. This includes the overlooked MSMEs, which it will, being a wholesale finance institution, support through microfinance banks.  Official figures show that the MSMEs account for 48% of GDP but only 5% of lending by DMBs.

Within its broader portfolio, the Bank of Industry disbursed N5.6bn to MSMEs in 2015 and N8.0bn last year. The bank also manages government and sector-specific funds. It has access to concessional wholesale funding, notably a US$535m zero-coupon bond issued by the CBN.

The Nigeria Sovereign Investment Authority is capitalised at US$1.25bn and has a US$500m infrastructure fund in five focus sectors, representing 40% of its funds under management. Its investments include a shareholding in the Nigeria Mortgage Refinance Company and the development of the Second Niger Bridge.

Capital releases within the 2016 budget have reached a record N1trn (Good Morning Nigeria, 29 March 2017), and the FGN’s 2017 budget proposals see a doubling to N2.24trn (US$7.3bn). The target may prove elusive in view of the challenging projection for non-oil revenue generation, so all contributions from public bodies are welcome.

While the field for development finance is crowded and could arguably benefit from consolidation, the infrastructure deficit is huge. Among the many estimates in circulation, we cite the figure of US$70bn investment per year from the UK’s Department for International Development if Nigeria is to emulate the “take-off” achieved by the likes of South Korea and China.


Increased focus required on hydro
 

 

30th March, 2017
 
Over the past several years, Nigeria’s hydro sector has been neglected. The underinvestment within the sector is reflected in the national accounts produced by the NBS. Last year the sector, which is classified as water supply, sewerage and waste management, contributed just 0.2% to total GDP yet managed to grow by 9.3% y/y amid the macroeconomic challenges. We note that the FGN has recently launched a roadmap geared towards tapping into the vast potential within the country’s hydro sector.

Nigeria boasts 250bn cubic metres of water (both surface and ground). This is sufficient for industrial, agricultural, domestic, hydropower and recreational usage. However, the country is ranked as an economic water scarce country. 

In 2016 the ministry of water resources was allocated N53.3bn (less than 1% of the total budget). Given the number of projects under its purview, the ministry secured N46.1bn from the allocation for capital expenditure. These projects include irrigation, the rehabilitation and construction of dams, and solar powered borehole installations.

According to the OECD, farming accounts for around 70% of water used globally. Nigeria has an irrigable land potential of 3.1 million hectares (ha); yet the actual irrigated area is only 70,000 ha.

The national irrigation development programme within the sector roadmap reveals that the FGN’s targets 78,000 ha of planned irrigation by 2019, which would require an average yearly investment of N59bn. Meanwhile, its long-term target of 500,000 ha by 2030 would require a total investment of N1.5trn

From the roadmap, we notice that the ministry has prioritised 38 projects, which are grouped into irrigation & drainage (10 projects), dams (13) and water supply (15).

Furthermore, the total funding requirement for the aforementioned is N338bn, with irrigation & drainage accounting for 57% and dams 32% of the total funding requirement.

According to the roadmap, there are currently 17 existing dams with combined installed hydropower capacity of 200 MW. Dadin Kowa dam in Gombe State and Gurara dam in Kaduna State have power generating capacity of 51MW and 50MW respectively. However, improved turbine technology is required to attain this level.

As for hydro dams under construction, the Mambilla dam located in Taraba State, when completed, will have a power generating capacity of 3,050MW.  Given that the power sector struggles to meet the estimated national demand of c.18, 000MW, alternative sources of energy (such as hydro) will give the power sector a leg up.


The FGN’s capital releases hit a record

 

29th March, 2017
 
The federal finance minister, Kemi Adeosun, told members of the House of Representatives earlier this month that the FGN’s capital releases within the 2016 budget had reached a record N1trn (US$3.3bn). The budget was only approved in May and this year’s remains with the National Assembly, so the total for releases could increase. She was confident that “we will do more this year”, citing the improvement in stability in the Niger Delta. The FGN’s expansionary fiscal stance has become the principal driver of growth, which we forecast at a modest 2.1% in 2017.

Both the new Development Bank of Nigeria and the CBN’s sizeable role in development finance could give a boost to public capital expenditure. 

The president’s budget speech to the assembly in December put capital spending in 2017 at N2.24trn and so just above the administration’s threshold of 30% of total spending. The figure does include the capital element of statutory transfers.

The Economic Recovery and Growth Plan 2017-20 has a lower figure for this year of N1.95trn, easing back to N1.41trn at the end of the period. Its projections may prove the more realistic in view of the budget’s high hopes of non-oil revenue generation.

The FGN’s capital releases hit a record


Sources: CBN, drawn from the Office of the Accountant General of the Federation; FBNQuest Research

Over the 12 months to September 2016, capital spending amounted to N970bn, and personnel (excluding pensions) to N1.78trn (see chart). The CBN data series does show no disbursements in two of the months (October 2015 and January 2016).


Much activity in the tech start-up space

 

28th March, 2017
 
At the Business Council for Africa’s annual debate in London last week, the most encouraging sessions covered the thriving tech space. Erik Hersman, the chief executive officer of Kenya-based BRCK, characterized investment in tech as the new gold rush in Kenya that did “more for less” and drew heavily on “old” first-world technology. His own company makes use of batteries and motors to create hardy “backup generators for the internet”. Its latest product is designed for the classroom.

Hersman added that M-pesa, the transformative mobile money system for transfers and lending in East Africa, was launched with technology governed by a 30-year old protocol. 

East Africa, and Kenya in particular, have led the way because of the lightness of regulation.

Figures were quoted to the effect that a total of 77 start-ups in sub-Saharan Africa (SSA) raised US$336m in 2016. Panelists agreed that tech entrepreneurs had little difficulty in tapping venture capitalists for up to US$2m or accessing “angel money”. They could struggle to raise between US$2m and the minimum target of private equity firms.  A good track record help, as always: BBOXX, a solar power provider in East Africa with mobile-only payment systems, was founded in 2010 and raised US$20m from its last funding round.

According to other data cited, an estimated 14% of household incomes in Kenya are devoted to the internet. The share is higher elsewhere in the region where the tariffs are higher, and averages just 2% to 3% in OECD countries.

The tech multinationals are present in SSA. They would say they are investing in local partnerships. Others might say they have set up regional sales offices.

Several other tech start-ups were represented or mentioned at the annual debate. These include: Sproxil, a US venture capital firm well known in Ghana for its app which enables users to determine whether a medicine is genuine; Strauss Energy, a Kenyan company which produces building materials to create solar power; Asoko Insight, which does the work digitally of a good chamber of commerce in four African markets; Pula Advisors, a data analytics provider which has supplied a leading Kenyan bank with the names of 300,000 potential agri-business clients; and Nigeria’s IROKOtv.

More than one speaker made the point that, alongside successful start-ups, robust growth requires large companies which make a sizeable contribution to non-oil tax revenues and job creation, such as the Dangote Group.


Infrastructure spending to transform growth

 

27th March, 2017
 
We attended on Wednesday the annual debate organized by the Business Council for Africa in London. This year’s theme was Africa: The Next Chapter, and we want to share the core points of the macro discussion. The World Bank’s chief economist for Africa, Albert Zeufack, noted that estimated growth of 1.6% last year in sub-Saharan Africa (SSA) was the lowest for two decades. However, he held out hopes for a modest recovery in 2017 of between 2.5% and 3.0%.

For the three largest economies in SSA, prospects are poor this year: the Bank sees growth of 1.4% in South Africa and 1.0% in Nigeria, and further contraction in Angola. The rest of the region should grow by 5.0%. 

Lawrence Kiambi, chief financial officer of Kenya Commercial Bank, singled out the challenge of poor savings rates, at least in his own country, which he blamed on cultural factors. A test of his theory will be the world’s first mobile-only government bond (M-akiba), which was launched on Thursday. The minimum subscription has been pitched as low as US$30 equivalent.

Babatunde Soyoye, managing partner of Helios Investment Partners, argued that SSA economies can only attain consistent double-digit growth with huge expenditure on infrastructure, which boosts employment and growth, reduces inflationary pressures, and raises investment inflows.

The contract to build a standard gauge railway from Mombasa on the Kenyan coast to Kampala in Uganda was awarded to a Chinese consortium. Soyoye noted that the winning bid was one third of that of the competition. He brushed aside concerns that the completed railway will be lossmaking and justified the project on the basis of its broader economic benefit.

The Trump presidency in the US is expected to bring a decline in donor assistance. One speaker noted that the US provides 16% of official development assistance of OECD economies. We would add that the presidency’s focus on the “war on terror” points to increased support for a few countries, and suggest Nigeria as a likely beneficiary.

Professor Thandika Mkandawire of the London School of Economics observed that the fastest growing economies in SSA over a 40-year period are both democracies (Botswana and Mauritius). This counters the view in some development circles that the fastest growers of the past decade are democracies only in name (Ethiopia and Rwanda).

In a forthcoming daily note, we will provide the highlights from a lively and encouraging panel discussion on the tech revolution and start-ups.
 



Few borrowing options for states

 

24th March, 2017
 
The external debt of state governments amounted to US$3.57bn at end-December. It declined by US$90m over six months: this fall reflects not the fiscal prudence of the states but that of the FGN, which guarantees these obligations and clearly has reservations on credit grounds. The background is well known: that the slide in the oil price since mid-2014 has exposed the dependence of most state governments on the monthly distribution by the Federation Account Allocation Committee (FAAC) and their limited efforts to raise internally generate revenue (IGR).

Predictably Lagos State accounts for 39% of the debt burden, and no other state more than 10% of the total. Lagos has a higher credit rating by virtue of its track record in fiscal management and of the concentration of businesses subject to tax in the state.

States’ borrowings are multilateral other than US$190m supplied by the Agence française de développement, the French state investment bank.

Their access to domestic funds has also been trimmed by the FGN’s insistence on best practice. The ongoing refund of debt service overpayments to the Paris Club is subject to reconciliation of the claims by the DMO and the Office of the Accountant General of the Federation. The payments were deducted from the monthly FAAC payouts as a first-line charge.

Few borrowing options for states

Sources: Debt Management Office (DMO); FBNQuest Research

The states’ escape from their fiscal vulnerabilities is through the development of IGR. Lagos has the best record but others have good news to share. Kwara achieved an impressive increase from N7.1bn to N17.2bn in 2016. For states with few businesses and low household incomes, the route is more challenging.
 

 



FAAC distribution weighed down by oil

 

23rd March, 2017
 
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government amounted to N429bn (US$1.4bn) in March (from February revenues), representing an 8% decline when compared with N465bn the previous month. According to the federal finance ministry, the decrease is due to production leakages arising from continued pipeline vandalism in the Niger Delta. Furthermore, the drop in the average crude oil price from US$49.6/b to US$44.7/b under the review period was also a contributing factor.

Although we only have one data point, the m/m decline in oil revenues according to the finance ministry is at odds with the consistent upward trend in official fx reserves. This increase in reserves was supported by the CBN’s restrictions on fx supply and the recent Eurobond issue.

Oil producing states benefiting from the 13% derivation principle such as Rivers, Bayelsa, Delta and Akwa Ibom collectively received N23bn.

For non-oil revenues, a significant decline was recorded in Companies Income Tax as well as import and export duties.

This decline in March’s payout will put some pressure on state governments’ finances, which are already under strain. The FGN has launched several initiatives to ease pressure on the finances of subnationals and the payment of their employees’ salaries.

 FAAC distribution weighed down by oil

There is still an urgent need for state governments to boost their internally generated revenue.

Sources: Federal Ministry of Finance; local media; FBNQuest Research

We have taken the details of the latest payout from the local media. Official data sources run to November, payable in December. We use the data for gross distributions whereas the local media cite a combination of gross and net payouts to the three tiers of government.
 



A successful auction for the DMO

 

22nd March, 2017
 
Last week the DMO held its latest monthly auction of FGN bonds. It has good reason to be satisfied with the outcome, not least because it is again running a programme of auctions without an approved FGN budget in place. It offered N130bn, attracted a total bid of N216bn and raised N160bn (US$520m). The office successfully launched a new 10-year benchmark, and was able to set a marginal rate for the two re-opened issues up to 50bps lower than at the previous month’s auction. The bid, while short of February’s record N337bn, provided adequate coverage.

The DMO has now raised N535bn (US$1.74bn) in just three months and has again front-loaded its issuance. The FGN’s 2017 budget proposals project a FGN deficit of N2.36trn and domestic borrowing of N1.25trn.


A successful auction for the DMO
 
Sources: Debt Management Office (DMO); FBNQuest Research

This year the domestic target extends beyond the staple FGN bonds sold at monthly auction. The DMO is currently selling savings bonds to retail investors with two- and three-year maturities. Additionally, together with the SEC, it is working on the launch of the country’s first sukuk (Islamic bond). It therefore has a little more flexibility in meeting the FGN’s funding target.

The DMO should be able to count on the PFAs to bid at auction. The institutions’ wariness of equity exposure is well documented in the regulator’s monthly reports.

The FGN’s expansionary fiscal stance is adding to the mountain of domestic debt service, which last year reached N1.23trn. Its Economic Recovery and Growth Plan 2017-20 happily projects a marked shift in borrowing to predominantly external (and lower cost) from 2018.
 



Another drop in internet subscriptions

 

21th March, 2017
 
The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 91.3 million in January, representing a y/y contraction of -4.7%. The figure implies density of 49.3% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. Given that mobile internet is still considered a luxury (particularly for low income earners), internet subscription has experienced steady y/y contraction over the past several months. This mirrors the effect of the current macro challenges on consumers’ spending patterns.

Another reason for the slide in internet subscriptions is the clampdown on unregistered SIM cards by the NCC, the industry regulator.

In January, MTN secured the highest number of internet subscriptions via GSM, representing 34% of the total. However, the operator has lost over 7 million internet subscribers, compared with the corresponding period of the previous year.

Globacom, its closest competitor, secured the second largest subscriptions in January, and accounted for 30% of the total. Data plans on this platform are relatively affordable and slightly more flexible.

Aside from the broadband target of 30% by 2018, we gather that the FGN is also targeting an 80% internet penetration in the same year. Given the steady slippage on subscriptions, we are doubtful that the latter will be achieved.


Another drop in internet subscriptions


Sources: Nigerian Communications Commission (NCC); FBNQuest Research

Access to the internet has a positive impact on productivity. Not only does it cut costs, it helps to broaden the reach of businesses as far as customers are concerned, boosting sales in the process.

Last year, Nigeria’s telecom’s sector contributed 8.8% to total GDP and grew by 2.0% y/y.
 



Mining, still on the agenda

 

20th March, 2017
 
The National Bureau of Statistics (NBS) recently released its States Disaggregated Mining and Quarrying Data series. According to the data, last year Nigeria produced 43 million tons of solid mineral; limestone emerged as the leader and accounted for 65% of minerals mined. The ministry of mines and steel development is currently partnering with state governments to promote mainstream mining and eliminate illegal mining operations across the country.

Granite and laterite which are main ingredients in the building and construction industry accounted for 13.4% and 5% respectively of the total minerals mined in 2016. Aquamarine and beryl ore were the least produced.

Ogun State recorded the highest level of mining activities last year, representing 38% of total tons mined. Limestone is one of the dominant solid minerals in Ogun State.

Borno and Yobe states both produced the least tons of solid minerals – 1,250 and 883 tons respectively. The two states have been severely affected by insecurity issues. Although attacks have softened, economic activity is yet to fully pick up.

In terms of accessing credit, the mining sector is not on most banks’ favoured list. The sector accounts for a low single-digit percentage of their loan books.

To tackle the lack of access to credit, last year the Federal Executive Council (FEC) approved a N30bn mining intervention fund to support local mining operators. We gather that the ministry of mines and steel development has partnered with the Bank of Industry (BoI) to offer loans from this intervention fund.

Loans will be offered to already existing mining operators as it is aimed at scaling up businesses within the industry.

The sector’s potential is significant when considering the impact it could have on broader economic development as well as export earnings. However, technical skills required to tap into the industry are scarce. To address this, the BoI has partnered with the United Nations to deliver training on gemstone production under its commodity-based industrialisation strategy.

Similar to agriculture, Nigeria stands to gain from increased investments into mining as the sector offers an alternative revenue source for the country via export earnings and is a potential job generator.

Last year, the sector accounted for just 0.1% of the non-oil sector GDP. Given the ongoing reforms by the FGN to push economic diversification, over the next 3-5 years, we believe that the sector will be on its way to becoming a key sector within the economy.


Towards a business friendly environment

 

17th March, 2017
 
Small and medium sized enterprises stand to benefit from the recently launched 60-day National Action Plan by the Presidential Enabling Business Environment Council (PEBEC). This group contributed c.50% to Nigeria’s national output in 2016. The ministries, departments and agencies (MDA) are tasked with implementing the plan but participation from other stakeholders such as specific state governments, the National Assembly and the private sector is also required if the plan is to have any realistic chance of succeeding. Nigeria is currently ranked 169 out of 190 in the ease of doing business index by the World Bank.

There are eight focus areas within the plan; ‘starting a business’ features at the top. Based on the World Bank’s most recent survey, Abuja, Zamfara, Kebbi, Lagos and Ogun emerged as the five leading states with regards to ease of starting a new business.

Generally, in Nigeria, the procedure for start-ups is cumbersome. When compared with developed economies, there are at least two times as many steps required. The action plan aims to reduce the number of days required to register a business from ten days to 2. The Corporate Affairs Council will drive this by adopting a more electronic approach.

In addition, obtaining construction permits proves to be difficult in Kaduna, Abuja, Lagos and Anambra. Nonetheless, these state still record a high level of construction activities. The action plan aims to reduce this process from forty two days to 20.

Usually applicants are unclear about which rules, fees, and procedures apply. The PEBEC hopes to address this by ensuring fees predictability during applications and transparency of planning permit assessment.

With respect to property registration, there is a high level of discord. The time required for a state governor’s consent delays the process considerably. Using e-signatures instead is currently being considered and the council aims to reduce the property registration duration from seventy seven days to 30.

Trading across borders is not very encouraging in Nigeria as well. We gather that the FGN has considered reducing the number of agencies operating at the air and sea ports to ease the process of clearing goods to within 24 or 48 hours. This should promote growth and stimulate pan-African trade.

Business travel into Nigeria can be challenging due to the long visa on arrival and submission processes as well as the poor  conditions at the airports. The council has now harmonised the entry and exit forms at the airports.

Additionally, authorities at the airports have been mandated to install the iCheck Security Solution Technology, which should phase out these entry and exit forms in the medium to long term.

We commend the FGN’s efforts made so far. However, we note that plans on eliminating major bottlenecks such as better access to credit and power shortages have not been clearly articulated.
 


Local refining, the obvious solution

 

16th March, 2017
 
Last week the National Bureau of Statistics (NBS) released the latest report in its premium motor spirit (PMS) price watch series. This shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In February it averaged N149.8/litre (l) for the 36 states of the federation and the FCT, and so above the fixed upper price limit for the retail pump price of N145/l set by the authorities.

The average price of gasoline in February represented a 0.7% m/m increase. Yobe State had the highest price for PMS at N177/l while Lagos State had the lowest with N144.9/l.

Generally, PMS is sold above the fixed upper limit in most states. We assume that oil marketers might be attempting to maintain reasonable profit margins.

However, we note that the NNPC remains the dominant supplier of PMS. Last month, the corporation had announced it would increase supply by providing six additional PMS cargoes of 37,000 tonnes each.

Inflation data for February was released this week. The NBS commentary cites that on a year-on-year basis the highest price increases were recorded for electricity, lubricants and fuel for passenger transport such as PMS.

Local refining, the obvious solution


Sources: NBS, FBNQuest Research

Boosting local refining capacity should play a key role in pushing gasoline prices down. Nigeria’s current refining capacity utilisation is c.14%; the NNPC has set out to resuscitate the refineries and is close to completing the first phase which requires securing expressions of interests from potential partners with technical and funding capacity.

Additionally, the Dangote Group is constructing a 650,000bpd refinery in Lagos which is set to begin operations in 2019; this should also assist in reducing reliance on imported fuel.

 



Finally, a slowdown in headline inflation

 

15th March, 2017
 
The latest inflation report from the NBS shows the first decline in headline inflation for 13 months, to 17.8% y/y in February from 18.7% the previous month. (Our expectation, shared with the wire services, was 17.3% y/y.) The decline was widely flagged, given positive base effects. Core inflation y/y slowed for the third successive month, to 16.0% from 17.9%. The disappointment was the pick-up in food price inflation, to 18.5% y/y from 17.8%.

CBN Governor Emefiele reminded an audience in Lagos at the weekend that the acceleration in inflation had been driven by supply-side shortages, notably of fx, fuel and electricity. We would add that the data may now be also reflecting squeezed household demand. Listed companies in the consumer goods space have not always been able to pass on the rise in their own imported input costs.

The NBS commentary notes that some of the highest y/y increases were seen in electricity, and fuels and lubricants for personal transport.


Finally, a slowdown in headline inflation


Sources: National Bureau of Statistics (NBS); FBNQuest Research

A relevant question is whether the slowdown in the headline rate will have an impact on the meeting of the monetary policy committee (MPC) the week after next. The committee could dwell upon the sharp decline in the core measure, which is influenced by monetary policy. It will also have access to in-house inflation projections, and may choose to trim the benchmark rate in the face of a contracting economy.

Our suspicion, however, is that it will want to see further declines in inflation before easing.

We see another slowdown in the headline rate in March, to 16.6% y/y.
 



A more positive story for external debt

 

14th March, 2017
 
Our third and final analysis of the DMO’s data release for end-2016 brings us to the more comforting story of the FGN’s external debt burden. Total obligations amounted to US$11.41bn, equivalent to 3.6% of GDP. Only the outstanding Eurobonds of US$1.5bn attract market interest rates. The obligations will increase in this half-year with the concluded Eurobond sales of US$1bn, which could reach US$1.5bn following the acting president’s request to the National Assembly, and perhaps with the planned diaspora bond to raise US$300m.

The burden rose by just US$150m in H2 2016. Increased borrowings of US$180m from the African Development Bank (AfDB) Group and US$140m from Exim Bank of China were partly balanced by a fall of US$170m in dues to the World Bank Group. The period saw the disbursement of US$600m by the AfDB for budget support. The FGN hopes that the World Bank will shortly make similar funding available, and that the Exim Bank releases additional funds for infrastructural development.

External debt service in calendar 2016 was US$320m. If we take the interest payments of US$180m and the mid-year stock of US$11.26bn, we arrive at an average interest rate of 1.6%.

The optimal blend of domestic/external debt obligations is 60/40 according to the DMO’s medium-term strategy. The ratio for the FGN at end-2016 was 76/24, having edged towards the objective due to the devaluation in June.

A more positive story for external debt

Sources: Debt Management Office (DMO); FBNQuest Research

The FGN’s debt at end-2016, domestic and external combined, represented 14.9% of GDP, which compares very favourably with its sovereign peers with B+/B credit ratings.
 



Alarming rise in domestic debt service

 

13th March, 2017
 
In our second commentary on the DMO’s data release for end-2016, we highlight the alarming increase in FGN domestic debt service (see chart). Payments have soared from N354bn in 2010 to N1.23trn last year. We focus on the domestic payments because they comprise close to 90% of the total burden, and because the FGN’s external debt obligations are overwhelmingly concessional and far less costly than its naira borrowing. The strength of the message on the successful Eurobond roadshow in February was based on the FGN’s external balance sheet.

To highlight the strains on the public finances, total debt service in 2016 represented a projected 35.4% of total FGN revenue. The ratio is so dire, of course, because the record of revenue collection has been poor.

The Economic Recovery and Growth Plan 2017-20 has the ratio deteriorating to 38.1% in 2018, and improving marginally to 34.5% in 2020. The explanation is twofold. Firstly, the projections assume stronger revenue collection and spending discipline, such that a primary surplus (before the deduction of interest payments) is achieved from 2019. Secondly, they have financing of the deficit predominantly external from next year (66% in 2018, rising to 72% at the end of the plan period in 2020).

The test of the plan is successful delivery, above all the use of the borrowed funds to create growth, employment and diversification of the economy. This administration has to set far higher standards than its predecessors.

Alarming rise in domestic debt service


Sources: Debt Management Office (DMO); FBNQuest Research

On a statistical note, our figures are drawn from the recovery plan rather than the older printed version of the current 2017-19 Medium Term Expenditure Framework
 



Domestic debt stock under control

 

10th March, 2017
 
The FGN’s domestic debt stock amounted to N11.06trn (US$36.3bn) at end-December, equivalent to 10.7% of annual GDP according to the projections in the 2017-2019 Medium-Term Expenditure Framework. This is a very healthy ratio for a sovereign rated B+/B. It remains so when we allow for the unrecorded debts of N2.2trn of the FGN which the administration unearthed in mid-December. These debts are to be securitized in the form of ten-year pro-notes, and are due to oil marketers, contractors, non-oil exporters and other private-sector operators.

The domestic debt stock increased last year by N2.22trn, which happens to have been the projected federal deficit for 2016. However, the budget projected net domestic borrowing of N1.20trn, which reminds us how limited progress the FGN made in securing external finance to cover its deficit.

The share of NTBs in the reported stock increased by, and that of FGN bonds correspondingly fell by two percentage points in H2 2016.

To expand federal (sovereign) into public domestic debt, we have to make some additions: the bank borrowings of state governments, which the DMO estimated at N2.82trn at end-September, their outstanding bonds, the bonds issued by AMCON, and the debts of the NNPC and other public agencies.

When we include the unrecorded debts unearthed in December, we have a public domestic debt stock approaching 25% of 2016 GDP. In line with common practice, this excludes contingents such as government guarantees.


Domestic debt stock under control


Sources: Debt Management Office (DMO); FBNQuest Research

We will turn in forthcoming dailies firstly to the far more challenging data for domestic debt service, and thereafter to the light external debt burden.


The good health of the DMO

 

9th March, 2017
 
The DMO holds its third monthly auction of FGN bonds of the year next week, and looks to raise N130bn. It is operating from a position of relative strength, having already raised N375bn (US$1.23bn) from January and February combined by the simple expedient of paying “top dollar” to investors. The total bid of N337bn in February was the highest for at least five years. The DMO is reopening its current five- and 20-year benchmarks (Jul ’21s and Mar ‘36s), and launching a new 10-year instrument to replace the 12.50% Jan ‘26s.

The FGN’s 2017 budget proposals project a FGN deficit of N2.36trn and domestic borrowing of N1.25trn.

We have noted how the DMO has made a good start to the year with the front-loading of issuance. There are now also some alternatives to FGN bonds to cover the domestic element of deficit financing.

The FGN is looking to raise N20bn from the sale of Nigeria’s first “green” bond. The DMO, together with the SEC, is working on the launch of the country’s first sukuk (Islamic bond) in local currency. Further, the CBN’s issuance calendar for NTBs through to 01 June shows net sales of N43bn.

Sales and demand at FGN bond auctions - FBNQuest Research

Another new product is the FGN’s first retail savings bond, which the DMO is launching this week with two- and three-year tenors as well as a maximum investment of N50m.

