Economy & Market

Economy & Market: Sluggish Recovery Persists

The global economy continued to experience sluggish recovery this second quarter owing to the lingering euro zone debt crisis. The weak balance sheet positions of euro zone financial institutions, rising unemployment in most advanced economies, geopolitical uncertainties affecting global oil prices and the legacy effects of the global financial crisis, also contributed to the slow recovery.

Growth in the advanced economies is estimated to decelerate from 1.60% in 2011 to 1.40% in 2012. In the Euro area, real gross domestic product (GDP) growth is projected to contract from 1.40% in 2011 to -0.30% in 2012, due to the fragility of the financial system.

In sub-Saharan Africa, inflation is trending upward while growth prospects are optimistically measured on the back of the resilience of the domestic economy in recent times.  However, the Central Bank of Nigeria (CBN), in its communiqué for the Monetary Policy Committee in May, said the risks posed by the recession in the euro area and Chinese slowdown could somewhat dampen the growth prospects in Africa, adding that the general slowdown in the global economy is already flowing to the domestic economy.

Domestic Economy

The CBN, which maintained the Monetary Policy Rate (MPR) at 12.00%, said there are indications that the robust output growth Nigeria recorded in 2010 and 2011 may not be replicated in 2012. Provisional data from the National Bureau of Statistics (NBS) indicates that real GDP in first quarter (Q1) grew by 6.17%, down from 7.68% in the fourth quarter of 2011 and 7.13% in the corresponding period of 2011. Overall, real GDP growth for fiscal 2012 is projected at 6.50%, down from 7.45% in 2011.

Interest Rates & Money Supply

Interest rates have remained bullish in 2012, seldom going below the upper Band of the interest rate corridor. Monetary tightening policy of the CBN that has sustained MPR at 12%, coupled with the frequent Open market operations to mop up excess money supply has resulted in high interest rates. Despite grumblings by the Government, who has had to contend with increasing borrowing costs, economic exigencies has made the CBN to continue with its tightening policy.

The Interbank deposit market has been very tight, with cyclical relief only upon the monthly receipt of the Federal Account Allocation Committee (FAAC) disbursements. The liquidity position has averaged just about a surplus of 56Bn in 2012. Due to the relative illiquidity, interest rates averaged 15.68% in the overnight funds market.

Deposit& Lending rates

The usual competitive environment in the banking industry has forced a tightening in the spread between deposit & lending rates. There has been a limit to how much leverage a particular Bank has over its borrowing customers. The increased funding costs are therefore not totally been transferred to the borrowing customers. The average maximum lending rate rose to 23.31% in April 2012 from 23.21% in March while the consolidated deposit rate rose to 3.93% from 3.79% during the same period. Thus, the spread between the average maximum lending rate and the consolidated deposit rate narrowed further to 19.38% in April 2012, from 19.42% in March 2012.


The year-on-year headline inflation which was 12.60% in January 2012 moderated to 11.90% in February but rose to 12.10% and 12.90% in March and April 2012, respectively; but later declined to 12.70% in May. Similarly, food inflation which was 13.10% in January 2012 fell to 9.70% in February but increased to 11.80% in March before declining slightly to 11.20% per cent in April 2012. It however accelerated to 12.90% in May.

Core inflation, which declined to 11.90% in February from 12.70% in January, rose sharply to 15.00% in March before moderating to 14.70% and 14.90% in April and May 2012, respectively. On a month-on-month basis, inflationary pressure was rather benign between April and May, and the rise in year-on-year figures largely reflects the base effects in January from fuel subsidy removal.

Oil Market

“When too much oil is just a tad too much”

After three consecutive monthly gains, the Organization of the Petroleum Exporting Countries (OPEC) Reference Basket declined in Q2, to close at $95.22 per barrel on June 14, 2002, representing 23% drop from the 2012 peak of $124.2 recorded on March 19, 2012. The 2nd quarter was a quarter of declining oil prices, resulting from two major factors: Overcompensation for the shortage in supply in Q1 as a result of the crises with Iran; and poor growth outlook for the USA and China:

China, has for the first time since the global economic crises, slashed key interest rates, amidst fears of an economic slowdown. The people’s bank of China cut the official one-year borrowing rate by 25 basis points to 6.35% and the one-year deposit rate by a similar amount to 3.25%. Interest rates are usually welcome as a stimulus to improve domestic productivity, but in the case of China, represents pessimism about its economic condition, for a country which grew by almost 10% during the global financial crises of 2008-2009.. According to the news agency Reuters, Foreign direct investment (FDIs) into China also fell by 1.9% to 47.1Bn USD in the first 5 months of 2012, bringing Jitters into the market about a contagion effect of Europe’s crises on the Chinese economy.

