Opinion & Analysis

Opinion & Analysis

State government finances mostly below water - Gregory Kronsten

State government finances mostly below water

Since July 2015 the FGN has delivered six separate programmes to ease the pressure on state government finances. It moved in response to the slide in oil prices one year earlier, which highlighted the dependence of most states on their monthly payout from the Federation Account Allocation Committee (FAAC) and their failure to develop taxable local economies. The FGN also recognised that money in circulation and spending power would be boosted if the states were able to resume full payment of their employees’ salaries and pensions. 

The impact of the FGN’s debt relief has been limited. BudgIT, the independent fiscal research body, estimated that in June this year 20 of the 36 states were still in arrears of some description on their payments. We have turned therefore to the 2017 edition of its State of States report in search of an explanation. We welcome the report for its pulling together of data from selected sources, although not the CBN, and for the snapshots on each state with suggestions on where they might be able to help generate investment, which should eventually create internally generated revenue (IGR) for their use. 

These BudgIT reports are best known for the fiscal sustainability index. Because these are useful indices, unlike several in circulation, state governors sit up and take notice at the placing of their states. A low position in the league table should prompt them to complain to BudgIT and, if possible, rebut the findings. 

For this column, our interest in the report lies in states’ debt obligations. The debt mountain of Lagos State looks huge in isolation: N735bn at end-2016, consisting of N312bn naira-denominated and N423bn in fx debt. The mountain looks less daunting when we study its constituent parts. The fx debt is more than six times that of any other state but is all due to multilateral and bilateral agencies at below-market rates. We should add that all external debt of states is guaranteed by the FGN and therefore subject to greater scrutiny, we suggest, than that of loans from commercial banks. 

We should also allow for the fact that Lagos State has borrowed N215bn domestically in the form of bonds. This issuance has to be approved by the Debt Management Office and the Securities and Exchange Commission, so our point about scrutiny above again applies. Lagos is the only state government to issue bonds that the offshore portfolio investor would consider buying. Further, external ratings agencies have Lagos on a par with the FGN and it will soon have access to the 13 per cent derivation formula as an oil-producing state. 


Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 30 October 2017.
Access the full article HERE

Rifles down, MPC holds fire - Chinwe Egwim

Rifles down, MPC holds fire

The monetary policy committee held its latest meeting a few weeks ago. The seven members of the committee present decided by six votes to one to hold the policy rate at 14.00%. Additionally, all other parameters were left unchanged. The outlier during the voting process decided to vote for a cut to signal an ease to the current stance of tight monetary policy.

The committee noted the welcome recovery in economic growth recorded in Q2. The modest growth of 0.6% y/y was attributed to fiscal injections and improved Fx supply on the back of relatively higher crude oil prices. However, there were concerns over growth sustainability as the committee stated that the recovery is still fragile.

The MPC felt that it is not until Q2 2018 that growth could pick up markedly. The drivers of growth in its view include capital releases from the 2017 budget (perhaps, this is overstated), revenue boost from firmer crude prices, exchange rate stability, some policy initiatives from the FGN and even the CBN’s role in development finance as the provider of credit lines.

On the demand side, consumer confidence is set to pick up given the recent approval by the FGN to pay salary and pension arrears. Additionally, the committee pointed towards a potential boost in consumption arising from the FGN’s payment of salary arrears to former employees of Nigeria Airways and its efforts to bolster state government finances.

Another indicator examined was the Purchasing Managers’ Index (PMI); the index checks the temperature of the manufacturing sector. Results from the CBN’s surveys have shown an expansion for the past three months, pointing towards a positive outlook for the economy.


Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: The Guardian, 16 October, 2017.
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NNPC several positives amid the uncertainty - Gregory Kronsten - FBNQuest

NNPC: several positives amid the uncertainty 

The old-style Nigerian National Petroleum Corporation (NNPC) viewed financial and operational data as its private property, and not to be shared at any cost. The new-look corporation in place since mid-2015, in contrast, looks to share data and engage with some of its stakeholders. One result of this stance has been the introduction of a monthly Financial and Operations Report. 