The FGN in our view is far better prepared than last year to achieve its domestic borrowing target, albeit at a high cost.


Return to a trade surplus in Q4

 

8th March, 2017
 
The latest data from the NBS in its Foreign Trade in Goods Statistics for Q4 2016 show the total value of trade as N5.29trn, representing an increase of 11% on the preceding quarter. Compared with Q3, the total export value was 28% higher at N2.98trn, and the import value 6% lower at N2.31trn. Thus a surplus of N670bn (US$2.20bn) was achieved, the first since Q4 2015. However, for the full year, total trade was estimated at N17.3trn with a deficit of N290bn. These customs data may tell a different story to the BoP series from the CBN, which is not yet available.

Crude oil represented 81% of total exports in the quarter. In Q4, OPEC introduced production cuts for members (excluding Nigeria, Libya and Iran), which pushed oil prices above US$50/b.  Additionally, improved oil production was recorded as a result of reduced sabotage.

In the quarter under review, Nigeria exported goods (presumably non-oil products) valued at N464bn to other African countries; exports to ECOWAS countries accounted for half of this figure.

The decline observed in imports is not surprising, given that the economy is still struggling with the recession. Furthermore, apart from fx illiquidity slowing import activity, there seems to be some improvement with local substitution.

Return to a trade surplus in Q4


Last year as a whole, import trade was dominated by mineral products, machinery and transport equipment, and chemical and related products.

Local substitution will play a key role in pushing Nigeria towards becoming more export oriented and less dependent on imports. The process is underway although not moving at the desired pace.


Continuing reserves accumulation

 

7th March, 2017
 
CBN data show that gross official reserves increased by US$1.5bn in February on a 30-day moving average basis to US$29.6bn. The authorities have now achieved reserves accumulation of US$5.7bn since end-October. By not formally throwing any light on this marked turnaround, they have fuelled the rumour mill. On surer ground we can point to loan disbursements: by the Exim Bank of China in the third quarter of 2016, US$600m by the African Development Bank in November and last month’s successful US$1.0bn Eurobond sale.

The semi-official explanation for the recovery is centred around a pick-up in crude oil production to 1.90 mbpd with effect from November. Statements over the past week by officials have put output back at 2.1 mbpd, and even 2.2 mbpd.  The price has been stable over the period, at US$53/b to US$56/b.

We are aware of appearing too trusting of official data. However, the trend follows what one should expect: oil revenues increase so reserves increase.

Sources CBN; FBNQuest Research


Sources: CBN; FBNQuest Research

The accumulation will have stiffened the resolve of the authorities to maintain their exchange-rate policy. The CBN circulars of 21 February on an additional forward sale of fx and on sales for retail such as personal travel and medical bills notwithstanding, its own supply to the market remains modest.

Nigeria’s import cover at the end of February has strengthened to 9.3 months for goods and 7.0 months once we include services, based upon the balance of payments for the 12 months through to September 2016. We favour this vanilla measure of international liquidity because Nigeria has a relatively strong external balance sheet and because the data are not generally available for other ratios.
 



Plenty of ideas at the Abuja oil event

 

6th March, 2017
 
Last week we attended the Nigeria Oil and Gas Conference in Abuja. Panel discussions supported the narrative that the oil economy is capable of thriving in the face of new realities. In his opening address, the minister of state for petroleum resources, Ibe Kachikwu, revealed an oil production target of 3 mbpd within the next five years. This compares with the short-term projection of 2.2 mbpd in the FGN’s 2017 budget proposals. However, an annual investment of US$10bn over the stipulated timeframe is required to achieve this target.

The OPEC secretary general, Mohammad Barkindo, reassured the conference about the organization’s efforts in support of oil prices. In October it introduced production cuts for members (excluding Nigeria, Libya and Iran), which pushed up prices above US$50/b (where they have since held).

A topical theme through the conference was the high cost of production. One panelist stated that security is the largest incremental expense and accounts for 40% of the industry’s average costs of production.

Another common theme was collaboration between oil servicing firms to reduce the overall cost of doing business. Such partnerships could presumably cover maintenance and fabrication operations.

For the downstream segment, one panelist suggested that the FGN concessions the pipeline network for the better transportation of petroleum products (particularly premium motor spirit). The thinking is that a privately-owned pipeline operator would be better equipped to tackle vandalism issues.

The NNPC has set out to resuscitate its refineries, adopting a three-step approach (preparation, financing and execution). The corporation is close to completing the first phase, which requires securing expressions of interest from potential partners with technical and funding capacity. Its target is refining capacity utilization of 90% by 2019; utilization is currently around 14%.

Local content also featured in panel discussions. We gather that the local content fund within the Nigerian Content Development and Monitoring Board now amounts to US$600m. The board has decided on a lending rate of 8% over a five-year repayment period; this should assist in driving participation of local O&G businesses.

In addition to the better known SEPLAT, another major indigenous player is Aiteo, which successfully acquired OML 29 in mid-2015 in a Shell divestment. The firm’s average daily production has risen from 23,000 b/d in 2015 to 80,000 b/d currently.

However, the firm faces some familiar challenges for the industry such as ageing assets, vandalism and theft, high debt service and community management issues. It could be a candidate for listing in the near future


Oil and gas again the worst performer

 

3rd March, 2017
 
From the national accounts for Q4 2016 we today highlight the five worst performing sectors. We cover only those sectors accounting for at least 1% of GDP at constant basic prices. The data show agriculture expanding by 4.0% y/y, and industry and services contracting by -6.7% and -1.5% respectively. Industry (the secondary sector) was dragged down by the -12.4% y/y contraction in the oil and natural gas sector. Three of the five worst performers (real estate, construction and manufacturing) are struggling with soft demand across the economy.

The most telling evidence of the softness of the non-oil economy is that trade, the second largest sector of the economy, declined by -1.4% y/y. This was little changed from the previous quarter. Trade is the most reliable measure of demand across all income levels.

The FGN plans to compensate for the weakness of household demand by boosting its own capital spending to N2.24trn this year, compared with the provisional outturn of N850bn in 2016.  This target may prove challenging but the sizeable increase that we see this year should support construction as well as the cement segment of manufacturing.

The contraction in manufacturing slowed in Q4, with a minority of segments (notably textiles, apparel and footwear) posting positive growth. This could be evidence of a rise in import substitution.

Finance and insurance was the strongest performer in services, growing by 2.7% y/y.

Oil and gas again the worst performer


Sources: National Bureau of Statistics (NBS); FBNQuest Research

The president’s 2017 budget speech to the National Assembly pledged to “maintain” spending on personnel at about N1.8trn. In contrast to capital expenditure, this is not supportive of consumption demand.
 



Another quarter of recession

 

2nd March, 2017
 
The NBS has released the national accounts for Q4 2016 to show negative growth of -1.3% y/y (after -2.2% the previous quarter). The contraction of the economy thus extended to a fourth successive quarter, and amounted to -1.5% y/y for the full year. Our expectation was modest GDP growth in Q4 on the basis of some recovery in the non-oil economy with help from the usual, seasonal boost. This did not materialize, and the slump in real oil output was worse than we anticipated. That fall was slower than the previous quarter yet still in double digits (-12.4% y/y).

Oil’s share of real GDP declined to just 8.4% in 2016 and is now only the fifth largest in the economy: it is topped in descending order by agriculture, trade, information and communications, and manufacturing. Through its linkages across other sectors, however, the indirect oil economy may be as large as 40% of GDP.

The non-oil economy contracted by -0.3% y/y in Q4. Trade, which is the most reliable measure of economic activity across all income groups, shrank by -1.4% y/y.

The FGN has a major role to play in economic recovery on the fiscal side. Construction contracted for the sixth successive quarter, by 6.1% y/y, and stands to benefit from the planned acceleration in capital releases to spending ministries.

Good Morning Nigeria

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Looking ahead to the Q1 2017 data, the base effects for the oil sector are challenging. Crude production averaged 2.11 mbpd in Q1 2016 according to the NBS data. The non-oil economy remains fragile and household consumption soft. We should see a token return to positive territory for GDP as a whole.


The recovery plan in outline

 

1st March, 2017
 
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a modest increase from 48.6 in January to 50.0. Our partner, NOI Polls, has gathered and compiled the data. The index report is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.

PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted nine negative headline readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third. Additionally for this month’s report, respondents were asked to name the main constraints upon their businesses. As well as the predictable answers about credit and fx, we note the mention of multiple taxation, poor roads and late payment by clients.

Four of the five sub-indices picked up in February. Other than the habitual festive boost at the end of the year, the headline index has moved within a fairly narrow range since November.

This is only our second neutral reading (after April 2014). It is consistent with our narrative that the economy is emerging from recession. While the output of the non-oil economy deteriorated in Q4 2016, the contraction of manufacturing did slow from -4.4% y/y to -2.5%.

We are not calling a dramatic turnaround in the economy although we see modest growth in Q1 2017. Manufacturing is one of the principal losers from the scarcity of fx despite some movement towards import substitution.

Demand is set to benefit from the FGN’s expansionary fiscal stance, particularly from the pick-up in capital releases. Manufacturing, however, will likely be one of the last non-oil sectors to recover due to the scarcity.


The recovery plan in outline

 

28th February, 2017
 
We have seen a version of the budget and national planning ministry’s Economic Recovery and Growth Plan. It draws on several planning documents already in circulation. The projections have GDP growth at 7.0% in 2020 at the end of the forecast period, compared with the IMF’s 3.8%. Not for the first time, the oil price benchmarks are conservative and rise to just US$52/b. Production forecasts, rising to 2.5 mbpd in 2020, are attainable with diplomatic initiatives in the delta and regulatory change.

The policies are well-documented and create no surprises. The plan concedes that, if the authorities fail to take “bold homegrown action”, they may have to turn to the IMF for assistance.

The strongest section in our view covers the fiscal challenges. Citing World Bank data on non-resource taxes as a proportion of GDP, it compares Nigeria’s 3% with India’s 16%, Kenya’s 18% and South Africa’s 19%.

The plan estimates that these taxes could generate an additional N2.3trn gross per year, of which N900bn would flow to the FGN. Improving compliance could earn N1.0trn, broadening the tax net N900bn and conducting audits N400bn. These are all works in progress. We hope that the plan, like the 2017 budget proposals, recognises that boosting the take from non-oil taxes takes time and patience.

The fiscal section notes that an increase in VAT rates is under consideration. This has been ruled out for this year by the minister (Good Morning Nigeria, 15 February 2017).

We read that the sale of selected oil and non-oil assets is among eight initiatives to increase macroeconomic stability. This includes reductions in the FGN’s stake in oil joint-ventures.

Financial market participants will have been hoping for some pointers on the exchange-rate regime. The only reference is a pledge to maintain a “stable” regime and adopt a “flexible market-determined exchange rate”. This second commitment reminds us of the language in the statement accompanying the CBN’s liberalisation in June 2016.

Finally, the plan looks to target listed core stakeholder groups, including local and international media so as to influence opinion at home and abroad. We have to say that there is considerable room for improvement. The document could have been widely circulated so that interested parties do not have to depend on fragmented versions.


Several plans for external financing

 

27th February, 2017
 
Since the FGN’s 2017 budget proposals remain in the National Assembly, we provide an update on deficit financing. The proposals project a deficit of N2.36trn, which is to be covered N1.25trn domestically, N1.07trn from external channels and N0.04trn from other sources. It is unclear whether the FGN has raised the external financing component of the approved N2.20trn deficit for 2016. The only disbursement to our knowledge was US$600m by the African Development Bank (AfDB) in November.

The FGN made a good start to its financing programme for this year with the successful US$1bn, 15-year Eurobond issuance earlier this month. For whatever reason, it was unable to take advantage of the near-eight times oversubscription.

Yemi Osinbajo, the acting president in the absence of Muhammadu Buhari, has sought the go-ahead from the National Assembly to raise a further US$500m from further Eurobond sales by the end of March. Sales proceeds will be allocated for financing of the 2016 deficit.

That deficit was to be funded largely on the external side with loans from the World Bank and the AfDB.

Armed with its new economic recovery programme, the FGN is renewing its conversation with the World Bank. It is reluctant to put a figure on the loan sought amid speculation of conditionality related to the exchange-rate regime.   We suspect that the Bank’s stance will be less exacting than that of the IMF, from which the FGN will not borrow, and more than that of the AfDB.

The authorities also aim to collect US$300m from the sale of diaspora bonds this year. When we consider the size of the diaspora, this would be a modest beginning.

Within the N1.25trn projection for domestic financing in the budget proposals, the FGN looks to raise N20bn from the issue of Nigeria’s first green bond

The DMO and the SEC are together working on a maiden sovereign sukuk (Islamic bond). We understand that issuance would initially be in local currency, and would follow on from the lead taken by Ogun State in 2013

Additionally, the authorities have announced some useful early results under the “whistle-blower” programme to recover stolen monies. These funds are, however, to be treated as other non-oil revenues rather than deficit financing items (Good Morning Nigeria, 14 February 2017). 


A higher yet subpar FAAC payout

 

24th February, 2017
 
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government picked up for the second successive month in February (from January revenues) from N400bn to N465bn (US$1.53bn). The federal finance ministry noted a marked increase in receipts from petroleum profits tax (PPT) despite the continuing force majeure at the Forcados terminal, balanced by a slight fall in collections from nonoil taxes. According to prevailing convention, the oil revenues cited are those of three months earlier.

The statutory distribution of N282bn was supplemented by VAT of N74bn, excess PPT payments of N61bn and an exchange-rate gain of N48bn.

The 2016 budget projected the net distribution from the federation account at N4.30trn and from the VAT pool at a further N1.42trn. The pro rata monthly average of N477bn has not been achieved since May once we deduct the unbudgeted extras such as exchange-rate gains (see above).

Neither the president’s 2017 budget speech nor the 2017-19 Medium-Term Expenditure Framework allows us to reach a comparable figure for the current year. Until the budget has been approved and signed off by the president, FAAC distributions cannot be made on the basis of the new projections and assumptions.

The ministry said that the balance in the excess crude account was broadly unchanged, at US$2.46bn.

Revenue allocations by the FAAC - FBNQuest Research

We have taken the latest payout from the local media. Official sources provide the revenue numbers up to September, distributed in October. We use the data for gross distributions while the local media cite a combination of gross and net payouts to the three tiers.



Scope for local fish production to grow

 

23rd February, 2017
 
The brightest spot in terms of growth observed from the national accounts released by the National Bureau of Statistics (NBS) for Q3 2016 was agriculture, which expanded by 4.5% y/y. However, within the sector, fisheries contracted by -0.3% y/y (see chart), and accounted for only 2% of agricultural GDP in the quarter. Based on data from the federal ministry of agriculture and rural development, Nigeria’s total annual fish demand is estimated at 3.3 million metric tonnes (mmt), only 33% of which is supplied domestically. The deficit is imported, resulting in an estimated annual spend of US$700m.

This supply gap should encourage a shift from subsistence to commercial fish farming. Artisanal fish farming is still dominant in Nigeria. The most recent data from the NBS show that artisanal fish production accounted for around 68% of the 1.02 mmt of fish produced in 2015.

Meanwhile, commercial trawling accounted for just 1.5% in the same year.

Given the FGN’s import substitution strategy, the fisheries segment is set to expand. However, the high costs associated with fish farming (particularly due to cost of fish feeds) pose a major challenge.

Industry sources suggest that fish feed accounts for c.75% of the total cost of production. Meanwhile, we gather that 5% VAT, the standard rate, is charged on locally produced fish feeds.


GDP, fisheries and agric growth - FBNQuest Research


Considering that access to credit is a consistent obstacle, a sustainable intervention programme should assist in deepening the pockets of local fish farming businesses.

An example is the CBN’s Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL) which recently announced its plans to launch a US$300m agribusiness loan project. Aquaculturists can tap into it.
 



Official fine-tuning of the fx market

 

22nd February, 2017
 
The CBN has fuelled conversations about exchange-rate policy with a press release on Monday and two circulars yesterday. The release pledged that the CBN would make additional fx available for school, medical and personal travel needs. It indicated that the end-users would pay rates no more than 20% above the prevailing interbank market rate. The circulars launched a sale of US$500m on a 60-day forward basis (without sectoral preferences) and fleshed out the fx retail sales.

Having read the CBN’s three documents, and specifically the pledge to develop “the programme to clear all unfilled orders”, we do not see this week’s changes as leading directly to, for example, another devaluation.

Rather, we see a fine-tuning exercise to reduce the backlog and the gap with the parallel market.

The authorities will be aware of the risks attached to raising, and then dashing market hopes in the manner of the liberalization of June 2016. They can mitigate this risk by maintaining the pace of change in the market. They have to attract sizeable autonomous flows to supplement the CBN’s fx supply if they are to restore two-way fx trading and therefore confidence among all market participants.

We are unsure about the basis of the cap of 20% above the interbank rate for retail fx sales. This does not prove that the CBN sees N360 per US dollar as an appropriate level.

The press release reveals that the rules on allocations of fx by the banks have been scrapped. Hitherto, banks had to devote 60% of their meagre ration from the CBN to manufacturing (broadly defined). This change was a surprise: manufacturing in Nigeria is still heavily reliant on imported inputs, the FGN’s programme of substitution notwithstanding, and will miss the privileged access to banks’ fx it enjoyed until this week.

Yesterday the CBN’s daily spot intervention increased from US$1.5m to US$6.0m without specifying whether this level would be sustained. Airlines and foreign portfolio investors are among the segments hoping to benefit, however marginally, from the end to sectoral preferences.

The CBN looks to meet all unfilled orders, and is adamant that arrears under matured letters of credit have long since been cleared. From the balance of payments for Q3 2016, we can see the compression of import volumes. We are not sure, however, that the CBN’s spot and forward transactions have together halted the expansion of the backlog.


Hopeful signs on pipeline sabotage

 

21th February, 2017
 
National crude oil and condensate production picked up to 1.92 mbpd in November from 1.78 mbpd. The average for January-November of 1.83 mbpd falls well short of the 2.20 mbpd assumption in the 2016 budget, which explains many of Nigeria’s macroeconomic woes. The NNPC’s Financial and Operations Report for December notes that about 330,000 b/d was shut-in throughout November due to sabotage of the Trans Forcados Pipeline. On the positive side, the pick-up in output, since maintained, helps to explain the recovery in gross official reserves.

The report notes a further decline in pipeline breaks due to vandalism to 18 in December, the lowest of the year. In this context, it is significant that the FGN has restored monthly allowances to the said militants in the delta to the level under the previous administration and provided for amnesty payments in its 2017 budget proposals.

The corporation’s operating deficit narrowed slightly in December from N18.7bn to N17.0bn (US$56m). Higher sales of white products by the Pipelines and Products Marketing Company were responsible for pushing up the NNPC’s revenue and expenditure in the month (see chart).

The operating deficit of N197bn (US$650m) for the full year compares with N267bn in 2015. By far the largest contribution to the deficit was N134bn from central headquarters (CHQ).

What is unclear is the treatment of the losses surely made by importers of petroleum products (principally the NNPC) at current oil prices and exchange rates. There is no provision for subsidy payments in the FGN’s 2017 budget.

Hopeful signs on pipeline sabotage

Sources: NNPC, Financial and Operations Report, December 2016; FBNQuest Research

The reports notes that power plants generated 1,715 megawatts (MW) in December from gas supplied by the industry, the lowest since June.


Air turbulence due to macro challenges

 

20th February, 2017
 
Nigeria’s aviation sector has suffered from the general slowdown in the economy. Based on data from the Nigerian Civil Aviation Authority, last year passenger traffic declined by -0.5% y/y on domestic flights. Furthermore, the recent national accounts released by the National Bureau of Statistics show that air transport contracted by -3.1% y/y in Q3 2016 (see chart below). We link this underperformance partly to the continued squeeze on household pockets which has eroded disposable income.

The lingering fx sourcing issues continue to pose a major challenge for the aviation sector. Securing spare parts for maintenance as well as jet fuel imports is difficult.

The price of aviation fuel, unlike that of PMS, is unregulated. Thus operators have to bear the full inflationary cost pressures associated with fx volatility as well as fluctuations in oil prices. While domestic air fares have almost doubled, the increases have been insufficient to offset the cost pressures.

January’s inflation report showed that transport prices rose by 1.0% y/y, unchanged from the rate recorded in December. This component has a 6.5% weighting.

A welcome development is the recent listing of Medview Air on the exchange. Given that newly listed companies deepen the market, this is a step in the right direction.

Air turbulence due to macro challenges

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Although its share of the NSE’s market capitalisation is relatively insignificant (at 0.2%), it is the only listed firm that gives investors exposure to the aviation sector.
 



Healthy growth of the PFAs

 

17th February, 2017
 
The assets under management (AUM) of the Nigerian pension industry increased by 15.3% y/y to N6.02trn (US$19.7bn) in November, according to the regulator Pencom. We view the increase as creditable when we make allowances for the arrears in contributions by some state governments and public agencies. The breakdown by asset class shows no substantial change: the share of FGN securities (bonds and NTBs) rose from 66.5% to 71.3% of the total over the period while that of domestic equities narrowed from 10.0% to 8.0%.

Fund managers do not like telling retail investors, who numbered more than 7.3 million at end-September, that the value of their portfolios has fallen over the last month. This would have been the message for much of the past three years if equities had dominated their portfolios. The NSEASI fell for three successive years (2014-16).

The PFAs have become the anchor buyers at the monthly auctions of FGN bonds to finance the budget deficit. The DMO was able to compensate for an unsuccessful auction in December with a very different outcome last month: it sought to raise N130bn but collected N215bn, albeit by setting the stop rates at close to 17.00% for all three instruments on offer.

Sadly, there are no industry comparisons of the PFAs by performance.

Healthy growth of the PFAs

Sources: National Bureau of Statistics (NBS); FBNQuest Research

We should flag a trend whereby officials have come to view the funds managed by the pension industry as a remedy to help cure Nigeria’s huge infrastructural deficit. At least one federal government minister and a former head of state have gone down this route. The Pencom data show infrastructural fund holdings at just N2.2bn in November. Increases on an entirely voluntary basis would be welcome.
 



Another slowdown in mm headline inflation

 

16th February, 2017
 
The latest report from the NBS shows the twelfth successive acceleration in headline inflation, to 18.7% y/y in January from 18.6% the previous month. The rounding masks an increase of 17bps. Core inflation y/y eased to 17.9% from 18.1%. In contrast, food inflation picked up from 17.4% y/y to 17.8%. The bureau’s commentary notes higher prices for all staples as well as wine and spirits, clothing, motor cars and maintenance, and passenger transport by road.

Within core inflation, prices of housing, water, electricity, gas and other fuels increased by 27.2% y/y in January, fractionally lower than the previous month. Fuel prices were probably the main culprit.

The trend of headline inflation m/m has broadly declined since May. January’s 1.0% compared with 1.1% in December on the back of squeezed household demand.

Real yields for liquid FGN bonds in the middle of the curve are currently up to -260bps (negative).

Another slowdown in mm headline inflation

Sources: National Bureau of Statistics (NBS); FBNQuest Research

Effective the February report, we expect headline inflation y/y to ease on positive base effects. This declining trend should result in a headline rate in very low double digits in December, subject to whatever exchange-rate reforms are introduced (and when). Our call is that the MPC will start to cut its policy rate in line with easing inflation.

Our more alert readers will have noticed that the headline rate y/y in January was higher than that of its constituent parts (food and non-food). We have therefore to share the NBS health warning that processed foods are elements of both parts.


More taxpayers rather than higher rates

 

15th February, 2017
 
A statement by the federal minister of budget and national planning, Udo Udoma, to the National Assembly on Monday noted that the 2017 budget proposals do not incorporate any increases in tax rates. The FGN’s focus is to extend coverage and compliance. There is clearly room for improvement. Only five million of the estimated 37 million micro, small and medium enterprises in Nigeria are registered. The Federal Inland Revenue Service says that about a half a million companies in the corporate sector are not paying tax.

Taking a different position, the federal finance ministry has recently floated the idea of a new higher VAT rate for some luxury goods.

Separately, there have been calls for a rise in the standard 5% rate of the tax. Advocates have included the IMF and the Revenue Mobilization Allocation and Fiscal Commission, which called for a new rate of between 7.5% and 10%. It also observed that Nigeria’s rate is among the lowest in the world.

Online filing of tax returns and computerization at all revenue collection agencies have helped to boost coverage. Increased remuneration for employees of the agencies would also be helpful.

Additionally, they have to encourage the culture of paying tax. This is more easily done when the taxpayer can identify additions to the infrastructure and public services. Lagos State offers a good case study in this respect.

More taxpayers rather than higher rates

Sources: CBN; FBNQuest Research

Finance ministries in some smaller developing economies have set up units to collect taxes from the largest companies. We do not think the idea should be extended to Nigeria on account of its size and the widespread evasion. The focus on coverage does require patience. The FGN, as we noted yesterday, has adopted more realistic projections for non-oil revenue generation.


Official rethink on revenue collection

 

14th February, 2017
 
The FGN’s 2017 budget proposals suggest a rethink on revenue collection. They see non-oil earnings of N1.37trn out of a N4.94trn (US$16.2bn) total for the FGN, which is not to be confused with federally collectible revenues. The rethink amounts to an acknowledgment that a sizeable increase in collections from the non-oil economy, even from a low base, is a programme for several years. The proposals see richer pickings from the oil economy (N1.98trn) whereas the 2016 budget set overambitious targets for non-oil and independent revenues.

In January-September 2016 total revenues for the account of the FGN were just N2.17trn, and therefore far short of the full-year target of N3.86trn.

The underperformance applied both to the oil sector (on account of sabotage of pipeline infrastructure) and to the non-oil economy (due to depressed household demand and regulatory changes such as the CBN circular on import items no longer eligible for fx).

The non-oil revenue projections for 2017 are not available by collection agency. We can say, however, that the FIRS is comfortably the largest agency, responsible for petroleum profits tax, companies’ income tax, and import and non-import VAT. It has met its collection target every year this century other than 2006, 2015 and, almost certainly, 2016.

Recoveries are outside the remit of the FIRS. The authorities announced at the weekend that they had recovered US$151m and N8bn in stolen monies in less than two months under a new “whistle-blower” programme.

Official rethink on revenue collection

Sources: Federal Inland Revenue Service (FIRS); FBNQuest Research

The 2017 budget proposals project a total of N565bn (currently US$1.85bn) from recoveries, which are being treated this year as other non-oil revenues rather than as a deficit financing item.


Subscription slippage on GSM platforms

 

13th February, 2017
 
The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 91.9 million in December, representing a y/y contraction of -5.3%. The figure implies density of 50% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. We attribute the decline in subscriptions to changes in consumers’ spending patterns. Given the squeeze on household pockets, there are competing priorities for disposable income (particularly for low income earners).

In 2016 MTN was the leading operator in terms of internet subscriptions. In December its market share was 34.6% while Globacom and Airtel accounted for 29.4% and 21.1% respectively.

