Nigeria 2016 Outlook - to be or not to be
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Nigeria Outlook 2016 GTI Research …to be or not to be January 2016
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Transcript of Nigeria 2016 Outlook - to be or not to be
Nigeria Outlook 2016
GTI Research
…to be or not to be
January 2016
2
Table of Content
Acronyms
List of Figures and Tables
1.0 Executive summary …………………………………………………………………… 6
2.0 2015 Review of the Global Economy ………………………………………………….. 7
2.1 A Year of Suspense …………………………………………………………… 7
2.1.1 The USA …………………………………………………………… 8
2.1.2 The Euro-Area …………………………………………………... 8
2.1.3 China ……………………………………………………………………. 9
2.1.4 Japan ……………………………………………………………………. 9
2.1.5 Brazil ……………………………………………………………………. 9
2.1.6 Russia …………………………………………………………………… 10
3.0 Nigerian Economy in Review ………………………………………………………….. 10
3.1 GDP …………………………………………………………………………….. 11
3.2 Inflation ……………………………………………………………………. 12
3.3 Interest Rate (MPR) …………………………………………………………… 13
3.4 Unemployment …………………………………………………………… 14
3.5 Exchange Rate …………………………………………………………… 15
3.6 Money Market …………………………………………………………… 16
4.0 The Nigerian Capital Market in 2015 …………………………………………………... 18
4.1 Recapitalization, MOS and Capital Flight …………………………………. 18
4.2 Bond Market …………………………………………………………………….. 20
Sectors
5.0 Oil and Gas ……………………………………………………………………………... 24
5.1 Global Energy Trends …………………………………………………… 24
5.2 Upstream Oil and Gas …………………………………………………… 25
5.2.1 Declining Unconventional Oil to Support 2016 Prices? ………... 25
5.3 Energy in Nigeria …………………………………………………………….. 26
5.3.1 Upstream …………………………………………………………….. 27
5.3.2 Midstream …………………………………………………………….. 28
5.3.3 Downstream …………………………………………………………….. 28
5.3.4 Power and Gas ……………………………………………………. 29
5.4 Energy Winning Team ……………………………………………………. 30
5.5 Investment Case …………………………………………………………….. 31
6.0 Mining ……………………………………………………………………………… 32
6.1 Overview of Nigeria Mining and Extractive Industry ………………… 32
3
6.2 Other African Countries with Good Mining Pedigree ………………… 34
6.3 Nigeria’s Mining Sector …………………………………………………… 35
6.3.1 The Way Forward ……………………………………………………. 35
6.4 The Nigerian Strategy ……………………………………………………. 35
6.4.1 Taxation and Finance ……………………………………………………. 35
6.4.2 Joint Venture …………………………………………………………….. 36
6.5 Recommendations for Liquidity Challenge in Mining Sector ……….... 37
6.5.1 Government Backed Corporate Bond ………………………….. 37
6.5.2 Proposed Criteria for Qualification …………………………………... 37
7.0 Agriculture ……………………………………………………………………………… 38
7.1 Agriculture Renaissance ……………………………………………………. 38
7.2 Capital Market Activities in the Sector …………………………………... 39
8.0 Banking ………………………………………………………………………………. 41
8.1 Aftermath of TSA Implementation ……………………………………………. 42
8.2 Headwinds …………………………………………………………………….... 43
9.0 Manufacturing …………………………………………………………………….... 44
9.1 Challenges ……………………………………………………………………… 46
9.2 Opportunities ……………………………………………………………………… 46
10.0 Industrial Goods ……………………………………………………………………… 47
10.1 Hot Stocks ……………………………………………………………………… 48
Outlook for 2016 …to be or not to be
11.0 The Outlook for 2016 ………………………………………………………………………. 50
11.1 The Budget ………………………………………………………………………. 50
11.2 The Global Economy ……………………………………………………………… 51
11.3 2016 Economic Tailwinds (TO BE) …………………………………………….. 52
11.4 2016 Economic Headwinds (NO TO BE) ……………………………………. 52
11.4.1 Falling Oil Prices ……………………………………………………... 52
11.4.2 Inflationary Pressures …………………………………………….. 53
11.4.3 Exchange Rate ……………………………………………………... 53
12.0 Conclusion ……………………………………………………………………………….. 54
4
Acronyms
ASI All Share Index
BOJ Bank of Japan
BRICS Brazil, Russia, India, China, (South Africa)
CBN Central Bank of Nigeria
CPI Consumer Price Index
CRR Cash Reserve Ratio
DMB Deposit Money Banks
ECB European Central Bank
FAAC Federal Accounts Allocation Committee
FX Foreign Exchange
GDP Gross Domestic Product
IMF International Monetary Fund
MOS Minimum Operation Standard
MPC Monetary Policy Committee
MPR Monetary Policy Rate
NBS National Bureau of Statistics
NIBOR Nigerian Inter-Bank Offered Rates
NSE Nigeria Stock Exchange
OECD Organization for Economic Co-operation and Development
OMO Open Market Operation
OPEC Organization of Petroleum Exporting Countries
PFA Pension Fund Administrators
QQE Qualitative and Quantitative Monetary Easing
RDAS Retail Dutch Auction System
WDAS Whole Sale Dutch Auction System
TSA Treasury Single Account
USA United States of America
5
List of Figures
Figure 1: World Economies’ Projections
Figure 2: Three-Year GDP Growth Rate
Figure 3: Oil and Non-Oil Growth Rates
Figure 4: Consumer Price Index Movement in 2015
Figure 5: Interest Rate Movement in 2015
Figure 6: Nigerian Unemployment Rate Movement
Figure 7: Average Exchange Rate
Figure 8a: Foreign Exchange Movement in 2014
Figure 8b: Foreign Exchange Movement in 2015
Figure 9: Domestic and Foreign Portfolio Participation in Equity Trading, 2015
Figure 10: Nigeria Stock Exchange Indexes, 2015
Figure 11: OTC Turnover of Assets Class Transactions in 2015
Figure 12: Crude Oil Prices Movement, 2015
Figure 13: Commodities Price Indexes for 2013-2015
Figure 14: Profitable Price Levels for Crude Oil Production
Figure 15: NSE All Share Index vs NSE Oil and Gas Index
Figure 16: NSE Banking Index Movement, 2015
Figure 17: Two-Year Consumer Price Index, Nigeria
Figure 18: Historical Contribution of Manufacturing Sector to GDP
Figure 19: Composition of the Nigerian Manufacturing Sector, 2013
Figure 20: Distribution of Challenges in the Manufacturing Sector
Figure 21: Contribution of Manufacturing Sector to Export
Figure 22: Budget Expenditures, 2016
List of Tables
Table 1: Treasury Bills
Table 2: Electricity Tariff Regime
Table 3: Minerals, Location and Description, Nigeria
Table 4: Overview of Nigeria’s Economic Outlook and Projections
6
1.0 EXECUTIVE SUMMARY
‘’To be, or not to be’’ is the dilemma that confronts the Nigerian economy in 2016. The largest
economy in Africa has continued to perform below its potentials given its inherent potentials.