USA:Productivity in the USA has further weakened in Q2 2012, amidst concerns that the economic woes seen in the Eurozone may have a spill over effect on the American Economy. The American Government has also scheduled higher taxes and spending cuts for 2013 to better manage its deficit which is estimated to be about 1.3Tn USD by 2012 and represents about 8.5% of GDP.

The effect of the oil glut in the market coupled with poorer prospects for the Chinese and American Economy have sent oil prices crashing massively. In response, there has been calls on OPEC, lead by IRAN to cut production quotas in order to keep prices high in the oil market.

The 2012 prospect for Oil prices remain very weak, with recent economic woes making a mockery of the world economic growth expectations for 2012 which has remained unchanged at 3.3% while world oil demand growth which was 0.9million barrel per day in May, may well not be realistic at current World market expectations


The Stability witnessed in FX rates in the first quarter of 2012 has largely been eroded during the closing days of Q2 2012. The impressive inflows of FX sustained by the high monetary interest rate regime had helped the CBN in managing its FX reserves. Q1 2012 was a period of relative ease for the CBN, which saw very low demand at its bi-weekly USD auction market. With Offshore supply been large enough to take care of demand by the major oil importers and other sundry users of FX, the naira appreciated during the Q1 period. Specifically in the interbank market, the naira price of 1 USD fell by N2.43from 160.15 opening the year to 157.72 on March 31, 2012. At the official window, the price also fell by about 70 kobo from 158.27 to 157.57 on March 31, 2012.

However, with inflation soaring higher and higher, amidst fears of price instability and its certain effect on Interest rates and Government yields, we have seen an alarming withdrawal of funds by offshore investors, in a rush to prevent against losses on their Fixed Income holdings in the country. To refresh, higher interest rates translate to lower prices on Government securities, and therefore losses for existing holders of those securities. This pullout from the Market has exerted considerable pressure on the exchange rate and security prices. The CBN is again reminded of the Stark reality of the unsustainability of supporting exchange rate by high interest rates.

Interbank FX rates have subsequently risen to 163 from the low of 157 recorded in at close of April, with the spread between the Interbank and official rates widening to N5.13 from the convergence we saw in April 2012.

Despite the drop in oil prices in Q2 2011, Nigeria’s external reserves have been growing. This is not altogether surprising, as there is a lagged effect of oil price movement on the external reserves. The reserves are from payments for oil contracts delivered in the past, and the oil market is essentially a futures market. The effect of the sharp drop in oil prices may not be felt on the reserve till Q3 2012, in our own opinion.

With the drying up of autonomous FX supplies from offshore investors, we have seen a sharp depreciation in the currency starting in the month of May. What we await is how the CBN intends to manage this situation. A common temporary solution is for the CBN to intervene in the interbank markets, by selling USD. Indeed, the CBN has acted on its status as an interbank player, by selling USD in the interbank market since the exchange rate crises re-emerged. Our Investigations revealed that the CBN has intervened on at least 7 occasions since the beginning of May.

With external reserves still buoyant at almost 38n USD, we think the CBN still has some flexibility in managing the exchange rates, before resulting to the very pessimistic solution of shifting its target midpoint. The CBN has recently shifted its target band for the USD/NGN from 150+/-3% to 155+/-3% in November 2011.

The Bond Market

In Q1 2012, the Bond market witnessed resurgence in Demand after the inactivity of 2011. Despite the surge in inflation in January, upon the partial removal of Fuel subsidy, the high interest rates and yields were more than enough compensation. Local portfolio investors, particularly in the pension industry were markedly present. Interest was also seen from foreign investors, though the T-Bills market was their preferred habitat. Yields therefore trended downwards in Q1 2012, a direct result of decent demand.

However, the resurgence of persistent inflationary threat in Q2 2012, with inflation soaring as high as 12.9% in April 2012 has sent Jitters into the market. As a result, yields have risen significantly, and the spread between Bond yields and both inflation and MPR has widened.

Two other issues that have contributed to the lack-lustre performance in Bond prices are:

  1. DMO’s Proposed Bond Switches Program

The DMO has a large concentration of Bond maturities in 2012 and 2013(>500Bn). The DMO has therefore proposed a switching program where it’ll replace some maturing stock with longer maturing Bonds. This action will increase the supply of the Bonds with which the Maturing Stock will be replaced. Some players in the Market view this as technical default, as it is effectively a restructuring for the Governments borrowings. The Program was to have started in April 2012, but is yet to be done as at June 2012. The market awaits clarity on this issue

  1. Pencom’s requirement for proper classification of PFA’s Bond Investment

There has been some disquiet in the Pension industry, over Pencom’s requirement for best practise classification of portfolio holdings of Debt Instruments. Best practise for any financial market player is to classify investments as either Held to Maturity, Available for Sale and Held for Trading, according to the International Financial Reporting Standards (IFRS). Our investigations revealed that most players in the Pension Industry do not currently follow this standard.