We gather that MTN has decided to increase the price of its data packages; this is due to a mandate issued by the regulator. It will not be surprising if the declining trend in subscriptions via GSM continues.

Internet service providers that offer fiber optic broadband services are gradually gaining momentum. Due to the reliable data speed offered, most corporates utilise their services, and there seems to be a growing trend for residential usage as well.

The FGN’s target of achieving 30% broadband penetration by 2018 from its current level of 21% may be threatened by the prevailing fx illiquidity. Most operators are having issues importing equipment for upgrading their networks. Furthermore, there are also growing issues surrounding the vandalism of telecommunications base stations.

Subscription slippage on GSM platforms

Sources: Nigerian Communications Commission (NCC); FBNQuest Research

Improved access to internet connectivity can have a multiplier effect. Beyond the immediate impact on the technology and telecommunications sectors, agriculture, education and health can also be big winners.


Slowdown in seaport traffic

 

10th February, 2017
 
A new data series from the NBS captures shipping and port activities. The ship traffic statistics, drawn from the Nigerian Ports Authority, show a provisional figure of 4,025 vessels berthed at the various ports across the country last year. When compared with 2015, the total number of vessels recorded last year represented a -26% y/y decline. This fall in import activities should be attributed to the current fx illiquidity as well as insecurity in Nigeria’s coastal waters.

Based on CBN data, Nigeria generated N35.6bn in customs and excise duties in May 2016, compared with N42.1bn recorded in the corresponding period of the previous year. The CBN circular on the 41 import items would have been a contributory factor behind the decrease in revenues.

Outward cargoes from Delta port dropped by -51% to an estimated 1.9 million in 2016 from 2013. The port exports crude oil primarily and, given the recurrent pipeline vandalism, export volumes have plummeted.

Meanwhile, at Apapa port outward cargoes surged by 54% over the same period to 1.3 million tonnes last year.

There is an over-reliance on Lagos ports. However, the evacuation of cargoes remains a major challenge, with other transportation links surrounding the port in poor condition.


In an attempt to improve maritime trade as well as reduce the pressure associated with transshipment cargo at Lagos ports, the construction of the Ibom Deep Sea Port (IDSP) located in Akwa Ibom State is underway.

Slowdown in seaport traffic


Given its proximity to industrial and commercial centers in southern Nigeria, once operations commence, IDSP has the potential of becoming a dominant hub within the region.


Welcome growth in capital releases

 

09 February, 2017
 
Our chart today is drawn from the CBN’s quarterly bulletin and shows recurrent expenditure to September 2016. The first point is that there were apparently no payments made to personnel in two months: for January 2016 we offer the mitigating explanation that the year’s budget was not signed off for several months (in May). Payments to personnel, which exclude the category of pensions and gratuities, are now running at about one third of total expenditure. The data in the bulletins are less detailed than in the quarterly economic reports, which run to June 2016.

In June 2016 the federal finance minister, Kemi Adeosun, said that personnel costs were running at about N165bn per month (including pensions of about N15bn per month). She has seconded 300 staff from the OAGF onto a continuous payroll audit. The aim is to continue the work to identify and remove from the payroll “ghost” workers and pensioners. The chart suggests some success for her endeavours from mid-2016.

This bulletin shows recurrent spending of N4.02trn over the 12 months in question and capital releases of N980bn. For the 12 months to September 2015, the comparable figures were N3.57trn and N500bn. The 2017 budget proposals project another ambitious rise in releases to N2.24trn.

The downside of the increase in capital releases, of course, is the widening of the FGN deficit and the alarming rise in domestic debt service (Good Morning Nigeria, 06 February 2017).

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On a historical note, spending on personnel was consistently running at less than N100bn per month until October 2010. The previous administration awarded a sizeable salary increase to civil servants ahead of the elections before last.


Current account back into surplus

 

08 February, 2017

Nigeria’s balance on the current account is highly correlated with its oil exports. Our chart shows that the trade and current accounts move in tandem. The balance on trade has fallen from a surplus equivalent to 11.8% of GDP in Q3 2012 to a deficit of -0.1% in Q3 2016. Over the same period, the share of oil and gas exports in GDP has plummeted from 20.4% to 8.4%. Import volumes held up well initially when the oil price started to slide in mid-2014 but have since slumped due to soft household demand and acute fx shortages.

Merchandise imports of US$7.9bn in Q3 2016 compared with US$10.7bn the previous quarter and US$13.3bn one year previously. The numbers tell a similar story if we exclude oil imports; US$5.7bn, compared with USS8.5bn and US$10.7bn.

This sharp decline reflects the early successes of substitution policy such as a boost to rice cultivation. We also have to mention the strong element of involuntary substitution where consumers buy the local product because they no longer have the choice.

The consequence of this higher-than-expected import compression was that the current account moved back into positive territory in Q3 2016, at 0.6% of GDP.

Net current transfers, which are mostly workers’ remittances, have ranged between 4.0% and 5.3% of GDP over the past year. We had expected a sharp decline in recent quarters, given the temptations of the fx parallel market.

Current account back into surplus

There was a blip to the correlation in Q1 2016. This has been removed by a substantial data revision on the communications line of the services account.
 


Limits to the comparison with Egypt

 

07 February, 2017
 
Our periodic look at three stock market indices in sub-Saharan Africa (SSA) places Nigeria between Jo’burg and Nairobi. The NSEASI has lost-4.8% ytd, compared with a 3.0% gain for Jo’burg and a -10.0% retreat by Nairobi. Reasons for the poor performance are not hard to find. The economy remains in recession and will grow only marginally this year. The fall in the oil price has indirectly squeezed households and so dampened sales by consumer goods companies. It has also damaged the balance sheets of many banks as loans to the industry have turned sour.

Turnover on the NSEASI has averaged a pitiful US$7.1m. It is only slightly ahead of Nairobi, and would be lower were it not for large volumes traded in a prominent oil company on 24 January.

The Nigerian pension funds are reluctant to add to their exposure to equities while foreign portfolio investors (FPIs) have to join a long queue if they want to repatriate sale proceeds. The NSE data show that foreign investors accounted for 45% of all trades in 2016. However, these trades would overwhelmingly have been the restructuring of existing portfolios.

Outside SSA, the market of choice for FPIs since October has been Egypt, where the authorities devalued the exchange rate, started moves towards a floating regime, hiked benchmark interest rates and secured a three-year credit of about US$12bn with the IMF. In local currency terms, the index (EGX30) has soared by 53.6% since end-October.

Limits to the comparison with Egypt


Any read-across to Nigeria should be cautious. The FGN is loath to accept IMF loans. Further, the monetary authorities are unlikely in our view to adopt a free float, not least because they have no experience of such a regime.


Surge in domestic debt service

 

05 February, 2017
 
While we endorse the FGN’s expansionary fiscal stance, we caution that it has time limits in view of the sharp increase in domestic debt service. The 2017 budget proposals project total debt service of N1.66trn including a N177bn sinking fund for the retirements of bonds. This compares with N1.21trn for this year in the 2016-18 Medium Term Expenditure Framework (MTEF) and N1.36trn in the 2016 approved budget. This burden is almost entirely domestic: of the N1.36trn in last year’s budget, just N50bn was due to external creditors.

The projection for this year represents 33.6% of total FGN revenues. The most recent MTEF for 2017-19, which has been approved by the National Assembly, has total debt service rising to N1.93trn in 2019, equivalent to 35.5% of FGN revenues.

These projections may need to be revised upwards: this year’s budget deficit of N2.36trn is to be financed N1.25trn domestically, N1.07trn externally and N0.04trn from other sources.

The financing costs are sharply higher for domestic than for external debt. The yield on the July ’23 sovereign Eurobond is below 7% and almost ten percentage points less than FGN naira instruments of similar tenor. The cost of concessional debt, which dominates the external debt profile, is considerably lower. Even when we allow for another devaluation, the case for external borrowing is compelling.

Surge in domestic debt service

The current roadshow for the third issue of Eurobonds enables the FGN to share the story that it has a strong credit to sell. That said, most of its external borrowing plans are concessional, many financed by export credits. We would like to see more of the same, along with greater use of credit guarantees.


Further decline in capital imports

 

03 February, 2017
 
The NBS recently released its latest report on Nigerian Capital Importation, which covers Q4 2016. The data was obtained from the CBN and compiled using information on banking transactions. The total value of capital imported into Nigeria in Q4 2016 was estimated at US$1.5bn, representing declines of 15% q/q and 0.5% y/y. Monthly imports within the quarter were relatively constant although December recorded marginally the highest level (of US$555m).

On an annual basis, capital importation fell by 47% from US$9.6bn recorded in 2015 to US$5.1bn. We gather that this is the lowest level since the inception of the series in 2007.

By type of investment, portfolio transactions were the smallest component of imported capital, at US$284m (18% of the total). Within this category, equity investment totaled US$176m.

By sector, telecommunications imported the largest share of capital, at US$554m. This represented 36% of the total, followed by the oil and gas sector, at US$327m (see chart below).

Generally portfolio investors tend to shy away from volatile markets because of the potential risks, notably the low returns and high transaction costs associated with exchange-rate uncertainty. Delayed repatriations have become a Nigeria-specific disincentive.

Further decline in capital imports

Feedback from portfolio investors in one jurisdiction tells us that a devaluation and bona fide two-way trading are the minimum conditions for re-entry.


A third month of reserves accumulation

 

02 February, 2017
 
CBN data show that gross official reserves surged by US$2.3bn in January on a 30-day moving average basis to US$28.2bn. The authorities have now achieved reserves accumulation of US$4.2bn over three months. Since they have not shed any light on this marked turnaround, they have fuelled the rumour mill. One such story in circulation is that they have secured some sizeable recoveries. On surer ground we can point to loan disbursements: by the Exim Bank of China in the third quarter and US$600m by the African Development Bank (AfDB) in November.

We understand informally from official sources that the accumulation is explained by a pick-up in crude oil production to 1.90 mbpd from November. The price has been stable over the period, at US$53/b to US$56/b.

We are aware of appearing too trusting/not sufficiently suspicious of official data. However, the trend follows what one should expect: oil revenues increase so reserves increase.

Experience since January 2012 had shown very limited accumulation when the price was consistently above US$100/b and steady depletion when it turned downwards from mid-2014 (Good Morning Nigeria, 19 January 2017).

The accumulation will have stiffened the resolve of the authorities to maintain their exchange-rate policy. Significantly, the CBN has not adjusted its daily sales of just US$1.5m to the banks. If output moves closer to the 2017 budget assumption of 2.2 mbpd, their determination will be still stronger.

Good Morning Nigeria


The accumulation will have stiffened the resolve of the authorities to maintain their exchange-rate policy. Significantly, the CBN has not adjusted its daily sales of just US$1.5m to the banks. If output moves closer to the 2017 budget assumption of 2.2 mbpd, their determination will be still stronger.


PMI reading no 46: post-festive reverse

 

01 February, 2017
 
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a strong decline from 60.0 in December to 48.6. Our partner, NOI Polls, has gathered and compiled the data. The index update is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.

PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets in developed economies.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted nine negative headline readings since our launch in April 2013 including five in 2016.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

All five sub-indices retreated in January. The index is roughly where it was in November (48.8). In the intervening period, the traditional pick-up in household demand has come and gone. Each year since our launch, the index has gone into reverse in January.

While we think that non-oil GDP in Q4 2016 was positive y/y, having been flat the previous quarter, we are not calling a turnaround in the Nigerian economy. Manufacturing is one of the principal losers from the scarcity of fx, some movement towards import substitution notwithstanding.

There has been no dramatic change in the availability and price of fx in the past month. The majority of manufacturing segments have a high import requirement, exceptions including cement. For now, there is no ready solution to the impasse. The CBN continues to make very small amounts of fx available and the latest MPC communique shows no hurry to change direction.

Demand is set to benefit from the FGN’s expansionary fiscal stance, particularly from the pick-up in capital releases. Manufacturing, however, will likely be one of the last non-oil sectors to recover due to the scarcity.


ATM transactions dominate e-payments

 

31 January, 2017
 
Data from what seems to be a new report series from the National Bureau of Statistics in collaboration with the CBN reveal that a total volume of 910 million transactions valued at N65trn was recorded on electronic payment channels last year. As expected, ATM transactions dominated with a volume of 590 million. Internet subscriptions directly correlated with electronic transactions stood at 92 million in December 2016 according to the Nigerian Communications Commission. This translates to internet penetration of 50%.

Based on data from the Nigeria Interbank Settlement Systems (NIBSS), total active bank accounts in the country amounted to 65 million last year. This shows that less than half of the population is currently exposed to electronic payment transactions.

Although total active accounts experienced an 11% y/y growth in 2016 from 59 million recorded the previous year, financial inclusion is far from its optimal level. Mobile services are regarded as viable tools for providing basic financial services, particularly for unbanked Nigerians.

However, the NBS report reveals that mobile payments accounted for only 5.2% of total e-transactions in 2016.

ATM transactions dominate e-payments
Sources: National Bureau of Statistics (NBS); FBNQuest Research

We noticed that in Q4 2016 the volume of transactions via Point of Sale (PoS) terminals grew markedly by 34% q/q. This suggests that Nigerians are slowly but gradually embracing the cashless policy launched in 2012.

Given the increased traffic recorded on various e-payment platforms, it is safe to assume that the cashless policy has gained considerable traction within the banked economy. The policy is expected to enhance financial inclusion and reduce incidences of theft.





An outlook revision by Fitch

 

30 January, 2017
 
Fitch last week revised the outlook on its B+ Nigeria sovereign rating for foreign and local currency, long-term obligations from stable to negative. It acted in response to the prevailing fx illiquidity, and its impact on growth, the public finances and the banking sector. Nigeria’s first recession since 1994 should also be attributed, Fitch observes, to the sharp decline in oil output last year. Looking ahead, it accepts the assumption of average production of 2.2 mpbd in this year’s budget proposals.
 
The agency estimates the current-account deficit at just 1.0% of GDP in 2016, noting the role of substitution within general import compression. We have more resilient import demand, and a deficit of 3.8% of GDP last year.

Fitch also estimates general government debt at 17% of GDP at end-2016. This measure goes beyond sovereign obligations, and so includes the NNPC’s cash-call arrears, which it puts at US$5.1bn. We assume that it does not cover the government arrears of N2.2trn to contractors, exporters and other private-sector parties that the federal finance ministry has recently unearthed.

Fitch says that this debt burden is 77% naira denominated and appears to regret the expected increase in the fx proportion.

We welcome this trend, and think that the FGN should borrow extensively from multilateral agencies at the concessional rates available. We recall the medium-term borrowing strategy of the DMO, which has a target of a 60/40 blend for the domestic and external obligations of the sovereign

We learn from Fitch’s note that the FGN has negotiated exports credits totaling US$10.6bn, subject to the approval of the National Assembly.  We assume that Exim Bank of China is one of the largest providers in question.

Fitch estimates public debt service at 1.4% of GDP this year. Alarmingly, it also amounts to 33.6% of projected aggregate government revenues in 2017

On the banking sector, Fitch notes that NPLs had increased to 11.7% of gross loans in June 2016 as asset quality had deteriorated across the economy. The ratio has since risen to almost 15%.

In September Standard and Poor’s lowered its comparable rating from B+ with a negative outlook to B with a stable outlook. Of the two agencies, Fitch has traditionally been the more patient on Nigerian sovereign risk. It therefore has a rating one notch above S&P’s, and will be looking out for any developments in the exchange-rate regime before making its next move.




Another trade deficit in Q3 2016

 

27 January, 2017
 
The merchandise trade data released by the NBS in its latest Foreign Trade Statistics for Q3 2016 show the total value of trade as N4.72trn, representing an increase of 16% on the preceding quarter. The data also show a trade deficit of N104bn, which compared with N482bn in Q2. The increase in imports in a recession in the first three quarters of last year (see chart) is due, of course, to the weakness of the naira exchange rate.
 
Total exports stood at N2.31trn in Q3 while the total value of imports was N2.41trn. This represented increases of 29% q/q and 6% q/q respectively.

The leading source of imported goods in Q3 was China, with an import value of N478bn (US$1.6bn) equivalent to 20% of total imports. Belgium appears to have been the second largest origin of imports in the review period, with an import value of N331bn (US$1.1bn).

Meanwhile, the value of imports from other African countries amounted to N88bn (US$290m). However, ECOWAS countries accounted for just 10%.

In terms of exports, crude oil was the largest contributor with a total value of N1.9trn (US$6.2bn). Meanwhile, the total value of agricultural products exported stood at N14.4bn (US$50m). Frozen shrimps and prawns accounted for 37%, and sesame seeds 34% of total agricultural exports in Q3.

Nigeria is heavily dependent on imports. However, given the current fx illiquidity, we expect the FGN’s import substitution strategy to have a significant impact over time.
 





A communique without surprises

 

26 January, 2017
 
The decisions of the monetary policy committee (MPC) this week were widely anticipated. An unchanged stance is consistent with the twin challenges facing the committee of contracting GDP and accelerating inflation. The communique notes the clamour for a rate cut but rightly argues that inflationary pressures have not yet abated, and that easing would send the wrong signal to investors and savers. We have said for some time that the MPC will cut its policy rate once inflation starts to slow.
 
The communique argues that pressures on prices will subside as non-oil output recovers and the naira exchange rate starts to stabilize. We will leave the matter of whether the current regime amounts to a managed float to the academic community but question this notion of stability.

The rate quoted on the CBN website has been stable since September. The gap with the other rates has widened and is set to remain huge despite the CBN’s special fx auctions designed to clear the backlog. The game-changer in our view would be another devaluation, along with some movement towards the market-driven model that was trumpeted in June.

The committee does not expect a sustained oil price recovery, and warns that the gains since the OPEC meeting in Vienna are vulnerable to a supply glut from non-OPEC producers.

Its coverage of the national accounts for Q3 2016 rightly focuses on the fact that the non-oil economy expanded, albeit fractionally. The communique is confident that positive GDP growth will return this year. (We see the turning point in Q4 2016.)

There are several positive mentions of agriculture, specifically the food sub-sector, along with praise for the CBN’s support through its anchor borrowers’ programme.

Since the scope for monetary policy has been reduced by GDP and inflation trends, the communique looks to the fiscal side to lift Nigeria out of recession. It endorses FGN initiatives to tackle the debt arrears due to state governments and contractors, and pleads for a swift passage of the 2017 budget.

The most interesting part of the communique is the observation that, given the structural shifts in the global economy of recent months, policymakers “need to be inward looking and hasten efforts towards economic diversification to support the domestic economy”. Our take is that the committee feels the Trump effect could become viral.




A small increase in the FAAC payout

 

25 January, 2017
 
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government picked up a little in January (from December revenues) from N387bn to N400bn (US$1.31bn). The federal finance minister, Kemi Adeosun, noted that mineral revenues amounted to N146bn in December, adding that force majeure at the Forcados, Qua Iboe and Brass oil export terminals continued to limit inflows. According to prevailing convention, the oil revenues cited are those of three months earlier.
 
The statutory distribution of N225bn was supplemented by VAT of N79bn, an exchange-rate gain of N53bn and excess petroleum tax payments of N43bn.

The 2016 budget projected the net distribution from the federation account at N4.30trn and from the VAT pool at a further N1.42trn. The pro rata monthly average of N477bn was not achieved after May once we deduct the unbudgeted extras such as exchange-rate gains (see above).

 
Neither the president’s 2017 budget speech nor the 2017-19 Medium-Term Expenditure Framework allows us to reach a comparable figure for next year. Until the budget has been approved and signed off by the president, FAAC distributions cannot be made on the basis of the new projections and assumptions.

 
Adeosun said that the balance in the excess crude account was unchanged, at US$2.45bn.

We have taken the latest payout from the local media. Official sources provide the revenue numbers up to September, distributed in October. We use the data for gross distributions while the local media cite a combination of gross and net payouts to the three tiers.
 





Bold initiatives for housing

 

24 January, 2017
 
Official records place the country’s housing deficit at 17 million units. In the current economic downturn, the real estate sector contracted by -7.4% y/y in Q3 2016 after -5.3% the previous quarter. Demand for residential property has been relatively low and resulted in some cases in subdued prices for rental accommodation. This month, we learnt that the Federal Mortgage Bank of Nigeria (FMBN) is currently developing a diaspora mortgage housing scheme to assist Nigerians living abroad own homes in Nigeria; by its estimates the diaspora community is as large as 17 million.
 
The Federal Housing Authority recently disclosed that mortgage default cases in Lagos rose sharply last year. This reflects the squeeze in purchasing power across income earners in the country.

The housing deficit in Lagos State alone is estimated at 2.9 million units. We gather that the Lagos State government aims to develop 20,000 housing units over the next three years. This initiative will be modelled as a rent-to-own scheme, which will afford first-time home buyers with a verifiable source of income the opportunity to own their homes.

Successful candidates will be required to pay 5% of the total value of the property as a down payment while the balance is to be spread over a ten year repayment period. The scheme is an improvement on the previous administration’s Lagos home ownership mortgage scheme, which required an initial deposit of 30% of the total cost.

The FGN also has plans to develop a similar scheme but only for low income earners. The plans include the construction of 360 houses in the first phase through a public private partnership. Based on industry estimates, about 700,000 housing units are required on an annual basis to bridge the housing deficit.

Furthermore, on the supply side the FMBN is expected to receive up to US$2bn from Shelter Afrique (a pan-African housing finance institution) for the construction of 10,000 housing units across Nigeria.

About US$200m will be disbursed annually to real estate developers. This should spur growth in the construction sector and the ripple effect will create additional jobs.

These efforts together indicate that the FGN is moving in the right direction in terms of housing provision.

However, there is a possibility that most of these housing units are located fairly distant from the city centers, so the repair of road networks to ease commuting also needs to be considered.




A rock and a hard place for the MPC

 

23 January, 2017
 
The monetary policy committee (MPC) opens its latest meeting in Abuja today, and is due to announce its decisions tomorrow afternoon. We see an unchanged stance. The committee is faced with an economy which has contracted y/y for three successive quarters and inflation which has accelerated for eleven months in a row on the same basis. It argues that it has little, if any responsibility for either trend, and we have some sympathy with its position.
 
GDP has gone into reverse due to the failure to diversify the economy and to the sabotage in the Niger Delta. Inflation has risen far above target due to supply-side factors. The MPC cannot be said to be the main culprit in either case although, along with the CBN, it has exchange-rate responsibilities and could have acted differently over the past 18 months.

It could hike in response to the surge in inflation, and to encourage savings. The committee did hike by 200bps to 14.00% in July but in an unsuccessful bid to attract departed offshore portfolio investors.

We read often of unconventional monetary policy but are not aware of a policy tool able simultaneously to counter surging inflation and shrinking GDP.

The above points to no change in stance this week. The MPC and CBN are looking to the fiscal side to lift the economy out of recession. The FGN has adopted an expansionary fiscal stance, which in our view is the right decision while it waits for its reforms to have a broad impact and oil revenues to recover.

Since the committee feels that its own ammunition is practically exhausted, we do not see a change in the policy rate until the expected marked decline in inflation on positive base effects. We forecast headline rates of 15.2% y/y in March and 11.3% in June.

On exchange-rate policy, we would be surprised by a change as early as this week. We do not see any signs that the monetary authorities or the political leadership are thinking in terms of a new direction. Next month the FGN is due to unveil an economic recovery plan, which may or may not extend to exchange-rate reform.

We close with a remark on openness. The committee, unlike its counterparts in several advanced economies such as the Eurozone, publishes the personal statements its members. However, this good work has been undone because the statements now only appear on the CBN website on the first day of the following meeting.
 





Persistent strain for petroleum marketers

 

20 January, 2017
 
Last week the National Bureau of Statistics (NBS) released the latest report in its premium motor spirit (PMS) price watch series. This shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In December this averaged N146.7/litre (l) for the 36 states of the federation and the FCT, and so above the fixed upper price limit for the retail pump price of N145/l set by the authorities.
 
Given the increase in global oil prices (UK Brent is currently trading at US$54/b) as well as persistent challenges with accessing fx to import PMS, supply from petroleum marketers has plunged.

The revision of the maximum price in May 2016 from N97/l to N145/l assumed an exchange rate of N285/US$1, compared with the CBN’s current administered rate of N305. Industry sources suggest that oil marketers are owed over US$1bn for the importation of petroleum products with accumulated interest as high as N160bn (US$520m).

Essentially, the economy is relying on PMS supply from the NNPC. Following the surge in costs which, we estimate, has pushed total costs above N145/l, it appears that in the first instance the corporation is making up the difference between the actual price and the price ceiling.

Based on the data provided by the NBS, the pump price for PMS in over ten states was above the fixed upper limit.

Persistent strain for petroleum marketers


The authorities maintain that there is no reason to raise the ceiling for the retail price. The transmission effects of a revision to reflect current fx rates would clearly be negative for consumption and therefore the broader economy.




A poor story of reserves accumulation

 

19 January, 2017
 
Our chart today shows one of the symptoms of the Dutch disease. Official reserves rose by just US$5bn to US$40bn between January 2012 and August 2014, in which period the average monthly price of Bonny Light never fell below US$100/b and averaged US$112/b. August 2014 marked the start of the latest oil price slide, and reserves have since declined by US$15bn to US$25bn at end-November. Since Nigeria is essentially a mono-export economy, reserves would normally fall in tandem with the oil price. The earlier movement is not so easily explained.
 
If the authorities had accumulated a sizeable external buffer in the earlier period, like Algeria for example, the economy would not have been so brutally exposed to the oil price slide.

There is a federal political dimension to this failing. In 2011 the National Assembly approved the replacement of the excess crude account with a ring-fenced, sovereign wealth fund. Such a fund has been created. However, the set monthly transfers to it on those occasions the oil revenues exceed the budget have not materialized because of the opposition of state governors.

The failing can also be explained by the sabotage of oil production facilities in the Niger Delta and by imperfections in governance.

A poor story of reserves accumulation


We can point to a possible change in this story for the better. Gross official reserves increased by US$800m in November, US$1.0bn in December and US$1.5bn month-to-date in January. November’s rise can be explained by a large multilateral loan disbursement. In the absence of other explanations, the subsequent increase could be the result of better management of oil revenues (and the OPEC accord in Vienna).




Tinkering with Fund forecasts

 

18 January, 2017
 
The IMF’s latest World Economic Outlook (WEO) has left its global growth forecast for this year unchanged at 3.4% and offered 3.6% for 2018. Downward adjustments for this year from three months ago for India (to 7.2% from 7.6%) and Brazil (to 0.2% from 0.5%) are balanced by improved projections for China (to 6.5% from 6.2%, based upon policy stimulus) and Japan (to 0.8% from 0.6%). This WEO update sees the risks overall to the downside, led by populism and protectionism in advanced economies, and vulnerability to external shocks in developing nations.
 
We see increasing mistrust of economists and experts generally all around us but should say in the Fund’s defense that the making of macro forecasts just days before the handover to the new administration in Washington is a major challenge.

India is again the fastest growing economy in the projections despite the downward adjustment for the current year due to the draconian currency withdrawal and exchange announced in November.