The crash in crude oil prices, the exchange rate volatility, weak infrastructure, lack of political
willpower to implement aggressive fiscal reforms, policy inconsistencies and many more are
some of the major challenges that has plagued the country in the past.
Our 2015 review takes a critical look at how the Nigerian economy fared in the just concluded
year, analyzing the domestic economic challenges and pass through effects from other global
economies. The impact of the crash in crude oil prices (over 60% decline between 2014 and 2015)
weighed heavily on the Nigerian economy, clearly because of the country’s reliance on crude oil
for up to 70% of its foreign exchange earnings. The impact also trickled down to exchange rate,
creating a huge volatility as a result of the country’s import dependence.
The effect of the heightened volatility in the country’s foreign exchange, as well as the pressure
in the prices of other commodities resulted in a massive capital flight. The Central Bank of Nigeria
(CBN) came up with very harsh currency control policies to ease the pressure on the fast depleting
foreign exchange reserve. The implication of these harsh currency control policies of the CBN was
the eventual delisting of Nigerian bonds from the JP Morgan Index for Emerging Markets which
triggered another round of capital flight in the bonds market. The year 2015 fast became a year of
consequences for the Nigerian Economy.
Our outlook for 2016 clearly appreciates the challenges ahead of the country and takes an
objective view of what can be done (or is being done) to help re-awaken the sleeping giant. The
major focus for 2016 is the expansionary budget being proposed by the government (the largest
ever in the country’s history). We took a look at the benefits of this budget to the economy,
focusing on the real sector, job creation, inflation and economic diversification. We also focused
on the impact of the TSA implementation and the anti-graft efforts of the government on fiscal
responsibility.
Based our review of 2015 and our outlook for 2016, the options clearly available to the sleeping
giant of Africa in 2016 are …to be, or not to be.
7
2.0 2015 REVIEW OF THE GLOBAL ECONOMY
2.1 A Year of Suspense
The year 2015 will go down in recent history as one filled with absolute suspense. It was mostly
characterized by uncertainties in both developed and emerging market economies. The year
inherited the global crude oil and commodities crises which started in the twilight of 2014 and
extensively coloured business activities all over the world. This reduced capital flow into
emerging markets and developing economies in the course of the year.
As a result of these challenges, global economic Institutions such as the IMF, World Bank, OPEC,
OECD among others were kept on their toes. Reviews and re-valuations of economic projections
were undertaken in order to provide fair and realistic estimates to crisis stricken economies.
In January 2015, at the first IMF World Economic Outlook review, the monetary body projected
that the world economies; the USA, the Euro-area, China, Nigeria and the Sub-Sahara African
would grow by 3.5%, 3.6%, 1.2%, 6.8%, 4.8% and 4.9% respectively. At the last review in October
2015, the projections were revised to 3.1%, 2.6%, 1.5%, 6.8%, 4.0% and 3.8% respectively as shown
in Figure 1.
Figure 1: World Economies’ Projections
Source: IMF, GTI Research
-6
-4
-2
0
2
4
6
8
10
World Economies' Projection
2013Actuals 2014Actuals 2015Forecasts
8
In other to help resuscitate ailing economies, most governments across the world especially in the
Eurozone instituted bail out programs for their respective economies. This cushioned the effect
on the economy and helped limit sharp currency depreciations.
We have taken time to review the peculiarities of key economies below and how they fared in
2015.
2.1.1 The USA
According to IMF, the USA economy was the shining star among the league of developed
countries in 2015. While the other majors suffered economic headwinds, the US economy
advanced on an annualized 2.0% in the third quarter (Q3) ended September 2015 (latest GDP
report). This figure was above market expectations of 1.9% growth and was boosted by household
spending and fixed investment.
One of the major indicators that benefited immensely from the robust GDP was jobless rate which
came down to 5% (November readings), the lowest in more than seven (7) years, while total
nonfarm payroll employment increased by a higher-than-expected figure of 211,000. Job gains
occurred in construction, professional and technical services and health care.
With this development, the Federal Reserve at its December 16th, 2015 meeting raised US
benchmark interest rate by 0.25% to 0.50% in order to sustain labor market and boost inflation
level projected to rise to the 2% target over the medium term. Note that the US inflation currently
stands at 0.2% (November readings).
2.1.2 The Euro-Area
The Euro-Area had a challenging year in 2015, ranging from the Greek economic debacle to the
recent refugee crises; the challenges were relentless. In order to help stabilize the area’s economy,
the European Central Bank (ECB) launched a quantitative easing exercise by purchasing €60
billion asset (bond) on a monthly basis until there is an improvement on key economic indicators.
This was aimed to boost growth and fight low inflation. On the average, the goals were
moderately achieved with the area’s inflation figure standing at 0.2% as at November 2015. Most
recently released GDP report showed that production level stood at 0.3% in Q3 2015; lower than
Q1 figure of 0.5% but stayed above the negative level witnessed in 2013. Household consumption
was the main driver of growth, offsetting a negative impact from external trade. Major member
states contributor to Q3 growths were, UK (+2.1%), Romania (+1.4%), Croatia (+1.3%), Malta
(+1.1%), Latvia (+1.0%), Poland & Slovakia (both +0.9%) and Spain & Sweden (both +0.8%).
9
2.1.3 China
If there was any economy that gave the world a cause for concern in 2015, it was the Chinese
economy. It performed extensively below market expectations. Having reached a GDP of $10.4
trillion in 2014 (crossing $10 trillion mark for the first time) - accounting for 13.4% of the world
economy and 59.5% of the US economy - the Chinese economy was expected to provide stability
for the world economy in 2015.
Unfortunately, the projection came at a time when industrial activities was at a full employment
level and real estate at consolidation stage. These, coupled with global commodity price
softening, were headwinds for the Chinese economy. The government provided intervention
funds to the economy on a number of occasions to jumpstart the economy in the course of 2015
as well as devalued the Renminbi. The recent GDP figure showed that production stood at 6.9%
as at Q3 2015, slightly down from 7.0% in Q2 2015 and the weakest since Q1 2009.
2.1.4 Japan
Japan, the third (fourth with the inclusion of Euro-area) biggest economy in the world, had its
fair share of the economic crisis as it struggled all through 2015. The economy suffered from weak
industrial production, low consumption level, high deflationary risk and global commodity price
crises. The government, through the Bank of Japan, initiated quantitative easing in order to
cushion the negative effects on the economy on a number of occasions. The most recent was the
¥80 trillion quantitative and qualitative monetary easing (QQE) at its December 2015 meeting.
Recent reading on industrial production showed that Q3 2015 GDP grew by 0.3% to avoid
recession having returned a -0.1% growth in Q2 2015. This was above market expectation of flat
reading. Positively, domestic demand edged up 0.1%, adding 0.1 percentage point to growth,
compared to an initial estimate of a 0.3% drop.
2.1.5 Brazil
The biggest economy in the Latin-American region and one of the “BRICS”, has struggled in
recent times. Low commodity prices, high inflation, depressed confidence levels and political
crisis have combined to push the economy into a deep recession with no end in sight. The GDP
shrank 1.7% in Q3 2015, the largest annual contraction on record, undershooting analysts’ already
dismal expectations. This is the third contraction in a row as investments shrank for the ninth
straight quarter while household spending posted the third consecutive decline.