Rather than regret the weaknesses in the reports such as the fact the monthly financials end with the results at the operational level (and so without below-the-line adjustments), we scrutunize them for what they do reveal. The financial performance has improved, ie losses have been contained. So the operational loss has been reduced from N267bn in 2015 to N197bn in 2016 and N46bn in H1 2017. 

In the current environment this is about as good as it gets: by this we mean the security issues in the Niger Delta, the absence of a new legal framework for the industry for many years, the soft price of crude and the sorry condition of the corporation’s refining arm. All becomes clear when we look at the performance of the three main activities (production, refining and retail/marketing) through the results of this June and those of June 2016. 

Revenue from production amounted to N75bn in June (or N9bn net after costs), compared with N19bn (or N2bn) one year earlier. The increase is due to more settled conditions in the delta. Officials have indicated that sabotage (production losses/leakages) peaked in mid-2016 at up to 700,000 b/d. The problem has receded rather than gone away. The corporation’s COO said last week that the Trans Niger Pipeline has been breached 27 times year-to-date, compared with 39 times in 2016.  

The Nigerian Petroleum Development Corporation is one of the principal losers from leakages. It managed production of 50,000 b/d in June and hopes to push up output to 250,000 b/d on the completion of its “re-kitting project” and repairs to other vandalized oil infrastructure. 


Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 19 September 2017.
Access the full article HERE

An end to the recession, but are we completely out of the woods - Chinwe Egwim - FBNQuest

An end to the recession, but are we completely out of the woods?

The second quarter GDP figures for the year 2017 were recently released by the NBS and pointed towards an end to the recession after five consecutive quarters of contraction. Although this comes as good news for the economy at large, there is still need to remain cautiously optimistic. The real economy is yet to feel the impact and with a growth rate of 0.6% y/y against a population growth rate of 3.0%, we are not completely out of the woods.

What You Need To Know

Following analysis of the national accounts, the oil economy improved significantly to a growth rate of 1.6% y/y from a steep contraction of -15.6% recorded in the first quarter of the year. It is worth mentioning that the growth figure for oil GDP for the previous quarter was revised and the possibility of a repeat would not be alarming. However, let’s live in the moment and digest the data at hand.  The pickup in oil GDP is largely due to improved oil production. 

At some point in Q1, oil production hit 1.8mbpd, there was some relief from pipeline vandalism and by extension oil leakages. Oil’s share of real GDP amounted to 8.9% in in the second quarter of the year and is now 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 grew by 0.5% y/y compared with 0.7% recorded in Q1. This shows a minimal slowdown in its growth. Perhaps, the anthem on diversification needs to become louder and also more action as opposed to talk is required. The major drivers were, agriculture as well as finance and insurance.


Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: Glazia, 11 September, 2017.
Access the full article HERE

Clean energy in the policy mix - Chinwe Egwim, FBNQuest  (1)

Clean energy in the policy mix

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.

The FGN estimates national energy demand at 17,720MW. However, generation capacity from the national grid is only about 7,099MW. In an attempt to improve this capacity, the Transmission Company of Nigeria (TCN) has secured US$1.5bn from donor agencies to finance power transmission projects across the country. The TCN aims to achieve transmission capacity of 20,000MW over the next three years.

Based on the most recent data from the federal ministry of power, works and housing, peak generation was 4,215MW on Monday of the final week of August. Its lowest generation on the same day was 3,088MW.

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%.

Access to reliable, cost-effective and sustainable energy could have a multiplier effect on development. Based on industry sources, China is the largest renewable energy employer providing at least 3.4 million jobs as at last year. Its photovoltaic (PV) industry (i.e. solar electric) alone employs 1.6 million individuals. Meanwhile, Brazil is regarded as the second largest employer with almost 1 million employed, mostly in liquid biofuels.


Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: The Guardian, 04 September, 2017.
Access the full article HERE

Economies, governments and elections much talk - Gregory Kronsten

Economies, governments and elections: much talk

It is often said that elections disrupt the macroeconomy. The recent elections in Kenya have prompted us to apply a beginner’s test to the theory. Economists generally subscribe to it. When asked to provide a forecast of core variables, the temptation is to build in a slowdown in growth, a boost to public spending and subdued private investment. This is the result of either laziness or thorough analysis.
Nigerian planning officials are divided on the point. The Economic Recovery & Growth Plan 2017-2020 has growth slowing from 4.8 per cent in 2018 to 4.5 per cent in 2019 (election year), and then picking up to 7.0 per cent in 2020. We understand from conversations with senior officials that the elections were built into the forecasts. It is the work of the federal ministry of budget and national planning, and is dated February 2017. The more recent 2018-2020 Medium-Term Expenditure Framework from the same ministry has growth rising steadily from 3.5 per cent next year to 4.5 per cent in 2019 and 7.0 per cent (again) in 2020. These projections we have taken from local media reports. 

Since the framework has been approved by the Federal Executive Council, the official line seems to be that the elections will not be disruptive. Our next step therefore is to examine the revised quarterly national accounts at constant prices for any trends around the presidential elections of April 2011 and March 2015, making allowances for the fact that the data series is not seasonally adjusted. 

Q1 2015 saw double-digit contraction of the economy on a quarter-on-quarter (q/q) basis. The first-quarter phenomenon (reaction after the holiday period) would have been a factor, and perhaps the elections too. Predictably, for private consumption, the q/q contraction was still greater (-26 per cent). When we look at the accounts on a year-on-year (y/y) basis, we find that that economy slowed from Q2 2014 through to Q3 2016 (with one small blip in Q3 2015). This coincides exactly with the slide in the oil price, which has exposed Nigeria’s vulnerability to the Dutch disease. One symptom of the disease is paucity of government revenue so we are not surprised to find that government consumption contracted y/y throughout 2015 and 2016. 

Any impact of the elections of March 2015 was dwarfed by the decline in the oil price from above US$100/b and its negative passthrough to the economy. Q1 2011 also saw q/q contraction of the economy (of 9 per cent), and again we identify the first-quarter phenomenon. When we look at q/q consumption trends in Q1 2011, the find the reverse of what we might have expected: private consumption increased (after the holiday period) by 9 per cent q/q while the government element shrank (when the authorities might have been distributing the largesse) by -28 per cent q/q. 


Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 21 August 2017.
Access the full article HERE

Forward movement in local substitution - Chinwe Egwim, FBNQuest

Forward movement in local substitution

Import substitution has remained one of the FGN’s primary focus areas, with agriculture serving as a potential catalyst. Over the past eight quarters, the agriculture sector has posted uninterrupted growth.

Given Nigeria’s heavy dependence on food imports, there has been increased focus on local substitutes for food products. There are conflicting figures on Nigeria’s food import bill. A few sources suggest that the country’s annual food import bill was as high as N1.5trn (US$4.1bn) last year.

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. Another data series from the CBN shows importation of food products accounted for 8.9% of fx utilisation in Q1 2017 compared with 9.5% recorded in the previous quarter.

There are a few investments within the sector which should drive sustainable local substitution of food. The rice segment has been a beneficiary. Based on industry statistics, annual rice consumption has risen from 5 million metric tons (mmt) to 7mmt with supply catering to less than half (39%) of the country’s annual demand.

The FGN has boosted rice paddy production, over that past two years annual paddy production has increased to 17mmt from 5mmt. Furthermore, the FGN is in the process of securing 200 rice mills, which it will supply at a discount. These mills could each handle between 10 and 100 metric tons (mt) per day, and are to be distributed to clusters of farmers across the country.

Investments within the rice segment led to the recent launch of the WACOT rice mill located in Kebbi State which has a milling capacity of 120,000mt. This mill is expected to engage at least 50,000 farmers over the next few years. Another development within the segment worth highlighting is the recent partnership between Lagos State and Buhler (a leading global rice milling firm situated in Switzerland). This partnership is expected to result in the construction of a 32 tons per hour rice mill in Lagos.


Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: The Guardian, 7 August, 2017.
Access the full article HERE

Diversification to include a shock-resistant BoP - Gregory Kronsten, FBNQuest

Diversification to include a shock-resistant BoP 

Most analysis of the balance of payments (BoP) covers the current account, and in this narrow sense Nigeria’s position is no longer dire. The oil price has now been soft for three years, leading to a current-account deficit for five successive quarters from Q4 2014. (There was briefly a deficit in Q2 2016 when the production losses/leakages from the Niger Delta were particularly high.)  We are seeing a familiar lag: export earnings fell with the price of oil whereas import demand was initially sustained by the CBN’s reserves and banks’ indulgence. The BoP shows that the sharp fall in imports dates from Q4 2015. We all remember the backlog in repatriations for offshore investors and the reduced access to fx for manufacturers for raw materials.

The current account was comfortably in surplus in Q1 2017 (3.4% of GDP) and the oil price has settled in a range of US$45/b to US$55/b for many months. We should, however, be concerned because the outflows will pick up now that the economy is emerging slowly from recession and the CBN is making fx available in copious quantities. The policy aim should be to make the BoP sustainable, and not a reflection of the swings in the oil price. This is an element of the FGN’s broader strategy of economic diversification.

Imports should have started to pick up from Q2 as a result of the CBN’s fx interventions. The CBN’s sales to authorized dealers via the interbank market will come off a low of just US$370m in Q1 2017, compared with US$2.75bn one year earlier and closer to US$5bn two years previously.

On the services side the retail-driven outflows have crashed. For business travel they amounted to just US$61m in Q1 this year, compared with US$655m two years earlier. The story was similar for health and education expenditure. Now that the CBN is making fx available on a regular basis to the banks for onsale to the retail segment for invisibles, this will change.

On the goods side, there is plentiful anecdotal evidence that the CBN’s interventions have boosted imports of raw materials. In addition, our own manufacturing PMI has been in positive territory for four successive months (February through to June). The sub-indices for output and new orders provide a good narrative. Closer questioning of respondents by our partner, NOI Polls, reveals that firms have been able to raise production thanks to the greater access to raw materials. We should add that the CBN’s manufacturing PMI highlights a similar upward trend for three months in a row.  It is because of this expected build-up in imports that we see the current-account surplus narrowing from 3.1% of GDP this year to 1.2% in 2018.


Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 24 July 2017.
Access the full article HERE

Neat needlework required

Neat needlework required

Conversations around textile, garments, ready-to-wear and fashion generally are incomplete without any reference to agriculture or the manufacturing sectors of the economy.

Inclusive growth in Nigeria can be driven by several segments of the economy, including cotton farming. Data from the International Cotton Advisory Committee (ICAC) revealed that only 51,000 metric tons (mt) of cotton was produced last year. Meanwhile, industry sources suggest that the country has only 23 ginneries which have a combined capacity of 650,000mt of cotton seeds but produces just 60,000mt annually, representing c.10% capacity utilisation.

Africa produces about 1.5 million tons of raw cotton annually and 85% is exported unprocessed. Plexus, a global agribusiness company with primary focus on cotton, has opened an integrated textile and garment operation in Uganda. Based on their operations in Uganda, cotton valued at US$60m is transformed into finished goods and sold for US$700m. Plexus has some presence in Nigeria but not to the extent as in Uganda.

Essentially, Nigeria is losing out tremendously in the cotton farming market. The potential annual export value is estimated at US$6.5bn. Furthermore, industry sources reveal that the country’s annual import bill for textiles and ready-to-wear apparels is US$4bn. In the United States, cotton remains a leading cash crop which stimulates business activities for factories. The processing and handling of cotton post-farm activities generates more businesses and therefore jobs. Annual business revenue stimulated by cotton in the US economy has been estimated to exceed US$120bn, making cotton one of the country’s top value-added crop.