The WEO now sees output growth in Nigeria in 2017 of 0.8%, compared with 0.6% three months ago, and has pencilled in 2.3% for 2018. The change is based upon higher oil output as a result of improvements to security. The commentary does not acknowledge FGN policy changes such as the expansionary fiscal stance. We see growth of 2.0% this year on the basis of that stance and rising oil production, and the evidence that the non-oil economy had recovered from contraction to being flat y/y by Q3 2016.
 





Approaching a slowdown in inflation

 

17 January, 2017
 

The latest report from the NBS shows the eleventh successive acceleration in headline inflation, to 18.6% y/y in December from 18.5% the previous month. The rounding masks an increase of just 7bps. Our expectation, shared with wire service polls of analysts, was 18.4% y/y. Core inflation y/y declined modestly from 18.2% to 18.1%, the first slowdown since November 2015. In contrast, food inflation picked up from 17.2% y/y to 17.4%. The bureau’s commentary notes higher prices for all staples: additionally, imported food inflation remained above 21% y/y.
 
Among the elements of core inflation, prices of housing, water, electricity, gas and other fuels soared by 27.3% y/y in December. We suspect that fuel prices were again the principal driver.

The interbank exchange rate, administered by the CBN in all but name, has now been stable for four months. If the parallel market was an important source for fx for imported goods and services, as some analysis in the media and elsewhere would suggest, we would not be seeing steady falls in m/m core inflation. Indeed, rises in m/m headline inflation have been slowing from a peak of 2.8% in May to 1.1% in December, when there was a small pick-up on seasonal effects.

From February, inflation is set to fall markedly on positive base effects. This will be balanced to an extent by the FGN’s expansionary fiscal stance and whatever exchange-rate reforms, if any, the authorities choose to launch.

Approaching a slowdown in inflation


The monetary policy committee’s view is that the principal drivers of inflation are structural and supply-side, and therefore beyond its control. We think that it will start to cut its policy rate in line with headline inflation this year.





One fx rate, yay or nay

 

16 January, 2017
 

Based on local media reports, the Association of Bureaux De Change Operators of Nigeria (ABCON) suggested last week that the CBN harmonise the multiple exchange rates within the country. The association recently launched a bureau de change (BDC) portal, setting an initial exchange rate of N399/US$. The past 15 months have brought a large divergence between the interbank (IFEM) and BDC rates (see chart), reflecting the sharp fall in oil revenues and resulting fx scarcity.
 
This, in turn, has led to a marked slowdown in both direct and portfolio inward investments. The equity space has had much reduced participation from offshore investors; a harmonised rate could bring some clarity and improve fx inflows. In terms of value, the ratio of foreign to domestic participation on the NSE was around 45: 55 in 2016, compared with 58: 42 in 2014.

The fx sourcing challenges have resulted in an upswing in input costs for most manufacturers. For those with fx denominated loans, the pain has been severe. For instance, Lafarge Africa reported an fx loss of N28bn in Q2 2016.

Furthermore, a harmonised fx rate would surely bring an uptick in the retail price of premium motor spirit (petrol/gasoline), which would prove politically unpopular.

However, some companies have benefited from the fx illiquidity. Local palm oil manufacturers are an example.

One fx rate, yay or nay

We are assuming that ABCON is not pushing for a harmonized rate at the administered interbank level. The association may feel that its own BDC rate would be the appropriate level. We do not think the authorities are ready yet to take this suggestion on board. Inflation would pick up again, the body language of the MPC is negative and the political leadership is not convinced of the argument.






Hopes of a smoother budget passage

 

13 January, 2017
 

A senior Senate official has been quoted as saying that the FGN’s 2017-19 Medium Term Expenditure Framework could be ready for approval and passage as early as this week. The Senate would then move to consideration of the 2017 budget. This would be the fastest budget process for several years, bringing forward capital releases and therefore the FGN’s contribution to lifting the economy out of recession. The National Assembly supports the expansionary fiscal stance but is capable of delaying tactics.
 
Udo Udoma, the federal minister of budget and national planning, has made the point that the FGN’s proposal for 2017 of aggregate expenditure of N7.30trn is not expansionary relative to the figure of N6.06trn in the 2016 budget when we make an adjustment for the exchange rate.

It is, however, expansionary when we take the outturn of just N2.42trn in H1 2016 and make allowances for a pick-up in disbursements once the budget had been finally approved and signed off in May.

We support the FGN’s fiscal stance since monetary policy was unable to deliver due to the textbook focus on inflation and weak transmission mechanisms.

The FGN has shifted its average exchange-rate assumption for 2017 from N290 to N305 per US dollar in line with the interbank market. We may well doubt that this will prove the year’s average. That said, we cannot expect the FGN to assume a weaker rate than today’s since it does not have a formal objective and would be foolish to “show its hand” to the market.

Our final comment on the proposals today are related to borrowing. Within the financing of the projected N2.36trn deficit, the FGN is now to borrow N1.25trn and N1.07trn respectively from domestic and external sources rather than the earlier projections of N1.07trn and N1.34trn

This is inconsistent with the DMO’s medium term strategy of borrowing more externally than domestically in pursuit of a 40/60 mix in the FGN’s debt obligations. The yield on the July ’23 Eurobond of 6.9% compares favourably with more than 16.0% on a FGN naira bond of similar tenor. The comparison is better still when we note that most external financing is contracted on concessionary terms at +/-2.0%

However, the changes to the borrowing projections are realistic, given the difficulties the FGN has experienced securing external finance for its 2016 budget. These difficulties with the World Bank and the African Development Bank would be greatly diminished if the FGN accepted IMF loans. Such a step remains off the agenda, however.
 








Marginal drop in internet subscriptions

 

12 January, 2017
 

The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 92.4 million in November, representing a y/y contraction of -5.5%. The figure implies density of 50% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. MTN emerged again as the leader with a 35% market share, while Globacom and Airtel accounted for 29% and 21% respectively.
 
The drop in internet subscriptions can be directly linked to the current squeeze on consumers’ pockets. Internet subscribers with multiple subscriptions would likely renew only one agreement with a provider in a bid to manage costs.

In Nigeria mobile data providers remain very competitive in securing new subscribers as well as retaining existing ones. Although MTN emerged as the top internet provider in terms of market share, data speed and network stability on Etisalat have improved in relative terms over the past few months. Meanwhile, Glo is widely known for its variety of internet bundles.

However, in an attempt to improve its data services, we gather that MTN intends to invest at least US$500m to push its 3G coverage to 90% this year. Additionally, the company plans to rollout fibre-network in six cities.

In 2017 the NCC expects to sell the remaining 40MHz in the 2.6GHz spectrum. Eight slots remain, with the reserve price for one slot set at US$16m. Last year MTN acquired six slots of this spectrum. We expect better data speed and network access on the back of these sales.

Marginal drop in internet subscriptions


The benefits of a fully-functional ICT structure in the country are numerous. It would enhance public awareness and engagement as well as improve health, education, financial services and agriculture. It could therefore boost GDP both directly and indirectly. In Q3 2016 telecommunications contributed 7.9% to total GDP.

 






Containment of losses by the NNPC

 

11 January, 2017
 

National crude oil and condensate production picked up to 1.78 mbpd in October from 1.65 mbpd. The average for January-October of 1.82 mbpd falls well short of the projection of 2.20 mbpd in the 2016 budget, which explains many of Nigeria’s macroeconomic woes. Diversification away from oil requires a healthy stream of oil revenues. That depends in turn on calm in the Niger Delta. The NNPC’s Financial and Operations Report for November notes that at least 300,000 b/d had been shut-in since February due to sabotage of the Forcados line.

The report notes a decline in pipeline breaks due to vandalism to 43 in November from 101 the previous month and 214 in November 2015.

We understand that the FGN has restored monthly allowances to the former militants in the delta to the level under the previous administration. This step would have been taken reluctantly but cannot be faulted since it stands a reasonable chance of buying peace.

The corporation’s operating deficit widened slightly in November from N16.9bn to N18.7bn (US$61m). Spending rose from N174.4bn to N206.4bn (US$680m) although the increase was due in part to research and development in the Chad Basin and the Benue Trough.

The January-November operating deficit of N181bn compares with N255bn in the same period of 2015. Cost control has been impressive in several respects but the return of healthy surpluses hinges upon security in the delta.

Containment of losses by the NNPC

The corporation’s reports also track the supply of gas to power plants. We see again the damage due to sabotage: in November the plants generated 2,344 megawatts (MW) from gas supplied by the industry. Generation has not exceeded 3,000 MW since February.




DMO calendar without an approved budget

 

10 January, 2017
 

The DMO has released its provisional issuance calendar for Q1 2017. It seeks to raise between N340bn (US$1.11bn) and N430bn (US$1.41bn) from the sale of FGN bonds, with provisional issuance peaking in February. Although the range is substantially higher than the programme of N250bn to N340bn in Q4, the DMO is following best practice in its aim of front-loading issuance at the start of the year. Its challenge is less whether it can meet its target than the price the federal finance ministry will pay. The calendar also launches a new 10-year benchmark in March.
 
The total bid has fallen off markedly since mid-2016 but should be adequate for the DMO’s purposes in the quarter ahead. The DMO will have sounded out its core investors (the PFAs) before releasing the calendar.

The PFAs held FGN bonds to the value of N3.50trn at end-September, equivalent to 58.7% of their AUM and 46.9% of the stock of FGN bonds as at end-June.

Domestic investors may feel that the returns on FGN bonds are low relative to those on longer tenor NTBs of well over 20%.

They may also feel that they should be better rewarded for covering the FGN’s 2017 deficit, which is projected in the proposals submitted to the National Assembly at N2.36trn. Domestic borrowing is forecast at N1.25trn, and the FGN bond market will again shoulder the lion’s share of the burden.

DMO calendar without an approved budget


The 2017 budget proposals also set total debt service at N1.66trn, including a sinking fund of N177bn to redeem maturing bonds. This represents an alarming 33.6% of projected aggregate FGN revenues, so we hope that, unlike in the past year, the revenue collection agencies will together meet their targets.




Macro challenges hindering job creation

 

9 January, 2017
 

The NBS recently released its latest Job Creation Survey. This defines the formal sector as consisting of establishments with ten or more employees, and is based on a sample of 5,000 firms across the 36 states of the federation. The data show that 187,200 jobs were created in Q3 2016, divided between 42,600 jobs in the formal sector and 144,600 jobs in the informal sector. As for the public sector, job losses were recorded for the fourth consecutive quarter, with 7,000 job cuts. This is a reflection of the general slowdown in the economy. In Q3 GDP contracted by -2.2% y/y.
 
There was a 20% increase in total job creation when compared with the previous quarter (which recorded 155,400 new jobs) but a y/y decline of -61%. Employment generation was still insufficient, given the steadily growing labour market.

In the formal sector, education lost its position as the leading source of new jobs. It recorded 16,500 job losses. As with other sectors across the economy, it has suffered from the economic downturn. The poor performance could also be linked to the difficulty in securing teachers’ salary payments (in both private and public schools) as well as the withdrawal of students due to the inability to keep up with fee payments.

Accommodation and food services accounted for 16% of new formal jobs. For food services, the new trend of sourcing local raw materials may have assisted in keeping the segment afloat.

Macro challenges hindering job creation


The job losses recorded in the public sector were not surprising since most state governments have struggled to pay salaries over the past several months. We gather that in some states an embargo has been placed on taking on additional labour into the public sector.




Another upward movement in reserves

 

6 January, 2017
 

CBN data show that gross official reserves picked up by US$1.1bn in December on a 30-day moving average basis to US$25.8bn. The monthly average movement has been an outflow of US$270m over the past 12 months. We can explain the increase the previous month on the basis of the disbursement of US$600m by the African Development Bank (AfDB) in the form of budget support. This latest rise, and the increase of US$300m in one day on a moving average basis, constitute a greater challenge beyond the US$10/b surge in the oil price since the new OPEC accord.
 
The reserves may appear comfortable according to one traditional measure:  on the basis of the balance of payments for the 12 months through to end-June, they provided cover for 6.8 months’ merchandise imports and for 4.9 months when we add services.

However, the CBN remains cautious. It has been selling just US$1.5m per day (to one bank in line with a rota) and looking to meet import demand with its periodic forward contracts since the devaluation/liberalization in June.


Movements in official reserves FBNQuest Research


We do not see a floating exchange-rate regime anytime soon. The CBN and monetary policy committee are not in a rush to make the change, and the political leadership is not convinced of its merits. Offshore portfolio investors and other market participants will be disappointed. Yet we cannot identify the large autonomous fx inflows which will prove the short-term, game-changer. We stick, therefore, with our piecemeal solution in which a series of transactions over time supplies the trigger (Eurobond, balance under the AfDB facility, World Bank and Chinese support, and oil-related transactions).

The figure for gross reserves includes the balance in the excess crude account, for which the latest figure in the public domain is US$2.7bn.






A rise in labour productivity in Q3

 

5 January, 2017
 
The Labour Productivity Report for Q3 2016 from the NBS has an hourly figure of N714, which represents an increase of 12.2% q/q and a decline of 7.1% y/y. The report measures the relationship between nominal GDP and the total hours worked in the period. The increase q/q is the result of output rising by 13.1% and hours worked by just 0.8%. Nigeria is, of course, mired in recession (on a y/y basis) and there is an unscientific argument that people may work harder and produce more when unemployment is rising.
 
In setting the background, the bureau’s commentary notes the positive factor of stable power output in the period, balanced by weak investment relative to earlier periods.

It also observes that agriculture has become one of the faster growing segments of the economy, and floats the argument that the harvesting season in the quarter could well have contributed to the boost in labour productivity.

We do not think that international comparisons are worthwhile because of the many operating challenges for businesses. The power supply was stable but the same cannot be said of access to fuel and fx.

This is very much vanilla analysis of productivity. It measures only one input and makes no distinction between sectors of the economy. Indeed, we have to allow for some flexibility in the calculation of hours worked in the informal sector.

A rise in labour productivity in Q3


The ultimate goal on the horizon is a measure of multi-factor productivity to include capital and labour inputs. The NBS should be commended for moving in that direction.







Online job vacancies stable in recession

 

4 January, 2017
 
Today we introduce another runner in the ever expanding stable of publications from the National Bureau of Statistics (NBS). The bureau has partnered with the largest player in the market to produce the Nigeria Online Recruitment Report. The data is valuable for the insight into better paid jobs, and those therefore likely to give a boost to tax collection. The number of applications has fallen sharply over 12 months while the number of vacancies has been stable.
 
The report points to 266,800 applications in Q3 2016, compared with 815,200 one year earlier. We might think that applications would rise in a recession. When we make such comparisons, it may be relevant that the bureau has partnered with the largest, but not the only, market participant.

In contrast, the number of vacancies increased marginally from 14,000 to 14,100 over the same period.

The ratio of applications per vacancy was highest for the higher-profile, white collar jobs: 80 for oil, gas and mining, 68 for engineering, and 67 for banking and financial services.

Trade and services accounted for 40.7% of all applications, and 73.2% of all vacancies.

Data on location is only available in a minority of cases. Lagos provided 56.4% of such applicants and Abuja 10.3%. As a measure of diaspora intentions, it is interesting that 4.3% of applications originated from outside Nigeria, compared with 4.4% in the year earlier period. As for vacancies, Lagos and Abuja had 34.7% and 4.6% shares respectively.

The wider picture is provided by another NBS publication, the quarterly Job Creation Survey. Its latest report shows a total of 187,200 jobs created in Q3 2016, an improvement on 155,400 the previous quarter. Again the informal sector was dominant, accounting for 144,600 positions, which would have been outside the online recruitment survey.

Most of the jobs created were therefore low-paid. Human health and social services were the leading destinations for entrants. We could say that a job is a job is a job.

However, the record for all jobs, formal and informal, falls far short of the annual growth of 2.6 million in the labour force. The unemployment rate picked up from 13.3% to 13.9% in Q3.



PMI reading no 45: festive rebound

 

3 January, 2017
 
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a strong rebound from 48.8 in November to 60.0. Our partner, NOI Polls, has gathered and compiled the data. The index update is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, suppliers’ delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted eight negative headline readings since our launch in April 2013 including five in 2016.
 
Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Unusually, all five sub-indices rebounded in December. Since our index is not seasonally adjusted, we attribute the marked recovery to the traditional pick-up in household demand for the festive season. We had higher headline readings in both 2013 and 2014.

While we think that non-oil GDP in Q4 2016 was positive y/y, having been flat the previous quarter, we are not calling a turnaround in the Nigerian economy. A clear decline for the headline reading in the January report would not come as a surprise.

There has been no dramatic change in the availability and price of fx in the past month. The majority of manufacturing segments have a high import requirement, which over time can be reduced through substitution. For now, there is no ready solution to the impasse. The CBN is making very small amounts of fx available and the authorities are in no hurry to change direction.

Demand is set to benefit from the FGN’s expansionary fiscal stance, particularly from the pick-up in capital releases. Manufacturing, however, will likely be one of the last non-oil sectors to recover on account of the fx constraint.



Not a vintage year

 

30 December, 2016
 
We have little festive cheer to share as the year closes although we can detect some green shoots of recovery. The economy has contracted for three quarters in a row, and headline inflation accelerated for ten successive months on a y/y basis. Monetary policy has been blunted while the CBN continues to manage the interbank exchange rate despite the said liberalisation in June. In these circumstances offshore investors remain on the sidelines, waiting for some positive signals to warrant their market re-entry.
 
The FGN is not wedded to the free market. It introduces reforms when the alternative is unpalatable. On this basis, it hiked the ceiling on the retail price of gasoline in May and the CBN announced the liberalisation.

At some point in Q1 2017 the FGN will conclude its third sale of Eurobonds. The timing remains favourable. The yields on the July ‘18s and July ‘23s have eased to about 4% and 7% respectively.

Over time, other inflows will materialize. These could include sizeable multilateral loans, an asset sale or two and advance payments for crude oil. Ours is the scenario of the piecemeal solution to the exchange rate impasse. A number of transactions finally triggers the autonomous inflows on a scale to make the liberalisation a reality. The regime may not be floating but could then be termed “market-driven” (to use the CBN’s own words). This process would be more rapid, as the Egyptian example shows, if the FGN was prepared to take IMF loans. Such a step, however, is off-limits for historic reasons.

The pick-up in the oil price following the OPEC agreement in Vienna and the pledge to production restraint by some leading non-OPEC players, led by Russia, has been timely, giving the authorities a little room for manoeuvre.

The FGN’s contribution to Nigeria’s emergence from recession is its expansionary fiscal stance. Its good record for capital releases this year should be noted, given the obvious constraints on revenue collection.

We see GDP growth of 2% in 2017. This is far from transformative, particularly when we recall the higher rate of population growth. It would look rather better if the FGN achieved a lasting settlement in the Niger Delta, and if the National Assembly facilitated a smooth and prompt passage of the 2017 budget.




A fourth relief programme for the states

 

29 December, 2016
 
The financial health of the state governments, Lagos and one or two others excepted, can be measured by the monthly distributions by the Federation Account Allocation Committee (FAAC) to the three tiers of government. Those aggregate payouts have now declined for five successive months, to N387bn in December. For eight months this year, they have fallen below N500bn: this seems an important health indicator for the FGN since loans within its N90bn package of 9% credits for states are not available for disbursement when the distribution exceeds it.
 
The loans were the third FGN initiative this year to ease pressure on state government finances, unblock salary and pension arrears, and give a boost to household consumption.

A fourth emerged at the start of this month. This is the return to the states of excessive external debt service deducted as a first-line charge from their FAAC payouts. The president has authorised the refund of N552bn, subject to verification, to the states in stages: a first refund of N153bn has been released this month, subject to a ceiling of N14.5bn for any single state.

We cannot say which states are eligible since the refunds apply to the Paris and London Club debt which was cancelled more than ten years ago. Our chart shows their current external debt of US$3.65bn as at end-June. All states have some debts and the creditors are all multilateral other than one Paris Club lender, France’s Agence française de développement, which has combined exposure of US$150m.

A fourth relief programme for the states


Lagos and the few other exceptions have a track record in collecting substantial internally generated revenue, which lessens their dependence on the FAAC distribution. Several other state governments are following suit.


Untapped potential of remittances

 

28 December, 2016
 
On a visit to the Federal Inland Revenue Service last week, a special advisor to the president said, according to local media reports, that inward remittances had reached US$35bn year-to-date. This steep increase from US$21bn the previous year comes as a surprise. We would have expected a fall, at least through reported channels due to the obvious temptation of remitting through the parallel market. A well-informed commentator has queried the figures on the grounds that the commercial bank with the largest branch network handles just US$300m per year.
 
A general data weakness in most developing countries and not just Nigeria is that banks are only required to keep very basic records of incoming remittances. The minimal change in annual inflows in the balance-of–payments (BoP) does point to gaps in the recording of transactions.

The more important point is that, wherever the transactions are posted in the BoP, the diaspora could receive incentives to invest in Nigeria.

The FGN could offer these incentives for its priority sectors with the highest potential to generate jobs (agriculture, manufacturing and mining). Alternatively, it could target those where prominent Nigerians have made their mark in business abroad such as hospitals, shopping malls and film. India offers a good case study of incentives for a huge diaspora.

The authorities could make it easier for the diaspora to invest. For example, registration of a new company with the Corporate Affairs Commission could also be handled by Nigerian embassies and consulates.

France is the only developed country to appear in the table. It is the only one therefore of the eight countries to record sizeable migrant outflows, which amounted to US$12.7bn in 2015.
 



Good demographics, could be better

 

23 December, 2016
 
The last national population census was released in 2006. The National Bureau of Statistics (NBS) has used the data of the National Population Commission to produce estimates by state, age and gender through to 2016. These show a sharp rise in the total from 140.4 million in 2006 to 193.4 million this year, and a current annual growth rate of 3.3%. If the population is growing at this rate, we can understand why policymakers target double-digit GDP growth to make an impact on living standards.
 
The census in Nigeria has traditionally been politicized due to its influence on revenue distribution by government. The last exercise is not, however, greatly out of sync with international data series.

The UN’s World Population Prospects has a total of 182.2 million for Nigeria in 2015, which compares with the NBS estimate of 187.3 million for the year extrapolated from the 2006 census.

Kano (13.1 million) and Lagos (12.6 million) are the most populated states in 2016. The rather higher estimates in circulation for Lagos are presumably based on the daytime population to include commuters. No other state has a population above 10 million.

The age profile in 2016 confirms the picture of the young population. The estimates have 41.8% under the age of 15 and the largest segment (54.9%) in the officially defined labour force of between 15 and 64 years. Those aged 65 years and above account for just 3.3% of the population.

A new census is due for release, we understand, in 2018. As the new national accounts provided an accurate snapshot of the economy for all interested parties, we hope that the new census will meet the highest standards. The demographics are already good in that they underpin the Africa rising narrative. We suspect that they can be still better qualitatively.  We expect to see some marked shifts within the country since 2006 such as away from the north east, and towards both the south west and the FCT.

The beneficiaries would include planning teams across government and in the private sector. Any supplier of goods and services would welcome an updated and reliable national census.


Still lower payout by the FAAC

 

22 December, 2016
 
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government declined for the fifth month in succession to N387bn (US$1.27bn) in December (from November revenues). The committee noted a small improvement in collections from VAT and companies’ income tax but also, more tellingly, the continuing force majeure at the Forcados, Qua Iboe and Brass oil export terminals. It also observed that oil export volumes were 340,000 b/d lower than in the previous month.
 
The statutory distribution of N240bn was supplemented by excess petroleum tax payments of N66bn, an exchange-rate gain of N39bn, the regular NNPC “refund” of N6bn and VAT.

The 2016 budget projected the net distribution from the federation account at N4.30trn and from the VAT pool at a further N1.42trn. The pro rata monthly average of N477bn has not been achieved since May this year once we deduct the unbudgeted extras such as exchange-rate gains (see above).

Neither the president’s 2017 budget speech nor the 2017-19 Medium-Term Expenditure Framework allows us to reach a comparable figure for next year..

However, it targets N4.94trn total revenue for 2017 including N1.98trn and N1.37trn from oil and non-oil sources. The president’s speech noted that just N2.17trn was generated in January-September. (These are revenues available to the FGN, and not to all three tiers of government..)

Still lower payout by the FAAC


We have taken the latest payout from the local media. Official sources provide the revenue numbers up to September, distributed in October. We use the data for gross distributions while the local media cite a combination of gross and net payouts to the three tiers.
 



Some fine details in the budget speech

 

21 December, 2016
 
The president’s 2017 budget speech to both houses of the National Assembly is an ambitious statement of intent. We learn that in the first nine months of this year aggregate FGN revenue and expenditure amounted to N2.17trn and N3.58trn respectively, and that the proposed budget projects corresponding totals of N4.94trn and N7.30trn. The speech shares the “paradox that to diversify from oil we need oil revenues”. This budget, unlike this year’s, targets higher revenues from oil than from non-oil sources.
 
This, we feel, is an official acknowledgment that the commendable aim of transforming the culture and mechanisms of paying tax in Nigeria can only be delivered in stages.

The FGN had earlier trimmed its expectations of independent revenue collection from N1.5trn in the 2016 budget, of which just N272bn had been raised by the end of October, to N811bn next year. These are the operating surpluses of government agencies. (They are required by law to surrender 80% of such surpluses to the consolidated revenue fund.)

The capital budget has been set at 30.7% of the total. How the FGN must look a little enviously at the mix in most state budgets, although not at their dependence on the monthly FAAC payout. Kaduna, for example, has set a capital to recurrent ratio of 69 to 31 in its 2017 budget..

The federal budget does not provide for cash call payments to the NNPC’s oil joint-venture partners. These were earlier shown at more than N1trn per year through to 2018.  The cost recovery mechanism is to replace cash calls.

The president’s speech noted additional overdue debts of N2trn to contractors and other private-sector parties (including oil marketers and exporters). This picked up on the plans of the federal finance minister, Kemi Adeosun, to issue 10-year promissory notes in settlement.  These obligations represent 2.3% of 2015 GDP.

The speech goes some way towards dispelling the notion that the FGN has been inert or inactive the past year. It notes, inter alia, the agreement with Morocco on reviving abandoned fertiliser plants; provisions in the new budget to clear overdue electricity bills; the completion of the Kaduna-Abuja railway; and annual cost savings of N180bn from the elimination of payments to ghost workers, reduced government travel budgets and the conversion of confiscated properties for government office space.

We have already commented upon the assumptions underpinning the proposed budget (Good Morning Nigeria, 15 December 2016).


Another pick-up in unemployment

 

20 December, 2016
 
The latest unemployment/underemployment watch from the National Bureau of Statistics (NBS) reveals that the labour force (population of working age between the ages of 15 and 64) increased to 108 million in Q3 2016 from 106.7 million recorded in Q2. At the same time, the unemployment rate accelerated to 13.9% from 13.3%. The recent International Labour Organisation (ILO) forecast of a global unemployment rate of 5.9% for both 2016 and 2017 implies that Nigeria’s unemployment rate of 13.9% is already significantly higher than average.
 
