point of inflection is it sustainable??? · point of inflection –is it sustainable??? 1. outline...
TRANSCRIPT
Presented by Bismarck Rewane
CEO, Financial Derivatives Company Ltd.
March 3rd, 2021
Point of Inflection – Is It Sustainable???
1
Outline
2
Domestic Economy & Market Proxies
Policy and Politics February Highlights
March Outlook06
Global & Regional Developments
Stock Market Review
01
03
02 04
05
06
February Highlights“So Far So Good”
3
A Surprising Exit of Recession- Q4’20 GDP in Positive Territory (0.11%)o Q4’20 GDP climbs to positive territory: 0.11%
o After two consecutive quarters of negative
growth
o FY'20 growth: -1.92%
o Driven by a surge in agric & ICT activities
o Of the 46 activities, 29 recorded positive
growth while 17 were stagnant or contracted
in nominal terms
o Quarrying and other minerals (48.42%) was the
fastest growing sector, followed by telecoms
& information services (17.64%)
1.87
-6.1
-3.62
0.11
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
Q1'20 Q2'20 Q3'20 Q4'20
Real GDP Growth (%)
Source: NBS, *FDC Think Tank4
Q4’20 GDP – Sector Breakdown
Source: NBS, *FDC Think Tank
41.81
17.3611.96
3.234.42
48.42
17.64
6.594.42
3.68
0
10
20
30
40
50
60
Q3'20 Q4'20
Sector Growth (%)
-68.29
-38.86
-13.99 -13.89
-22.61
-56.5-51.69
-23.16-19.76
-15.03
-80
-70
-60
-50
-40
-30
-20
-10
0
Oil refining Air
transport
Coal
mining
Oil and
gas
Accom
and food
services
Q3'20 Q4'20
Sector Growth (%)
Cumulative nominal contribution of 34.46% to GDP
Air transport, accommodation and food services sectors are suffering from the restrictive measures
and lagging effects
5
Inflation at a 4-year High - 16.47% in Jan’21o Headline inflation rose by 0.72% to 16.47% in
January
o The highest level in four years
o Major culprit remained food inflation which
rose to 20.57%
o Exchange rate pass through effect
o Core inflation also increased by 0.48% to
11.85%
o Month-on-month inflation slowed to 1.49%
from 1.61%, annualized at 19.59%
o Driven by border reopening and typical
decline in food prices in January
0.00
5.00
10.00
15.00
20.00
25.00
Headline Inflation (%)
Core Inflation (%)
Inflation (%)
Source: NBS, *FDC Think Tank6
Capital Importation down 26.71% in Q4’20o The total value of capital imports fell by
26.71% to $1.07bn in Q4’20 from $1.46bn
(Q3’20) on sharply lower FPIs
o Lagos was the top destination for capital
inflows followed by Abuja
o UK remained the top source of capital
investment ($236.88mn), accounting for
22.14% of the total capital inflows
o Could increase as the global economy
recovers
o BOT pressures to ease but will still be in deficit
in 2021 (-$5.7bn) from -$10.5bn in 2020
8.51
6.05 5.63
3.8
5.85
1.29 1.46 1.07
0
2
4
6
8
10
Capital Imports ($bn)
214.25 148.59
414.76251.27
4309.47
385.32404.25
35.15
1330.65 761.03639.44 783.26
0
1000
2000
3000
4000
5000
Q1'20 Q2'20 Q3'20 Q4'20
FDI ($mn) FPI($mn) Other Investments ($mn)
Capital Inflows Breakdown (Q4’20)
Source: NBS, *FDC Think Tank7
Landing Cost of PMS Climbs to N186/liter o Landing cost of PMS up by 17.33% to
N186/liter from N158.53/liter in January
o Retail price could climb to N190-N200/
liter
o Driven by the sharp increase in global
oil prices – Brent back at pre-
pandemic levels ($63pb)
o FG says state govts to have the final
say on PMS price hike
Source: NBS, *FDC Think Tank
200
210
220
230
240
250
260
0
50
100
150
200Price movement between Brent, PMS & Diesel
Brent ($'pb) PMS Price (N/ltr) Diesel Price (N/ltr)
o Diesel price up 11.18% in Feb’21 (N250/litre)
as avg Brent price climbs 10.17% to $61pb
o To push up distribution and operating cost
for businesses
8
Implications of PMS Price Hike
Source: NBS, FBN Quest, *FDC Think Tank
Assumptions
o Daily PMS consumption of 58 million barrels
o Retail price of petrol climbs to N200/litre
o IEFX rate of N410/$
o FAAC disbursement of N640.3bn
o Aggregate consumption of $346.4bn
o Import value of $56.2bn
Positive Negative
A = Aggregate consumption $346.4bn
B = PMS price increase $1.96bn
C = Exchange rate depreciation $2.19bn
D = FAAC disbursement increase $51.4mn
Net Effect (A+D-B-C) is positive $342.3bn
Effect
o Aggregate consumption to fall by 1.18%
on an increase in PMS price
o Country spends an additional $2.19bn to
purchase PMS due to exchange rate
depreciation
9
Insecurity & Economic Performanceo Rising insurgency in the North, impeding foreign investment inflows and
output growth
o Also intensifying inflationary pressures
o Theft and vandalism taking a heavy toll on the domestic oil industry
o Oil still accounts for over 70% of export revenues
o Nigeria loses an average of 200,000 barrels per day of crude oil to theft
and vandalism
o The EIU projects that Nigeria will still be highly insecure over the next
five years
10
Other Highlights
o CBN restricts banks from cryptocurrency transactions
o FG to convert N10trn in Ways and Means Advances into 30-yr bond
o FEC approves revised debt management strategy
o Borrowing limit raised to 40% of GDP from 25%
o External debt stock limit set at 30% of total debt stock