However, this may be an unfair comparison with Nigeria given that some of Nigeria’s limitations to a booming cotton industry are not experienced in the US. They include low quantity of seeds accessible to farmers, lack of adequate inputs, poor transport infrastructure and the list goes on. The federal ministry of agriculture and rural development highlighted in its policy roadmap the lack of an industry wide standardisation system as a core reason for underdevelopment within the segment.

Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: The Guardian, 3 July, 2017.
Access the full article HERE

A long haul over non-oil revenue collection

A long haul over non-oil revenue collection

We all know that the FGN’s total spending is low because its revenue collection is poor and because it is fiscally responsible. The fiscal stimulus in this year’s budget, finally signed off last week, is not great. Total spending is projected at N7.44trn, equivalent to 6.7% of forecast GDP for the year. This would support the recovery from recession this year, and probably be the largest single element in the process, but would not amount to take-off. 

Federally collected revenue last year of N5.68trn represented 5.6% of GDP. This was a decline of N1.23trn on the previous year, for which sabotage in the Niger Delta was largely responsible. Within a regional context, the performance was pitiful. The country data for 2016 in the African Economic Outlook 2017 shows grants, which we take to be “free” donor support, and revenue as a percentage of GDP. Nigeria’s 9.0 per cent compares with 18.7 per cent in Kenya, 20.1 per cent in Ghana and 21.2 per cent for the continent as a whole. 

Perhaps the most telling figure is a ratio of 24.0 per cent for Angola, an economy with a non-oil sector a fraction of the size of Nigeria’s. Could it be that the oil majors are getting a rather better deal than they let on? (The outlook is a joint publication of the African Development Bank, the UN Development Programme and the OECD. As these publications go, it is clearly written and relatively free of impenetrable jargon.) 

Our focus is on non-oil revenue collection because it is inseparable from the policy of economic diversification. While it yielded more revenue than the oil economy last year (N2.99trn vs N2.69trn) because of the pick-up in sabotage, it is very low. The take represented 2.9 per cent of GDP. The non-oil economy accounted for 93.6 per cent of GDP at current basic prices in 2015 according to the National Bureau of Statistics. Even when we allow for the informal sector, which the bureau estimated at 41.4 per cent of GDP, we have a sizeable mismatch between the productive, tax-paying non-oil base of the economy and the collection of revenue from it. 

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 19 June 2017.
Access the full article HERE

EMEA Finance - Interview with Patrick Mgbenwelu

Patrick Mgbenwelu of FBN Merchant Bank Recalls How Deals Were Done, What’s Changed & and What Lies in Store

The last 4 years have been eventful ones for investment banks in Nigeria where we have had a flurry of transactions initially driven off a combination of high oil prices, government privatization of the power sector assets in 2013, divestment of the Shell assets in 2014 and the subsequent sharp drop in commodity prices, weakening of the Naira and macro-economic challenges. From a project financiers’ perspective acting as financial adviser, structuring bank and or debt arranger, I can say that the times remain very challenging, but we in the local financial community remain resilient, optimistic and ambitious and see things as ‘half full, rather than half empty’.

What excites me, in particular, are the creative features that we at our bank, and some of our peers are able to construct, in an effort to get new deals “banked” and more recently to address debt service constraints on “challenged facilities”.

Many of the recent challenges are driven by a combination of macro and systemic factors, for example, short tenors, an absence of long term and much needed pension funds liquidity, project economics “historically” tied, not to the Naira but to the US dollar, and of course the much reported on, limited availability of foreign exchange, namely the US dollar.

Just taking one of these issues as a point to elaborate, short tenors, structuring “bankable” transactions given the continued absence of long tenured liquidity remains a major challenge for us and indeed a host of corporates. Save for the Lekki-Epe expressway toll road transaction which achieved financial close in 2008, project debt maturities appear to have hit a 7 year “brick ceiling” and very few transactions have succeeded in piercing this tenor. The reasons for this are pretty obvious given the fact that in a deliberate attempt to manage their balance sheets, local banks are not able to provide long term funding in excess of 5 to 7 years in view of the short term nature of their own liabilities.