The remote and immediate effect of this classification will be to force pension companies to realise losses on existing stock of Fixed Income securities. We will recall that there was unprecedented demand in the Bond market in Q3 2009 to Q3 2010, a period of low interest rates and super high Bond prices. With the upsurge in interest rate starting from Q4 2010, Bond prices have since fallen.

New Issuances

The DMO has issued 2 new maturities in 2012. The new 10-year “16.39% FGN Jan 2022” which was first issued in January 2012 at a yield of 16.39%, the new 5-year 15.1% April 2017 was also introduced into the market in April 2012. A new 7-year instrument is also expected into the market at the June auction which will now hold on June 27, 2012. A total of NGN570Bn has been sold in the first half of 2012.


With the lack of any positive stimulus in the Bond market, and the shying away of the Pension players, the short term prospects of the Bond market remain very weak. This has worsened the inverted yield curve presently in the Bond market. With Inflation forecasted by the Nigerian Bureau of Statistics to touch 14% in 2012, we expect the largest Market players to take a sideline approach, especially until the issues discussed above have been resolved.

The Stock Market

Globally, equities continued in their bearish trend, as European stocks fell to a five-month low, with the benchmark measuring index slumped 6.8% in May. Euro zone debt crisis remains a key risk to the world economy as slower growth of 2.60% has been projected this year in the Organisation for Economic Co-operation and Development (OECD) countries.

The Nigerian Stock Exchange (NSE) at end of May also closed on a bearish note, as the market traded in negative territory for the greater part of the second quarter. At the end of trading activities in May, the NSE market capitalisation of equities, closed at N7.04trillion from N7.22 trillion recorded at the beginning of the month.

However, on year-to-date, the closing figures in May represents 7.81% increase when compared with the N6.53trillion recorded at the beginning of the year. The NSE All-Share Index also increased on year-to-date by 6.44%, to close at 22,066.40 basis points from 20,730.63. Transactions during the first five months of the year translated to an average daily deal of about 480million shares valued at N3.87billion.

In a recent report by Proshare, an important highlight was the fact that a total of 55 Stocks listed on the Exchange now trade at their nominal value of 50 kobo, a testament to the severe bearish pressure gripping the market. Of these, 27 are Insurance stocks, 3 are from the oil & Gas sector, while Wema Bank is the only Banking stock trading at 50 kobo. Most of these companies have suffered severe losses or have not even submitted their results for at least 1 financial year ending.

In spite of the lull in the market, the Financial Services sector retained its position as the most active sector for the last five months of the year, followed by the Conglomerates and the Consumer Goods sector. In terms of turnover volume, the Banking subsector of the Financial Services sector was the most active subsector during the period in view with volume in the subsector largely driven by activity in the shares of Guaranty Trust Bank Plc, First Bank and UBA Plc.

Activities were also bearish on the Over-The-Counter bond market in May, with most instruments dipping in price. A turnover of 609.98million units worth N563.43billion in 3,457 deals was recorded during the period.

Investors’ Confidence

Rilwan Belo-Osagie, Managing Director/CEO, First Securities Discount House, said the sustained downturn in the capital market has continued to adversely affect the operations of stock-broking firms.

“The loss of appetite for equity investments has been compounded by the high yield in fixed-income securities, as investors liquidate their investments in shares of quoted companies to take advantage of the better yield in fixed-income securities,” Mr. Belo-Osagie said, adding that all the efforts by the capital market authorities to restore confidence in the capital market have, so far, not resulted in any appreciable increase in the volume of activities because of the many challenges facing the financial industry.

However, he said, “Despite these challenges, the potential for growth is very high given the fact that the country’s infrastructure needs massive improvement” which can be funded through capital market instruments.

In the meantime, Oscar Onyema, CEO of the NSE, at the House of Representatives Ad-Hoc Committee on the Investigation of the Near Collapse of the Capital Market, in April, said the nation’s bourse has embarked on initiative programmes to restore investors’ confidence in the market.

Mr. Onyema said the Exchange has improved on its regulations and compliance level, noting that it recorded approximately 90% compliance for submission of financial accounts from broker-dealer firms at the end of 2011 (from 5% in early 2011); and reported a 96.81% compliance rate for the submission of 2010 annual accounts by listed companies, up from 64% in July 2011.

The Exchange’s boss said the NSE has N635 million in its Investor Protection Fund (IPF), as at December 31, 2011 audited accounts; the fund is used to compensate investors who suffer pecuniary losses.

Meanwhile, Mr. Onyema said, “Slight market recovery is anticipated” in the remaining half of the year, on the back “returned liquidity in the banking system and deeper capital market reforms.” He is optimistic that as confidence is restored in the market, the Exchange would also achieve its target market capitalisation of one trillion dollars (N155trillion) by 2016.

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