Within the labour force, 27.1 million people were either unemployed or underemployed, compared with 26.1 million in Q2 2016.

As for the 25‐34 age group (which falls under the youth population per the NBS definition), the unemployment rate increased to 15.0% in Q3 from 14.5% recorded in Q2. Additionally, the underemployment rate for the same category rose to 20.8% in Q3 from 20.5% over the same period.

Given that rural jobs are predominantly in agriculture, and are often seasonal, attention tends to focus on unemployment in urban areas, particularly white-collar positions in the formal economy.

To assist in reducing the unemployment rate, policymakers have flagged entrepreneurship as a solution. There are many gaps to be filled within Nigeria’s economy, opportunities for skilled graduates to develop their own small businesses.

However, Nigeria’s business climate is generally unfavorable, particularly for start-up firms including SMEs. Several bottlenecks obstruct business growth and expansion, which discourages graduates from venturing down the entrepreneurship route.

The FGN has set out to create three direct job creation and training schemes under its programme of social welfare intervention. The N-Power Teacher Corps initiative aims to engage 500,000 unemployed graduates for two years.

The targeted number amounts to 5% of the working population. There are concerns surrounding the next phase for the successful applicants once the stipulated time frame of two years elapses, given the high possibility that some of these candidates would then rejoin the ranks of the unemployed or underemployed.

Globally, the highest unemployment rates in data shown in this NBS report include Djibouti (54.0%) and Kenya (40.0%) while the lowest include Qatar (0.2%), Cambodia (0.5%) and Thailand (1.2%).


Some fine details in the budget speech

 

21 December, 2016
 
The president’s 2017 budget speech to both houses of the National Assembly is an ambitious statement of intent. We learn that in the first nine months of this year aggregate FGN revenue and expenditure amounted to N2.17trn and N3.58trn respectively, and that the proposed budget projects corresponding totals of N4.94trn and N7.30trn. The speech shares the “paradox that to diversify from oil we need oil revenues”. This budget, unlike this year’s, targets higher revenues from oil than from non-oil sources.
 
This, we feel, is an official acknowledgment that the commendable aim of transforming the culture and mechanisms of paying tax in Nigeria can only be delivered in stages.

The FGN had earlier trimmed its expectations of independent revenue collection from N1.5trn in the 2016 budget, of which just N272bn had been raised by the end of October, to N811bn next year. These are the operating surpluses of government agencies. (They are required by law to surrender 80% of such surpluses to the consolidated revenue fund.)

The capital budget has been set at 30.7% of the total. How the FGN must look a little enviously at the mix in most state budgets, although not at their dependence on the monthly FAAC payout. Kaduna, for example, has set a capital to recurrent ratio of 69 to 31 in its 2017 budget..

The federal budget does not provide for cash call payments to the NNPC’s oil joint-venture partners. These were earlier shown at more than N1trn per year through to 2018.  The cost recovery mechanism is to replace cash calls.

The president’s speech noted additional overdue debts of N2trn to contractors and other private-sector parties (including oil marketers and exporters). This picked up on the plans of the federal finance minister, Kemi Adeosun, to issue 10-year promissory notes in settlement.  These obligations represent 2.3% of 2015 GDP.

The speech goes some way towards dispelling the notion that the FGN has been inert or inactive the past year. It notes, inter alia, the agreement with Morocco on reviving abandoned fertiliser plants; provisions in the new budget to clear overdue electricity bills; the completion of the Kaduna-Abuja railway; and annual cost savings of N180bn from the elimination of payments to ghost workers, reduced government travel budgets and the conversion of confiscated properties for government office space.

We have already commented upon the assumptions underpinning the proposed budget (Good Morning Nigeria, 15 December 2016).


A poor auction result but no disaster

 

19 December, 2016
 
The DMO sought to raise N95bn from last week’s monthly auction of FGN bonds yet registered sales of just N69bn (US$230m). The total bid of N103bn was an improvement on the previous month’s N62bn but otherwise the lowest since December 2014. We are seeing clear signs of investor fatigue, the predominance of the PFAs in the profile of bidders and the impact on demand of holding the auction before the latest release of FAAC monies into the banking system. The marginal rates (effective cut-off points) were up to 50bps higher than one month earlier. Macro considerations are finally visible in the auction results.
 
The auction was not an unmitigated disaster because the DMO had already met its funding target for the year from the federal finance ministry. Over the full year it has raised N1.12trn (gross). The DMO therefore chose to reject more than 30% of the total bid in an effort to contain financing costs.

We learnt from the president’s 2017 budget speech to the National  Assembly that the FGN deficit is projected at N2.36trn and the domestic borrowing component at N1.25trn. We cannot say what changes the assembly will seek and when the budget will be signed off. In any event, another challenging year lies ahead for the DMO.

A poor auction result but no disaster

The monetary policy committee’s view is that the principal drivers of inflation are supply-side and beyond its influence. We think that it will start to cut its policy rate next year as headline inflation slows on positive base effects with effect from Febr At last week’s auction, it raised just N3bn from sales of the benchmark five-year paper, compared with its offer of N35bn. The DMO partly compensated by collecting N41bn from the reopening of the long bond (Mar ’36) and so above its offer (of N35bn).

This reinforces the point that the PFAs predominate. They favour the long-term instruments so as to match their liabilities. Other domestic investors can reasonably argue that the longer tenor NTBs pay rather better returns.


Nearing the peak in headline inflation

 

16 December, 2016
 
The latest inflation report from the NBS shows the tenth successive acceleration in the headline rate, to 18.5% y/y in November from 18.3% the previous month. This was our expectation, shared with wire service polls of analysts. There was an increase in the core measure to 18.2% y/y from 18.1%. Once again, the highest increase recorded among elements of the core measure was for housing, water, electricity, gas and other fuel prices: they increased by 27.2% y/y in November, compared with 26.9% the previous month, and account for 12.7% of the total index.
 
The m/m increase in headline inflation has now slowed from 2.8% in May to 0.8%. This trend is consistent with the squeezing of household demand.

Naira depreciation has slowed since the large adjustment in June. If the parallel fx market was on a scale that some commentary suggests, we would not be seeing this steady decline in m/m inflation.

Nearing the peak in headline inflation


The monetary policy committee’s view is that the principal drivers of inflation are supply-side and beyond its influence. We think that it will start to cut its policy rate next year as headline inflation slows on positive base effects with effect from February.

Mid-curve FGN bond yields are now about 250bps negative in real terms. For whatever reason, the bid from domestic institutional investors has been soft at the last two monthly auctions.

Our observant readers will have noticed that the headline rate y/y in November was higher than that of its constituent parts (non-food and food). We therefore have to share the NBS health warning that processed foodstuffs are elements of both parts.


A second, larger dose of fiscal expansion 

 

15 December, 2016
 
The president yesterday submitted the 2017 budget to a sitting of both houses of the National Assembly. Nigeria’s exit from recession depends upon its expansionary fiscal stance, and the monetary policy committee will not play a supporting role unless it performs an about-turn from its communiqué in November. The headline figure in the budget is total FGN spending of N7.30trn (US$23.9bn), compared with N6.06trn in the 2016 budget and, more significantly, an outturn of N2.42trn in H1 2016.
 
The underlying assumptions are average crude production of 2.2 mbpd, an average crude price of US$42.5/b and an average exchange rate of N305 per USD (the current interbank rate).

Not for the first time, an outperformance on the oil price may compensate for an underperformance on production. The FGN may pursue an “engagement with the oil producing communities” but will surely have to compromise with the various parties responsible for the sabotage.

FGN budgets tend to work with the exchange rate in effect at the time of submission, and for good reasons. The rate is, of course, effectively administered and not the floating model envisaged in June. We have to move to a flexible arrangement if the FGN’s economic vision is to be realized and we doubt very much that the rate would then remain at N305.

Our watchlist for 2017 and beyond includes the standard VAT rate of 5%, the mounting burden of debt service, the external/domestic mix of FGN borrowing, its personnel costs and disbursements under its flagship social interventions.

Among events outside the FGN’s control, we have to single out the impact of the Trump presidency on US interest rates and on the Chinese economy in addition to the oil price.

We welcome the relatively early submission of the budget to the assembly. We also recall the suggestions from the federal finance ministry that the regrettable delay in the final sign-off on this year’s budget (to May) was balanced by important procedural victories at the expense of the legislature, and hope that these successes are visible in 2017. The assembly has a track record of pursuing its institutional agenda ahead of the policies of the political parties in whose names its senators and representatives have been elected.

Our note today is based upon local media coverage of the president’s submission of the budget yesterday, and upon the 2017-19 Medium Term Expenditure Framework and Fiscal Strategy Paper on the Budget Office of the Federation website (and dated August).


Steep drop in business confidence in Q4 

 

14 December, 2016
 
In most economies, Small and Medium Enterprises (SMEs) are regarded as the engine for growth. Based on data in the public domain, SMEs contribute over 50% to Nigeria’s GDP. However, a large portion is unrecorded as it falls within the country’s informal sector. Nigeria’s SME category has struggled for the past few years due to a reduction in demand for goods and services and a contraction in lending by banks and other financial institutions. These challenges can be traced to the slide in oil prices. 
 
The CBN’s Q4 2016 report on business expectations was released recently; it captured views from 1,950 business enterprises nationwide (95% were SMEs). 

The CBN’s Business Expectation Survey confidence index for Q4 2016 was -29.0 points (indicating respondents’ pessimism on the macro economy) compared with +8.3 points which was recorded in the corresponding period of 2015. 

Additionally, the survey also revealed that the average capacity utilisation index stood at -8.9 points in Q4 2016 compared with +10.5 points in the corresponding period of 2015.

The survey identified insufficient power supply as the major constraining factor to business activities in Q4 2016. Other factors were financial related; respondents expect inflation and borrowing rates to rise in both the current and next quarters.

Given that SMEs tend to be more labour intensive, they contribute significantly to employment. The survey also indicated that the wholesale/retail trade and construction sectors have prospects of improved employment in Q1 2017. Based on the national accounts by the NBS, these sectors contracted by -1.4% y/y and -6.1% y/y respectively in Q3 2016.

The federal minister of finance, Mrs Kemi Adeosun, recently disclosed that the establishment of a Development Bank is underway.  The bank is expected to begin operations by January 2017.

Essentially, this development bank will serve as a vehicle focused on channelling low-cost funds to SMEs with an initial start-off capital of US$1.3bn to provide support through microfinance banks and a few commercial banks.

 
We note, however, that aside access to finance and hardware infrastructure (transport networks, reliable power supply etc.), transparent regulation and policy consistency are also required to improve the business climate, and thus drive SME growth.


NNPC results again hamstrung by sabotage 

 

13 December, 2016
 
The NNPC’s accounts for October show a group operating deficit of N16.9bn (US$55m), little changed from N17.2bn the previous month. The driver was an improved performance from the Pipeline and Products Marketing Company (PPMC), which boosted its sales to N112.0bn from N104.9bn and its operating result to a profit of N1.4bn from a loss of N11.2bn. This more than compensated for weaker figures from the Nigerian Petroleum Development Company (NDPC) as well slightly worse numbers from the three refining companies. 
 
These are acceptable results in the adverse circumstances, the worst of which was the shut-in of more than 300,000 b/d from February from the sabotage of the Forcados terminal export line. Additionally, the commentary notes the impact of vandalism on the Bonny, Usan and Que Ibo terminals. It puts average crude production at just 1.65 mbpd in September. 

We can see the cost of sabotage another way. In September output under production sharing contracts amounted to 27.7m barrels, compared with 27.8m barrels in October 2015. Over the same period, output from the corporation’s joint ventures, under alternative financing arrangements and from the NPDC declined by 9.7m barrels, 6.1m barrels and 1.9m barrels respectively. 

The January-October operating deficit of N162bn compares with N241bn in the same period of 2015. Cost control has been critical but we repeat our point that the corporation cannot become the policeman in the Niger Delta.

NNPC results again hamstrung by sabotage


Over the 12 months to October, export receipts from crude oil and gas sales totaled US$2.66bn. Other than token payments of US$73m to the federation account, the amount was paid in full towards joint-venture (jv) cash calls to the IOCs. These payments were still heavily in arrears.
 



Agric (slowly) on the move

 

9 December, 2016
 
Probably the brightest spot in the otherwise dire national accounts for Q3 2016 was the performance of agriculture. The sector expanded by 4.5% y/y for the second successive quarter (after 3.1% in Q1). It is not about to take off since just 8.2% of its output derived from the formal economy in 2015. However, we have identified enough encouraging pointers to be confident about the years ahead for agric. The one negative to highlight is the acute food shortage in the north east, notably Borno State. 
 
Our first is that the sector benefits from continuity of government policy. The FGN has indulged in rebranding and so come up with a roadmap entitled the Agriculture Promotion Policy. The e-wallet initiative is however inherited from the previous administration. A total of 14 million farmers were registered on the federal ministry’s database for access to inputs in February, and a target of 30 million has been set. 

Secondly, the CBN and other public bodies continue to provide financing for agriculture and compensate for the limited support from commercial banks. (At end-June just 3.1% of DMBs’ loan books favoured it.). 

The FGN is to inject fresh capital of N1trn into the state-owned Bank of Agriculture. For its part, the CBN still has lending capacity within its commercial agriculture credit scheme of 2009 and its more recent N220bn enterprise fund for MSMEs, of which N80bn has been disbursed to date.

Our third pointer is the investment picture. The FGN is in the process of importing 110 rice mills, which it will supply at a discount. The CBN is again involved, this time through its anchor borrowers’ programme, which, it maintains, will have bridged the national supply/demand gap by 2017.

Outside rice, we note the large-scale planting of cashew seedlings across three states, and a US$150m investment in wheat milling and poultry by Olam, which was comfortably Nigeria’s leading non-oil exporter in 2014.

Fourth, in October the FGN gave some hope for employment by launching its smart farmer scheme, which is designed to create 490,000 posts.

Finally we have to comment on agricultural and related imports, having seen official figures ranging as high as US$20bn annually. We have looked at the latest foreign trade statistics from the NBS and used the broadest definition to include live animals, vegetable products, oils and prepared foodstuffs. This shows total imports at N1.29trn (US$7.8bn) in 2014, N1.17trn (US$6.0bn) in 2015 and N840bn in the first nine months of this year. The import bill is far too high in view of the unused cultivable land, of course, but has stabilized.
 



A rare increase in reserves

 

8 December, 2016
 
CBN data show that gross official reserves picked up by US$820m in November on a 30-day moving average basis to US$24.8bn. The monthly average movement has been an outflow of US$430m over the past 12 months. This first sizeable increase since July 2015, when the fx holdings of public bodies were transferred to the CBN, is apparently due to the disbursement of US$600m by the African Development Bank (AfDB) in the form of budget support. We do not see another inflow on this scale until Q1 2017, when the sovereign Eurobond is due to be launched. 
 
The reserves may appear comfortable according to one traditional measure:  on the basis of the balance of payments for the 12 months through to end-June, they provided cover for 6.6 months’ merchandise imports and for 4.6 months when we add services. 

The cushion is not wholly the CBN’s. Its latest figures (from June) show that it was the owner of 73% of reserves. 

Given the oil price and allowing for the OPEC accord in Vienna last week, and seeing still robust import demand, the CBN is playing cautiously. Since August it has sold just US$1.5m per day (to one bank according to a rota). In addition it has honoured four forward contracts since the devaluation/liberalization in June, and held a special fx auction for petroleum marketers this week.


A rare increase in reserves


In June we were told that a floating exchange-rate regime was imminent. We urge patience, however, since we cannot currently identify the large autonomous fx inflows which will prove the short-term, game-changer. We are content with our favoured piecemeal solution in which a series of transactions over time supplies the trigger (Eurobond, balance under the AfDB facility, World Bank support and oil-related transactions).


Resilience of the PFAs

 

7 December, 2016
 
Conventional wisdom has it that the growth of inflows into the PFAs has slowed on account of arrears in contributions by government. Data on assets under management (AUM) from Pencom and on membership numbers, drawn from the same source but published by the National Bureau of Statistics, show that the damage could have been worse. AUM increased by 11.4% y/y to N5.10trn in September 2015 and by a further 16.9% y/y to N5.96trn one year later. Before the start of the oil price slide in Q3 2014, the annual growth of AUM was said to be about 20%.
 
Total membership, of which retirement savings accounts (RSAs) represent 99%, rose by 7.6% y/y to 6.81 million in September 2015 and then by 7.3% y/y to 7.31 million in September 2016. 

The private sector supplied 670,000 of the increase in membership over the two years, the federal government 100,000 and the states 121,000. Government employees remain members even if their employer does not make their pension contributions, of which there was plenty of anecdotal evidence in 2015. The interesting point in our view is that government has continued to add employees to its schemes. 

Sadly, there are no industry comparisons of the PFAs by investment performance. We can say, however, thanks to some elementary arithmetic that the average value of a RSA increased from N724,000 in September 2014 to N749,000 one year later and N815,000 in September 2016.  

The PFAs have become the anchor buyers at the monthly DMO auctions of FGN bonds to finance the budget deficit. Indeed their holdings of these instruments rose by 11 percentage points to 58.7% of their AUM in the two years to September, and we trust that the very low total bid in November was a one-off (Good Morning Nigeria, 29 November 2016).


Gas not the only solution

 

6 December, 2016
 
The sabotage of the Forcados pipeline in February had a dramatic impact on electricity generation and also highlights why the FGN has a policy of encouraging diverse energy supplies. Babatunde Fashola, the federal minister of power, works and housing, said in August that generation had declined by as much as 3,000 megawatts (MW) at one point. Yemi Osinbajo, the vice president, nevertheless maintained in October that 7,000MW is attainable in 2017, citing works in progress. 
 
One high-profile project is Geometric Power’s in Aba, Abia State. The company is confident that its first plant, a 150MW facility, will come onstream within six months. In partnership with General Electric of the US and Orascom of Egypt, it then plans to build two further plants, each of 500MW, in the city. 

Successful industrialization is dependent upon regular and adequate power supplies. Since Nigeria falls well short in this respect, the sector is, rightly, a priority for the FGN. It received N209bn of the total capital releases of N754bn made this year through to end-October. 

The CBN has played a supporting role with its Nigeria electricity market stabilization facility, launched in 2014. It is available to generators, distributors, gas companies and service providers. The first disbursement of N64bn was made in February 2015 and the second of N55bn in May this year, marking 57% utilization of the facility.  

The frustration for the FGN is that the pipeline of projects and initiatives is overshadowed by the sabotage, which explains its support for power sources other than gas.

Coal has a role in the FGN’s energy policy but Kayode Fayemi, the solid minerals minister, is adamant that mining licences are only awarded to companies with a coal-to-power programme. Nigerian Bulk Electricity Trading is preparing a suitable tariff. The FGN projects that coal will generate 1,000 MW by 2020 and will eventually supply 30% of the country’s energy mix.

The Nigerian Investment Promotion Commission (NIPC) has hosted talks on solar power in the north east between Germany’s LTI Re Energy and a local operation, NIGUS International. A memorandum of understanding has been signed by the two companies, and the NIPC is confident that a power purchase agreement will follow. The partnership plans an N180bn (US$590m) investment in a solar farm and related infrastructure in Adamawa State.  

Looking further ahead, the FGN is developing a nuclear power programme to generate 1,000 MW, rising subsequently to 4,000MW.
 



Time needed to transform non-oil revenue

 

5 December, 2016
 
Gross federally collectible non-oil revenue of N3.1trn in 2015 amounted to just 3.3% of GDP. This compares poorly with most frontier, let alone emerging markets. The salient question is how quickly the authorities can push collection up to a respectable level. Our chart shows that there has been an improvement in naira terms other than last year. The budget projection for this year of N5.7trn does include one-offs, notably recoveries. Yet the preliminary outturn of N1.2trn for H1 2016, while striking because it matched oil revenues, tells us that the projection was overoptimistic. 
 
The authorities have to overhaul compliance and their principal challenge is to conquer the culture of not paying tax. 

There are an estimated 37 million micro, small and medium enterprises in Nigeria. The Corporate Affairs Commission says that just 14% are registered. 

On VAT, the policy is to improve coverage rather than raise the standard rate of 5%, which is the lowest in the region. On recoveries, the FGN calls for patience, given the lengthy judicial processes. On asset sales, its concern is that it would be selling into a buyer’s market although it may well decide to divest a few state-owned holdings.  

Time needed to transform non-oil revenue


The FGN’s efforts at boosting its non-oil revenues are complemented by measures to contain recurrent expenditure. The remit of the efficiency unit, inaugurated in November 2015, includes a through scrutiny of overheads and of the terms paid to contractors.

Separately, the federal finance ministry has established a committee to lean on the 31 revenue-generating government agencies to transfer their unremitted operating surpluses, which it provisionally estimated at N450bn, to the federation account.


Welcome news from OPEC in Vienna

 

2 December, 2016
 
OPEC overcame its internal differences on Wednesday to announce a cut in its production quotas of 1.2 mbpd to 32.5 mbpd with effect from 01 January. The target may prove still more ambitious since several members are known to produce above their allotted quotas. Nigeria is exempted from the cuts because its production is running far behind its own quota due to sabotage in the Niger Delta. Crude prices in New York rose by close to 10% to about US$51/b on news of the first OPEC cut since 2008.
 
The communique from Vienna noted that certain non-OPEC countries had agreed to reduce their own production by a combined 600,000 b/d. Indeed, Russia subsequently pledged a cut of 300,000 b/d. 

We are all familiar with the poor record of OPEC in quota compliance. We also know the historic tensions within the organisation such as Saudi vs Iran, and Iraq vs Iran. Yet we see in the agreement a recognition by Saudi and other low-cost Gulf producers that they cannot drive the shale industry out of business by producing at full capacity. 

We also think that the US president-elect, who campaigned on a message of  “America first”, will support domestic energy self-sufficiency and therefore incentives for the shale industry. 

We are close to surrender on making a call on Nigerian production levels, given the different data sources that are available, and note the opinion of one indigenous producer that output of 2.20 mbpd (the assumption in the 2016 budget) requires new annual investment of US$14bn for five years.  

The OPEC announcement should be welcomed by the FGN, which is assuming an average price of US$42.5/b in its provisional 2017 budget. 

We see no reason to adjust our end-2016 forecast for spot Bonny Light of US$53/b. The OPEC decision covers six months, extendable for a further six months. Our take is that it has revised its underlying analysis of market dynamics, deciding that many shale producers in the US are here to stay. We may therefore push up a little our forecast of US$60/b for end-2017. 

The higher spot price clearly feeds into the costs of importers of petroleum products. The FGN has said several times that it is not incurring any subsidy costs. Yet the devaluation/liberalisation of June has added greatly to importers’ costs and pushed them above the N145/litre ceiling for premium motor spirit set by the regulator. We suspect that the importers, or at least the NNPC, are taking the hit on their books. 
 



PMI reading no 44: back below water

 

1 December, 2016
 
Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a decline from 52.9 in October to 48.8. Our partner, NOI Polls, has gathered and compiled the data. The index update is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses. 
 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets. 

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted eight negative headline readings since our launch in April 2013 including five this year alone. This is to be expected since Nigeria has entered a recession. 

Our sample is an accurate blend of large, medium-sized and small companies. 

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third. 

Unusually, all five sub-indices deteriorated in November. The return of the headline reading to negative territory is consistent with statistical and anecdotal evidence. The contraction of manufacturing picked up from -3.4% to -4.4% y/y in Q3 2016.

Different factors are at play. The food, beverages and tobacco segment has a high import requirement and contracted by -5.8% y/y. The cement industry uses limited imported inputs in its production and contracted by -6.3% y/y in Q3. We should add the squeeze in demand and the fall-off in capital projects to the acute fx shortage in our list of drivers of shrinking output.

For GDP we see a return to growth of 0.6% y/y in Q4 (from -2.2%) on the back of a modest seasonal boost to household demand as well as positive base effects for the oil sector. The figure could look rather better if the oil economy surprises on the upside 

Demand is set to benefit from the FGN’s expansionary fiscal stance. Manufacturing, however, will likely be one of the last non-oil sectors to recover on account of the fx constraint. 


The slow boat to fx reform 

 

30 November, 2016
 
Nigeria’s proposed floating exchange-rate regime will not emerge until large and steady supplies of fx from autonomous sources complement the CBN’s modest sales to the market. At this point, confidence would return, offshore players would re-enter local securities markets in sizeable numbers and fx would be traded in genuine two-way transactions. The challenge has been how we arrive at this destination from the current system which is effectively administered, old-style, by the CBN. 
 
One route could be the US$15bn advance payment for crude oil imports by the Indian authorities which Ike Kachikwu, the minister of state for petroleum, is said to have secured on a recent visit to the country. 

India has replaced the US as the leading importer of Nigerian crude. However, a recent note by Fitch Ratings on the Nigerian oil industry has queried the value of the deal in practice. The agency has made similar suggestions about the size of the undertakings made during a visit to China in July by Kachikwu and senior NNPC officials. 

The minister highlighted commitments totalling US$76bn in loans and investments to the Nigerian oil industry, of which US$69bn were destined for the corporation and government agencies. He acknowledged that a memorandum of understanding was not a binding commitment, and added that a 20% success rate would be an achievement. 

These deals would form part of what we have termed the “piecemeal solution” to the malfunctioning of the fx system. Another element would be the sovereign Eurobond, which now appears to have been pushed into Q1 2017. We expect a successful launch although pricing has become a little less favourable for emerging market issuers since the US presidential election. The yield on Nigeria’s July 2018 maturity has widened by about 20bps on fears of more rate hikes by the Fed than previously expected due to the president-elect’s fiscal agenda. 

 Under the piecemeal solution, we would gradually arrive at the floating regime. The journey would be more rapid and smoother if the FGN accepted IMF loans for the first time (Good Morning Nigeria, 10 October 2016). Concessional external financing from, for example, the World Bank and African Development Bank would flow from such an agreement. The omens are poor, however, due to the resistance of the presidency and most influential Nigerians. 

We should flag another scenario (not our own) under which we arrive quickly at the fx destination without the IMF loans but with concessions on reforms by a more amenable presidency and FGN. 


A hint of investor fatigue

 

29 November, 2016
 
The DMO sought to raise N95bn from its most recent monthly auction of FGN bonds yet registered sales of just N39bn (US$130m). Monthly sales are generally steady and the rare dips can be explained by the DMO’s determination to halt upward pressure on yields by setting marginal rates that reject the majority of bids. In November, however, the total bid slumped to N62bn, the lowest since January 2012 when our records begin. Given the FGN’s sizeable borrowing requirement this year and next, a continuation of this trend would be highly damaging.
 
It would increase the dependence on external financing of the budget deficit. We favour such financing but it comes neither easily nor rapidly, which is evident from the delay in launching the sovereign Eurobond and securing the World Bank funding. 

One explanation for the exceptionally low total bid lies in the fact that the auction was held before the latest monthly release of FAAC monies.  