This means that the challenge for sponsors is the fact that they end up with a smaller group of interested local banks in situations where their projects require debt tenors towards and or beyond the 7 year threshold.

Patrick Okey Mgbenwelu
General Manager & Head, Debt Solutions, FBN Merchant Bank

Source: EMEA Finance, 4 May, 2017.
Download the full interview with Patrick Mgbenwelu HERE

Gregory Kronsten, BusinessDay - FBNQuest

A better process next time please!

The 2017 budget was approved by the National Assembly on 11 May so we are now waiting for the sign-off by the acting president or the president. At that point the FGN will publish the detail but for now we are dependent upon the media for the outline figures. We will confine ourselves to five brief comments on the content.

First, we endorse the increase of US$2/b in the average oil price assumption to US$44.5/b. This leaves some room manoeuvre in the event of any underperformance on the output assumption of 2.20 mbpd. The record of OPEC for quota compliance is not brilliant and the resilience of the US shale oil industry may have been understated. However, when we allow for the gentle pick-up underway in the global economy, we are quite comfortable with US$44/5/b.

Second, we also like the allocation of N77bn for the amnesty programme. The fact that the amount has been raised from N65bn in the president’s budget speech in mid-December points to a shift in official thinking. The forces of pragmatism have established the correlation between payments within the programme and the incidence of sabotage. The shift adds to the credibility of the assumption for crude output this year.

Third, the president’s speech pledged to hold FGN spending on personnel to about N1.8trn. Data from the CBN for January and February suggest that this has been achieved but then we had the May Day speech promising a new national minimum wage. The fallout from the last increase included the rapid accumulation of payment arrears at state government level, which has led the FGN to launch five separate debt relief initiatives. In these circumstances talk of another rise came as a surprise.

Fourth, the budget has set capital spending at N2.24trn, which compares with the actual figure of a record N1.20trn for the 2016 budget year (through to 06 May). We would expect the FGN to fall short of its target because its underlying revenue projections are ambitious. Further, governments everywhere struggle against logistical and organizational hurdles to implementing their capital programmes. A 50 per cent increase on the 2016 outturn would still have a useful impact, particularly if it was accompanied by an improvement in project management and delivery.

Fifth, the media coverage implies a deficit of N2.50trn for 2017 and refers to borrowing of N2.36trn. Our take is that the small balance (of N140bn) is to be raised from a combination of asset sales, recoveries, signature bonuses and the like.  The deficit would fall comfortably within the 3 per cent of GDP ceiling set in the Fiscal Responsibility Act. We assume that the domestic component of the borrowing remains N1.25trn, and note that the Debt Management Office has already raised N750bn from its first five monthly auctions of the year.

On the external side, the FGN has collected US$1.5bn from the sale of its 15-year Eurobond. (It is a shame that its hands are effectively tied behind its back and that it was not able to take greater advantage of the strong oversubscription.) The balance of the projected external financing for this year (and last) will prove a greater challenge: whereas buyers of the Eurobond appear to have had a cursory look at the external balance sheet and approved its content, the multilaterals rightly insist upon detailed discussion of policy and plans for which the FGN does not appear always to have the stomach and the skills-set. 

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 22 May, 2017.
Access the full article HERE 

A pitfall or three in forecasting

A pitfall or three in forecasting

Last week the IMF released its latest World Economic Outlook (WEO) in time for its spring meetings with the World Bank. The media seized upon the forecasts and commentary for what we might term easy copy. Anybody who has been a journalist knows that press releases and report launches are a comfortable alternative to investigative research. At the same time, anybody who enjoys political power knows that the IMF’s forecasts still carry weight.

So the UK government hailed the fact that the WEO has the UK as the second fastest growing G7 economy in 2017 (after the US). If the Fund’s forecasts had told a more negative story, as they had before and directly after the referendum on EU membership, the government would have tried to pick them apart. Sovereign downgrades by ratings agencies can produce a similar response. The French government was not happy with the downgrade to AA by S&P in November 2013 and said so publicly.

