October LBS 2015

MONTHLY ECONOMIC NEWS AND VIEWS

October 13, 2015

by

Bismarck J. Rewane

Naira Pressure Continues

Presented at Lagos Business School

2

Outline

September Highlights

Global Economic Update

Domestic Economic Performance

Commodity Update

Capital Markets

Policy & Politics

Outlook for October

IT’S SHOWTIME

4

All the President’s men - Dream team or lightweights?

After 125 days Buhari submits a list of ministers to the

Senate

A few minutes to the September deadline

Delay was more from assuaging internal squabbles within

the APC

Aggrieved Senators have been waiting gleefully for their

pound of flesh

Screening of the ministers will be a circus

5

September Highlights – GDP is down and falling

Indications for Q3 GDP growth is that Nigeria is in

stagflation

GDP growth estimates are for 2.5%

Higher than initial consensus forecasts of 2%

Principally because of improved power supply

Agric. output is also expected to be strong in Q3

6

Power is up and stable

National grid output in September up to 4,500MW

Due to higher rainfall and hydro output

Also due to steadier gas supplies from Escravos and

other fields

Oil production in September averaged 1.86mbpd

This is 0.2% above the average in Q2

Combined with the 23.52% decline in oil prices this is a

major revenue blow

7

Government revenue holding up

Revenue shared by the 3 tiers of govt., FAAC, is holding

up strongly at N442.6bn

No new unemployment data, but estimates suggest higher

rural and urban unemployment

The FBN purchasing managers index which measures

investor confidence recovered to 51.6

Higher inventory levels due to forex availability fears

A reading above 50 signals growth

CBN Governor warned of a possible decline into a

recession

8

Oil price crosses $50 pb again

Brent oil price stayed below $50pb throughout

September at an average of $48.66pb

Average for August and September was $48.51pb

8.47% below the benchmark of $53pb

Meaning no accrual into the Excess Crude Account

External reserves declined by 3.03% to $30.3bn

External reserves cover was flat at 4.94 months

9

It’s Showtime

The naira firmed up at the forex cash market to N225/$

Transfers are trading at N240/$

The CBN disallowed banks from accepting dollar cash

deposits

And made the importation of 41 items ineligible for forex

transactions

Banks complained of significant delays by the CBN in the

settlement of forex transactions

Building up a backlog of arrears on letters of credit

10

Nigeria delisted

J.P Morgan delists Nigerian Bonds from the Emerging

Market Index

Broad Money Supply shrank by 2.23% in August

On an annualised basis, the Money Supply contracted by

3.34%

The Treasury Single Account sent shock waves through

the money markets

11

Naira saturation

The Interbank market froze for 2 days, sending interest

rates through the roof

The MPC promptly reduced the CRR from 31% to 25%

Unlocking approximately N700bn of sterilized bank

deposits

Bringing interest rates sharply lower to 0.5% p.a.

Inflation increased to 9.3% in August

Driven both by cost-push pressures and shortages of

banned imports

GLOBAL ECONOMIC UPDATE

13

Faltering global recovery

The international financial community gathers in Peru for

the World Bank meetings

Amidst fears of a faltering global recovery

And uncertainties as to when the Fed will start increasing U.S.