A hint of investor fatigue


This would affect the banks. Turning to the PFAs, we just hope that their low bid was a one-off. Data from Pencom show that 59% of their AUM at end-September was invested in FGN bonds. These holdings of N3.50trn represented 47% of the stock of bonds at end-June. 

On a related point, we note a number of official suggestions that the assets managed by the PFAs should somehow be mobilized to finance Nigeria’s huge infrastructural deficit. This would be welcome as a voluntary exercise although some of the throwaway remarks overlook the fact that the assets are the savings of individuals. 

A large shift in this direction could reduce their monies invested in FGN paper. 
 



Another poor payout by the FAAC

 

25 November, 2016
 
The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government amounted to N420bn (US$1.38bn) in November (from October revenues). It therefore remains below the forecast pro rata monthly average of N477bn per the 2016 budget, which projects the net distribution from the federation account and the VAT pool combined at N5.72trn. Both mineral and non-mineral revenues were below par in October, resulting in the lowest distribution for five months.
 
The federal finance minister, Kemi Adeosun, warned last month that October revenues would again be disappointing because of the three-month lag in the accounting treatment of mineral revenues. 

Her point was that sabotage of oil industry installations was acute in June and July. The national accounts for Q3 2016, however, suggest that crude output may not have recovered in the balance of the third quarter (Good Morning Nigeria, 23 November 2016). 

Adeosun observed after the FAAC meeting that the volume of import duty and the collection of companies’ income tax also disappointed in October.

The statutory distribution of N239bn was supplemented by excess petroleum tax payments of N109bn, an exchange-rate gain of N37bn, the regular NNPC “refund” of N6bn and VAT.

Another poor payout by the FAAC


We have taken the data for the latest payout from the local media and caution that there may be some inconsistencies between reports. Official sources provide the revenue numbers up to September, distributed in October. We use the data for gross distributions while the local media cite a combination of gross and net payouts to the three tiers. 
 



Most pressure still on the secondary sector

 

24 November, 2016
 
From the national accounts for Q3 2016 we today highlight the five worst performing sectors. We cover what the NBS terms activity sectors, and then only those accounting for at least 1% of GDP at constant basic prices. The data show agriculture expanding by 4.5% y/y, and industry and services contracting by -12.2% and -1.2% respectively. Industry (the secondary sector) was dragged down by the -22.0% y/y contraction in the oil and natural gas sector. We doubtless were not alone in thinking that its performance in Q2 (-17.5%) could not get any worse.
 
Probably the best evidence of the softness of the non-oil economy, which was flat y/y in Q3, is that trade, the second largest sector of the economy, declined by -1.4% y/y. Trade is the most reliable measure of demand across all income levels. 

Manufacturing sector contraction picked up from -3.4% y/y to -4.4%. For the largest segment of the sector (food, beverages and tobacco), it accelerated from -5.5% y/y to -5.8%.  Its underperformance relative to most other segments may be traced to its high import requirement. 

The data for the diverse services sector do not send any clear signals. Public administration (see below), and real estate both shrank by more than -3.0% y/y. Their performance more than outweighed the modest growth y/y posted by financial and insurance, information and communications, and professional, scientific and technical services. 

November 24


Some observers might be tempted to cheer that public administration contracted by -3.6% y/y, and for the seventh quarter in succession. They should celebrate if public sector output improves. They should also remember that the sector’s output includes the consumption of fixed capital as well as the remuneration of employees. 
 

 



The multiplier effects of sabotage

 

23 November, 2016
 
The NBS has released the national accounts for Q3 2016 to show negative growth of -2.2% y/y (after -2.1% the previous quarter). Contraction for the third successive quarter had been widely flagged, not least by the federal finance minister. Our own expectation was -1.7% y/y, based in part on the semi-official narrative that oil production had hit its low in June and July. The NBS commentary puts crude output at 1.63 mpbd in the third quarter, compared with 1.69 mbpd in the second and 2.11 mbpd in the first. The data tell rather different oil and non-oil stories.
 
Although oil’s contribution to constant price GDP declined further to just 8.2% in Q3, the impact of the sector’s latest contraction (of -22.0% y/y) is felt more broadly through linkages across the economy. Some estimates of the indirect oil economy range up to 50% of GDP. 

An obvious priority for the FGN is to tackle the sabotage and insecurity in the Niger Delta. It has little choice but to make concessions for the sake of peace. 

In stark contrast, the non-oil economy was flat y/y in Q3. (In fact, it expanded fractionally.) Among the few encouraging highlights, agriculture expanded by a solid 4.5% y/y while finance and insurance enjoyed a turnaround from -10.8% y/y the previous quarter to 2.6%. 

The FGN has a major role to play in economic recovery on the fiscal side. Construction again contracted by 6% y/y, and stands to benefit from the planned acceleration in capital releases to spending ministries. 

Looking ahead to the Q4 data, the base effects are positive for the oil sector. Additionally, we should expect a small seasonal boost to household consumption, the squeezing of personal incomes notwithstanding, and a token return to positive territory for GDP as a whole. 
 

 



MPC likely to leave its stance unchanged

 

22 November, 2016
 
The monetary policy committee (MPC) closes its latest meeting in Abuja today. We see an unchanged stance. The committee is faced with an economy which has contracted y/y for three successive quarters and inflation which has accelerated for nine months in a row on the same basis. It has often argued that both negative developments have been largely driven by legacy and structural factors beyond its control. In the cases of pipeline sabotage and electricity tariff rises, for example, we agree.
 
Almost as long as we can remember, the committee has called for the harmonisation of monetary and fiscal policy. 

At the same time, it likes to stress the limitations on the impact of its monetary policy. A hike would be the classic response to the surge in inflation, and would encourage savings. However, it would add to the FGN’s borrowing costs and very likely slow the recovery from recession. The committee hiked by 200bps to 14.00% in July in a bid to attract departed offshore portfolio investors but the tightening made little impact. 

A cut in the policy rate would expose what one member has termed the “oligopolistic” structure of the banks and would not be fully shared with their customers. The CBN governor, Godwin Emefiele, said in Lagos on Saturday that the committee also had to look at rate decisions from the perspective of the lender. This was a reference to banks’ high operational costs, notably power, security and infrastructure. 

The MPC’s idea of harmonisation is that it has borne the responsibility for creating macroeconomic order and that the fiscal side must now raise its game: A wish list could include a boost to capital spending, a programme of external concessional borrowing and the more timely passage of budgets. 

Given its view that its own ammunition is practically exhausted, we do not see  a change in the policy rate until the expected marked decline in inflation next year on positive base effects, We estimate the headline rate at 15.1% y/y in March and 11.3% in June.

On exchange-rate policy, the MPC may well call for time for the liberalisation in June to have the desired impact. 

Finally, we note a disappointing trend in the publication of members’ personal statements. We do not see why these explanations of voting decisions are sometimes released as late as the first day of the subsequent meeting of the MPC. The statements should be a useful transmission mechanism for the market and the delays mark a step away from best practice. 
 



Textile feeling the fx pinch too

 

21 November, 2016
 
The “textile, apparel and footwear” sub-sector remains the second largest contributor to the manufacturing sector, with a total output of N465bn (US$1.5bn) in Q2 2016 or 21.7% of manufacturing GDP. However, the segment is still performing below its full potential. Given the fx illiquidity in the country, manufacturers within the textile industry are increasingly having to confront the possibility of suspending or halting production due to the inability to secure imported raw material such as chemical based products like polymer, dyes and other synthetic materials.
 
Based on data from the National Union of Textile Garment and Tailoring Workers of Nigeria, collective production output from the textile industry has not exceeded 55% of annual domestic consumption. This has resulted in the heavy inflow of imported textiles as well as garments.

Additionally, low productivity levels limit export capacity. We gather that Nigeria spends approximately N100bn on imported clothes.

The 10% textile development levy on imported fabrics by the FGN is aimed at assisting with developing operations of local textile manufacturers. However, the industry has seen very minimal impact.

According to Euromonitor International, the combined apparel and footwear market in sub-Saharan Africa is estimated to be worth US$31bn. Given its aim to promote trade among African countries as well as boost inter-regional collaboration, the Africa Development Bank recently launched a platform - ‘Fashionomics’ - geared towards developing Africa’s fashion industry at the recently concluded Lagos Fashion and Design Week.

The platform is expected to stimulate activity across the fashion value chain (textile included) and generate more jobs.

The Bank of Industry (BoI) is also committed to driving the textile and fashion industry forward. From the FGN’s N100bn textile revival fund, the BoI has disbursed N60bn for 70 projects within the Cotton Textile and Garment (CTG) value chain.

As with other sectors of the economy, the textile industry can achieve its full potential only under a favourable business climate i.e. policies that would encourage ease of doing business and drive private sector participation (local and foreign investors) 


Laudable efforts in broadband penetration

 

18 November, 2016
 
The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 93.6 million in September, representing a y/y contraction of -3.6%. The figure implies density of 51% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. MTN emerged again as the leader, with 35% market share while Globacom and Airtel accounted for 29% and 20% respectively.
 
The NCC’s data on porting activity showed MTN accounted for the largest (44%) customer losses while Etisalat gained 13,365, representing 75% of total incoming porting data in September.

A recent survey carried out by DigitXplus, a digital media consultancy firm, revealed that China has the highest number of internet users with 632 million subscribers while the US comes in second place with 269 million. Internet subscriptions in India, Japan, Brazil and Russia are 198 million, 110 million, 105 million and 87 million respectively.

We recall that earlier this year, the industry’s regulator auctioned 14 slots of the 2.6 GHz spectrum. We gather that the commission is now gearing up to commence the licensing of broadband services on the 5.4 GHz spectrum.

This is expected to assist with achieving the FGN’s broadband penetration target of 30% by 2018. Broadband penetration is currently 21%.

Laudable efforts in broadband penetration

Based on the recent GDP data released by the National Bureau of Statistics (NBS), in Q2 2016 the telecommunications sector contracted by -11.6% y/y compared with a growth of 9.4% y/y in the corresponding period in 2015.

Although there is a visible slowdown on a y/y basis in internet subscriptions, going forward we expect to see further investments within the sector due to opportunities in the data segment.



Forward movement in e-payments

 

17 November, 2016
 
Data from the CBN’s Economic Report for H1 2015 reveal that the volume of electronic payments surged by 22% y/y to 244 million while the value increased by 20% y/y to N2.3trn (US$7.3bn). The CBN commentary indicated that ATM remained the most patronised e-payment channel within the review period, accounting for 84.8% of total transactions. In terms of value, ATM also accounted for the lion share, or 81.5%. Despite the increase in the value over ATM transactions, the CBN report disclosed that the number of ATMs nationwide declined by 1.5% y/y to 15,699 in H1 2015.
 
The volume of electronic transactions on mobile payments systems and PoS terminals represented 7.7% and 6.1% respectively.

Meanwhile, the volume and value of web-based transactions increased by 50% y/y and 29.6% y/y respectively when compared with the corresponding period in 2014, to 3.3 million and N39.8bn respectively. This was due to increased awareness and acceptance of web payment.

According to the Nigerian Communications Commission, internet subscriptions stood at 94 million in September 2016. This translates to internet penetration of 51%. That said, we suspect the volume of transactions on the web payment platforms could accelerate exponentially if fraudulent activities are curbed.

Forward movement in e-payments

Investments to boost financial inclusion are a pre-requisite for e-payment transactions to grow. To this end, the Nigeria Interbank Settlement System recently launched a mobile payment system (mCash) for low value retail payments. It is designed to extend payment options to low-income trading activities.
 




Boosting fish production

 

16 November, 2016
 
Today we turn our attention to Nigeria’s fish industry. Industry sources suggest that catfish accounts for about 80% of fish produced domestically. Nigeria has over 200 different species of fishes which are untapped due to lack of modern aquaculture equipment, inadequate training of fish farmers and poor development of quality fish feeds. According to the federal ministry of agriculture, US$700m is spent annually on fish importation due to the country’s annual fish supply shortage of an estimated 2 million metric tonnes (mmt).
 
On Monday, the latest inflation figures were released by the National Bureau of Statistics. The data showed food inflation accelerating to 17.1% y/y. Price increases in fish was a primary driver.

The lingering fx sourcing challenges continue to put a strain on this segment. We gather that a 15kg imported bag of catfish previously sold at N6,000 is now sold for N11,000 - an increase of 83%.

As for locally produced fish, feeds prices have surged by over 80%, forcing some fish farmers to abandon their farms.

Boosting fish production

 In Q2 2016, fisheries GDP contracted by -6.8% y/y, compared with growth of 5.5% in Q2 2015. The decline mirrors the macro challenges being faced by the economy as a whole.

To drive the fisheries segment towards expansion, the FGN needs to develop policies geared towards encouraging aquaculture. For instance, addressing power shortages as well as promoting technology and training indigenous fisheries professionals.



Another pick-up in inflation

 

15 November, 2016
 
The latest inflation report from the NBS shows the ninth successive acceleration in the headline rate, to 18.3% y/y in October from 17.9% the previous month. There was an increase in the core measure to 18.1% y/y from 16.6%. The NBS commentary again singled out soaring energy costs. We note that housing, water, electricity, gas and other fuel prices increased by 32.8% y/y in October, compared with 26.3% the previous month; they account for 12.7% of the index.
 
Education costs also stuck out as one of the primary drivers behind the acceleration in October’s headline rate. Costs within the segment rose by 19.2% y/y compared with 18.6% in September. This component has a 4.0% weighting.

After a steady slowdown for four successive month, the m/m increase was  0.8% (unchanged from the rate recorded last month).

There was an increase in food measures to 17.1% y/y from 16.6% the previous month. The rise in the index was attributed to price increases in bread, cereal, fish and meat. However, we note that fruits recorded the slowest pace of increase.

Although fx sourcing challenges still linger, the naira depreciation has slowed since the large adjustment in June.

Another pick-up in inflation


At its last meeting the MPC left its stance unchanged as the committee opted to assess the impact of the hike in July. The communique suggests that it has abandoned attempts to lure offshore investors back with hikes.

Given this surge in inflation, any decision tilting towards a policy rate cut may be difficult. If the clampdown by the authorities on the black market proves effective, inflationary pressures could ease slightly, paving the way for cuts.



Disruptions to oil production

 

14 November, 2016
 
The CBN’s Economic Report for May showed that Nigeria’s oil output (including condensates and NGLs) decreased by 20% to 1.35 million barrels per day (mbpd) from 1.68mbpd in April. The allocation of crude oil for domestic consumption remained at 0.45mbpd or 13.95mb during the period under review. Meanwhile, crude oil exports stood at 0.90mbpd, a 27% decline from 1.23mbpd recorded in the preceding month.
 
The decline observed in crude oil production was attributed primarily to attacks on oil and gas infrastructure in the Niger Delta region. The federal minister of state for petroleum, Dr. Ibe Kachikwu, recently revealed the FGN is targeting zero shutdowns on the back of fairly good dialogue with the militancy group.

Based on the national accounts for Q2 2016 released by the National Bureau of Statistics (NBS), the oil economy shrank by -17.5% y/y as a consequence of the heightened sabotage.

We gather that Nigeria’s largest export stream, Qua Iboe, has resumed loadings after being shut in for over two months due to pipeline vandalism. This should add an additional 300,000 b/d to the country’s total production.

However, last week the Trans Forcados pipeline which feeds crude from the Niger Delta to the Shell-operated export terminal was attacked. Trans Forcados had just restarted operations after several months of force majeure due to earlier attacks.

Disruptions to oil production


At an estimated average of US$47.59 per barrel, the average spot price of Nigeria’s reference crude (Bonny Light) implied an increase of 13% compared with the level recorded in April. The uptick was attributed largely to increasing global oil supply outages as well as ongoing declines in US rig count.



FDI still lagging behind

 

11 November, 2016
 
The NBS recently released its latest Capital Importation Report which covers Q3 2016. The data was obtained from the CBN and compiled using information on banking transactions. The total value of capital imported into Nigeria in Q3 2016 was estimated at US$1.8bn; this represents an increase of 75% on a q/q basis but a 33% decline when compared with the corresponding period in 2015. Within the quarter, August recorded the highest level of capital imported at US$894m. This happens to be the highest level since July 2015.
 
In Q3 2016, portfolio investments accounted for the largest component of imported capital at US$920.32m (51% of the total). Although portfolio equity declined by 28% relative to the previous quarter, this was outweighed by large increases in other types of portfolio investments.

Just like in each of the past eight quarters, FDI accounted for the smallest share of imported capital in Q3 with a total of US$340.64m.

On a sectorial basis, the banking sector imported the largest value of capital at US$555m. This accounted for 30% of the total, followed by telecommunications at US$245m (see chart below).

The data also captured capital importation by country source. Nigeria imported the most capital from the United Kingdom, which accounted for 60% of the total. The United States was the second largest investor into Nigeria, accounting for 23% of the total.

FDI still lagging behind

Generally, foreign portfolio investors continue to remain on the sidelines. Relatively better participation was observed in fixed income compared with the equity market. As for direct investment, participation is still low primarily due to fx volatility and Nigeria’s weak macroeconomic outlook.



First Brexit, now Trump

 

10 November, 2016
 
Yesterday, the United States elected Donald Trump as its incoming President to replace Barack Obama, defeating the Democratic Party candidate, Hillary Clinton. The 45th President-elect will be sworn in on 20 January 2017. Mr Trump’s victory sent shockwaves around the world akin to the morning after the UK Brexit vote. The initial sell-off in financial markets was primarily as a result of the uncertainty that was created by Mr Trump’s victory. Although we have seen some slight recovery, it will take some time before the markets figure out what the new normal will be, mainly because of the policy vacuum that has been created in several areas. The uncertainty is negative for markets in general, not just Nigeria. The longer term impact is more difficult to call at this stage.
 
The IMF in its latest World Economic Outlook (WEO) trimmed its forecast for global output growth this year by 10bps from three months ago, to 3.1%, while leaving next year’s unchanged at 3.4%. The adjustment in the forecasts was partly linked to Brexit which in the IMF’s opinion had added to market and macroeconomic uncertainties in the near term. The risk that the IMF may moderate its growth projections further is higher following the US elections.

A Trump presidency is a shock to the system on several levels, the most significant being global trade. The rhetoric that dogged his campaign was one which posed a major threat to existing and proposed trade agreements between the US and a number of its major trading partners. Tariffs were the blunt instrument of choice for Mr. Trump.

The reality is unlikely to be anything close to what the President-elect pushed for during the campaign. Notwithstanding, the threat to China in particular is real, potentially risking further slowdown in growth. The slow response of China to congratulate Mr. Trump is telling.

The elections are likely to put the next Federal Open Market Committee (FOMC) meeting in December into sharper focus. In the medium to longer term, Mr. Trump’s broad plans are more likely to worsen the US’s fiscal deficit, push inflation up and lead to dollar softening. A rate hike by the FOMC in such circumstances is almost inevitable, posing further threat to the naira and foreign portfolio investments into Nigeria.

The case could be made that the FOMC may hike as the market had been anticipating in December anyway, despite the volatility that the markets are now experiencing. This would bolster the view that Mr. Trump recognises and respects the independence of the FOMC, despite his unprecedented attack on the committee and its Chair during the campaign period. Such a scenario playing out will confirm our suspicion that the rhetoric during the campaign period was just that. The markets may then breathe a sigh of relief.



Cocoa: a potential revenue booster

 

9 November,  2016

Nigeria’s current macro challenges have resulted in an urgent call to boost the non-oil economy and encourage non-oil exports in order to diversify the country’s revenue base. Arguably, cocoa leads Nigeria’s agricultural exports. Following the cut in the projected cocoa output for 2016 from 270,000 metric tons (mt) to 190,000 mt, Nigeria has slipped to seventh position in the league table of largest producers of the commodity from fourth. Ivory Coast, Indonesia and Ghana remain the leading three producers. In West Africa, Nigeria ranks third in terms of cocoa exports behind Ivory Coast and Ghana.
 
About 70% of global cocoa supply is sourced from West and Central Africa, with the vast majority grown on smallholder farms.

Industry sources suggest that Ghana currently produces 700,000 mt per year. Meanwhile, Nigeria’s annual production is approximately 250,000mt; the target is to hit 500,000mt over the next few years.

Given that the potential exists to grow cocoa across at least 20 states in the country, Nigeria is performing below par when compared with its peers within the West African region.

Due to the high moisture content in its cocoa beans, Nigeria’s cocoa is more suitable for cake baking, butter production and soap manufacturing and is less attractive for chocolate production – a lucrative market worth US$800bn globally - when compared with Ghana and Ivory Coast. Notwithstanding, the scale of the untapped potential is significant, leaving the chocolate industry to one side.

In 2014, the cocoa value chain which was under the FGN’s Agricultural Transformation Agenda (ATA) received a N100bn Development Fund. This fund was expected to expand cocoa plantation across the country, support the Cocoa Corporation of Nigeria and improve access to finance for cocoa farmers. To our knowledge, the impact of this initiative on the cocoa production segment has been very little.

 
To drive the economic diversification narrative, more support from the FGN by means of fully implemented intervention funds is a necessity. In addition to this, efforts towards an effective industrial take-off for the Nigerian economy would accelerate the diversification process.

The agriculture sector is a rare positive in terms of GDP growth. Based on data from the National Bureau of Statistics, the sector grew by 4.5% y/y in Q2 2016 compared with 3.5% recorded in the corresponding period of the previous year. Crop production accounted for 89% of total agriculture GDP and remains the primary driver of growth within the sector.



Slowdown in accommodation and food services

 

8 November,  2016

Today we turn our attention to Nigeria’s hotel, restaurant and quick service meal industry (also referred to as accommodation and food services). Given the macro challenges which have affected the broader economy, the sector has contracted steadily since Q2 2015. Based on data from the National Bureau of Statistics (NBS), the sector has contracted by an average of –6.3% over the past five months. The most recent data from the NBS reveal that the accommodation and food services sector contracted by -6.4% y/y in Q2 2016.
 
Industry sources suggest that the country’s quick service restaurant (QSM) segment accounts for 25% of Nigeria’s food industry which is estimated to be worth N1trn.

The lingering fx sourcing issues continue to strain the restaurant and food services industry as a significant proportion of food products used in preparing meals are imported. However, a gradual shift to locally sourced food products will bring some respite over time.

September’s inflation report showed that prices of restaurants and hotels in the Restaurant and Hotel sector rose by 9.4% y/y compared with 9.7% in August. This component has a 1.2% weighting.

Amidst the economic downturn, there are some bright spots within this industry: one of such is the carbonated soft drink (CSD) segment which appears to be holding up well relative to other segments.

Another is the packaging industry; local packaging firms should experience increased patronage as food services companies seek ways to cut costs and capitalise on the FGN’s import substitution strategy.

Recently, the Federation of Tourism Association of Nigeria (FTAN) committed to exploring methods through which hotels across the country could be upgraded in order to attract both local and foreign investors.

Currently, the trend in the hotel segment tilts towards corporate Nigeria, not retail or tourists. The squeeze on household wallets has led consumers to restructure their spending patterns; as such, hotel accommodation for leisure purposes is widely seen as a luxury expense.

In the medium term, we expect GDP growth to recover; our forecast for 2017 is 2.0% y/y compared with a forecast of -1.0% in 2016.

This recovery should ultimately translate to improved naira liquidity, thus boosting household incomes and purchasing power. The hotel industry should be a beneficiary of this.



Cost controls but production shortfalls

 

7 November,  2016

The NNPC’s accounts for August show a group operating deficit of N11bn (US$37m), compared with N24bn the previous month. Revenue from the Nigerian Petroleum Development Company picked up from N15bn to N33bn in August, which the corporation’s commentary attributes to the resumption of production on OML 119. It pushed up its operating surplus from N2bn to N12bn. Another positive was a boost to coastal sales by the Pipeline and Products Marketing Company (PPMC), which raised its revenue from white products from N104bn in July to N130bn.
 
These are creditable results in the adverse circumstances, the worst of which is the shut-in of about 300,000 b/d since February due to sabotage of the Forcados terminal export line. The corporation puts average crude production at just 1.65 mbpd in July.

The corporation will continue to report trend deficits without a lasting settlement in the Niger Delta. The commentary notes 221 PPMC pipeline breaks in August, the lowest since April.

The January-August operating deficit of N128bn compares with N183bn in the same period of 2015. Given the production constraints, the improvement has been achieved through cost control at head office and the renegotiation of contracts with local and external parties. These accounts are presented on an operating level and so exclude below-the-line items.

Over the 12 months to August, export receipts from crude oil and gas sales totaled US$3.17bn. Other than token payments of US$73m to the federation account, the amount was paid in full towards joint-venture (jv) cash calls. These payments are falling well behind budget, and the NNPC puts its arrears under the jv arrangements at US$6bn. The industry has higher figures.



Further depletion of reserves

 

4 November,  2016

Data from the CBN show that gross official reserves declined by US$580m in October on a 30-day moving average basis to US$24.0bn. The monthly average movement has been an outflow of US$490m over the past 12 months. The moving average basis dilutes the immediate impact of forward contract sales of fx by the CBN: it entered into three contracts (for one, two and three months) on 20 June and last week sought to sell US$500m under a fourth. Its spot sales are regularly less than US$5m daily, such is its need to slow the depletion of its reserves.
 
An extreme free market solution to the fx shortage would be to meet all demand and hope that, before reserves had fallen to a critical level, confidence was restored, offshore investors had returned to Nigerian markets in droves and autonomous inflows were on a scale to create the fully functioning fx regime envisaged in the liberalization/devaluation in June.

The latest CBN figures (from June) show that the CBN was the owner of 73% of reserves. This proportion would amount to a cushion of less than US$18bn at end-October. The free market solution would be little more than a game of roulette in our view.

In reality, autonomous (non-CBN) inflows to the interbank market remain modest, with the largest component still fx sales by the oil majors. Many of these transactions are with downstream players in the industry, which supports the availability of petroleum products but does not satisfy the demand of manufacturers and airlines.

Further depletion of reserves


So we are far from the intended floating exchange-rate regime because we cannot see the trigger which will prove the game-changer. We rule out a surge in the oil price, a huge programme of privatisation and IMF borrowing. The solution will be piecemeal and patience is advisable.

 



The US$30bn question (or a no-brainer)

 

3 November,  2016

The FGN is looking to borrow US$30bn externally over the 2016-18 period. This has brought some criticism on the grounds that Nigeria could fall into a second debt trap. We note that the external debt stock/GDP ratio for Ghana is now worse than before the application of relief by bilateral, commercial and multilateral creditors. However, we would argue that Nigeria’s infrastructural deficit is preventing a sustainable recovery and is so large as to require large-scale government borrowing.
 
The FGN has to borrow, therefore, in our view and we all have to hope for a marked improvement in the management of the loan proceeds.

We welcome the fact that the borrowing is to be external, and concessional other than the Eurobond programme of US$4.5bn. This 15% share of the total is similar to the 13/87 split between market and concessional obligations in the FGN’s external debt burden of US$11.3bn at end-June.

This clearly reduces the debt servicing costs. Data from the Debt Management Office (DMO) show public external and domestic debt service (principal and interest combined) in 2015 at US$331m and US$5.17bn respectively. Servicing the outstanding US$1.5bn Eurobonds amounted to US$91m.