Political posturing aside, there are several reasons to be wary of the forecasting industry. Firstly, there is the use of forecasts as a marketing exercise, a good example being the call for crude oil at US$100/b by a well-known investment bank. Secondly, there is their use with bonds, for example, in support of a bank’s trading position. We will not enter the litigious territory of giving an example.

A third criticism is their chequered record in terms of accuracy. We should be particularly careful when the industry shares the same position. This is neither a macro nor an asset variable but it was striking how all large financial institutions got the result of the UK referendum wrong. It may have been laziness on their part, or it may have been a failure by analysts to take the temperature outside London and south-east England. Whatever the reason, it was embarrassing. A safer alternative would have been to construct scenarios around the two possible results rather than try to call the outcome of the vote.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 24 April, 2017.
Access the full article HERE 

Hydro Every tiny drop should count

Hydro: Every tiny drop should count

The federal ministry of water resources has released its medium to long term strategies in the form of a roadmap. This is a good step forward given that over the past several years, Nigeria’s hydro sector has been neglected. The under-investment 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.

Nigeria boasts 250bn cubic metres of freshwater (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.

According to UNICEF, as at four years ago, 38% of Nigerians lacked access to safe drinking water, and over 60% lacked access to improved sanitation, meanwhile open defecation rates stood at 28.5%. This poses as a public health risk. Industry sources suggest that the economic impact of poor sanitation and hygiene costs to Nigeria is about 1.3% of gross domestic product.
Historically, this sector has not been a key beneficiary of the FGN’s public funds. Last year, 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.

In developed countries, the motivation for advanced wastewater treatment is usually to sustain environmental quality or to supply alternative water sources during periods of water scarcity. In developing countries, the release of untreated wastewater remains common practice. On average, high-income countries treat about 70% of the municipal and industrial wastewater generated. That ratio drops to 38% in upper middle-income countries and to 28% in lower middle-income countries. In low-income countries, only 8% undergoes treatment of any kind.

Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: The Guardian, 3 April,  2017.
Access the full article HERE 

Borrow and spend wisely!

Borrow and spend wisely!

We endorse the expansionary fiscal stance of the FGN since it underpins the prospect of lifting the economy out of recession this year. This is the hope of the authorities as well as a plausible independent view, which happens to be our own. Caution is warranted on two grounds. First, the quality of spending and the value for money has to be better than that of previous administrations. Second, the expansionary stance must have a limited life span if the burden of domestic debt service is not to suffocate the economy and take the said “crowding out” of lending to the real economy to a new level. 

The data release for end-2016 from the Debt Management Office (DMO) shows that this burden has soared from N354bn in 2010 to N1.23trn in 2015. Domestic payments account for more than 90% of total debt service because the FGN’s external obligations are predominantly loans from multilateral and bilateral agencies, and far less costly than its domestic borrowings.

The DMO’s medium-term debt strategy seeks a 60/40 split between the FGN’s domestic and external borrowings, compared with the 76/24 blend at end-2016, but that is a detailed subject for another day. The Eurobond roadshow in February was a great success because it told the story of Nigeria’s healthy external balance sheet.

Total debt service last year reached 35.4% of projected total FGN revenue. The ratio is particularly alarming because revenue collection has been so poor. The slide in the oil price since mid-2014 has highlighted the derisory level of non-oil tax collection. The FGN has a number of initiatives in place to boost this level. However, we urge patience. There are some quick wins to be had from closing loopholes but these are small in relation to the challenge of engineering change in the culture of paying tax.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 3 April,  2017.
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FGN Savings Bonds

Facelift required to grow the economy and shore up the naira

Besides cost-cutting, diversification of revenue sources should be at the front burner of any struggling economy. The lingering macro challenges caused by the current global oil price regime should stimulate economic activity around segments of the economy which are largely untapped. First, this will assist with trimming the country’s heavy import bill. Second, it will help generate jobs, thereby enhancing household pockets. Finally, it will boost exports.

The “Grow the economy: support the naira” anthem has become familiar. Despite operational challenges, there are a few “cash cows” that stick out. These include agriculture, manufacturing, human capital, petroleum and petrochemicals.