interest rates

The IMF in its fall report is forecasting a deceleration in the

global recovery

Has cautioned commodity dependent economies to adopt

market friendly policies

As a counterbalance for cyclical downturn

14

Emerging markets diverge

Emerging markets and advanced economies moving in

opposite growth directions

The Volkswagen emission control scandal leads to the

CEO being fired

Sending its stock price tumbling

Glencore, the commodity trading giant, saw its stock

price crash

After analysts warned about the debt level on its balance

sheet

15

Deflation in the EU

The Eurozone dipped back into deflation as inflation fell

by 0.1%

Inflation has been below the ECB target of 2% for more

than 2 years

The European PMI shrank from 54.3 to 53.9 in

September

16

China flat-lining

Chinese economy on track to expand 7% in 2015

Slowest pace in 25 years

Slowing manufacturing and a depressed equity market

likely to limit Q3 growth to 6.4%

China is being advised to embrace a consumer driven

growth strategy

Chinese imports have fallen by 20.4% to $145.2 billion

Leading to softness in global commodities

Outlook for global economy dampened

Chinese growth to pick up in Q4

Stimulus measures and higher government spending to take

effect

SUB SAHARAN AFRICA

18

African growth shrinks

African growth likely to decelerate to 3.7% in 2015 amid

falling commodity prices – World Bank

From 4.2% initially projected and 4.6% in 2014

Will be the only developing region to miss global poverty

reduction targets

Terms of Trade deterioration estimated at 18.3%

About 40% for oil exporting countries

19

African growth shrinks

Lower oil price has helped reduce inflation

Policy adjustment to the adverse terms-of-trade shock will

be especially challenging in countries with depleted policy

buffers

Regional inflation is an average of 6.9%

20

Post Conflict Economies Growing Faster

Ethiopia, Ivory Coast, Mozambique, Rwanda and Tanzania

likely to achieve annual growth rates of above 7%

Driven by investments in energy, transport and consumer

spending

To mitigate impact of new shocks, World Bank

recommends

Improvement in efficiency of public expenditures

Strengthening tax administration

21

South Africa – Fears of a recession are real

Growth forecast revised downwards for the second consecutive month by the EIU

From 2% to 1.8% in 2015

And from 2.5% to 2.2% in 2016

Growth constraints include:

Serious power shortages

Declining demand and prices for key mineral exports

Rising interest rates

Downturn in tourism – stringent new visa regulations

Policy uncertainty

Renewed concerns over Chinese economy weighing on the rand

Has lost over18% so far this year

22

Ghana – Woes ahead of elections

GDP growth to remain subdued in 2015 at 3.4%

High inflation will dampen consumer and business

confidence

Annual inflation of 16.9% expected in 2015

The cedi will continue to suffer from volatility in the

coming months

Growing disillusion with economic situation main threat

to economic stability

The EIU expects further protests against the

government’s management of the economy

Presidential and legislative elections will hold in Dec

2016

Commodities COMMODITIES

25

Commodity Prices in September

The Bloomberg Commodity Index (BCOM) declined by

2% in September from August

Volatility in oil prices driven by news from China and

production data from US

-20.00% -10.00% 0.00% 10.00% 20.00% 30.00%

WTI ($/b)

Natural Gas ($/MMBtu)

Silver ($/ounce)

Sugar (US cents/pound)

Rough rice ($/cwt)

PalmOil ($/tonne)

m-o-m change

26

Commodity Prices

The EIU expects agricultural prices to stabilise in 2016

After falling for a 4th consecutive year in 2015

The food, feedstuffs and beverage price index will fall by

17.9% in 2015

When adjusted for the devaluation the impact on

domestic inflation is only 9%

27

Global Oil Prices remain Low

Brent crude declined 9.9% to an average of $48.66pb in

September

From $54pb at the end of August

Despite reports of slower drilling activities in the US

New fears from Russia and U.S. airstrikes on Syria

Weakness in China continues to linger

OPEC still struggling to battle for market share despite

widening fiscal deficit in member countries

28

Soft Commodities

Agric. commodities up 8% on average in September

Gains led by:

Sugar: 20.5% up m-o-m

Palm Oil: 9.4% up m-o-m

Wheat: 5.7% up m-o-m

Due to adverse weather conditions including drought in

India and haze in Indonesia

Increasing fears that supply of crops might be affected

29

Outlook and Impact - October

Low correlation between changes in commodity prices and

movement in stock prices of FMCGs

Stock prices have been driven majorly by negative investor

sentiments and weak corporate earnings

Share Price(N) as at

30th Sept. 2015

m-o-m (Aug/Sept) YTD (Jan-Sept.)