10
Unfortunately, all economic indicators are on a rout. Inflation in November climbed from
October’s 9.9% to 10.5%, which marked the highest figure since November 2003. Consequently,
inflation remains far above the Central Bank’s tolerance margin of +/- 2.0% points around 4.5%.
2.1.6 Russia
Russia’s economy, the sixth biggest economy in the world (when the Euro-area is taken as a
block), had a rough year in 2015. In addition to economic pressures due to western sanctions
driven by military intervention in Ukraine in 2014, the economy suffered extensively the effect of
weak oil and commodity prices. Major characteristics of the economy were; high inflation and
unemployment rate, weak investment and tight fiscal policy. In the recent growth reading, Q3
2015 GDP returned at -0.57% and remained in recession for the fifth time consecutively backdated
to Q3 2014.
Year-on-year, the economy contracted by 4.1%. Unemployment rate has been on the increase,
rising to 5.8% in November from 5.5% in October and above market expectations of 5.6%. It is the
highest rate since April 2015. Rising inflation also plagued the economy in 2015 as reported
figures were far above benchmark (15.0% in November 2015, though lower than 15.6% in the
previous month).
3.0 NIGERIAN ECONOMY IN REVIEW
The saying “it never rains but it pours” depicted in absolute terms, the Nigerian economic
adventure in 2015. The economy rode through stormy waters beginning with the keenly
contested general elections, heightened insurgency and the global commodity price crises.
Pressures from these sources provided a negative bearing on the exchange rate, external reserve
and inflation.
The Central Bank of Nigeria (CBN) intervened by employing tight monetary policies to cushion
the impact on the wider economy. Among these interventions were the devaluation of the Naira,
closure of rDAS/wDAS forex window and restriction on the amount of US dollar accessible by
businesses and investors from the banks. This put a strain on foreign portfolio investors’
participation in the economy and equally led to capital flight.
Further intervention activities by the CBN led to the downward review of the benchmark
Monetary Policy Rate (MPR) and Cash Reserve Ratio to 11.0% and 20.0% from previous 13.0%
and 25% respectively in order to boost liquidity and credit to jumpstart the real sector.
11
Despite the challenges, the Nigerian economy remains central to the world economy (currently
the biggest economy in Africa) and the revival of Sub-Sahara African economy. Huge natural
endowments (human and materials) remain major incentives for expected growth of the
economy. Furthermore, our analysis on the Nigerian economic performance in 2015 is well
articulated when viewed from the various economic indices, amongst which are;
3.1 Gross Domestic Product (GDP)
On a year–on-year comparison, the Gross Domestic Product (GDP) stuttered all through the first
three quarters of 2015, reflecting the increased challenges in the global space. However, the latest
productivity data showed a GDP growth of 2.84% in Q3 2015, representing 0.49 percentage points
appreciation from 2.35% in Q2 2015 as shown in Figure 2 below.
Figure 2: Three-Year GDP Growth Rate
Source: NBS, GTI Research
The oil sector, still faced with depressed global oil prices and weak demand, grew by 1.06% (year-
on-year), representing a growth of 4.65% from the figure posted in the corresponding period of
2014. On a quarter-on-quarter basis, growth improved in Q3 as against Q2 when it dropped by
6.79%. Growth here was boosted by increase in crude oil production to 2.17 mbpd, 0.17 mbpd
higher than Q2 level. In Q3 2015, oil sector’s contribution to the real GDP stood at 10.27%, 18 basis
points lower from the share recorded in similar period of 2014, and 47 basis points higher from
the share posted in Q2 2015 (Figure 3).
The non-oil sector performance within the period was marginally lower than the previous
quarter. At 3.05% growth, the sector fell by 41 basis points against Q2 2015 contribution, and
4.45% lower than the corresponding Q3 2014. This is the fourth straight quarter of lower-lows in
this session. Despite this decline, the sector continued to contribute significantly to the real GDP.
4.455.40
5.17
6.77
6.21
6.54
6.235.94
3.962.35
2.84
0
1
2
3
4
5
6
7
8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2013 2014 2015
% GrowthReal GDP Growth for Nigeria
GDP (%)
12
Its’ contribution stood at 89.73%, marginally higher than 89.55% posted in corresponding period
of 2014, but lower than 90.2% recorded in Q2 2015.
Figure 3: Oil and Non-Oil Growth Rates
Source: NBS, GTI Research
3.2 Inflation (Year-on-Year)
The Consumer Price Index (CPI) was within single digit all through 2015. However, rising
inflation became of significant concern to monetary policy administrators and economists as
inflation rose above the Central Bank’s tolerance limit of 9.0% in June 2015. This was a worrying
sign for business owners and the populace because of rising price levels of goods and services
that prevailed for most parts of the year.
The latest inflation figure for November 2015 stood at 9.4%, representing a growth of 10 basis
points over 9.3% recorded in October as shown in Figure 4. This was the highest rate on record
ever since February 2013. A closer analysis shows that the advanced pace in November’s CPI was
impacted by price increases across all the sub-components of the index (food and non-food
categories).
Figure 4: Consumer Price Index Movement in 2015
Source: NBS, GTI Research
-20-15-10
-505
1015
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2013 2014 2015
Oil & Non-Oil Growth
Oil (%) Non-Oil (%)
7.07.58.08.59.09.5
10.0
Dec. '14 Jan. '15 Feb. '15 Mar. '15 Apr. '15 May '15 Jun. '15 Jul. '15 Aug. '15 Sept. '15 Oct. '15 Nov. '15
Inflation Index Movement
CPI (Headline (%)) 12-mth average (%)
13
Meanwhile, the Food Sub-Index Category which carries a greater weight in the CPI computation
increased to 10.3% year-on-year, representing 20 basis points growth higher than 10.1% reported
in the previous month. The Core Sub-Index Category (all items less farm produce) which takes
into account imported finished goods among others, closed at 8.7%, (same rate as was recorded
in October 2015).
Despite the flat close, it was yards away from January’s record of 6.79%. We observed that this
was as a result of heightened pressure on the FX window in the face of global commodities crisis.
3.3 Interest Rate (MPR)
As indicated earlier, the CBN’s Monetary Policy Committee (MPC) at its final meeting in
November 2015, moved the Nigerian benchmark interest rate (MPR) down to 11.0%, representing
200 basis points cut from previous 13.0%. This was the first time the benchmark rate had been
reduced since 2009 and the CBN highlighted that it aimed to unlock liquidity into the system in
order to jumpstart the economy and channel liquidity into the real sector.
Note that the Monetary Policy Rate averaged 10.02% between 2007 and 2015 and reached an all-
time high of 13% in November of 2014 (Figure 5). This figure prevailed through 2015 until it was
cut in November. The policymakers also widened the interest rate corridor by 200 bps above and
700 bps below the benchmark interest rate, bringing the CBN’s cost of borrowing to 4% and cost
of lending to 13%.