o Domestic oil production fell by 2.19% to 1.34mbpd in Jan’21 from
1.37mbpd in Dec’20
o Active rigs dropped marginally to 6 in Jan’21 from 7 in Dec’20
11
Other Highlights
o Average opening position of the deposit money banks was down 36.26%
to N349bn
o Average interbank rates up sharply to 8.25%p.a. in February from
3.55%p.a. in January
o FAAC up marginally by 3.38% to N640.3bn
o FBN PMI back in expansion territory (53 points), 19.1% higher than 44.5
points in January
12
13
Global Developments
14
Noteworthy Global Eventso US jobless claims increase further to 861,000
o Unemployment rate currently at 6.3%
o Delay over new fiscal stimulus of $1.9trn could stall US’ economic
recovery
o US is an important market for emerging markets with respect to trade,
aid and remittances
o UK’s unemployment rate increase to near 5-yr high of 5.1%
o Negative for diaspora remittances into Nigeria
15
British Pound Streak, How Sustainable?o British pound rallied to its strongest level ($1.40) in 3 years
o As investors rotate out of US assets
o The UK is on course to be the 1st leading economy to inoculate its
entire adult population after Israel
o Reached its goal of vaccinating 20 million people by March
o The pound is approaching its PPP value of 1.5
o The UK accounts for 2.51% of Nigeria’s total imports in Q3
o Appreciation streak may be short-lived if lockdowns persist
16
China – EU’s Top Trading Partnero EU’s main trading partner in 2020 was China
o Year-on-year imports from China grew by 5.6%
to $465.6bn (€383.5bn) and exports were up by
2.2% to $245.84bn (€202.5bn)
o Trade with the US declined both ways
o EU benefitting strongly from China’s
automotive and luxury industry
o EU and China aggressively working to deepen
trade ties
Source: Eurostat
17
Cryptocurrency – A Store of Value or a Source of Risk?o Bitcoin, the most popular cryptocurrency, climbed to a record high of $51,000 per
bitcoin before tumbling to $46,500. Now above $48,000
o Driven by positive sentiments from Wall Street, JP Morgan & Morgan Stanley
o Level of volatility still a threat to cryptocurrency as a major store of value
o Yellen warns about an extremely inefficient bitcoin
o Growing optimism of corporate participation in cryptocurrency
o But the CBN has banned cryptocurrency transactions
o Will dampen investors’ appetite
o Force crypto transactions to be conducted illegally
o Vice president advises that the regulations should be out of opportunity not fear18
Global Auto Sector on the Road to Recovery o US auto sales rebounding strongly in 2021
o Due to low interest rates, record-long financing offers and a strong preference for
road travel over airlines or public transport (due to fear of infection)
o Many dealerships also gained from investment in technology, as auto sales went online in the US
o China's total new-vehicle market growing rapidly on high demand for new
commercial vehicles and new energy vehicles
o Commercial vehicle sales spiked owing to higher infrastructure outlay, loose credit, and fiscal
support measures by the government
o Online-sales infrastructure will also help the new-car market to recover by an expected 8% this year -
EIU
o Ford to invest heavily in South Africa- R15.8bn ($1.1bn)
o Attracted by industrial policy incentives and export opportunities 19
Regional Developments
20
Era of Accommodative Monetary Policy Coming to an End?o African nations are likely to start
increasing their interest rates
o 3 have already increased this year
o Zambia, Mozambique and Zimbabwe
o Due to growing inflation and currency
pressures
o This could weigh on economic
recovery efforts
o Due to the negative impact on credit
flows to the private sector
Country Jan
Inflation
Rate (%)
Last MPC
Decision
Growth
Rate (%)
Exchang
e Rate
(%)
Nigeria 16.47 11.50 0.1 (Q4) 3.19
South
Africa
3.2 3.50 -6.0 2.25
Angola 24.4 15.50 -5.8 (Q3) 2.67
Ghana 9.9 14.50 -1.1 (Q3) 2.21
Kenya 5.69 7.00 -1.1 (Q3) 0.48
Zambia 21.5 8.5 -2.6 (Q3) 3.21
Mozambi
que
4.09 13.25 2.4 (Q4) 0.05
21
Debt Relief – Is it Debt before Tears?o Several African countries are taking advantage of the G20 debt relief
program due to low revenue
o So far in 2021, 3 countries have requested debt restructuring under the G20
debt initiative
o Chad has no outstanding foreign bond, but has total debt of $3.5bn
o Ethiopia with an external debt of $27.8bn (2019)
o Zambia is the first African economy to default on its debt since the
pandemic started
o African countries do not yet have resilient buffers and are grappling with
significantly low revenues 22
Keynesian Theory of Output, Employment & Inflation
23
Q1'20 Q2'20 Q3'20 Q4'20
Keynesian Economics
o Keynesian economics is a theory of
employment, output and price
o Increased government expenditure as a
catalyst for growth
John Maynard Keynes
General theory on employment,
interest rate and money (1936)
24
Keynesian Economics Has Limitations
o Increased borrowing raises interest rates
o If productivity does not increase, inflation will
o In the long run we are all dead!!!