Nestle 869.99 3.57% -12.62%

Cadbury 24 -15.97% -40.00%

Guinness 156.51 12.61% -5.32%

NB 147 21.00% -9.82%

Honeywell

2.68 9.84% -22.54%

Flourmills 22.21 -8.03% -43.25%

30

Outlook and Impact - October

Pacific Investment Management Co. (PIMCO) say that

the worst collapse of commodity price is probably over

In the first week of October, commodities experienced

biggest leap in prices since 2012

Bloomberg Index advanced 3.9% in the week starting on the

5th of October

The recent fall in commodity prices is not justified by

the fundamentals

31

Domestic Commodity Spot Prices Today

Commodity Current Prices (50kg)

LAGOS

Current Prices

(50kg)

KANO

Current Prices

(50kg)

ONITSHA

Cement N1,700/bag N1,650/bag

Cassava (Garri) N6,000/bag N5,000/bag

Maize N2,650/bag N2,300/bag

Flour N6,000/bag N6,300/bag N6,800/bag

Sugar N6,000/bag N10,000/bag

Rice N9,000/bag N10,000/bag

Palm Oil N6,300/litre (25L) N5,500/litre (25L)

Domestic commodity prices were flat to falling in

September

Wheat flour increased in spite of falling world wheat price

Commodities DOMESTIC ECONOMIC PERFORMANCE

33

Leading Economic Indicators

INDICATORS August’15 September’15

(Sep/Aug)%

change October*

Oil Markets

Spot price (avg $’pb) 48.21 48.56 0.73 48.50-49.00

Production (m’bpd) 1.79(Jul) 1.86(August) 3.91 1.89

Money Markets (End Period)

OBB (%)p.a 8.5 5.42 308bps 5.25-5.50

Overnight (%)p.a 9.25 5.92 333bps 5.50-6.00

MPR (%)p.a 13.00 13.00 -- 13.00

CPI ( %) 9.20(July) 9.30 (Aug) 0.1 9.4(Sept)

External Reserves ($’bn) 31.32 30.37 3.03 29.50

Exchange rate (End Period)

Inter-bank (N/$) 198.97 199.08 0.04 199.1

Parallel (N/$) 219.00 223.5 2.01 220.8

Other

Market cap (N’trn) 10.21 10.73 5.09 11.00

FAAC N’bn) 511.8 442.6 13.5 350-400

M2 (N’trn) 18.43 (Jul) 18.51 (Aug) 0.43 18.50-18.70

FBN PMI 49.2 51.6 4.8 -

Vacancy Factor (Residential %) 39 40 1 40

Vacancy Factor (Commercial %) 30 31 1 30

34

FBN Purchasing Managers’ Index

FBN’s PMI reading increased

to 51.6 from 49.2 in August

Output sub-index rose strongly

from 43 in August to 55 in

September

Employment sub-index rose

marginally from 48 to 50

New orders sub-index rose

from 47 in August to 51 in

September

Suppliers delivery times sub-

index fell sharply from 61 to 50

Stock of purchases sub-index

rose from 47 in August to 52 in

September

0

10

20

30

40

50

60

70

Purchasing Managers' Index

August September

35

LEIs – Oil

Average oil prices rose marginally to

$48.66pb

0.93% higher August’s average of

$48.21pb

2.25% below January’s average of

$49.78pb

50.06% below September 2014 average

of 97.44

Fiscal revenue is already feeling the

impact of lower prices

Oil production increased in August

to 1.86mbpd compared to July’s

1.79mbpd

44

45

46

47

48

49

50

51

52

Brent Oil Price ($)

36

Lower Interest Rates

Aberrational spike to 50% due to

implementation of TSA before

easing to 5% with FAAC

disbursement

Average NIBOR (OBB, O/N and

30-day) closed lower at 8.53% p.a.

relative to 11.26% p.a. in August

Interbank interest rates are likely

to remain below 10% due to

system liquidity

Source: FMDQ, FDC Research

0

10

20

30

40

50

60

01

-Sep

03

-Sep

05

-Sep

07

-Sep

09

-Sep

11

-Sep

13

-Sep

15

-Sep

17

-Sep

19

-Sep

21

-Sep

23

-Sep

25

-Sep

27

-Sep

29

-Sep

Interest rates (%)