Another DMO series, expressed in naira, shows the steep rise in domestic debt service from N537bn in 2011 to N1.02trn in 2015.

Against this background it has set a medium-term target of 60/40 for the domestic/external split in the stock of FGN debt. As at June, the split was 77/23.

The ratios for the stock remain healthy. For the FGN, the figure at June was 15% of GDP (domestic including contingent liabilities and external). Its latest plan would add a further 7% on our exchange-rate assumptions.

We are not sure whether the US$30bn package would cover the full external requirement over the three years. It includes just US$3.5bn in budget deficit financing, and we ask how the expected deficits next year and in 2018 are to be funded.

On Tuesday the Senate rejected the request from the presidency for the approval of US$30bn in external borrowing. It appears that the rejection was based on technical grounds. The local media reported that the request was not backed by the relevant supporting documentation. This was the equivalent of failing to send the promised attachment with an email, albeit with rather greater consequences.



Flying at a low altitude

 

2 November,  2016

There has been a general slowdown in growth across all sectors of the economy, and the airline industry is no exception. Based on the national accounts series for Q2 2016 released by the NBS, airline transport contracted by -2.6% y/y, and so considerably worse than the non–oil economy as a whole (-0.4%). The sector expanded by 2.2% y/y in the preceding quarter. We are seeing again the slowdown in consumers’ purchasing power, which has resulted in squeezed household demand.
 
The country’s macroeconomic challenges are weighing heavily on domestic airline operators. Given the fx sourcing issues, the cost of importing jet fuel has surged and has had a negative impact on profit margins.

The fx illiquidity has made it difficult for airlines to secure imported spare parts. More than one foreign airline has withdrawn its service, and others have scaled down their operations due to delays in repatriating naira ticket sales.

In September, Aero Contractors indefinitely suspended its operations. In addition to operational challenges amid the economic downturn, local newswires report that the airline is indebted to AMCON and banks to the tune of N30bn.

However, Arik Air (another domestic airline) has recently announced plans to create new routes. The airline currently has 28 aircraft, and over the next ten years the number is expected to double. It has also announced plans for a private share placement and a possible IPO.

Last month the CBN resolved to intervene in the inter-bank FX market through its Special Secondary Market Intervention Sales (SMIS) in a bid to reduce the backlog of specific fx obligations, those of airlines included.



PMI reading no 43: a marked rebound

 

1 November,  2016

Our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a recovery from 47.9 in September to 52.9. Our partner, NOI Polls, has gathered and compiled the data. The index update is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted seven negative headline readings since our launch in April 2013 including four this year.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

Unusually, all five sub-indices showed an improvement in October. The striking trend for all sub-indices is the shift from a decline to an unchanged reading.

Among the answers to the trigger questions, we note that one respondent reported improved (shorter) delivery times because of orders made in smaller quantities. This reinforces the narrative on squeezed household demand.

This headline reading takes us back roughly to where we were in August (52.2). Subject to the usual caveat about the difficult operating environment, we suggest that the marked shift towards unchanged readings could indicate that companies are adjusting to the additional challenge of fx shortages.

For GDP we see further contraction (of -1.7% y/y) in Q3 2016. The figure could look rather better if the oil economy surprises on the upside. This is a challenging call, given the lack of a single official date source for oil production.

For Q4 we see GDP flattish on a y/y basis. The pick-up in capital releases from the 2016 budget by the FGN should then start to make an impact.



Overcoming the macro headwinds

 

31 October 2016

A highlight of our investor conference in Lagos on Thursday was a panel discussion with managing directors of four successful Nigerian companies. The session was entitled “Capitalising on disruptions to the status quo” and provided colour on the way the businesses had responded to the well-documented macro headwinds. The panellists broadly supported the thrust of FGN policy, and one estimated that as much as 75% of manufacturing’s raw materials could be locally sourced.
 
SecureID is Africa’s leading smart card manufacturing and personalisation company. Its managing director and founder acknowledged that reduced government budgets had had an impact and that naira invoicing had become prevalent. 

Unified Payments is a payments service provider founded in 1997 by a consortium of Nigerian banks. It moved into contactless payments in 2015.   It has managed annual sales growth of about 25% over the last five years, and is confident that it can maintain the rate of expansion. The company prides itself on its success in educating the public on alternatives to ATMs. 

Chi Limited is best known for its fruit juices and is the principal asset of TGI Nigeria. It serves two million customers each day. The company’s strengths, in the words of the managing director of TGI Nigeria, are its spending on R&D and its offering of products for all wallets. In January Coca-Cola acquired a 40% stake in Chi and hopes to buy the balance within three years. 

Chi is expanding on the basis of backward integration. It has recently opened a plant for the manufacture of concentrates for juice production. A rice mill with an annual capacity of 125,000 tonnes per year (t/y) is due to be commissioned in February, at which point work will commence on a second. 

GZ Industries manufactures cans for the drinks industry, and is the best known holding of Verod Capital Management. It produces 1.8 billion cans per year from three plants, two of which are located in Nigeria. Imported aluminium coil accounts for 70% of its cost of sales so the devaluation in June has been painful. Its concern, however, is more the availability than the cost of fx.  Its sales growth in naira terms is running below budget. 

To GZI’s advantage is the opportunity to boost its market share. An estimated 90% of drinks are not served in cans. 

Portfolio investors will have noticed that these four companies are unlisted. The four, however, have strong growth potential, and one (Chi) is in a segment particularly favoured by the FGN (agro-processing). 

Chi Limited favoured by the FGN (agro-processing) : Overcoming the macro headwinds



Rewards of fiscal policy in stages

 

28 October 2016

The economic record of this administration will be judged on its fiscal performance. It was therefore encouraging to hear an upbeat yet realistic narrative from the federal finance minister, Kemi Adeosun, at our investor conference yesterday in Lagos. She answered our questions in a prerecorded interview. If we were to isolate one message, it would be that the FGN is determined to pursue its economic agenda and that substantial gains beckon provided that Nigerians are patient.
 
The FGN aims to double tax revenues as a percentage of GDP in the next five years to 10%. We assume that she had non-oil revenues in mind, and note that the target is conservative, even by low-income country standards. 

The minister was adamant that the FGN can halt the remorseless rise in recurrent spending without job cuts. One of the initiatives in progress is the continuing audit of the public payroll to root out inflated or bogus claims. She was confident that large savings would be achieved once the exercise was extended to the military and paramilitary services. 

Capital spending is the beneficiary of recurrent expenditure discipline. The minister said that capital releases year-to-date amount to N725bn. (CBN data show the total last year at N660bn.) 

If the FGN was able to push through its budget earlier in the year, then the releases could be made more quickly to the advantage of growth. At an earlier  event, we recall the minister suggesting that the delay in the passage of this year’s budget, while regrettable, did at least bring some “procedural” victories for the FGN in its annual tussle with the National Assembly. 

On the forthcoming Eurobond issue, she did not dismiss the idea that the FGN might raise more than the proposed US$1bn if the price and the bid permitted. 

The minister noted that the 2016 budget projects external financing of N900bn to cover the deficit. The devaluation in June gave the ministry some room for manoeuvre since the fx equivalent is now rather less than the original US$4.5bn. The World Bank element of the financing is therefore being pushed back into 2017. 

On the non-debt creating part of deficit financing for 2016, she urged patience on recoveries, noting a pattern of lengthy delays due to legal challenges. Asset sales also do not create debt but can cover deficits. The minister observed that the domestic debate about a fire sale of state-owned assets was not initiated by the FGN and that negotiating from a position of weakness (low oil prices in this case) was generally not a good idea. 



NSE underpinned by sentiment and hope 

 

27 October 2016

As our annual investor conference opens today in Lagos, we note that the NSEASI has declined by -5.3% ytd and so outperformed Nairobi while lagging Johannesburg. Our chart shows that Lagos hit its low point of -21.6% ytd very early in the year (19 January) and has recovered on sentiment. Positive news on the fiscal side and the resilient performance of top tier bank names has been balanced by what we charitably term the work in progress of the new foreign-exchange policy launched on 20 June.
 
Turnover has slumped to a ytd daily average of N2.4bn. Total transactions to the end of September were running 41% lower than the comparable year-earlier period.  The exchange’s latest report on portfolio participation in equity trading shows monthly turnover of N95bn for September, compared with N130bn for the year-earlier period. For foreign players, the report highlights an increase from N29bn to N44bn.

 
It may be surprising that there was a net foreign inflow of N5bn in September. There has been some offshore buying of flagship names such as DangCem and GT Bank but, we understand, from funds “blocked” due to delayed repatriation after earlier trades or from dividend payments.

Our view is that a fully functioning fx regime will only come about gradually and in a piecemeal fashion because we cannot identify one solution large enough and politically acceptable to provide the necessary trigger.

NSE underpinned by sentiment and hope


In our 2016 Outlook, published in late January, we forecast a decline in the index of -10.0% over the year.



Contingents seemingly under control
 

26 October 2016

Another release by the DMO (its 2016 Debt Sustainability Analysis Report) puts the FGN’s contingent liabilities at N1,656bn at end-2015, equivalent to 1.7% of GDP. When we add the domestic and external debt of the federal government, the latter including the foreign-currency loans of the states guaranteed by the FGN, we come to a burden representing 13.0% of GDP. For a worst case scenario for total public debt, we have to allow for the states’ domestic debt, AMCON and NNPC obligations, and other items, which could push the total to a maximum of 25% of GDP.
 
By far the largest item among the contingents are pension arrears to employees of ministries, departments and agencies. The data are supplied by PenCom.

The second are dues to local contractors totaling N234bn. The liability is a FGN guarantee covering a bond issued by a special purpose vehicle to clear the arrears. A first coupon payment was made in June 2015. We should note the possibility that further arrears have accumulated since the creation of the vehicle and launch of the bond.

Other guarantees included in the data amount to N266bn. Those covering a fx transaction (such as the Lekki port and the World Bank support for the Azura-Edo IPP) are converted at the then exchange rate of N197. The end-2016 data from the DMO would show a higher naira burden.

A way forward for the FGN in its tackling Nigeria’s huge infrastructural deficit would be greater use of such loan guarantees.

Contingents seemingly under control


We do not wish to appear in any way complacent and so conclude by repeating the view that the weakness of the Nigerian debt story is the burden of its service and not its stock.



A marked decline in the FAAC payout
 

25 October 2016

The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government decreased by N90bn to N420bn (US$1.38bn) in October (from September revenues). It therefore falls back below the forecast pro rata monthly average of N477bn per the 2016 budget, which projects the net distribution from the federation account and the VAT pool combined at N5.72trn, for the first time in four months. We note a trend of substantial data revisions once they appear on official websites.
 
The three previous distributions were boosted by the impact of the devaluation on 20 June. Both petroleum receipts based upon the US dollar price and customs revenues benefited from the adjustment.

The federal finance minister, Kemi Adeosun, was quoted after the latest FAAC meeting as highlighting the state of force majeure at the Bonny terminal and the “subsisting” force majeure at the Forcados terminal. Non-mineral revenue also disappointed in September.

Adeosun put the excess crude account (ECA) balance at US$2.45bn. This compromises part of official reserves, which amounted to US$23.91bn as at 21 October.

The statutory distribution of N251bn was supplemented by excess petroleum tax payments of N63bn, an exchange-rate gain of N41bn, the regular NNPC “refund” of N6bn and VAT.

We have taken the data for the two latest payouts from the local media and caution that there may be some inconsistencies between different accounts. The federal finance ministry provides the revenue numbers up to July, distributed in August.



Fiscal challenges for Delta State
 

24 October 2016

Given the swings in the Federation Account Allocation Committee payouts over the past few months, the need for states to bolster their internally generated revenue (IGR) cannot be overemphasized. Lagos State sits as the poster child with an estimated IGR of N271.4bn in 2014; this represented 67% of its total revenue. In Lagos, economic activity is skewed towards services. However, for states in the northern region, agriculture pops up as the top category while a few states in the eastern region have huge potential to become light manufacturing hubs.
 
At a recent briefing we attended in Lagos which focused predominantly on Delta State, we gathered some data on its fiscal performance and projections. This information did not include its assumptions on, for example, federal and state GDP, inflation and oil production. In 2015 the state’s total revenue declined by 36% to N157.4bn.

Since mid-2014 there has been a significant drop in the statutory allocation from the FGN upon which Delta State relies heavily. Last year, its share of statutory allocation to total revenue stood at 76%, compared with 83% recorded in 2014.

Meanwhile IGR also dipped. According to its state ministry of finance, IGR declined to N37.6bn in 2015 from N42.6bn recorded in the preceding year.

In 2014 total expenditure amounted to N294.8bn, with recurrent expenditure accounting for 62% of the total. For 2015 the data only captures total expenditure from January to August: this totaled N130.7bn, of which capital items expenditure accounted for just 12%.

We gather that the state’s capital expenditure slumped by 74% to N29bn as at August 2015, when compared with N112bn recorded in 2014. Additionally, the budget deficit of N49.9bn recorded in 2014 had grown to N59.2bn as at August 2015.

Based on the state’s medium term fiscal framework, this year IGR is estimated to reach N46.8bn, and then experience steady increases to N51.4bn and N56.6bn in 2017 and 2018 respectively.

Given the current economic downturn, we did expect to observe more prudence in the projections. It seems that overhead costs are set to increase. The estimate for this year is N49.4bn, rising steadily to N54.5bn in 2018.

The state government is committed to attracting investment. It has produced policy frameworks geared towards agriculture, urban renewal, education and health. However, the state has been badly impacted by the pipeline vandalism in the Niger Delta. If security is not improved, the flow of inward investment is likely to be minimal.



FAAC to the rescue of states
 

21 October 2016

DMO data put the domestic debt of the 36 states and the FCT at N2.50trn at end-2015. This amounted to 2.7% of the year’s GDP: when we add the FGN’s domestic and external obligations (including the states’ foreign loans guaranteed by itself), we reach a burden of 14.3% of GDP for state and federal government debt. The DMO does not clarify whether the total for the states includes their bank loans restructured last year into FGN bonds in the sum of N680bn. It does specify that these instruments are not included in its data for FGN domestic debt.
 
The total for states increased sharply from N1.66trn at end-2014. This rapid accumulation tells us that the banks were less demanding in their granting of loans to states than the FGN (over their foreign borrowings).

We can see from our chart that just one state (Delta) accounts for more than 10% of states’ total debt, and that the burden is fairly evenly shared.

The FGN has launched three debt relief programmes for states in the past 15 months, seeking to reverse the emergence of sizeable salary and pension arrears due to their employees.

FAAC to the rescue of states


The third of its programmes was a N90bn loan for the states, announced in June 2016 and backed by an unspecified private-sector credit.

The federal finance ministry announced that the loan would not be disbursed when the monthly distribution by the Federation Account Allocation Committee exceeded N500bn because the states would then be able to run their own programmes.

To end on a positive note, the payout has been above this threshold for two of the three past months.             

Bond auction underpinned by the institutions
 

20 October 2016

The DMO last week held its latest auction of FGN bonds, and raised N95bn (US$310m) from the sale as well as N9bn from non-competitive bids. It offered N105bn but saw only modest demand for five-year paper (July ‘21s). In part it compensated by raising more than planned from the ten-year and 20-year debt instruments on offer. The FGN is struggling to contain the soaring cost of domestic debt service, which is projected to absorb 34% of revenues in the 2016 budget. Yet it has to fund its deficit, for which external financing has been slow to materialise.
 
The DMO did achieve marginal rates (effective cut-off points) close to those of the previous monthly auction, and lower for the 10-year paper.
 
These are seemingly grounds for congratulation once we allow for headline inflation touching 18% y/y, a projected deficit this year of N2.20trn and the FGN’s plans for another expansionary budget in 2017.

Bond auction underpinned by the institutions


While the total bid at auction has eased this year, to N173bn in October, the DMO can count on strong domestic institutional demand from the PFAs. The funds held 59% of their assets under management in FGN bonds in July, and their appetite for the paper, notably for matching purposes, shows no sign of cooling.

The offshore investor, meanwhile, sits on the sidelines. The yields may look attractive in an emerging market context if we overlook the matter of repatriations and the new fx regime that is some way from fully functioning.

This makes the PFAs even more important to the FGN’s deficit financing plans. We think that yields will tick upwards for solid macro reasons but grant the DMO a breathing space in the short term.                 

Inflation moving in the right direction
 

19 October 2016

The latest inflation report from the NBS shows the eighth successive acceleration in the headline rate, to 17.9% y/y in September from 17.6% the previous month. Our own contribution to wire service polls of analysts was a rate of 18.0% y/y. There was an increase in the core measure to 17.7% y/y from 17.2%. The NBS commentary again singled out soaring energy costs. We note that housing, water, electricity, gas and other fuel prices increased by 26.3% y/y in September, compared with 25.9% the previous month; they account for 12.7% of the index.
 
The m/m increase in headline inflation has now slowed for four successive months, from 2.8% in May to 0.8%. This trend is consistent with the squeezing of household demand in the recession.

Inflation moving in the right direction

 
Naira depreciation has slowed since the large adjustment in June. The FGN’s expansionary fiscal stance should become another driver in the months ahead.

The monetary policy committee’s view is that the principal drivers of inflation are supply-side and beyond its influence. We think that it will start to cut its policy rate next year as headline inflation slows on positive base effects.

Mid-curve FGN bond yields are now close to 300bps negative in real terms. This has not deterred the domestic institutional investors which dominate the DMO’s monthly auctions.

Our more alert readers will have noticed that the headline rate y/y in September was higher than that of its constituent parts (non-food and food). We therefore have to share the NBS health warning that processed foodstuffs are elements of both parts. The price of imported food, which has a 13.2% weighting in the index, increased by 20.8% y/y in September.



A review of the FG’s oil & gas enterprise
 

18 October 2016

The underfunding of Joint Venture (JV) cash calls by the federal government (FG) is a major problem in the oil & gas sector, alongside militancy in the Niger Delta region. JV cash call funding is a first-line priority statutory provision in federal budgets and as such had become a major strain on national expenditure. According to the minister for finance, Kemi Adeosun, the FG has recently signed an agreement with oil majors through the NNPC to unlock private capital. From all indications, we believe this will be in the form of a modified arrangement where the local debt markets could be accessed to fund JV projects. The move is in line with a decision reached last year to grant financial autonomy to some JV oil companies, giving the JVs control over their budget, empowering them to source for funds and remit taxes, royalties and dividends to the government.
 
As at January 2016, cash call arrears owed by the NNPC were estimated at slightly over US$5bn. Given the shortfall in oil revenues, this figure could be much higher presently. The latest monthly report of the NNPC showed that the corporation paid a total sum of US$1.93bn from January to July 2016 compared with US$4.99bn expected to be paid for the period.
 
Funding issues which have lingered for over two decades have limited the nation’s oil production growth. Additionally, production from JV assets has significantly declined over the last decade, partly due to funding constraints as the NNPC struggled to meet its share of cash call obligations.

Furthermore, figures from the NNPC indicate that output from Production Sharing Contracts (PSC) now accounts for more than half of the country’s daily national production.

We however note that JV production which is mainly onshore and in shallow water territory is the primary victim of recent militant activities. PSC assets are primarily located offshore, in deep water fields.

Recently, there have been suggestions of an impending asset sale by the FG. Some of the mentioned assets have included the government’s interests in JV oil assets, NLNG and airports.

Although the public outcry against such sales was significant, we believe a reduction in the government’s financial and operational commitments to the oil & gas sector should be explored. In our view, allowing the private sector to invest and grow the oil & gas industry would be mutually beneficial for both private enterprise and the FG. A positive outcome could ultimately lead to more effective public expenditure and improved tax revenues.



Q3 earnings season to mirror Q2
 

17 October 2016

The Q3 2016 earnings season kicked off with UBA last week. The bank reported results that were generally encouraging, especially given the challenging macroeconomic backdrop. Pretax profits grew 16% y/y to N21bn and puts the bank on track to meeting market expectations of a full year pretax profit of at least N75bn, equivalent to a y/y growth of c.10%. We expect other tier 1 banks to follow UBA ‎over the coming weeks. Their results are likely to show similar trends and in some cases better-than-expected results on the back of fx-related gains. In contrast, we expect most non-financial companies’ results to feature losses stemming from naira devaluation, similar to what we observed in Q2.
 
The effect of the slump in oil prices continues to be felt in the weak GDP figures for Nigeria and by extension, pressure on the naira.
 
Q2 results showed that banks were able to capitalise on the naira’s weakness by being net long dollars (within regulatory limits), and book significant fx-related gains as a result. For our universe of banks, on average, fx-related gains accounted for at least 40% of their H1 2016 pretax profits.
 
In Q2, the naira depreciated by c.30. ‎In Q3, it fell further by 11%. All else being equal, it follows that banks are likely to report additional fx-related gains. On its Q2 2016 result conference call, GT Bank indicated that as at then (end-Aug), the additional fx gains the bank was sitting on was N40bn. For the tier 1 banks in particular, even if they have to book additional provisions due to loans going bad, the fx gains are likely to dwarf the impact of the former.

The one bright spot outside of the banks is the palm oil sector. Importation (competitors) of crude palm oil has become more expensive, thanks in part to a CBN policy which pushed demand for fx by this group out of the interbank into the parallel market. Both domestic producers Presco and Okomu Oil reported triple digit y/y growth rates in pretax profits in Q2.
 
Ultimately, focus will shift to the underlying results when the naira stabilises. In the meantime, smart money has to follow those names which are able to capitalise on the dislocations the naira depreciation is creating.



The FG delivering on its agenda on mass housing
 

14 October 2016

Yesterday, the local newswires reported that Nigeria’s Vice-President Yemi Osinbajo disclosed that the Federal Government (FG) is working on a social Housing programme called the Family Home Fund. According to the VP, government is partnering with key stakeholders including local and international funds to raise about N1trn (US$3.2bn) required to kick start the fund. Although it was not explicitly stated, we believe the Family Home Fund is the vehicle meant to drive the FG’s initial plans to build 360 houses in three pilot states under a “Rent to Own” scheme.
 
Relative to other countries, Nigeria’s mortgage finance as a percentage of GDP is extremely low at around 0.5%. This compares with around 2% for Ghana and 31% for South Africa. Similar ratios for the more advanced economies such as the USA and the UK are 77% and 80% respectively.
 
The fund will be deployed to drive mortgage finance via a model by which developers will build special houses to the FG’s stated specifications. Nigerians with monthly disposable incomes as low as N30,000 will be able to benefit from the scheme.
 
Assuming an initial 30% equity contribution by prospective homeowners and an average price of around N5m per housing unit, we estimate that the fund will be able to provide almost 670,000 housing units over a 3 to 5 year period.
 
Although this falls well short of the estimated housing deficit of 17 million units, it is a significant addition to the annual housing production of 100,000 units.
 
Already about nine states are supporting the scheme by giving land and certificate of occupancy. Other states are expected to follow suit as the fund gathers momentum. 
 
On the international front, one of the outcomes of the MOU between the FGN and the People’s Republic of China which was signed in July is the working partnership between the FG and a Chinese firm, the One Belt–One Road Fund management, on the provision of mass housing.
 
Apart from creating affordable housing, the initiative will also help in the government’s job creation efforts. We believe that fiscal injections combined with social intervention programmes and “helicopter money” such as tax reductions to SME’s and low income earners will go a long way to return Nigeria to the growth trajectory.

 



Some cheer for broadband penetration
 

12 October 2016

The latest data released by the NCC, the industry regulator, show that internet subscriptions stood at 93.5 million in August; representing a y/y contraction of -1.8%. The figure also represented density of 51% in a population estimated at 185 million, placing Nigeria well above the African average of around 16% as estimated by McKinsey. (A national census is due this year but likely to be delayed due to budget pressures.) MTN enjoyed the leading, 35% market share while Globacom and Airtel accounted for 29% and 20% respectively.
 
The NCC recently revealed that broadband penetration has risen from 10% recorded in 2014 to about 21% as at September. The FGN has targets of 30% by 2018 and 76% in 2020.

We recall that MTN was the only successful bidder at the NCC’s 2.6 GHz spectrum auction earlier this year. It secured 14 slots of this spectrum.

 On the back of this transaction, MTN formally launched its 4G LTE service last week. This should assist in optimising wireless 4G broadband and high-speed browsing across the country. We expect this launch to push broadband penetration closer to the 30% target set by the FGN.

The inflation data for August show that communications prices rose by 5.5% y/y compared with 5.4% recorded in July.

Some cheer for broadband penetration

Improved broadband penetration has been cited as one of several tools capable of navigating Nigeria out of its economic downturn. If implemented effectively, we could see a significant boost to the speed of business transactions, to education and to healthcare delivery.

 

 



Manageable deficit on the current account
 

11 October 2016

Nigeria’s balance on the current account is highly correlated with its oil exports. Our chart shows that the trade and current accounts move almost in tandem. The balance on trade has fallen from a surplus equivalent to 10.0% of GDP in Q1 2012 to a deficit of -1.4% in Q1 this year. Over the same period, the share of oil and gas exports in GDP has plummeted from 25.0% to 5.8%. We therefore get to see Nigeria’s Achilles heel at close quarters, and the simplicity of its balance of payments, at least for current transactions.
 
It is commonly said that Nigeria has a high import dependency, which we would paraphrase to say that certain sectors, notable manufacturing, are dependent. Oil inflows have slumped while import volumes have declined in the current recession at a slower rate, which has boosted the backlog in unmet import demand and deepened the CBN’s exchange-rate difficulties.

We can see a modest trend decline in the ratio for the services account. Lower merchandise imports mean lower related payments for freight and insurance.

The inflows on net current transfers, which are not shown in our chart, are remarkably steady, ranging between 3.9% and 5.0% of GDP in the period.    Anecdotal evidence points to a more recent fall-off as remitters access the parallel market for the greater naira value.

It is clear that, until Nigeria is able finally to diversify its economy, weak oil export revenues translate directly into a current-account deficit, albeit one of manageable proportions.

Manageable deficit on the current account


We see deficits ahead representing -3.8% of GDP this year and -2.0% next. This is not Ghana nor does it invite comparison with, say, Angola or Russia.



IMF loans to the FGN, no thanks!
 

10 October 2016

The managing director of the IMF, Christine Lagarde, said at the annual meetings of the Fund and World Bank in Washington on Thursday that concessional loans are available at zero interest rates. Different accounts indicate that the offer was available for developing or low-income countries. In Nigeria’s predicament, such support on a large scale might be tempting.  For example, it could borrow 145% of its quota of SDR2.45bn (US$3.40bn) annually under a stand-by arrangement, or 435% cumulatively.
 
The FGN has signed IMF credit agreements in the past, the latest being a stand-by in August 2000, but never drawn upon them.

If it was to accept the latest offer and draw down funds, it would see an improvement in its relations with other official creditors. Negotiations with the World Bank and the African Development Bank (AfDB) over financing of the 2016 budget deficit would run more smoothly.