25
Other Theories and Theorists
o The Monetarists disagree with Keynes
o Friedman says inflation is taxation without legislation
o Supply side economics has led to serious downturns and deflation
o But keeps inflation in check
Milton Friedman
(1912-2006)
26
Testing Keynesian Economics
o Nigeria, like other nations, is adopting
the Keynesian model
o Its stimulus of N2.3trn is 4% of GDP
o The dose is small and it is coming at a
time of high inflation
Country Stimulus as
a % of GDP
GDP growth
Rate (%)
Nigeria 4.0 0.11
South
Africa
12.6 -6.0
Ghana 4.0 -1.1
China 11.5 6.5
UK 45.04 -7.8
India 10.0 0.4
US 28.4 -2.4
Russia 7.1 -3.1
Brazil 27.6 -3.9
27
Minimum Wage, Subsidies and InflationMin. wage (N) Dollar
equivalent ($)
Inflation
rate in
2019 (%)
Inflation
rate in 2020
(%)
Actual
Min
wage in
2019 (N)
Dollar
equivale
nt ($)
Actual
Min
wage in
2020 (N)
Dollar
equivalent
($)
30,000 77.95 11.4 13.21 26,580 73.83 26,037 63.26
o Inflation eroding the true value of minimum wage
o Disposable income falling
o Minimum wage in Nigeria is low compared to peer countries like South
Africa ($232.03) and Egypt ($128.22)
28
Minimum Wage and Inflation2018 2019 2020 2021
Nom Min wage (N) 18,000 30,000 30,000 30,000
Real Min wage (N) 15,818 26,580 26,037 24,975
Dollar equivalent ($) 51.69 73.83 63.26 60.91
0
10
20
30
40
50
60
70
80
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2018 2019 2020 2021
Nom Min wage (N) Real Min wage (N) Dollar equivalent ($)
29
Time to Reconstitute the Inflation Basket and What Next?o In Nigeria, the last review of the CPI basket was in 2009 (12 years ago)
o The weight attached to the current CPI basket is no longer reflective
of current consumption conditions.
o Punctual basket reconstitution is necessary in view of demographic,
consumption and behavioral changes
30
Time to Reconstitute the Inflation Basket and What Next?Nigeria’s basket Weight at Nov, 2009 Proposed weight
Food and non-
alcoholic beverages
51.8 45.54
Health 3.00 6.12
Transport 6.51 6.44
Communication 0.68 5.53
Entertainment 1.89 1.07
Education 3.94 6.04
Insurance and
Financial service
- 0.5
o Assuming we change the weights to reflect current changes
o The headline inflation is likely to increase marginally31
Need to Reconstitute the Inflation Basket and What Will Happen?
o Bias in the measurement of the CPI will constrain the effectiveness of
intervention policies
o CPI predicts the required changes to workers’ wages in a given year
o There is high possibilities that the current inflation rate is undervalued
o Poor estimates of CPI can result in misleading signals for policy making
o This can lead to further distortions in the economy
32
33
Domestic Economic Performance
34
Leading Economic IndicatorsLEI Jan’ 21 Feb’ 21 %
Change
Comments Mar’21*
GDP Growth
(%)
-3.62
(Q3’20)
0.11
(Q4’20)
3.73 Economy to grow but at a slow pace in
2021. Slow roll out of COVID-19 vaccines to
threaten pace of economic recovery
-0.15
(Q1’21)
FBN PMI
(end)
44.5 53.00 19.10 FBN PMI reading to increase as
manufacturing activities improve on border
reopening and increased forex sales
55
Oil
Production
(mbpd)
1.37
(Dec’20)
1.34
(Jan’21)
-2.19 Oil production to gradually pick up as
OPEC+ eases production cuts
1.4 -1.5
Oil Price
($pb; avg)
55.37 61.0 10.17 Hopes of demand recovery on COVID-19
vaccines to keep oil prices elevated. Likely
ease in supply could limit price gains
57-60
M2 Growth
(%)
26.89
(Nov’20)
31.90
(Dec’20)
5.01 Money supply growth to slow as CBN
intensifies mopping up activities
25 - 28
Source: CBN,NBS, EIU, OPEC, FBNQuest *: FDC’s forecast35
Leading Economic IndicatorsLEI Jan’ 21 Feb’ 21 % Change Comments Mar’21*
Average Opening Position (N’bn)
627.89 324.28 -48.34Market liquidity to reduce as CBN mops up excess liquidity with the IEFX window activity and lower naira
350-450
Primary T-Bills (%):91-days
0.55 2.0 1.45
Interest rates to maintain upward trend as liquidity reduces 2.5-3.00
Inflation (%) 16.47 17.20* 0.73 Inflationary pressures to persist as the planting season commences coupled with a further increase in PMS price and widespread insecurity
16.8
External Reserves ($bn; month-end)
36.30 35.47 -2.29External reserves level to pick up on higher oil revenues
33-35
Exchange Rate (N/$; month-end)
Parallel: 480IEFX: 394.13
482411.63
0.424.44
Naira convergence to continue around the IEFX, CBN to reduce forex rationing
475 – 477410-412
Stock Market Cap (N’trn) 22.19 21.0 -5.37
Flat earnings and higher money market rates will continue to impact on the stock market
19 - 20
Source: CBN,NBS, NSE, FMDQ, EIU, *: FDC’s forecast
36
GDP Growth to Rise but at a Slow Paceo Real GDP to rise but at a slow pace
o FY’21 estimates
o 1.1% - EIU
o I.5% - IMF
o W- shaped recovery still expected in 2021
o Q1’21 may slip back into negative growth of
-0.15%
o Due to planting season
o Typical lull in business activities in Q1
o Heightened insecurity
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
GDP Growth (%)2021
Source: NBS, *FDC Think Tank37
o Pace of economic recovery will depend largely on the robustness of fiscal,
investment and monetary policies
o Growth in total factor productivity critical to economic recovery
o ICT to remain a fast-growing sector
o Gradual recovery expected in manufacturing, trade and real estate
Q1’21 Growth Projections - Sector Breakdown
0
1
2
3
4
5
6
ICT Construction Manufacturing
Winners (%)
-6
-5
-4
-3
-2
-1
0
Aviation Accom and food
services
Oil refining
Losers (%)
Source: NBS, *FDC Think Tank
38