OBB O/N 30 day

37

Inflation Inches Up Marginally

Inflation inched up to a 2-

year high of 9.3% in August

from 9.2% in July

Due to a rise in the prices of

Healthcare, Alcohol and

Tobacco, Transportation and

Leisure and recreational

activities

Cost push effect of

depreciation

September estimate: 9.4% 7.50

8.00

8.50

9.00

9.50

10.00

Inflation (%)

Forex Market

IFEM and IATA exchange rates

relatively stable at N200/$ &

N199.08/$

Depreciated 2.05% at the

parallel market to N225/$ this

week

Transfer dollars down to

N235/$

Exchange rate differential has

widened to N24.42 from

N20.03 in August

38

180

185

190

195

200

205

210

215

220

225

230

235

July August September

Interbank IATA Parallel

External Reserves – Depletion Continues

External reserves declined

3.03% ($950m) to $30.37bn in

September

Import cover of 4.94 months

of goods and services

Way below Emerging Markets’

average of 11months

Reserves depletion rate will

intensify if oil prices fall below

$45pb

Source: CBN, FDC Research

39

31.46 31.32

30.37

29.80

July Aug Sep Oct**

External Reserves $'bn

40

Misalignment when the value of a currency is outside the

equilibrium path

It could be arising temporarily or structurally due to balance

of payment shocks

Misalignment of the Naira

150.7 158.3 157.3 157.3 169.7 220.5

230.5

0

50

100

150

200

250

2010 2011 2012 2013 2014 2015* 2016*

Naira to US Dollar Exchange Rate

N/$

* Economist Intelligence Unit forecasts

41

Deteriorating Trade Balance

31.8 35

40.9

43.8

26.8

4.6

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014 2015*

Trade balance (US$'Bn)


Down from a high of $44 billion to less than $6 billion

Due to falling oil revenues and sticky import dependence

42

Net Foreign Direct Investment


5.2

8.1

5.6

4.4

3.1 1.8

0

1

2

3

4

5

6

7

8

9

2010 2011 2012 2013 2014 2015*

Net FDI (US$'Bn)

Net foreign direct investment sharply lower

From a peak of $8.1 billion to a projected $1.8 billion in

2015

43

Economic Indicators


-50

-40

-30

-20

-10

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015*

Change in export prices (%) Change in import prices (%)

S/N Indicators % change

1 Change in export prices (37.7%)

2 Change in import prices (-7.6%)

3 Terms of trade 30.1

4 Cumulative devaluation 2014/2015 (26%)

Required adjustment 5% (equal to N10)

44

Economic Indicators


32.3 32.9

44.2 43.6

34.5

30.3

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014 2015*

External Rerserve (US$'Bn) Import/Payment Cover

45

What is the true value of the naira?

Naira/$

Analysts’ Projections

Rencap EIU B of A

230 220 220

Value as per PPP

Rencap (SA) 340

FDC 217.91

Rencap (UK) 185

46

What is the true value of the naira?

Oct-02

=N= US $ PPP ('=N=/US$)

Bottle of Coke (50cl) 100 2.65 37.74

Heineken 350 2.82 124.11

Hamburger (Johnny Rockets Nigeria) 2,100 4.59 457.52

Uncle Ben's rice (S. Pkt) 1,585 3.79 418.21

Toyota Corolla 7,300,000 16,950 430.68

Bottled Water (1ltr) 100 1.43 69.93

Big Loaf Bread 300 2.51 119.52

Irish Spring Soap (1 cake) 300 1.31 190.84

Chicken Drumsticks ( 1 kilo) 800 5.65 141.59

Eggs (One dozen) 480 2.54 188.98

Average PPP 217.91

Naira Price at IFEM 199.05

PPP (%)

Decision: Naira is Overvalued 9.48%

Spot Rate (Parallel) 225

Outcome: Compared to official spot rate of N199.05/$1, the Naira is overvalued by 9.48%

47

What can $100 buy in Nigeria? - RenCap

According to Renaissance Capital, $100 buys almost 50%

less in Nigeria than in SA

Analysis based on a 31 food and groceries basket, fuel and

two services (a cinema ticket and cable TV)