Beyond interest rate management, the CBN is expected to manage liquidity in the interbank
market as well. This is done through the sales of treasury bills at the Open Market Operations
(OMOs) and regulation of Cash Reserve Requirement (CRR) movement in order to mop-up
excess liquidity in the system. In this regard, the MPC also lowered the CRR by 500 basis points
from 25% to 20%. This was intended to boost liquidity and credit extension capacity of Deposit
Money Banks (DMBs) to the investing units of the economy.
14
Figure 5: Interest Rate Movement in 2015
Source: CBN, FMDQ, GTI Research
With the CBN restricting the number of import products that can be funded through the official
FOREX window and the attendant pass-through effect, there was increased level of volatility in
the inter-bank interest rates movement as shown in Figure 5. The Overnight (O/N) call rate
opened the year at 12.87% and reached a high of 81.4% in November 2015, and eventually closed
the year at 0.84%. The 90-day Treasury-Bill rate exhibited divergent movement all through the
year; it averaged 9.83% and was highest in January 2015 at 11.2%. Prime and Maximum lending
rates at averages of 16.84% and 26.7% respectively were way above the MPR all through the year.
These were areas of concern all through the year as it determined the rates businesses and the
investing public accessed funds from the DMBs.
3.4 Unemployment
Early in the year, the National Bureau of Statistics (NBS) modified the methodology for data
gathering and computation of unemployment rate in Nigeria for a more competitive data
estimation. With the new method, the NBS defines unemployment as the proportion of those in
the labour force (not in the entire economic active population, nor the entire Nigerian population)
who are actively looking for work but could not find work for at least 20 hours during the
reference period to the total currently active (labour force) population. Accordingly, one is
unemployed if one did absolutely nothing at all or did something but not up to 20 hours in a
week.
0
5
10
15
20
25
30
Jan. '15 Feb. '15 Mar. '15 Apr. '15 May '15 Jun. '15 Jul. '15 Aug. '15 Sept. '15 Oct. '15 Nov. '15
% G
row
th
Interest Rate Movement
MPR
Inter-BankCall
Treasury BillRate
SavingsDeposit Rate
PrimeLending Rate
MaximumLending Rate
15
The new method showed that unemployment rate in the Country fell below double digit. The
new computation was back dated to Q3 2014 with unemployment rate reported at 9.7% while the
subsequent quarter’s (Q4 2014) rate stood at 6.4%. As the economic environment became
somewhat challenging, especially in 2015 with some firms cutting down their personnel size, the
figure accelerated to 7.5%, 8.25 and 9.9% in Q1, Q2 and Q3 2015 respectively. Figure 6 shows an
up-to-date transition on the unemployment level; the old, new and ILO (International Labour
Organization) rates.
Figure 6: Nigerian Unemployment Rate Movement
Source: NBS, GTI Research
Note that the previous methodology reading was last reported in December 2012 with
unemployment rate at 23.9%.
3.5 Exchange Rate
Nigeria experienced protracted pressures in the foreign exchange (FOREX) market in 2015. This
was intensified by drastic fall in the global price of crude oil and eventually limited the CBN’s
ability to pursue her mandate on price stability in the light of lean foreign reserves account. Given
the structural deficiencies of the Nigerian economy, (huge import bill, and lack of proper
diversification) the monetary policy authority adopted drastic short term initiatives in a bid to
achieve her mandate.
Among the initiatives were;
Devaluation of the Naira by the official closure of the rDAS/wDAS FOREX window
Prohibition on the acceptance of foreign currency cash deposits into domiciliary accounts
with the DMBs
Exclusion of 41 products from funding through the FOREX window.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
% G
row
th
Unemployment Rate
Old Rate
New Rate
ILO Rate
16
Despite these drastic measures, the pressures on the Naira continued unabatedly. On December
18th, 2015, it touched a new low of NGN270/US$ and closed on December 31st, 2015 at
NGN265/US$. When compared to the opening position of NGN188.45/US$ as at the beginning of
the year, the Naira depreciated by 40.62% against the US$ in 2015 as shown in Figure 7.
Figure 7: Average Exchange Rate
Source: FMDQ, GTI Research
At the official market, the Naira largely traded unchanged at NGN199.10/US$ through the year.
Note that after the CBN’s closure of rDAS/wDAS window in February 2015, the Naira was
automatically devalued from NGN168/US$ to NGN199.10/US$.
Considering the fact that foreign reserve level keeps declining, it is no longer economical for the
CBN to continue to defend the Naira against competitive foreign currencies. The possibility of
further devaluation of the Naira in H1’16 remains a strong possibility especially with the
plummeting price of crude oil.
3.6 Money Market
The money market witnessed extreme volatility all through 2015. The volatility occurred on two
fronts:
High liquidity period
Low liquidity period
We observed that in H1 2015, the increased spending that accompanied the general elections
boosted liquidity within the economic space. The liquidity found its way into available
investment windows, especially, the money market. Also, the CRR on private sector funds (at
20% at that time) provided opportunity for the DMBs to play active role in the money market.
0
50
100
150
200
250
300
Q1'13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
NairaAverage Exchange Rate (NGN/US$)
Official Parallel/BDC
17
At this point, the CBN took drastic steps by tightening existing excess liquidity through OMO
sales and subsequent harmonization of both public and private sector CRR at 31%. The H2 2015
was characterized by extreme external pressures which significantly strained both oil revenues
and government allocations (distributable to the tiers of government). Also, the protective stance
of the CBN on the Naira triggered the exit of Foreign Portfolio Investors (FPIs). These outcomes
limited liquidity in the money market. The Open-Buy-Back (OBB) opened the year at 8.67%,
traded high at 86.1% in September and closed the year at 0.50%. Over-night call rate (O/N) opened
at 9.25%, traded high within the bands of 68%-71% in August and closed the year at 1.0%.
Our analysis also showed that the Nigerian Interbank Offered Rates (NIBOR) were volatile all
through the year. There were notable increases in all the tenors in the month of May through
October 2015. The 30day, 90day and 180day recorded a high of 18.67%, 20.73% and 21.82%
respectively in August and closed the year at 13.56%, 14.81% and 15.72% respectively.
The dip in the NIBOR rates during the year were due to the OMO auctions’ settlement as well as
CRR debits that limited DMBs active participation in the CBN’s lending window amidst dearth
of funds.
Table 1: Treasury Bills
Source: FMDQ, GTI Research
Treasury Bills Yields (%)
O/N 30-day 91-day 182-day
May 12.25 15.40 16.57 17.59
June 8.63 15.10 16.11 17.59
July 7.75 12.92 15.69 16.71
August 11.00 17.23 18.29 19.94
September 14.00 15.76 16.91 18.06
October 1.29 13.61 15.36 17.42
November 0.88 8.90 10.63 12.61
December 0.87 8.33 10.23 11.97
18
4.0 THE NIGERIAN CAPITAL MARKET IN 2015
4.1 Recapitalization, MOS and Capital Flight
The year 2015 was an eventful one for the Nigerian capital market. The long awaited and much
dreaded recapitalization exercise for the market operators was implemented at the end of the
third quarter of 2015. The recapitalization exercise was followed by the NSE enforced Minimum
Operating Standard (MOS) requirement for dealing member firms.