Inflationary Pressures to Peak in Q2’21- Seasonality Effecto Headline inflation to maintain upward trend in
the near term
o Average inflation could increase to 17% in
Q1’21
o Food inflation will remain the major driver of
inflation
o Rate of increase to slow in Q3’21 as harvest
season commences
o Lower inflation would support consumer
disposable income
Inflation Stoking Factors Will Be
o M2 growth
o PMS price deregulation
o Planting season
o Electricity tariff hike
o Supply chain disruptions
o Insecurity in the food belt
o Higher logistics cost (diesel price now
up 24% to N235/liter from N190/ liter)
o Forex restrictions on food imports
o Exchange rate pass through
39
40
Parallel Market Rate & IEFX Rate Volatileo IEFX rate has lost 4.06% in the last 4 weeks
o From N394 to N410.25/$
o Has so far depreciated marginally by 0.34% to
N411.63/$ in March
o Parallel market has been more volatile
o Oscillating between N473 and N480
Naira Effect
Source: EIU, *FDC Think Tank
385
390
395
400
405
410
415
370
385
400
415
430
445
460
475
490
Parallel IEFX
Average Daily Turnover ($mn)
Exchange Rate(N/$)
Naira Effect (N’bn)
March 03 33.15 411 13.62
February 26 37.83 410.25 15.52
February 24 212.43 408.8 86.84
February 01 28.85 394 113.67
o Increased IEFX turnover at a
weaker rate will mop up more
liquidity
o Pushing up interest rates
41
Naira Moving Further Away From its PPP Value
“With the IEFX rate at
N411/$ the naira is
overvalued by 23.46%”
Oil Price Rally to Continue
o Brent expected to maintain upward trajectory in the coming
months
o On lingering supply tightness and vaccine rollouts
o Analysts project oil price to reach $100pb in the next few years
o Oil price could average $70pb by year end
42
External Reserves Falling as Total Debt Stock ClimbsQ1’20 Q2’20 Q3’20 Q2’21*
External Reserves ($’bn) – end period
35.16 36.19 35.72 29
External Debt ($’mn)
27.67 31.48 31.99 32
Domestic Debt ($’mn)
51.64 54.42 52.59 76
Total Debt 79.31 85.99 84.58 109
o On average, domestic debt makes up approx. 64% of total debt stock
o External reserves level to pick up on higher oil prices, will be capped by increased
forex sales by CBN
o Domestic debt to increase as FGN has ruled out further borrowing from the IMF
o Will crowd out the real sector * FDC’s forecast43
44
Market Proxies45
Value of Transactions
o Total value across e-payment channels fell by 1.60% to N20.67trn in February from
N21trn in January
o Downward trend is partly driven by:
o Second lockdown and restrictions
o Dollar exchange rate reducing disposable income
o Confirms a reduction in PMI in January and a gradual pick up in February
E-channels Jan’21 Feb’21
Cheques 248.2 277.45
POS 489.24 468.91
NIP 18,892.81 18,734.46
NEFT 1,374.06 1,194.08
46
FBN PMI Levels Pick Up on Improved Economic Activities
o FBN up 19% to 53 points
o To 53points from 44.5points in January
o Output up sharply especially in
manufacturing
o New orders higher with more forex at IEFX
window
o Inventory up 30% , indicative of a strong
close of Q1
Sub-index Jan’21 Feb’21
Output 38 58.5
Employment 49 48
Supplier delivery time
45 44.5
New orders 49.5 57.5
Stocks of
purchases
41 56.5
020406080
FBN PMI
47
FAAC Disbursements to Increase with Higher Oil Priceso FAAC allocation expected to keep rising
o March estimate: N700bn owing to:
o oil price rally and lower subsidy payments
o improved tax collection
o States still in budget deficit
o Could temporarily support consumer disposable
income as government pays contractors
o An increase in money supply and lower interest
rates
716.3
647.35581.6
780.92
606.2547.309
651.18676.41682.06639.9
604 601619.34640.3690
0100200300400500600700800900
FAAC (N'bn)
48
Active Rigs & Oil Production Down o Domestic oil production fell by 2.19% to
1.34mbpd in Jan’21 from 1.37mbpd in Dec’20
o Active rigs dropped marginally to 6 in Jan’21
from 7 in Dec’20
o Nigeria’s active rigs are 0.51% of total world rigs
(1,183)
o 11.76% of total rigs in Africa
o Average global oil rigs slumped by approx. 38%
in 2020 (1,352), compared to 2,177 in 2019
o If rig count is a proxy for production and
revenue, quarterly revenue will fall to $9bn at a
price of $63pb Source: Baker Hughes, *FDC Think Tank
1423 21 16
8 9 6 8 10 7 8 7 6
114 120108 103
61 60 56 62 55 5463
53 51
020406080
100120140
Domestic Africa
Rig Counts
1.76 1.79 1.85 1.781.58 1.49 1.47 1.47 1.44 1.48 1.45 1.37 1.34
0
0.5
1
1.5
2
Oil Production (mbpd)
49
Ships Awaiting Berth
o Apapa gridlock addressed, courtesy of the new electronic call-up
system (ETO) development
o Greater preference for Tin Can Island as new road to Oshodi made
clearance easier
Vessels Awaiting
Berth
Jan’21 Feb’21
Apapa 22 1
Tincan 18 23
50
Power Sector Update – One Grid Collapse in February
o Electricity generation drops as idle plants rise to 11
Peak Energy Generated
5,593MW
Average Energy Generated
4,555MWH/H
Constrained Revenu
e (Million Naira)
24,262Total Grid Collapses
1Total
constrained energy
1,805MWH/H
0
1,000
2,000
3,000
4,000
5,000
6,000
Power (MWH/h)
51
52
Power Sector Newso Nigeria to disconnect Niger and Benin over N2.6bn electricity debt
o FG subsidizes electricity by N50bn monthly
o Nigeria wants 30% of its power supply to come from renewable
sources by 2030
o FG signs 25MW power deal for Kano Free Trade zone
o FG urges China to intensify support for $5bn Mambilla power project
o FG inaugurates 30kwp Solar mini-grid in Adamawa
o Survey progresses at N5.3tn Mambilla hydropower site
o World Bank injects $500mm into Nigeria Distribution Recovery
Program (DISREP) for Nigeria’s power distribution53
54
Policy Thrust