The FGN would also find it easier to sell its forthcoming Eurobond issue, and enjoy some marginal pricing advantages. That said, it can sell the issue without an IMF loan, given the global investor chase after yield in emerging and frontier markets. Ghana has an embedded twin deficit and an IMF programme that is in difficulties if not off-course, and still got its issue away.

Nonetheless, we do not think that this will be the first Nigerian government to borrow from the Fund. Resistance was ideological when structural adjustment was central to IMF policy in the 1980s and 1990s, but has become more an issue of purported sovereignty.

The conditionality attached to an IMF loan is seen as more onerous than that in a credit from other multilateral agencies.

Exchange-rate policy and retail pricing of fuel are two contentious areas. The FGN has this year devalued and raised the ceiling for petrol (gasoline) prices. It acted in both cases not out of conviction but because there was no longer an alternative.

It happens that the Fund advocated both measures, albeit not from the rooftops. From our perspective, sovereignty is three parts illusion. However, the FGN does not want to test the waters with the electorate and does not share the Fund’s “free market” solution to the exchange-rate impasse.

The FGN may feel that other official creditors are less demanding. It may have a point although our sense is that the deficit financing talks with the World Bank have dragged on longer than it had hoped.

 



Uneasy times for petroleum marketers
 

6 October 2016

Last month the National Bureau of Statistics (NBS) released the latest report in its premium motor spirit (PMS) price watch series. It shows the average monthly price for PMS (petrol/gasoline) paid by households across the country. In August this averaged N196.5/litre (l) for the 36 states of the federation and the FCT, and so above the fixed upper price limit for the retail pump price of N145/l set by the FGN.
 
The average price of gasoline in August represented a -4.9% m/m decrease. However, when compared with the corresponding period in 2015, it surged by 30% y/y. Nassarawa had the highest price (N209/l).

 
The August inflation report showed that transportation prices rose by 18.0% y/y, primarily driven by higher fuel prices. Additionally, the maintenance cost for vehicles has risen due to the hike in price of imported spare parts largely driven by fx sourcing challenges.

On a slightly positive note, this year the major oil marketers have recorded significant gains because they enjoy better access to fx for product importation than independent marketers. However, the product remains expensive due to the steady depreciation of the naira.

Uneasy times for petroleum marketers

 
The current interbank and parallel market rates are 13% and 70% weaker respectively than the PPPRA’s fx assumption of N285/US$. This has placed significant pressure on the pump price range of N138-N145 per litre.

 
Demand from the depots has dropped considerably. A further increase in pump prices could see a sharper drop in demand. This is a counter argument to the fiscal and other benefits of the removal of subsidies. Our hunch is that the authorities are reluctant to sanction another pump price increase.



Little change in Fund forecasts and remedies
 

5 October 2016

The IMF’s latest World Economic Outlook (WEO) has left its global growth forecasts for this year and next unchanged at 3.1% and 3.4% respectively. Downward adjustments for this year from three months ago for the US (to 1.6% from 2.2%) and sub-Saharan Africa (to 1.4% from 1.6%) are balanced by improved projections for Japan (to 0.5% from 0.3%) and Russia (to a contraction of -0.8% from -1.2%). The WEO’s forecast for Nigeria is now 10bps better for this year at -1.7%, and that for 2017 trimmed to 0.6% from 1.1%.
 
A Fund remedy recommended for all country groupings is that the authorities pull all policy levers. In a Nigerian context, this would involve the harmonisation of fiscal and monetary policy. We have noted how the MPC routinely calls for support from the fiscal side to boost the economy.

The WEO advises those countries struggling with the slump in commodity prices to allow the exchange rate to absorb fully the resulting pressures. This advice is likely to fall on deaf ears in the CBN and the FGN, neither of which is in a hurry to risk a bona fide float for fear that official reserves are exhausted without the required external boost to inflows. Both bodies tend to be converted to a move on the exchange rate when there is no alternative.

India is again the fastest growing economy in the forecasts (see table). Taking a leaf out of China’s book from the last decade, it is to host the annual meetings of the African Development Bank in May 2017. The Fund suggests that near-term sentiment on China has recovered from “the acute anxiety” at the start of this year.

Little change in Fund forecasts and remedies

The underlying price assumptions, based on the futures markets, for the Fund’s basket of three crude blends (including UK Brent) are barely changed from July, at US$43.0/b for 2016 and US$50.6/b for 2017.



PMI reading no 42: a reality check
 

4 October 2016

The latest report for our manufacturing Purchasing Managers’ Index (PMI), the first of its kind in Nigeria, shows a fall from 52.2 in August to 47.9. Our partner, NOI Polls, has gathered and compiled the data. The index update is a familiar data release at the start of the calendar month in developed markets (such as the ISM’s in the US), the larger emerging markets such as China and a few other frontiers. It is based upon the responses of manufacturers to set questions on core variables in their businesses.
 
PMIs are forward-looking indicators of sentiment, and have the proven capacity to move financial markets.

In the unweighted model of our choice (the ISM’s), respondents are asked  whether output, employment, new orders, delivery times and stocks of purchases have improved on the previous month, are unchanged or have declined. A reading of 50 is neutral. We have posted seven negative headline readings since our launch in April 2013 including four this year.

Our sample is an accurate blend of large, medium-sized and small companies.

We have also added “trigger” questions, which apply when the respondent has the same answer on a sub-index for two successive months and then changes it for the third.

The readings for delivery times and stocks of purchases, which are the secondary sub-indices, and employment drove the decline in the headline.

Following three successive modest upticks in the headline reading, we now have a decline for the third month of the quarter, which acts as a reality check. The economy is in recession although we see a flattish number y/y for GDP in Q4.

The new exchange-rate regime has been in place for three months. Manufacturers will have seen little, if any increase in fx supply. We do not see any sea-change for the better in the months ahead, and are sceptical about talk of a grand sale of state-owned assets (Good Morning Nigeria, 29 September2016).

Yesterday’s public holiday allows us to report headline manufacturing PMI readings from elsewhere for September: 51.5 from the US (ISM; vs 49.4 in August); 50.4 from China (official; flat); 50.1 from China (Caixin; vs 50.0); 52.6 from the Eurozone (vs 51.7); and 46.0 from Brazil (vs 45.7), its 20th successive month below the water.




DMO issuance institutionally supported
 

30 September 2016

The DMO has released its provisional issuance calendar for Q4 2016. It looks to raise between N250bn (US$820m) and N340bn (US$1.11bn) from the sale of FGN bonds over the three monthly auctions. In line with established and best practice, issuance again slows in the fourth quarter of the calendar year: however, the range compares with sales of N180bn in Q4 2015, highlighting the expansionary stance and large projected deficit of N2.2trn in this year’s budget. In many other markets these conditions would push up yields/the FGN’s cost of borrowing.
 
The total bid has fallen off since a recent peak in March but should suffice for the DMO’s purposes in the quarter ahead. Given their general aversion to equities, demand from the PFAs is set to remain steady, notably for the long bonds for matching purposes. Their combined holdings of N3.42trn in FGN bonds at end-July amounted to 58.7% of their AUM.
 
The offshore investor with risk appetite and patience over repatriations is more likely to be drawn to yields above 20% on longer tenor NTBs.
 
The fiscal challenges have had minimal impact on yields, which have settled into a range of +/- 15.0% in mid-curve in recent weeks. We think that this underlying domestic institutional demand will constrain yield widening on the FGN bonds for the time being.

The DMO is reopening the three issues it has sold for the last three months (Jul ‘21s, Jan ‘26s and Mar ‘36s).



Pouring water on the fire sale
 

29 September 2016

The past two weeks have seen a lively domestic debate about a fire sale of state-owned assets to rebuild official reserves and restore a fully functioning fx market. Supporters of a sale include Nigeria’s best known industrialist, the Senate president and a former head of state; a former CBN governor, the majority in the Senate, the labour movement leadership and, reportedly, the presidency number among its opponents. We would support a sale if it was on a scale to solve the problems.
 
The figure of US$15bn in circulation is said to cover NNPC interests, Nigeria LNG, the leading airports and miscellaneous stakes such as the CBN’s 42.5% interest in the Africa Finance Corporation.
 
We recall that in 2009, and in a time of firm oil prices under the Yar’Adua presidency, Chinese state interests reportedly offered US$50bn for a menu of state-owned oil leases.
 
Some legislators have not grasped the fact that the authorities would be selling from a position of weakness and not be in a position to dictate terms.
 
Imports of goods and services were running at about US$6bn per month in 2015. Once we make allowances for a) the CBN circular of June 2015 on the 41 import items no longer eligible for fx from official sources and b) the easing of demand in the current recession, import demand falls closer to US$4bn per month.
 
This figure assumes that import demand is fully met. In reality a backlog has developed on imports of goods and services (such as dues to the airlines) as well as payments to the offshore portfolio community. A programme of asset sales to generate US$30bn-US$35bn would cover six months’ imports and clear the backlog according to our estimates.
 
Ideally the authorities could push further and perhaps seek to expand the Eurobond issuance programme for this year. Under this scenario, we think that portfolio players would return in greater numbers, other autonomous fx inflows would recover strongly and the exchange rate would enjoy stability in a fully functioning market.
 
However, the assets recommended for sale would not currently raise this figure. Also, the sale proceeds would materialize over time (although a strong marketing pitch would send a positive signal to the market.)
 
We fear, therefore, that this latest initiative to kick-start the fx market and the broader economy will remain a proposal.

 



Some cheer from the FAAC
 

28 September 2016

The total monthly payout by the Federation Account Allocation Committee (FAAC) to the three tiers of government increased to N510bn (US$1.63bn) in September (from August revenues). It therefore returns above the projected pro rata monthly average of N477bn per the 2016 budget, which projects the net distribution from the federation account and the VAT pool combined at N5.72trn. At first glance, one might be surprised by the increase in the payout when the economy has entered a technical recession.
 
However, the devaluation on 20 June has given a boost to federation account inflows. Both petroleum receipts based upon the US dollar price and customs revenues have benefited from the adjustment.
 
The federal finance minister, Kemi Adeosun, was quoted after the FAAC meeting as highlighting a rise in dutiable imports. Given the recession and the challenge in sourcing fx for imports, she would appear to have been referring to an improvement in compliance. Anecdotal evidence supports this view.
 
The broadly upward trend in payout since May is based upon improved non-oil revenue collection and devaluation. It is set to continue in our view.
 
Adeosun put the excess crude account (ECA) balance at US$2.91bn.
 
The statutory distribution of N315bn was supplemented by an exchange-rate gain of N84bn, excess petroleum tax payments of N35bn, the regular NNPC “refund” of N6bn and VAT.

Some cheer from the FAAC


We have taken the data for recent payouts from the local media, given the   delays in posting the information on official websites, and caution that there may be some inconsistencies between different accounts.

 

 



The mounting debt burden of the states
 

27 September 2016

The latest data release from the DMO shows the external debt of the 36 states and the FCT at US$3.65bn at end- June. Since these borrowings are guaranteed by the FGN, they are included in the figure of US$11.27bn for the federal government’s external debt. It will be no surprise that Lagos State accounted for close to 40% of the debt, given its superior credit ratings and the more persuasive story it has to tell. Only five states, the four in the chart plus Ogun, had external debt above US$100m at end-June, leaving US$1.58bn divided between 31 states and the FCT.

The states’ creditors were all multilateral agencies other than France’s state development bank, the agence française de développement, which had total exposure of US$150m.

The debt increased by just US$280m in six months. This reflects the financial strains on the states due to the slide in the oil price and the fact that the borrowings, being guaranteed, have to be approved by federal government agencies including the DMO.

The mounting debt burden of the states


Separate DMO data put the domestic debt of the states at N2.50trn (currently US$8.06bn) at end-2015, an increase of N840bn over one year. The total excludes N680bn in FGN long bonds issued last year in a restructuring of state governments’ commercial debt.

The FGN has launched three separate debt relief programmes for states so that they could clear salary and pension arrears to their employees (Good Morning Nigeria, 09 August 2016). The call in the latest post-meeting communique from the MPC for the settlement of the arrears (to boost household consumption) tells us that it is work in progress.

 



FGN external debt mostly concessional
 

26 September 2016

FGN external debt at end-June amounted to US$11.26bn, equivalent to 3.4% of 2015 GDP. The total has increased by US$540m over six months, and the outstandings to the World Bank Group by US$560m. The group remains by far the largest external creditor, and multilateral creditors account for 71.0% of all borrowings. When we add the bilateral creditors, led by Exim Bank of China, the burden is 86.7% concessional. The only debt contracted at market rates are the three sovereign Eurobonds. The very low total debt servicing costs compensate for the impact of the devaluation and ensuing naira weakness.
 
The 2016 budget projects N900bn in external financing, which was US$4.5bn when it was passed. We are not party to any changes the FGN may have made to its budget as a result of the devaluation or to the progress of its talks with the World Bank and the African Development Bank (AfDB) on deficit financing.

There was talk of raising US$3.5bn from the two multilaterals and US$1.0bn from the sale of Eurobonds. Separately, China was to provide US$6bn over three years for either the infrastructure or industrialisation, depending on the source of the report.

FGN external debt mostly concessional


We noted yesterday how market conditions favour Eurobond issuance in emerging and frontier markets. This is clear from launches with a good credit story (such as Argentina) and those that are less attractive (like Ghana). The story for the forthcoming FGN issue does not belong to the first group. 

The Jul ’23 Eurobond currently yields 6.4%, and the naira-denominated Mar ’24 FGN bond 14.7%. Offshore investors can see the large differential, which was a compelling argument for the NGN paper when the exchange rate was table and repatriation a formality.



No sign of respite in the very near term
 

23 September 2016

Downward revision to estimates; Underperform rating maintained: Guinness Nigeria (GN) reported pretax and post-tax losses in Q4 2016 (end-June); the losses were significantly worse than our expectations. As such, we have cut our earnings estimates over the next two years by 88% on average. However, beyond 2019E, we believe that the company should start to show some signs of recovery on the back of its import substitution strategies and enhanced focus on the spirits business. As such, despite increasing our risk free rate assumption by 200bps to 14.5%, we have trimmed our price target by -8% to N80.12. GN shares have shed -7.2% (NSEASI: -0.2%) since the announcement of its Q4 2016 numbers. Despite the recent sell-off, we still find the shares relatively expensive. From current levels, they show a downside potential of -14% to our N80.12 price target. As such, we retain our underperform rating.

Pre-tax and post-tax losses in Q4 2016: GN reported a pre-tax loss of –N3.6bn in Q4 2016. The results were weak across all key headline items. Although a combination of factors including a -4% y/y decline in sales to N32.4bn, a gross margin contraction of -939bps y/y to 35.7% and a 6% y/y rise in opex all contributed to the pre-tax loss, a 3.1x spike in net interest expense was the major driver. Owing to a tax rebate, the after-tax loss narrowed to -N2.9bn. Sequentially, sales grew by 64% q/q due to seasonality. The pretax and post-tax losses compare with the -N449m and –N309m delivered in Q3 2016 (end-Mar).

Fx challenges to weigh on outlook: GN’s Q4 2016 numbers were weighed down by y/y gross margin contractions and a significant rise in finance charges. Both negatives resulted from fx challenges. We estimate that the company imports over 60% of its raw materials. GN reported an fx translation loss of N3.5bn in 2016. We believe the bulk of the loss was due to the company’s decision to take a loan of US$26m in the last quarter. Given the company’s significant reliance on imported raw materials and the naira having weakened further since June, we have been conservative on both the gross margin and interest expense lines in the very near term. We see a glimmer of hope in the company’s strategy to increase its focus on the spirits business, which ordinarily should attract higher margins than the mainstream beer segment. In 2017E, we see sales growing by 5% y/y and PBT and PAT of N257m and N400m respectively. 

 

 



Another downgrade from S&P
 

22 September 2016

Last week Standard and Poor’s (S&P) downgraded its sovereign rating for the FGN’s long-term, foreign currency obligations from B+ to B, and revised its outlook to stable from negative. The downgrade is based upon the worse-than-expected contraction in oil production, the foreign-exchange regime which S&P terms restrictive and delays to the FGN’s proposed fiscal stimulus. It offers the possibility of an upgrade if, for example, the FGN pushed through structural reforms and anti-corruption steps which enhance non-oil revenue collection. This rating action leaves S&P’s sovereign rating for Nigeria one notch below that of both Fitch and Moody’s. We are a little surprised by its timing after the exchange-rate reform in June.
 
The agency now sees GDP contraction of -1% this year and feeble growth of 2% y/y in 2017. This is in line with our forecast for both years.

The explanations for the projected recovery (through to 4% in 2018) are accelerated capital expenditure by government (now that the 2016 budget has been passed) and the liberalization of the fx regime. Other reforms (such as the creation of the Treasury Single Account, changes at the NNPC and the plugging of fiscal leakages) will be increasingly supportive in the medium term.

The special economic advisor to the president recently observed that the investment/GDP ratio had risen to 17.0% from 15.2% recorded in 2015. S&P sees the ratio declining to 17.1% from its 2016 estimate of 17.4%.

S&P expects inflation to settle at 15.0% y/y at end-year while its exchange rate projection is N300/US$ this year. We see higher inflation this year (18.0%) and a weaker naira (N325).

The deficit this year is expected to fall within the 3.6% of 2016 GDP gross borrowing requirement. The agency forecasts that the FGN will borrow up to 1.5% of GDP on a blended basis from multilaterals.

The agency puts the gross government debt/GDP ratio at 20% of GDP at end-2016, rising to 21.3% next year. While these levels compare favourably in any emerging market context, the weakness of the Nigeria debt story remains the cost of debt servicing.

Nigeria expects to raise US$1bn from the sale of Eurobonds by mid-December. We gather that all borrowing would be directed towards capital projects. We suspect that this downgrade will have limited impact on investor appetite.

To provide some sub-regional context, the republic of Ghana raised US$750m in early September from the sale of Eurobonds at a yield of 9.25%. It is struggling with a sizeable twin deficit and has run into difficulties with its IMF credit programme. The FGN will expect rather more competitive pricing.

 



In need of a boost to non-oil exports
 

21 September 2016

The latest quarterly Economic Report from the CBN puts non-oil exports provisionally at US$577m in Q2 2016, indicating a decrease of 43% from the preceding quarter. The fall in receipts on a q/q basis can be traced to the steep decline in export receipts from manufactures, minerals and food products. The largest proceeds came from agricultural products, which earned US$197m. The breakdown by sectors for Q2 2016 shows that proceeds from manufactured, agricultural and mineral products accounted for 13.8%, 34.1% and 32.2% respectively.
 
The high cost of doing business in Nigeria (intensified by current macro challenges) has adversely affected export activities as domestic production levels have dropped, resulting in a cut in export products.

The CBN’s non-oil export stimulation facility has had minimal impact on the sector. However, the CBN has disclosed its intent to address bottlenecks hindering the effective execution of the facility.

Loans for up to three years will be granted at a maximum interest rate of 7.5% per year while those with a tenor above three years will be granted a maximum rate of 9% annually.

Last month the Manufacturers Association of Nigeria called for the restoration of the export expansion grant (EEG), which was withdrawn in 2014 due to extensive abuse of the system (Good Morning Nigeria, 11 August 2016.)

However, some argue that the EEG should be granted only to exporters of processed products, as opposed to those that focus on raw materials, to reduce the level of abuse.

In need of a boost to non-oil exports


The FGN should consider export-driven policies to hike proceeds from non-oil exports. However, structural issues such as power shortages as well as inadequate utilisation of domestic input need to be addressed to make these policies effective.

 



Another welcome slowdown in m/m inflation
 

20 September 2016

The latest inflation report from the NBS shows the seventh successive acceleration in the headline rate, to 17.6% y/y in August from 17.1% the previous month. Our own contribution to wire service polls of analysts was a rate of 17.4% y/y. There was an increase in the core measure to 17.2% y/y from 16.9%. The NBS commentary singled out the rate of 25.9% y/y for housing, water, electricity, gas and other fuels. Food price inflation in August was 16.4% y/y, compared with 15.8%. Seasonal, post-harvest effects should prove positive in the months ahead.
 
The m/m increase in inflation has now slowed for three successive months, to 1.0% and 0.9% for the headline and core measures respectively. For the urban and rural indices, the rates have slowed to 0.9% and 1.1%.

We therefore add squeezed private demand to fx sourcing issues as the drivers behind the inflation data. Naira depreciation has slowed since the large adjustment in June. The FGN’s expansionary fiscal stance should become another driver in the months ahead.

Another welcome slowdown in mm inflation

The monetary policy committee will doubtless note the easing of inflationary pressures today. That said, we think it will be tempted to hike in an effort to attract offshore fixed-income players and create a fully-functioning fx market.

 
Mid-curve FGN bond yields are now about 250bps negative in real terms.

Our more observant readers will have noted that the headline rate y/y in August was higher than that of its constituent parts (non-food and food). We therefore have to share the NBS health warning that processed foodstuffs are elements of both parts. The price of imported food, which has a 13.2% weighting in the index, increased by 20.7% y/y in August.
 


Temptation of the MPC to hike again
 

19 September 2016

The monetary policy committee (MPC) meets today and tomorrow in Abuja, and again has a difficult call. Since its last meeting in July, the economy has entered a technical recession while headline inflation has continued to accelerate, although the m/m rates have finally slowed. The tightening in July of 200bps on the policy rate was designed to encourage the offshore fixed-income investor. There has been a response but not on the scale to create a fully functioning, two-way fx market.
 
The committee rediscovered its interest in offshore investors because the new fx regime will not function smoothly without sizeable autonomous inflows to supplement the CBN’s. It knows that a lasting economic recovery requires a properly functioning regime and it has an eye on the diminishing official reserves. Its goal therefore becomes relative exchange-rate stability.

The fastest route to this destination is through investment by the offshore community in naira-denominated assets. Over time, Eurobond issuance and FDI can play a role, and further ahead a recovery in the oil price could prove a game-changer. When we pursue this argument, a rate hike appears likely.

Some might challenge even the discussion of a hike when the economy is in recession. The MPC’s communique in July noted that the CBN “lacked the instruments required to directly jumpstart growth”.  This was a point it has frequently made, although more forcefully than in the past. What led to a rapid decline in annual growth, to 2.8% y/y in 2015, was not monetary policy (in the narrowest sense) but the macro consequences of the slump in the oil price for an ill-prepared economy.

Headline inflation y/y has now accelerated for seven successive months, which in itself could be said to point to tightening. At the same time, the m/m increases have started to slow, to 1.0% in August. This could be attributed to the squeezing of household demand and/or the relative stability in the naira exchange rate since the large adjustment in mid-June.

The MPC operates on majority voting, and tightened in July on a split decision (five votes to three). A higher turnout this week would add to the uncertainty surrounding the conclusion of the meeting. The committee has a full complement of 12 members.

Our call in this difficult environment is that the committee will hike by 100bps to 15.00% on Tuesday. Our thinking is that in its own words its policy has limited impact on growth. While inflationary pressures are easing, its priority is to attract more substantial inflows from the offshore community and so hasten the establishment of a fully functioning fx market.
 


Steep decline in job creation for Q1
 

16 September 2016

The NBS recently released its latest Job Creation Survey. This defines the formal sector as consisting of establishments with ten or more employees, and is based on a sample of 5,000 firms across the 36 states of the federation. The data shows that only 79,465 jobs were created in Q1 2016, divided between 21,477 jobs in the formal sector and 61,026 jobs in the informal sector. Meanwhile the direct opposite was the case for the public sector, which recorded 3,038 job cuts. This mirrors the economic slowdown observed in Q1, when GDP contracted by -0.4% y/y (and grew by a marginal 0.8% q/q).
 
When compared with the previous quarter, total job creation declined sharply by 84% from 499,521.

The bureau’s report focuses on 18 sectors. Education emerges again as the leading source of new formal-sector jobs in Q1 2016, accounting for 60%. Manufacturing, agriculture, and food and accommodation services contributed 7%, 5% and 4% to the total respectively.

We see that senior management, professional and technical positions accounted for 33% of formal-sector jobs generated.

For the public sector, 5,726 jobs were generated in Q1 2016. However, this was outweighed by the number of losses, which amounted to 8,764 in the same quarter, resulting in net employment of -3,038. Compared with Q4 2015, which recorded total job losses of 10, 155 and net employment of -4,288, retrenchment was at a slower pace.

National Bureau of Statistics (NBS); FBNQuest Research

In view of the current macro challenges, the business environment has deteriorated. Only a few companies will take on additional labour. For the public sector which is struggling to pay salaries (as seen in most states), its easiest option is to lay off workers to ease pressure on recurrent expenditure. 
 


Movement on import substitution
 

15 September 2016

The federal minister for agriculture and rural development, Heineken Lokpobiri, told a meeting at the weekend in Bayelsa State that the local community could play its part in diversification of the economy. He warned that the cost of a bag of rice could rise from N26,000 to N40,000 by the end of the year if it did not plant rice in time for consumption in three months’ time. Lokpobiri subtly developed his argument to say that the development of commercial agriculture would discourage sabotage and violence in the Niger Delta.
 
His message is in line with the official policy of import substitution.

Since this was also the policy of the previous administration we have looked at the foreign trade data for Q2 2016 for any clues as to its success.

We have used the NBS measure of broad economic categories (BEC, see chart). Food and beverage imports declined gently from N1.20trn in 2014 to N1.09trn in 2015, and then sharply to N419bn in H1 2016.

We see the influence of easing household demand in the economic slowdown in this decline, and also the CBN circular of June 2015, which ruled 41 import items including several in the food category ineligible for fx from the interbank market. Our feeling is that substitution is underway but not at the desired pace. The target of rice self-sufficiency, for example, seems to have slipped from 2017 to 2018.

Movement on import substitution

The local media account of Lokpobiri’s visit to Bayelsa highlights the need for caution over statistics. He was quoted as putting annual food imports at US$22bn. The figure was US$5.6bn for food and beverages in 2015 in the BEC definition of the NBS, and US$34.2bn for total imports cif. 
 


A pick-up in labour productivity
 

14 September 2016

We draw today upon a fairly new data series from the NBS on labour productivity. It begins in Q1 2015 and measures the relationship between nominal GDP and the total hours worked in the period. Our chart shows productivity peaking in the period under review in Q3 2015, declining for two quarters and then recovering by 5.3% q/q in Q2 2016. The improvement was the consequence of nominal GDP rising by 5.7% over the quarter and hours worked by just 0.3%. (The labour force expanded by 1.8% over the period and the unemployment rate from 12.1% to 13.3%.)
 
We are not submitting the findings to international comparison because of the distorting impact of well-documented constraints. We have in mind shortages of power, fx and fuel.

Because these have become regular constraints, a person is likely to remain “working” in Nigeria and the employer to continue paying his/her salary. In other jurisdictions and under similar constraints, we suspect that the position would generally be axed.

The NBS commentary notes an improvement in the power supply towards the end of Q2 2016.

This is very much vanilla analysis of productivity. It measures only one input and makes no distinction between sectors of the economy. Indeed, we have to allow for some “wiggle room” in the calculation of hours worked in the informal