Price variance is due to the fact that most items in the

basket where imported and the fact that the naira is

expensive

In addition, poor infrastructure inflates the cost of production

and transportation

Lagos is as expensive as UK, but wages and per capita GDP

in the UK is13 fold that of Nigeria

48

What can $100 buy in Nigeria? - RenCap

Source: Rencap

49

Nigeria’s Daily PMS Consumption - FBN Capital

Source: FBN Capital

50

Amount spent on Subsidy

Source: FBN Capital

Commodities MAJOR POLICY CHANGES

53

Monetary Policy - Outlook

Fair value of the naira was the “Elephant in the Room”

at the MPC meeting

The CBN continues to use administrative measures to

manage the currency

However, it cannot control the price of crude oil

Oil prices have stayed below $50pb for 6 out of the last

7 weeks

External reserves are down to $30.37bn

A currency adjustment more likely if oil price stays

below $50pb through October

Forex demand will spike as soon as cabinet is in place

Commodities BUSINESS PROXIES

FAAC Allocation Down in September

55

FAAC allocation shared was

N442.6bn in September

13.5% lower than

N511.8bn in August

Revenue loss of $8.6m due to

$5pb decline in oil prices

between June/July

Expect further loss based on

$8pb decline in oil prices

between July and August

500.13

522.05

435

388

409

518.5 511.8

442.6

300

360

420

480

540

600

FAAC (N'bn)

Source: FMF, FDC Research

55

Ships Awaiting Berth Down

Ships awaiting berth in Lagos

ports declined sharply to 34 in

September

From 59 in August

Adverse effect of CBN forex

policy

Goods likely to be diverted to

Lome and Benin

Source: NPA, CBN, FDC Research 56

61

51 49

46 49 49

57 59

34

0

10

20

30

40

50

60

70

No of Ships Awaiting Berth

56

Rig Count Down

Active rigs in Nigeria not following the global trend

Increased to 9 in August from 8 in the previous month

US rigs down by 5% to 640 in the same period

Source: Baker Hughes

885

208

9 0

50

100

150

200

250

300

350

400

450

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15

US Canada Nigeria

57

Power Generation Up but Becoming

Unreliable Again

Average power output from

the national grid rose to

4,500MW

2.3% higher than 4,400MW in

August

Peak: 4,735MW

Lost about 1,000MW this 1st

week of October

Distribution issues

Chaos in Egbin station

Power outages now frequent

in Ghana and South Africa

Average Daily Power Generation (MW)