IMF Article IV Review Recommendations o Urgent policy adjustment and more fundamental reforms to sustain
macroeconomic stability
o Improved revenue mobilization to reduce fiscal sustainability risks
o Naira devaluation to ease external imbalances and clear dollar backlog
o Unification of multiple exchange rates and removal of forex restrictions
o CBN’s financing of the budget deficit must be phased to reduce inflation
o Implementation of trade-enabling reforms that are critical to rejuvenate
growth 55
Progress on the IMF’s Recommendations
56
IMF
Recommendations
Done Work in
Progress
Not
done
Unification of multiple exchange rates
Improved govt revenue mobilization
Removal of fuel subsidies
Removal of forex restrictions
Increase interest rates
Hike in electricity tariff
VAT rate hike
Trade policy reforms
o IMF article IV review
influencing recent policy
pronouncements
o Most of the
recommendations are being
implemented
o Likely driven by the need to
visit the Eurobond market in
the near term
o The endorsement of the IMF is
imperative for this purpose
Rationale
Monetary Policy
o Next MPC meeting to hold – March 22/23
o Major considerations will be:
o IMF recommendations
o Rising inflation
o Currency pressures
o Committee unlikely to adopt tightening policy stance in
the near term
57
The New Auto Policy
o FG reduced import duty on
automobiles from 35% to 10%
o Reducing the landing cost of
brand-new cars
o Could taper transportation
and logistics costs
o Will boost activities in
automobile industry
year Prado Price (N’mn)
Corolla Price (N’mn)
Exchange rate(avg N/$)
2018 53.5 15.5 361.96
2019 50 12.9 361.92
2020 52 16.5 382.09
2021* 49.4 15.675 420
58
FGN to Convert $25bn of CBN Financing to 30-Year Bondo FG plans to securitize its debt
o Overdraft estimated at N10trn
o after increasing its borrowing limit to 40% from 25% in the new
medium-term debt management strategy
o An increase in securities will push interest rates higher and
taper M2 growth by at least 300-400bps
o Interbank rates will spike to an average of 7-8% pa
o PFAs likely to pull out about 50% of funds from the stock
market
o Impact already being felt in the equities market
59
Movement in Interest Rates & Exchange Rates91 day T/bill Rate
(%)
Parallel MarketRate (N/$)
IEFX Rate (N/$)
Week 1 0.035 480 394
Week 2 0.50 480 404.67
Week 3 0.55 473 410.00
Week 4 1.00 480 408.6
Week 5 2.00 482 411.63
o Convergence around the IEFX rate to continue in the near term
o Further supporting the uptick in interest rates
o Currency pressures to still persist60
61
Stock Market Review
62
Nigerian Stock Market in February
Peer Comparison Exchange YTD Return Drivers
NSE ASI 1.2%
• Rising yields of fixed income securities
• Mixed corporate earnings
• Profit taking activities on capitalised stocks
JSE ASI 11.3%
• Need to finance investments that promote social and environmental growth
• Optimism among global investors for stimulus and relief packages
GSE 13.36%
• Investors took advantage of current undervaluation of equities
• Market benefitting from low interest rate environment in advanced markets
o Market cap 6.1% to N20.82 trillion
o NSE ASI 6.2% to 39,799.89
o 4 days positive, 16 days negative
o P/E 6.2% to 15.04 x
63
Sector Performance in February
4.4%
-8.1%
-8.8%
-9.7%
-17.8%
-6.2%
-20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
OIL & GAS
CONSUMER GOODS
INDUSTRIALS
BANKING
INSURANCE
NSE ASI
Sectoral Performanceo All sub indices in the red except
the oil & gas sector
o Uptick in the fixed income
space
o Investors are optimistic about
higher oil prices
o Insurance sub-index recorded
the highest loss (17.8%)
o Driven by 18% and 24% loss in
Aiico and Axamansard
respectively64
GDP Growing Sectors (Stock Performance)STOCKS INDUSTRY Change in Earnings
Share Price %
(1 Year Return) P/E ratio
BOC Gases Quarrying 47.8% 203.21% 21.40x
MTN Telecom 0.95% 55.17% 18.59x
Airtelafrica Telecom 21.1% 180.03% 15.31x
Dangote
Cement Industrial35.5%
23.59% 14.73x
BUA Industrial 16% 80.5% 34.58x
Presco Food processing 84% 27.58% 10.03x
Okomu Food processing 48% 23.75% 11.29x
Average 47% 64% 17.99x
o Growing sectors not specifically driven by fundamentals
o Share prices appreciating faster than earnings growth
o Indicating that stocks are overvalued
o All stocks indicating asset bubble except Dangote Cement and stocks in the
agricultural sector65
MTN Nigeria –FY’20 Result (Top Player)o MTN maintains its dominant market share in the industry (65%)
o Revenue grew by 15.1% to N1.35trn and operating income grew by 8.5% to
N426.7 driven by:
o Additional 12.2 million subscribers amounting to 76.5 million subscribers
(mobile data subscribers up by 29%)
o Data growth (76.5 million subscribers ) is 32.1 million subscribers ahead of
Airtel (44.4 million)
o Service revenue grew by 15%
o Average data usage up by 64%
66
MTN Nigeria –FY’20 Result (Top Player)o Addition of 280,000 agents over the year and fintech subscribers up to 4.7
million
o Ayoba subscriptions up 121% to 1.4 million#
o Expenses grew by 21% resulting in a 2.5% contraction in EBIDTA margin to
51% driven by:
o Forex depreciation
o Impaired base station leases
o Increased employee and network cost
o Bottom line grew by 0.95% to N205bn attributed to increased activities
67
MTN Nigeria –FY’20 Result (Top Player)MTN is positioned to consolidate its growth
o Increased efficiency and capex (59% growth in Q4’2020) will give
it an edge
o MOMO has been successful in Ghana and will eat into market
share of PSB’s
o New CEO taking over with very strong technical and marketing