The market also bore the brunt of the exclusion of Nigerian bonds from the JP Morgan index
which saw many foreign investors exit their Nigerian positions in reaction to the heightened risk
profile of the country due to the exclusion.
The crash in crude oil prices which became more severe in the third quarter of 2014 (hovered
between $47per barrel and $38 per barrel from $100 earlier in 2014), prompted the CBN to
introduce very stringent currency control policies to cushion the effects of the crash in crude oil
prices on the Nigerian economy particularly.
These steps were taken by the CBN to save the fast depleting foreign exchange reserve of the
country and meet the huge domestic FX demand which had triggered a massive exchange rate
volatility. However, the continuous pressure on crude oil prices (which of course accounts for up
to 70% of the country’s foreign exchange earnings) and the huge local demand for foreign
exchange due to the country’s import dependence, led to a surge in parallel market rates. The
arbitrage window between the official rate and the parallel market rate was 27% in Q2 2015 and
as high as 38% in Q4 2015 (Figure 8a and 8b).
Figure 8a: Foreign Exchange Movement in 2014
Source: GTI Research
19
Figure 8b: Foreign Exchange Movement in 2015
Source: GTI Research
The heightened FX volatility in addition to the stiff FX control regime of the CBN which resulted
in the delisting of the Nigerian bond from the JP Morgan index triggered a massive capital flight
as Foreign Portfolio Investors scrambled to salvage what they could in their Naira denominated
asset exposure as shown in Figure 9.
Figure 9: Domestic and Foreign Portfolio Participation in Equity Trading, 2015
Source: NSE, GTI Research
0.00
10.00
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% of Transaction'NGN Billions
Domestic & Foreign Portfolio Participation in Equity Trading
Total Foreign Transactions Total Domestic Transactions Foreign % Domestic%
20
The market closed 2015 on a bearish note. The All share index closed at -17.36% and major
indices closed in the red except for the industrial goods sector, a clear reflection of the acute
bearish sentiments that prevailed the equities segment of the market for the most part of 2015 as
shown in Figure 10.
Figure 10: Nigeria Stock Exchange Indexes, 2015
Source: NSE, GTI Research
4.2 Bond Market
The fixed income market reacted periodically to various economic and political news that marked
the investment environment in 2015. The uncertainty around scheduled general elections within
the H1 of 2015 reduced foreign investor participation in dollar denominated assets. Fund
managers such as Pension Fund Administrators (PFAs) and the DMBs equally moderated their
level of exposure.
Also, continued decline in the crude oil price strained revenue and FAAC allocations distributed
to the tiers of government and hampered liquidity flow from the DMBs to various asset classes
including bonds. The market was equally affected by various CBN interventions around FOREX.
At the peak of these interventions, the JP Morgan released a notice of expulsion of Nigerian
Sovereign Bonds from her Government Bond Index for Emerging Markets (GBI-EM) in June
based on the following reasons;
Absence of liquidity in the FX market
Lack of transparency in the determination of FX rate
Lack of a fully functional two-way FX market
-17.36%
1.27%
-17.41%
-6.20%
-23.59%
-4.70%
-25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00%
NSE INSUR NSE BKNG NSE OIL & GAS NSE CONS GDS NSE INDUS NSE ALSI
21
The expulsion was eventually effected by the end of September 2015 due to the inability of the
CBN to address the issues raised.
Another grey area was the news around the US Fed raising her interest rate for the very first time
since the last global financial crisis (was eventually raised in December 2015 by 0.25%). While this
news lasted, FPIs again scaled down their exposure to emerging markets, including Nigeria. All
the above combined to weaken the fixed income market and impacted negatively on valuations.
Year-on-year, yield valuation dropped by 14,716 basis points as against 2015 opening position.
As yield contracted, prices moved significantly up, appreciating by 2,447 basis points (Figure 11).
Figure 11: OTC Market Turnover of Assets Class Transactions in 2015
Source: FMDQ, GTI Research
The average yields on the 10-year FGN Bonds stood at 9.57% compared to 13.4% recorded in 2014.
The movements in the yields on the FGN Bonds were influenced by the developments in the
broader economy as enumerated above.
0
1,000,000
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5,000,000
6,000,000
7,000,000
NGN Million2015 OTC Market Turnover
Treasury Bills
FOREX
FGN Bonds
Eurobonds
22
Discretionary - Portfolio Asset Management Service
Helping you take advantage of opportunities in the
capital market here and abroad.
D-PAMS
For inquiries, contact [email protected]
23
SECTORS
24
5.0 OIL & GAS
5.1 Global Energy Trends
“Global energy market reacted to varying market forces that ultimately paddled the dynamics of
the market.”
Global primary energy consumption increased by just 0.8% in 2015, the weakest since 2009. This
marked a decline compared to previous year’s growth (2014; +0.9%) and well below the 10-year
average of 2.1%. Apart from nuclear power that grew at an above average rate, every other fuel
experienced slowed growth in 2015.
Oil remained the world’s leading fuel accounting for 32.6% of global energy consumption but lost
market share for the sixteenth consecutive year as renewables sneaked up the pecking order.
The price of Brent averaged $48.91 per barrel in 2015, a decline of $50.04 per barrel from the 2014
level. Crude oil prices showed recovery signs in the second quarter of 2015 (as shown in Figure
12) in the face of continued large supply disruptions, but remained low later in the year due to
strong non-OPEC production growth combined with weaker consumption (relative to 2014) and
OPEC’s decision to defend market share.
Figure 12: Crude Oil Prices Movement, 2015
Source: GTI Research
The fall in oil prices was the major shift in the market although it benefited countries including
India and Indonesia who took advantage of the oil price decline to move ahead with their phase-
out of fossil-fuel subsidies. The US’s negotiation with Iran - one of the world’s largest
hydrocarbon resource-holders - amidst turmoil in parts of the Middle East opened up an
opportunity for the oil giant to return to oil markets. Asia’s key energy consumer, China, entered
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Brent Dated WTI OPEC Basket
25
into a new phase in its economic development that led to a worrisome economic slowdown and
a regime of less energy consumption.
Renewables took up the slump in the energy industry contributing about one-third of world
power generation in 2015. As climate change issues became more critical, the UN Climate Summit
in Paris (COP21) buttressed the need for countries, policy makers, industries and stakeholders to
have aligning legacies and policies that will steer the energy sector through a sustainable pathway
(the agreement will become legally binding if joined by at least 55 countries which together
represent at least 55% of global greenhouse emissions).
Commodities were under pressure from specific global issues such as market expectations for an
interest rate hike in the US on the basis of continuous improvements in unemployment figures
and ongoing economic expansion and the stronger growth of the US dollar as shown in Figure
13.
Figure 13: Commodities Price Indexes for 2013-2015
Source: World Bank, Commodity Price Data
5.2 Upstream Oil & Gas
5.2.1 Declining Unconventional Oil to Support 2016 Prices?
Oil rig counts in the United States declined by 946 from its open of 1482 rigs, thereby supporting
OPEC’s forecast and strategy to sustain production levels. Saudi Arabia, the largest OPEC
producer, has insisted that the country’s policy of unrestrained output is a reliable policy and
won’t be changed (Saudi Arabia has cut its production during past price downturns to force
prices higher).