Source: Nigeria Power Reform

4073.75

3926

4735

2000

2500

3000

3500

4000

4500

5000

16

-Ja

n 2

5-J

an

3-F

eb

1

2-F

eb

2

1-F

eb

2

-Ma

r 1

1-M

ar

20

-Ma

r 2

9-M

ar

7-A

pr

16

-Ap

r 2

5-A

pr

4-M

ay

13

-May

22

-May

31

-May

9-J

un

18

-Jun

2

7-J

un

6-J

ul

15

-Jul

2

4-J

ul

2-A

ug

11

-Aug

2

0-A

ug

29

-Aug

7

-Sep

1

6-S

ep

58

Commodities RETAIL INDUSTRY

60

2015 Global Retail Development Index (GRDI)

2015 Rank Country GRDI Score

1 China 65.3

2 Uruguay 65.1

3 Chile 62.3

4 Qatar 59.1

18 Botswana 49.8

23 Nigeria 47.1

30 Angola 44

A.T. Kearney says SSA will be the big story by 2040

The region presents opportunities just starting to open up

Three SSA economies ranked in this year’s Global Retail

Development Index

61

Global Retail

Botswana

Total retail sales estimated at $6.3bn

CAGR (2010 -2014): 7.2%

It is one of Africa’s most stable countries both politically

and economically

Features fairly well-established infrastructure

62

Global Retail

Angola

Retail sales estimated at $41.9bn

CAGR (2010 -2014): 10.3%

Widespread informal sector still dominates

Local production facilities are limited

Infrastructure is underdeveloped

But locally owned retail networks are expanding rapidly

63

Global Retail

Nigeria

Retail sales estimated at $135bn

CAGR (2010 -2014): 12.7%

Still dominated by traditional and informal formats

But becoming more organised and modernised

A growing number of Nigerians order goods online

64

Domestic retail sales up in September mainly due to

back-to-school shopping

Sale of stationeries increased

Stores also increased their inventory levels slightly in

anticipation

Prices of goods remained relatively unchanged

Retailers struggle to pass on costs to consumers

Domestic Retail

65

Weekend traffic increased slightly

Cash-to-card ratio unchanged at 65:35

Appointment of ministers will bring some clarity to fiscal

policy

Expect increased retail investments as investors re-enter

the market

Domestic Retail

Commodities REAL ESTATE

67

A lot of vacant properties across Lagos

Casualty of transparency and money laundering

Combination of liquidity constraint and fear of probe

Money has not been released into the sectors with no

ministers

Treasury Single Account also contributed to liquidity

constraint

Now a buyer’s market as sellers crash property prices

Some people selling off their properties in Eko Atlantic to

clear off debts

Real Estate – Domestic

67

68

Residential vacancy factor sharply up in Lekki to 63% in

September

From 58% in August

Vacancy mainly in Agungi, Oniru

Commercial vacancy factor in Lekki up to 58%

From 57% in August

No significant recovery expected this year until 1st half of

2016

Real Estate – Domestic

68

69

Vacancy Factor Up

Source: FDC Research

0% 5%

10% 15% 20% 25% 30% 35% 40%

Victoria Island

0% 5%

10% 15% 20% 25% 30% 35% 40%

Jan-

15

Feb-1

5

Mar-

15

Apr-

15

May-1

5

Jun-

15

Jul-15

Aug

-15

Sep-1

5

Ikoyi

0% 10% 20% 30% 40% 50% 60% 70%

Residential Vacancy Factor Commercial Vacancy Factor

Lekki

Commodities AVIATION UPDATE

71

Aviation – Financial Results Weaken

Airline shares fell 5% in August compared to the 4%

boost in July

Markets were impacted by developments in the Chinese

economy

Airlines in Asia Pacific were most impacted with a loss of

15%

Passenger yields remain weak globally

Average global fares were down 13% in US $ terms in

Jan-July’15 relative to corresponding period in 2014

72

Aviation - Load Factors

Global load factor reaches record level of 84.7%

Passenger load factor in July 2015 was 71.2 % in Africa

compared to 87.6% in North America

Global load factor for August and September expected to

have increased, as many return to school/work

73

Aviation - Profits

Global airline industry net post-

tax profit for 2015 is $29.3

billion

$8.27 per departing passenger

Compared to $177 profit Apple

made on each product sold in Q1

74

Airline News

Government of Mozambique has stepped in to rescue

state owned Linhas Aéreas de Moçambique (LAM)

LAM in bad financial shape despite monopoly status and high

prices

Prime minister requests independent audit of the airline

which relies on government for financial sustainability

75

Airline News

Lufthansa Group will serve 261 destinations in 101

countries

2014: 260 destinations in 100 countries

Air France cuts 2,900 jobs

Including 1,700 ground staff, 900 cabin crew and 300 pilots

Part of effort to cut costs and cope with pressure from low-

costs competition in Europe and the Middle East

76

Airline News

Arik Air denies bankruptcy allegations previously

published by online site

Claims that it maintains over 100 flights per day, and is

expanding operations to other African cities including Abidjan

and Cotonou

Airline has also resumed flight services from Lagos to

Monrovia, Liberia following the end of the Ebola plague in the

country

Emirates launches $20 million global ad campaign with

new cheeky commercial

Featuring Hollywood's A-lister, Jennifer Aniston

78

Domestic Aviation

International air traffic declined by 27.93% in Q2,

according to the National Bureau of Statistics

Reduced public sector travelling due to Buhari Administration

Reduction in the use of private jets

Domestic travel increased marginally by 0.71% to 2.37m

Domestic flight passengers represented 69.37% of the

Nigeria’s total air traffic in Q2

79

Domestic Aviation

Murtala Muhammed Airport recorded the highest number

of passengers

39.4% of total domestic air traffic and 69.43% of international

air travel passengers

Challenges facing the industry include:

Poor airport infrastructure

Cost of operation and fuel

High interest rate on credit facility from banks

The national carrier will be another dead on arrival project

80

Steals & Deals

Lufthansa great value premium economy flights to :

New York $1,206

Washington $1,218

Chicago $1,245

Boston $1,253

Toronto $1,171

Vancouver $1,453

Dublin $622

Madrid $630

Geneva $644

London $765

81

Flight Fare Promos

Airline Destination Price (N)

South African Airways Johannesburg from 124,380

Etihad Airways Dubai from 129,999

Qatar Airways Dubai from 142,500

Virgin Atlantic London from 198,768

British Airways London from 198,768

Delta Airlines New York from 240,500

82

Outlook

Global GDP for 2015 is projected at $760 billion in 2015

Translating into higher profits and returns on capital for

airlines

Predicted 7.5% returns on capital for airlines in 2015

Air fares are expected to fall as supply increases

Commodities STOCK MARKET

Global Equity Markets

Emerging markets indices

drop as traders dump

emerging market equities

Shrinking global growth and

economic slowdown in Asia

drag the S&P 500 down by

4.47% - worst quarter since

2011

NSE ASI outperforms major

indices around the world

84

85

Nigerian Stock Market Review

Market trades sideways on local and foreign news

BC30 index gained 8.52% in September as against 8.97% in August

Scottfree’s average P/E ratio was 7.06x 30 day volatility was 26.59%

Dividend yield 3.90%

Scottfree BC30 Index

28,500.00

29,000.00

29,500.00

30,000.00

30,500.00

31,000.00

01

-Sep

-15

03

-Sep

-15

05

-Sep

-15

07

-Sep

-15

09

-Sep

-15

11

-Sep

-15

13

-Sep

-15

15

-Sep

-15

17

-Sep

-15

19

-Sep

-15

21

-Sep

-15

23

-Sep

-15

25

-Sep

-15

27

-Sep

-15

29

-Sep

-15

NSE ASI

NSE ASI

Source: Solactive, FDC Research Source: NSE, FDC Research

86

September 2015 Highlights

NSE ASI gained 5.16% during the month, -6.69% in Q3, and -

9.92% YTD

Market capitalization increased by 3.78% from N10.21tn to

N10.59tn

Diageo announces intent to increase equity stake in

Guinness Nigeria to 70%

Treasury single account took effect

Neutralized by reduction of CRR to 25% from 31%

JP Morgan delists Nigeria from its government bond index

87

All sectors recorded positive performance except for Oil

& Gas

Consumer goods sector propped up by NB, Guinness &

Unilever despite rising inflation

Sectoral Performance

88

Corporate Earnings in September

UBA H1 2015 result mirrored performance of its tier 1

counterparts

Loan loss provision up 70.82%

Earnings Per Share of N0.94

Declared interim dividends of N0.20

Payout ratio of 21.3%

UBA PLC

N'000mn

H1 2015 H1 2014 % Change

Net Interest Income 65,658 55,211 18.92

PBT 39,046 22,856 70.83

Net Interest Margin (Annualized) 7.23% 9.60% -24.69

Earnings Per Share (Kobo) 0.94 0.71 32.39

Total Assets 2,929,278 2,762,573 6.03

Loan Loss Provision 3,500 2,049 70.82

Total Expenses 73,820 63,947 15.44

89


Rising inflation and reduced disposable income hits the

consumer goods

Guinness and PZ Cussons report declining PBT and EPS

No respite in sight for Q3 results

90


Decline in GPI - Reflection of economic activities

Reduced operating cost boosted underwriting profits

Standard Alliance’s PBT augmented by increase in

investment income

91

Reallocation of Asset Mix

92

Analysis of Asset Mix

A gradual shift from supranational bonds as their yields

become less attractive

Asset managers dump equities as poor corporate results

and volatility erode market capitalization

A significant shift away from real estate

93

Equity Market Outlook for October

Poor Q3 results may weigh on the markets and wipe out

gains

JP Morgan index delisting implementation will hurt

equities in October

Trade volumes and market capitalization to pick up on

renewed interest in the market

Trial of oil barons will hit banking stocks

Exchange rate uncertainty will hurt market sentiment

Commodities POLITICAL RISK ANALYSIS