background
o Nigerian pedigree will out-reach leadership status
68
Zenith Bank – FY’20 Result (Top Player)Nigeria’s biggest bank by asset (N8.48 trillion)
o Gross earnings grew 5.2% to N696.5bn driven by extra-ordinary items
and revaluation gains;
o Interest income grew by 60.4% to N420.8bn driven by optimal pricing
despite a low yield environment
o Non-interest income grew by 39.6% to N275.6bn
o PAT grew by 10.4% to N230.5bn
o Capital and liquidity ratios well above regulatory threshold (66.2%
and 23% respectively)
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Zenith Bank – FY’20 Result (Top Player)o Zenith Bank to remain resilient and maintain market share
o Possibility of acquiring Union Bank and remain the market leader
increasing its market share to 35%
o Increased customer acquisition and public sector activity
o Diversify revenue base and hedge against currency volatility
o Deepening retail market penetration using its digital platforms
o Creating innovative solutions to grow market share
70
FMCG Industry – Earnings
o Mixed performance recorded amongst players
o Players in a stable cash position
o High cost of sales and finance weigh on Nestle’s operating profit and
bottom-line
o Flourmill’s stock performance reflecting earnings performance
o Benefitting from shift towards value brands
Nestle Flourmills Unilever
Revenue 1.1% to N287.08bn 31% to N555.34bn 1.3% to N61.57bn
Operating Profit 10.6% to N64.42bn 42.7% to N35.21bn 70.5% to -N3.05bn
Profit After Tax 14.2% to N39.2bn 90.9% to N15.58bn 62.3% to -N1.59bn
FCF 123% to N80.7bn 22.4% to N40.27bn 103% to N61mn
P/E ratio 26.38x 5.91x 26.2x
Dividend Yield 5.36% 4.85% 4.69%
YTD Stock return 3.65% 11.00% 2.2%
71
FMCG Industry - Outlooko Expected reduction in operating costs driven by exchange rate adjustment
o The industry will benefit from AfCFTA implementation
o Penetrate other African countries
o Increase market access for locally made goods
o FMCGs with strong export operations will benefit from the border re-opening
o Lower production and distribution cost
o Low purchasing power to continue to weigh on revenue
o Pricing has become a key source of competitive advantage
o Smaller brands with lower prices gain market share from larger players72
Breweries Industry –Earnings
o Mixed performance recorded amongst players
o Potential for business growth as measured by increased free cash flow
o Lingering weak economic fundamentals continue to weigh on
bottom line figures
Nigerian Breweries Guinness
Revenue 4.3% to N337bn 5.9% to N72.35bn
Operating Profit 15.9% to N29.6bn 4.5% to N3.72bn
Profit After Tax 54.2% to N7.37bn 124% to -N317mn
FCF 401% to N46.1bn 277.4% to N39.36bn
P/E ratio 63.61x 17.21x
Dividend Yield 3.0% 5.03%
YTD Stock return 7.14% 21%
73
Breweries Industry - Outlooko Beer, malt and RTD’s still struggling
o Expected reduction in operating cost driven by exchange rate
adjustment
o Increased competition
o Urbanization and gender recruitment favouring south east markets
o NBL consolidating market share
o Pricing is a key source of competitive advantage
o Brewery industry to benefit from AfCFTA implementation
74
Breweries Industry - Outlooko Brewery industry to benefit from AfCFTA implementation
o Penetrate other African countries
o Domestic raw materials gaining ground, especially ethanol
o Players to benefit from low cost of borrowing
75
76
Banking Industry –FY’2020 Result
o Mixed performance amongst players
o Players recorded an increase in non-interest income
o Improved digital services across players
o Macroeconomic weaknesses reflected in FY result
o Significant increase in impairment charges
o Zenith, Fidelity and Sterling Bank delivered optimal pricing despite a low yield
environment as measured by the increase in net interest income
Tier 1 Tier 2
Zenith FBN Holdings Fidelity Sterling
Gross Earnings 5.2% to N696.5bn 2.7% to N574.4bn 4.8% to N205.2bn 3.9% to N144.4bn
Net Interest Income 12.2% to N299.7bn 8.2% to N256.4bn 25.2% to N104bn 4.3% to N67.5bn
Non-Interest Income 8.4% to N251.7bn 21.8% to N168bn 2.9% to N24.7bn 21.4% to N27.8bn
Profit After Tax 10.4% to N230.6bn 8.1% to N79.7bn 1.4% to N28bn 10% to N11.7bn
Impairment 64.6% to N39.5bn 0.4% to N50.9bn 402% to N15.7bn 131% to N13.4bn
Dividend Yield 11.76% 5.39% 8.16% 1.87%
P/E Ratio 3.52x 3.93x 2.65x 3.96x
YTD Change 2.6% 2.8% 3.17% 16.2%
77
Banking Industry - Outlooko Expected increase in net interest income
o Rising interest rates
o Lower deposit repricing to support growth in net interest income
o Expected reduction in non-performing loans driven by exchange rate
adjustment
o Competition to intensify – especially in the retail space
o Possible merger and acquisition within and across tiers and
Fintechs
78
Banking Industry - Outlooko Tier 1 banks switching to Hold Co. structure
o To diversify revenue base and hedge against currency volatility
o Banks also expanding footprints to other African countries to take
advantage of AfCFTA
o Asset quality volatility to remain a feature of the Nigerian banking
system
o Largely due to increased exposure to the oil & gas industry and foreign
currency denominated loans
79
Oil and Gas Industry - Earnings
80
Seplat Total
Revenue 10.9% to N190.9bn 30.1% to N204.2bn
Gross Profit (loss) 63.1% to N44.8bn 13.9% to N30.18bn
Operating Profit (loss) 111.9% to (N11.4bn) 62% to N3.72bn
Profit After Tax 136.1% to (N30.7bn) 1.8% to N2.24bn
FCF 10% to N58.6bn 375% to N37.5bn
Dividend Yield 7.47% 5.09%
YTD Return 31.7% 9.2%
o Underwhelming performance driven by