26
Crude oil inventories in the U.S. continue to rise (rose by 2.6 million barrels in the week ended
December 25, 2015) as against an expected decline of 1 million barrels. The unexpected increase
was due to higher imports and an uptick in production (shale) as Companies have been able to
cut costs and increase efficiency, keeping output high in a low-price environment.
A successful nuclear negotiation deal between the US and Iran could unlock about 1 million
barrels of oil into an already oversupplied market in the next 6 months. Countries and oil firms
will continue to work to increase throughput at lower costs via improvements in technology
(Figure 14 shows the breakeven price levels for 2015). The slower growth rate in demand and
improvements in production efficiency will contribute to lower oil prices in 2016.
Figure 14: Profitable Price Levels for Crude Oil Production
Source: Rystad Energy, GTI Research
5.3 Energy in Nigeria
Energy mix in Nigeria is dominated by oil which accounts for more than 57% of total energy
demand in the country. The decline in global oil prices by more than 51% in 2015 (from 2014)
hugely affected the revenue stream of the Nigerian government and reduced its foreign exchange
earnings and reserve.
The Oil and Gas Index of the Nigeria Stock Exchange (NSEOILGAS) declined by 6.2 % during the
year from its opening 380.11 points as the industry continued to react to an oversupplied market
as shown in Figure 15. The key players in the downstream sector were exposed to unstable and
unfavorable exchange rates on importation of petroleum products caused by the efforts of the
Central Bank of Nigeria (CBN) to defend the Naira in ways that attracted negative international
27
sentiments. While the upstream players were directly affected by the decline in their crude sales,
strategies such as CAPEX reduction and job-cuts were prominent in order to stay profitable in
business.
Figure 15: NSE All Share Index vs NSE Oil and Gas Index
Source: GTI Research
5.3.1 Upstream
Nigeria is on a mission of economic expansion which will be achieved by leveraging on oil
revenues to develop non-oil sectors of the economy. The new Minster of State for Petroleum and
Nigerian National Petroleum Corporation (NNPC) GMD, Dr. Ibe Kachickwu, commenced an
elaborate restructuring of the Corporation in a bid to halt corrupt practices within.
The restructuring effort will unbundle NNPC into four key components: the Upstream
Company, the Downstream Company, Midstream Company (gas and power company) and, the
Refining Group Holding Company. The NNPC reviewed major contracts and awarded select
downstream operators 41% of Nigeria’s equity crude between them1 (Oando, Forte Oil, Eterna
Oil, Sahara Energy, AA Rano, MRS, Northwest Petroleum, and China Zhenhea). Although
financing for the industry still remains a key issue, the upstream sector has seen several advances
which positions it for improved operational efficiency in 2016.
1. One year oil crude term contracts: Oando – 60,000bpd, Forte Oil – 45,000bpd, Eterna Oil – 45,000bpd, Sahara Energy – 60,000bpd,
AA Rano – 45,000bpd, MRS – 60,000bpd, Northwest Petroleum – 45,000bpd, and Emo Oil & Petrochemical/China Zhenhea –
45,000bpd. The rest will be lifted by NNPC Subsidiaries (Duke Oil – 90,000bpd, Carlson/Hyson – 32,000bpd) and International Oil
Companies (IOCs).
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Notably, efforts will be made to reduce production cost; increase crude oil production per day;
reduce government’s subsidy on domestic supply of petrol; improve on cash call regime in joint
venture operations; reducing the industry’s contracting cycle to six months; and reengineer a
profitable operational model for the country’s four refineries in 2016. Crude oil production is
expected to increase by 14% to 2.42 mbpd from its current average of 2.12 mbpd.
5.3.2 Midstream
Midstream activities and logistics were a major cause for revenue and man-hour losses in 2015
accounting for above N105 billion in direct and indirect losses (N55.53Bn for NNPC, N5bn daily
due to Apapa, Lagos State gridlock). The NNPC GMD hinted on privatizing the Corporation’s
5,120km pipeline across the country in a bid to reduce vandalism and production disruption
considering that the Petroleum Product Marketing Company (PPMC) recorded 2,284 pipeline
breaks in 2015.
The commitment of government to revitalize strategic infrastructures such as rail transport for
goods and services, road networks and waterways via its national transportation master plan will
have significant impact on the midstream sector in 2016.
With efforts such as huge State infrastructure investments to resolve the gridlock in the Apapa
region of Lagos State and deployment of air support machineries to monitor pipelines, the
midstream still proves to be a viable investment opportunity in Nigeria.
5.3.3 Downstream
The downstream sector has been plagued by pricing issues for years and the advocators for
deregulation and subsidy removal seem to be on the right path. Nigeria’s N6.08trn budget for
2016 premised around oil price benchmark of $38/b has little or no provision for subsidy although
oil price at above $50/b will almost smoothen out any subsidy claims. Pump price for retail PMS
was reduced to N86.50 per litre (previously N87.00 per litre) effective January 1, 2016 according
to announcement by the Petroleum Products Pricing Regulatory Authority (PPPRA) in December
2015.
In August 2015, the Kaduna Refinery and Petrochemical Company with a total installed capacity
to refine 110,000 bpd resumed operation. The company is refining about 60,000 barrels of crude
per day (54.54% of capacity utilization) following the rehabilitation of its two production lines
with a target of 60% of its local refining capacity in few months.
29
The tenacity of the current government to improve oil and gas business environment has given
rise to revamping of state owned refineries2 and constructions of private refineries (18 licenses
issued by government in 2002). This will help reduce dependency on imported petroleum
products, reduce local demand of exchange rate (petroleum purchases accounts for more than
47% of FX transactions), and reduce probability of fuel crisis and improved allocation of funds.
We do not expect that subsidy will continue into the second half of 2016, considering that oil
prices are likely to remain lower in 2016, thereby allowing government focus on financing key
projects such as refinery operation. We are optimistic that milestones will be achieved on the
NNPC refineries, however, the country will still need to depend on importation for 2016.
5.3.4 Power & Gas
Electricity tariff has been a key debate among the players in the market. Obviously the
Distribution Companies3 (DISCOs) have been at the receiving end partly due to the system of
power privatization programme, number of illegal users, and conditions of infrastructure. The
Nigerian Electricity Regulatory Commission (NERC) announced new tariffs for the next billing
period effective February 1, 2016. The new tariff regime will eliminate fixed charge and excessive
billing of customers (as shown in Table 2) and also encourage the use of meters for appropriate
pricing of power consumed. This will lead to increase in revenue for the DISCOs due to proper
collection of monies from consumers. We do not expect significant improvements in power
operations in 2016 because we are skeptical if the required changes will be fully implemented.