95

Political Outlook/Cabinet Anticlimax

The army you have and not that you wish to have

Six months after the election

Five months since the transition committee

Buhari releases names of his dream team

Critics called it a downer and some light weights

Realists said the wait was not worth it

Energy/Integrity Economic Output Matrix

ENERGY

INTEG

RIT

Y

HIG

H

LOW

LOW HIGH

AGE

AG

E

Great

to have!

Good to have!- Median

score

More

likely Suboptimal

Undesired

Positive

Economic

Output

Minority outliers

Reveals the bulk of the team in the upper right quadrant,

lower level

97

Political Outlook/ Cabinet Anticlimax

High physical energy, satisfactory mental energy, astute

political skills

Those with medium integrity can be controlled and

managed

Stated priorities

War against insurgency

War against corruption

Blocking leakages

Stabilizing economy

Stimulating recovery

Reform

Commodities OUTLOOK

100

The Economic Reality

According to the EIU October 2015 report

“Expect significant upheaval as the patronage networks

of the outgoing administration are dismantled

Economic policy announcements are likely to be

ambitious

Actual policy reform- particularly in the vital oil industry-

will be slow

The politicization of economic policy will also slow the

reform agenda”

101



“Fiscal expenditure will remain dominated by recurrent

spending, despite efforts to boost capital investment

Growth will remain below potential

Hit by troubles in the oil sector and by the country's

crippling infrastructure deficit”

102



“Inflation will ease after a rise related to currency

weakness in 2015

The naira will fall sharply in 2015, reflecting lower oil

earnings

The current account will slip into a deficit in 2015-16

Owning to the oil price slump”

103

Outlook – Reality will set in

The World Bank meeting in Peru has shed some light on

policy direction

Sustained lower oil prices will push monetary policy

towards currency adjustment

Petroleum subsidies will have to be reviewed in

November/December

The trial of the Senate President will be adjourned

As the Senate approves most of the Ministers

104


More Federal appointments will be announced to

compensate the states not in the cabinet

The Interpol, EFCC dragnet will take down major

casualties in the private sector

Reputation, financial and market risks will escalate and

bring down banking stocks

Simmering systemic risks associated with oil scandals will

affect the banking system

105


Inflation in September will inch up marginally to 9.5%

Elections will be annulled in most oil producing states

The risks of violence in the bye elections and Bayelsa is

very high

APC clamour for electoral compensations and IOU’s will

put pressure on Buhari

The President will stay steadfast

106

Corporate Humour

106

Kenneth Tynan

Immature poets imitate; mature poets steal.

- T. S. Eliot

A critic is a man who knows the way, but

cannot drive the car.

107

Corporate Humour

107

The dead actor requested in his will that his

body be cremated and ten percent of his ashes

thrown in his agent’s face.

The United States is like the guy who gives

everybody cocaine at a party and still

nobody likes him.

It is better to be wanted for murder than not to be

wanted at all.

- Anonymous

Jim Samuels-

- Marty Winch

108

Corporate Humour

108

To reduce stress, avoid excitement, spend more

time with your spouse.

Never mistake endurance for hospitality.

- Robert Oben

Anonymous

109

Corporate Humour

109

Never mistake motion for action.

Flies spread disease – keep yours zipped.

- Ernest Hemingway

Anonymous -

110

Corporate Humour

110

One should forgive ones enemies but not before

they are hanged.

Running is an unnatural act, except from

enemies and to the bathroom.

- Heinrich Heine

Anonymous -

111

Bismarck J. Rewane, MD/CEO Financial Derivatives Company Ltd.

Lagos, Nigeria 01-7739889

Economy & Finance

October LBS 2015