o Impact of COVID-19
o Lower oil prices
Oil & Gas Industry - Outlook
81
o Expected positive growth for the industry
o Implementation of Nigeria’s Petroleum Industry Bill (PIB) expected to
enhance oil revenue
o Higher oil prices
o Exchange rate adjustment
o Improved earnings performance
o Revenue diversification amongst players
Telecoms Industry
82
o Top line figures remain resilient driven by strong growth in customer base
posed by the pandemic
o MTN’s free cash flow impacted by increase in capital expenditure
o Airtel’s bottom line affected by
o Recognition of expired indemnity to some pre-IPO investors
o Increased finance cost
MTN AIRTEL
Revenue 15.1% to N1.35trn 13% to $2.9bn
EBIDTA 9.7% to N685.7bn 16% to $1.3bn
PAT 0.95% to N205bn 21% to $261mn
FCF 18.6% to N307bn 20% to $466mn
P/E ratio 17.35x 15.61x
YTD Stock return 3.00% 9.18%
Telecoms Industry- Outlook
83
o Increased operational and financial resilience to persist
o Telecoms to further compete with financial institutions
o Pursue PSB license
o Partner with digital content providers
o Telecoms to focus on increased network capacity
o Expanding rural coverage
o Focus on 4G coverage
o Deepened multi-products propositions
o Projected to grow at 14 – 15% in 2021
Telecoms Industry- Outlook
84
o Compulsory sim registration to weigh on profitability
o Ban on new customer acquisition until the customer has obtained a
National Identification Number
o Possible penalties for late submission of NIN customers
o Further extension of NIN-SIM integration deadline to April 6, 2021
Insurance Industry
85
AIICO Custodian Mansard
Gross Premium Written
24% to N62bn 20.7% to N57.7bn 9.2% to N47.6bn
Net Premium Income
21% to N52.8bn 20.2% to N33.7bn 20.5% to N31.7bn
PAT 17.5% to N6.7bn 111.3% to N12.7bn 48.3% to N4.3bn
YTD Return 1.8% 2.56% 0.95%
o Impressive performance driven by
o Improved regulatory support
o Innovation of improved insurance products
o Likely consolidation across the industry driven by:
o Need to meet up with the new capital requirement
Insurance Industry- Outlook
86
o Need for players to offer specific products desirable to various income and
demographic levels
o Gradual demand for insurance products by the elite and middle class driven
by recent economic issues and events
o Increasing poverty rate and decline in purchasing power makes the idea of
insurance unthinkable to many Nigerians
o Need for awareness campaigns on relevant insurance cover for lives and
properties of individuals and all businesses
o Projected to grow at 5 - 7% in 2021
o Improved regulatory support
o Technology driving insurance penetration
Stock Market Outlook – March 2021
87
o Sustained bearish sentiment
o Uptick in the fixed income space
o Investors gradual shift towards risk free securities
o Profit taking activities on capitalised stocks
o Possible reversal in bearish trend driven by:
o Positive GDP growth
o Higher oil prices
o Improved investors’ confidence in the economy
o Bargain hunting for stocks with strong fundamentals
Stock Market Outlook – March 2021
88
o Banking stocks to dominate activity due to high sensitivity to liquidity
o Further consolidation in the insurance space
Aviation Update
89
“A Sector in Turbulence”
Aviation – Global Updateo Global aviation is facing an uphill task in 2021
o The carry over of losses and negative cash flow still debilitating
o Q4’20 results show some improvements over Q3’20
o Cash burn rate still growing in spite of subsidies and state support
o Oil and jet fuel prices now at pre-pandemic levels
o Load factors are still 40% below the peak
o Cost pressures are building as the recovery starts but revenues are still
weak
o Vaccine rollout is much slower than expected
o Summer travel still nowhere near expectations 90
Aviation – Global Updateo Heathrow is in trouble with passenger traffic down to 1970 levels
o When there were only terminals 1, 2 & 3
o Now there are five terminals
o Business travel has been cut by 70% because of virtual interactions
o Most hotels are still closed and luxury goods shopping still tanking
o Introduction of vaccine passports to support recovery in the aviation
industry
o Expect a pick up with good turnout at sporting events
o Australian open tenuous with crowd of 30,000
o Tokyo Olympics may achieve 40% attendance
o Wimbledon & French open may achieve 30 – 40%91
Aviation – Regional Updateo Rapid testing continues at Accra airport and seamless
o Ethiopia Airlines and Asky continue to compete on the Lagos – Lome –
Newark route
o Average load factors on the 787 Dreamliner is at 40%
o The 777 Boeing incident with an engine falling off in Denver is another
black eye
o Especially with the 737 max now back in operation
o US visa section opening back up. No appointment dates available
92
Aviation – Domestic Updateo Lufthansa - The 4th most patronized network carrier in Nigeria
o And leading carrier in the star alliance
o Some others include - Turkish Airlines, United Airlines, SAA, Ethiopian Airlines
o Recorded a loss of €6.7bn ($8bn) in 2020
o Compared to a profit of €1.2bn ($1.4bn) in 2019
o Due to COVID-19 and the attendant travel restrictions
o That led to low passenger travel demand and increased flight cancellations
o Airline expects a maximum load factor of just 40% in 2021
o Launched a new flight program for summer but conservative about a full
recovery in 202193
Aviation – Domestic Updateo British Airways have resumed operations in the country
o Average load factor around 40%-60%
o The airline also recorded a massive loss of €7.4bn ($8.9bn) in 2020