Petroleum and petrochemicals is an industry that is severely under-utilised. Despite being a leading producer of crude oil, Nigeria is import dependent on plastics, paint and textile which are derivatives of petrochemicals. Industry sources suggest that the country’s petrochemical market is worth US$30bn annually.

To put this in better context, the bottled drinking water industry continues to maintain its rapid momentum due to high water consumption across the country. However, the bottles are largely imported. One reason is the underdeveloped plastics industry. Plastics contribute only 3% to manufacturing GDP.

In Saudi Arabia, the development of its plastics industry can be attributed to the 1987 low price regime which awakened the need to implement an economic diversification program away from hydrocarbons. Through supportive policies, the Saudi government has encouraged the industry to shift from import dependence to actual growth in domestically manufactured plastic products. Perhaps, Nigeria should adopt this template and modify it to suit its economy.

Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital

Source: The Guardian, 13 March,  2017.
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The FGN will do it its way - Gregory Kronsten

The FGN will do it its way

On 03 November the Central Bank of Egypt (CBE) devalued the pound by more than 30 per cent and announced a move to a floating rate regime. The rate was adjusted from EGP8.9 per US dollar to EGP13.0, and the pound has since weakened to EGP18.9. The CBN also hiked its policy rate by 300 bps to 14.75% in a coordinated step with the devaluation. On 11 November the executive board of the IMF approved a three-year extended fund facility of about US$12bn including an immediate disbursement of about US$2.75bn. 
This loan, like all others, has conditionality attached although the Fund insists that the economic programme is “homegrown”. For example, the country now levies VAT. Electricity subsidy costs have been reduced, and some fiscal savings are being directed to the creation of social safety nets. 

The agreement with the Fund hastened the release of support from other multilateral agencies. Bank credit lines over time will be reopened. The authorities will be able to rebuild reserves, which had fallen below US$20bn. We should also see some pick-up in direct investment, particularly from the Gulf.

The government has now begun a roadshow for a Eurobond launch to raise an estimated US$2.5bn. The finance minister noted last week that the reforms were popular with offshore portfolio investors, and suggested that, once the government had built up its track record on reform, the EGP-denominated debt securities market could see inflows of US$10bn. (Such holdings are currently said to be less than US$1bn.) 

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 23 January, 2017.
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Positive budget proposals: just pass it! - Gregory Kronsten

Positive budget proposals: just pass it!

While we wait for the National Assembly to conclude its debate on the 2017 budget proposals, we look for promising trends in the FGN’s fiscal stance. Happily, we have identified several. This is fortunate since the authorities’ hopes of lifting the economy out of recession this year rest largely upon the fiscal stimulus in the budget.  We make no apologies for the many figures in this column: an analysis of the budget would be worthless without them. 

There are some welcome developments to report on the revenue side.  The first is the new realism in the projection of N1.37trn for the FGN’s share of non-oil revenue collection in 2017. This is clearly warranted when we consider that total revenue in January-September amounted to N2.17trn, compared with the full-year budget of N3.86trn and representing a 25% shortfall on a pro rata basis. The underperformance can be traced both to sabotage of infrastructure in the Niger Delta and to overambitious targets on the non-oil side. 

The second positive on revenue in the proposals is the projection of N1.98trn for the FGN’s share of oil revenue. It is a positive because of a subtle movement in the FGN’s position on insecurity in the Niger Delta. The FGN now acknowledges that it has to engage the said militants and the vice president is making regular visits to the delta for talks with community leaders. 

Further, it has incorporated payments under the amnesty in its current budget proposals. To paraphrase its own words, the diversification of the economy away from oil requires a sizeable boost to oil revenues. There is evidence that the new approach is successful. The NNPC’s latest monthly report puts production of crude oil and condensates back at 1.92 mbpd in November, the highest level since April. This recovery in output, which has since been maintained, is offered in semi-official circles as the explanation for the increase of US$5.0bn in gross official reserves since end-October.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 20 February,  2017.
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