Table 2: Electricity Tariff Regime
Previous Tariff (fixed) New Tariff (Increase)
R2,
residential
Abuja Electricity DISCO N702.00 N9.60kwh
Eko Electricity DISCO N750.00 N10kwh
Ikeja Electricity DISCO N750.00 N8kwh
Kaduna Electricity DISCO N800.00 N11.05kwh
Benin Electricity DISCO N750.00 N9.26kwh
C2,
commercial
Ibadan Electricity DISCO N17,010.00 N12.08kwh
Enugu Electricity DISCO N22,141.00 N13.35kwh
Source: NERC, GTI Research
2. NNPC operates three refineries with a combined capacity of 445,000 barrels per day (bpd); the 210,000bpd Port Harcourt refinery,
the 125,000bpd Warri refinery and petrochemical plant, and the 110,00bpd Kaduna refinery and petrochemical plant.
3. Distribution Companies: Abuja Electricity Distribution Company, Benin Electricity Distribution Company, Eko Electricity
Distribution Company, Enugu Electricity Distribution Company, Ibadan Electricity Distribution Company, Ikeja Electricity
Distribution Company, Jos Electricity Distribution Company, Kaduna Electricity Distribution Company, Kano Electricity Distribution
Company, Port Harcourt Electricity Distribution Company, Yola Electricity Distribution Company
30
Electricity demand in Nigeria is expected to keep increasing and the deficit would remain a
challenge for the Minister of Power with peak demand forecast at 12,800MW and current
generation levels at an averaged 4,100 MW in 2015. There has been a significant surge in gas fired
plants across the country thereby putting pressure on gas supply and the amount of gas flared
during production. The challenge however is meeting an increasing demand for gas (gas demand
for domestic and industrial use is expected to increase by 23% in 2016).
5.4 Energy Winning Team
The Nigerian government is making huge efforts through its new Minister of Power, Works and
Housing, Mr. Babatunde Fashola (SAN) to revive the industries under his portfolio. The Ex-Lagos
State Governor now Minister is perceived to be capable of achieving real transformation and
development of these industries with key emphasis on power.
The country is embracing investments in renewable energy as a means to bridge the gap in power
demand and supply especially in regions strategically disconnected from the national grid.
Companies that operate in the renewable space will enjoy huge investments in 2016 and beyond
as the country continues to seek alternatives to solve its power shortage problems.
The oil sector will receive boosts from ongoing refinery projects (both new and resuscitating
project) and restructuring efforts in the National Oil Company driven by the new Minister of
State, Petroleum, Mr. Ibe Kachickwu. These efforts will help to reduce dependency on
importation, stabilize exchange rates (oil and gas accounts for more than 45% of forex
transactions) and improve business environment in the sector.
The use of Natural gas for domestic and industrial activities is expected to grow by 20% over the
next five years owing to tangible investments in gas pipelines and gas production in recent times.
This gives a cue to downstream players on the availability of market for natural gas in the country.
Demand for oil products is expected to grow significantly over the next 5 years from the daily
consumption of an averaged 49 million liters. The expansionary drive of the present government
will support expansion in industrial activities and investments in relevant infrastructures needed
to improve the standard of living of citizens.
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5.5 Equity Research: Investment Case
Forte Oil Plc
Up until the third quarter of 2015, Forte Oil Plc recorded improvements in earnings
portraying itself as a downstream giant in the country. The company has vested interest
in power and is also vying for upstream assets in order to be present in all value chains in
the energy sector. The share price of FO has returned 38.71% from its opening price of
N227.10 in January 2015.
Total Nigeria Plc
Total Nigeria Plc is another downstream powerhouse with over 500 retail outlets in
strategic locations within the country. The company is considering further expansion of
its business in the country in an effort to retain its market share. Total has made efforts in
renewables energy, a business that will thrive in 2016 and beyond.
Oando Plc
Despite Oando’s weak case on the premise of poor corporate governance and weak
earnings in 2015, the company is strategically positioning itself via the sale of cost-center
subsidiaries to take advantage of the shifting dynamics of the industry. Oando Plc is
leveraging on the listing of its upstream subsidiary on the Toronto Stock Exchange to
source funds to deal with its current financial issues owing to impairments on legacy
assets in 2015. The company also got a green light to raise N80 billion via rights issue and
partial divestment of its midstream and upstream services businesses in its 38th Annual
General Meeting in 2015.
32
6.0 MINING
6.1 Overview of the Nigerian Mining & Extractive Industry
Since the oil boom till date, Nigeria’s economy has been centered on the extraction and
exportation of Crude oil as a main revenue source despite having tons of land filled with 40
different mineral deposits. Why then are other minerals under tapped despite the early signs of
possible fall in oil which eventually took full shape in 2014 Q3? Does this mean foreign investors
are not aware of the country’s wealth of resources? Just to mention a few; Nigeria has over 40
million tons deposits of talc in Niger, Osun, Kogi, Ogun and Kaduna States; one billion tons of
gypsum deposits spread over many states; three billion metric tons of iron ore deposits in Kogi,
Enugu and Niger States as well as an estimated 15 million tons of lead/zinc deposits spread over
eight states. The process of getting any mineral from the earth is highly capital intensive and
requires a series of processes before reaching the mineral which then becomes a commodity
tradable in the global market for foreign exchange .
In order to achieve the aforementioned, it is essential to have adequate planning in place such
that the mined commodities have a competitive advantage in the global commodity market. The
driving force of this sector is hugely reliant on adequate infrastructure as it eases investor’s
expenses on exploration. Nigeria is endowed with vast reserves of solid minerals, including, but
not limited to, precious metals, stones and industrial minerals.
The country was a major exporter of tin, columbite and coal in the early 1970s. However, activities
in this sector plummeted significantly when crude oil production became a major foreign revenue
generation source for the country. A new national focus and strategy on mining evolved in 2007,
and the Nigerian Minerals and Mining Act (the Act) was enacted to revitalize the Nigerian mining
industry.
There are over 40 different types of minerals spread across the country, including gold, barite,
bentonite, limestone, coal, bitumen, iron ore, tantalite/columbite, lead/zinc, barites, gemstones,
granite, marble, gypsum, talc, iron ore, lead, lithium, silver, etc. However, not all the minerals are
available in commercial quantities. As part of the strategies to reform the sector, the Ministry of
Mines and Steel Development (MMSD) has identified seven (7) strategic minerals, namely, Coal,
Bitumen, Limestone, Iron Ore, Barites, Gold and Lead/Zinc for priority development as further
discussed in Table 3 below.
33
Table 3: Minerals, Location and Description, Nigeria
Minerals Description
Coal
Nigerian coal has been found suitable for boiler fuel, production of high caloric gas,
domestic heating, briquettes, formed coke and the manufacture of a wide range of
chemicals including waxes, resins, adhesives and dyes.
Bitumen
In Nigeria, bitumen typically occurs both on the surface and sub-surface. The estimated
probable reserves of bitumen in Ondo State (south-west region of Nigeria) is 16 billion
barrels, while that of tarsands and heavy oil is estimated at 42 billion barrels. The probable
reserve of bitumen and heavy oil in the entire tarsand belt is expected to double the reserves
in Ondo State.
Limestone
The largest and purest deposits of lime stones are found in the south-west and middle belt
regions of the country. Limestone in the southwest region of Nigeria has been estimated at
31 million tonnes. Most limestone mining activities are mainly for cement production.