o Compared to a profit of €2.7bn ($3.2bn) in 2019
o Passenger revenue also fell 75% y-o-y to €5.6bn ($6.7bn)from €22.74bn ($27.4bn)
o Emirates has suspended flights into Nigeria for 3 – 4 weeks
o To resume flights in 2nd week of March
o Flights from Accra to Dubai uninterrupted
o Lagos, Abuja, Owerri and Port Harcourt are expected to dominate
domestic air travel traffic94
95
Real Estate Update96
Real Estate Sector Improving Q-o-Qo Sector recorded positive growth of 2.81%
o First time since Q1’19 (0.93%)
o Q3’20: -13.04%
o Largely driven by
o Increased construction activities
o Investors scrambling for attractive yields
-35
-30
-25
-20
-15
-10
-5
0
5
Real Estate Sector Growth (%)
Construction Sector Growth (%)
Real Estate & Construction Sector Growth (%)
97
Real Estate Sector Improving Q-o-Qo Real estate agents increasingly innovative to attract more
investment
o Land and house ownership packages with installmental payment plans
o But vacancy factor could widen as consumer disposable income
remains weak
o Housing costs to climb on expensive raw materials
o Rate of increase in commercial buildings to pick up in the near term
98
Real Estate Survey BreakdownQ3’20 Q1’21
RVF (%) CVF (%) VFI (%) RVF (%) CVF (%) VFI (%)
Ikoyi 37 23 31 29 24 27
VI 30 22 27 23 21 22
Lekki 27 14 22 20 8 15
Total 30 18 25 23 14 19
o Vacancy factor down 6% to 19% in Q1’21 from 25% in Q3’20
o In tandem with the recovery in the real estate sector in Q4’20
o Driven by the increase in malls and retail outlets
o Increase in serviced apartments and condos boosted the number of residential
buildings 99
Political Update
100
Political Updateo The new electoral act is likely to fast track the 2023 election process
o Primaries of political parties will mostly hold in early 2022
o National working committees and conventions likely in 2021
o Jockeying for office has started and is turning out to be vicious
o Success will be driven by zoning, insecurity, economic performance
and money bags
o The difference between direct primaries and the delegate system is
already tearing the APC apart
o In direct primaries, the governors will lose their influence
101
Political Update
o The current revalidation exercise in the APC means the delegates are
done
o Zoning between the North and South is likely to be a deal breaker
o We believe that zoning will be tested and will galvanise the middle belt
and southwest zones
o Anambra state is a major litmus test for 2023
o APGA more likely to pick Soludo, his chances are bright
102
Political Update
o It will be a tough battle between the 3 parties APC, PDP & APGA
o The level of political sophistication will favour the choice of a
technocrat over a politician
o The southwest is under pressure to consolidate interests
o Fayemi, Amosun, and Tinubu are players to watch in 2021/22
103
March Outlook
104
Outlook for March 2021o Headline inflation will increase towards 17% but will begin to taper in
the months ahead
o The MPC will maintain status quo at its March meeting because of the
positive but tepid Q4’20 GDP growth
o Stock market will lose some more ground with stock prices dipping into
the correction territory
o Average interest rates on deposits will creep up towards 4-5% p.a.
o Vaccine controversy will become a political flash point if mismanaged
o The exchange rate will drift at the IEFX window towards N412/$
105
Outlook for March 2021o Forex rationing will ease and higher sales will bring parallel market
towards N480/$
o Oil price will trade at $58pb after OPEC (+) meeting
o As production climbs back to 1.5mbpd
o Q1’21 growth numbers will be released on May 24, likely to be -0.15%
o Easter is April 4, 2021, we do not expect any surge in domestic and
international travels
o Most international passengers are going for vacation for vaccination
o Mainly to Dubai, Mumbai, Shanghai or Bye Bye
106
Corporate Humour
A committee is a group of people who individually can do nothing but together decide that nothing can be done.– Fred Allen
A homeless musician is one without a girlfriend– Dave Barry
“Nice party” – I see a lot of familiar face lifts– Lt. Frank Drebin
107107
Corporate Humour
What do Christmas trees and a priest have in common? Their balls are just for decoration– Graham Norton
Show me a man who is a good loser and I will show you a man playing golf with his boss.
– Jim Murray
108108
Corporate Humour
The reward for hard work is more work with the less pay.– Anonymous
Accomplishing the impossible means only that the boss will add it to your regular duties– Doug Larson
109109
Corporate Humour
Be nice to people on your way up, because you will meet them on the way down – Wilson Mizner
If you think nobody cares if you are alive or dead, try missing a couple of loan repayments
– Flip Wilson
I think the expression it’s a small world is really a euphemism for I keep running into people I can’t stand
– Brock Cohen110110
Corporate Humour
Everybody can write. Writers cannot do anything else.– Mignon MCLaughlin
A synonym is a word you use when you cannot spell the word you first thought of
– Burt Bacharach
The difference between light and hard is that you can sleep with a light on– Anonymous
111111
112
Bismarck J. Rewane, MD/CEO Financial Derivatives Company Ltd.
Lagos, Nigeria01-7739889
© 2021. “This publication is for private circulation only. Any other use or publication without the prior express consent of Financial Derivatives Company Limited is prohibited.”
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