Iron Ore
Iron ore deposits have been found in various locations in Nigeria, but mainly in the
northcentral, north-east and south-east regions. Iron ore deposits in Nigeria typically occur
in the following forms: hematite, magnetite, metasedimentary, bands of ferruginos
quartzites, sedimentary ores, limonite, maghemite, goethite and siderite
Barites
In a survey carried out by the Nigerian Geological Survey Agency, proven reserves for
Benue and Nassarawa States (central region of Nigeria) have been estimated at 111,000
tonnes while the estimated probable (unproven) reserves across the country, where mining
is considered viable, is estimated at 21,123,913 metric tones Barites is suitable for glass,
paint, and paper making. Also, it is used in petroleum well drilling.
Lead-Zinc
Lead-Zinc ores are usually found together. They are often associated with copper and
silver. Lead-Zinc is found along the northeast and southwest trending belt. They occur in
commercial quantities in the northeast and central region of Nigeria. The estimated reserve
is well over 100,000 tonnes of lead and 80,000 tonnes of zinc.
Gold Gold is associated with the northwest, northcentral and southwest regions of Nigeria,
although there are smaller occurrences beyond these major areas. The preliminary
exploration and identification of deposits which is still ongoing has confirmed ten sites to
be holding reserves of over 50,000 ounces2 of high quality gold. Till date, over 30 licenses
have been issued to co-operative societies and companies for mining of gold in the country.
Most of the concessions are still at the exploration stage.
34
6.2 Other African Countries with Good Mining Pedigree
Some African countries have shown more growth potentials than others and are on the path to
expanding their mining industries. They are:
Botswana
Botswana has well-known coal reserves in excess of 200 billion tonnes and is currently the
world’s largest miner of diamond. The country is expected to ramp up coal production in
order to increase value generated from minerals.
Namibia
Namibia’s mining industry is ranked 2nd in Africa and 9th in the world behind Botswana.
Mineral exports constitute half of the country’s total export earnings, with the country
producing diamonds, uranium, copper, magnesium, zinc, silver, gold, lead, semi-precious
stones and industrial minerals. Namibia is the fourth-largest exporter of non-fuel minerals
in Africa. The mining sector is expected to post a real expansion of 12% annually towards
2017.
Ghana
Ghana has a good mining landscape dominated by foreign-owned firms with gold mining
as its flagship. Ghana is the second-largest gold producer on the continent after South
Africa with an attractive long term production growth. Mining investments in Ghana’s
mining sector have continued to grow over the years especially in its gold mines.
Zambia
Zambia has a wide spectrum of mineral resources including copper, cobalt, zinc, gold,
manganese, nickel and gemstones. The country remains dependant on the extraction and
processing of copper and cobalt which accounts for approximately 10% of GDP and
around 79% of export revenues. The sector is expected to expand by 2.5% - 5.5% annually
over the next decade.
Tanzania
Although relatively small, Tanzania’s mining industry is ranked 13th in the world and has
remained a significant source of export revenues. The sector contributed approximately
3.2% to GDP in 2012 with a projected improvement of 5.5% contribution to GDP by 2018.
It is estimated that about 90% of Tanzania’s minerals have yet to be exploited. The ongoing
construction of a nickel mine and large-scale uranium mining will contribute to revenue
from minerals.
35
Mozambique
World projections for increased coal production will favour Mozambique’s mining sector
and contribute to overall economic expansion with a medium to long-term outlook owing
to global coal production projection of beyond 105 million tonnes annually within the next
five years.
Other countries of interest include DRC, Kenya, Liberia, Mali, Angola, Cameroon, Rwanda and
Sierra Leone.
6.3 Nigeria Mining Sector
6.3.1 The Way Forward
To say that the mining sector in Nigeria has suffered years of neglect is stating the obvious, the
big question is ‘what can be done differently’. A cursory look at the table on page 3 above makes
it clear that the mining sector has a wide scope for growth, considering the abundant minable
resources in the country.
6.4 The Nigerian Strategy
The Mining Nigerian strategy currently revolves around two key parts to boost investment into
the sector.
6.4.1 Taxation and Finance
The industry’s tax policy has been adjusted accordingly to incentivize investors. This includes a
tax relief period of 3 years for any company granted a Mineral Title under the Mining Act, 2007.
The tax relief period may be extended for a further period of 2 years by the Minister on the
fulfilment of certain conditions although Under the Companies Income Tax Act (CITA) mining
companies have no option of extension. The tax relief period commences on the date that the
licence holder commences operations.
The goal is to trigger Nigeria’s position into one of the principal venture capital markets for
mineral exploration and development. The mining sector is still considered a junior sector in
terms of contribution to real growth of the economy due to certain obstacles that have remained
unresolved.
The challenge with this strategy is that it does not assist in providing the initial liquidity to
emerging businesses in the mining sector for exploration, which is very risky and banks will be
unwilling to fund. This strategy will only be advantageous to already established businesses.
36
However, because of the harsh operating environment, these big players have stayed away from
mining opportunities in the country.
6.4.2 Joint Venture
Mining and energy projects throughout Australia are frequently conducted through joint
ventures (J.V.) which makes J.V. a tool for success in the industry. The joint venture is a flexible
structure, without the detailed regulation applicable to corporations and partnerships, giving
joint venture participants a great deal of flexibility in structuring their arrangements and
determining their contractual rights and obligations.
Exploring for resources is an expensive undertaking with relatively low prospects of success.
Developing resources is also expensive, with profitability dependent on commodity prices and
other factors outside the miner’s control. The joint venture structure spreads the high risks and
substantial costs of exploration and development in a mutually advantageous way for parties and
enables them to mutually benefit from each other’s knowledge, skill and expertise.
Also, the challenge with this strategy is that small companies in possession of exploration licences
may lack the funds to carry out exploration, whilst larger companies with the means to conduct
exploration will often seek to diversify their risk profile by having a joint venture interest in a
greater number of projects, rather than sole-funding exploration on a smaller number of projects.
So far, this strategy has only achieved success in the oil segment of the sector as a result of its
wider market. Once again the challenge of providing initial liquidity for exploration, especially
for the smaller companies with mining licenses has not been addressed.
In addition to our recommendation for providing a solution for the liquidity challenges in the
Nigerian mining sector, the following needs to be addressed to boost investor confidence in the
sector:
Security:
Social conflicts arising from mining activities especially when foreigners are involved and
perceived by host communities as exploitation are inevitable in most cases. The
government must play a major role in ensuring that security agencies are equipped to
respond appropriately to social conflicts when they arise. The aim is to assure investors
of the safety of mining regions and the importance of implementing a robust corporate
social responsibility programme to address the needs of their host communities.
Infrastructure Development:
The mining sector requires huge power and some level of technology to be sustainable
and viable in contributing to national growth. A major challenge to the development of
the mining sector is the significant infrastructure gap in Nigeria (inadequate electricity
37
supply, and poor roads to sites of mineral deposits). However, the ongoing revitalization
of the economy which include eradicating corruption and building a winning team in
governance are stimuli for private sector participation in the sector and improvements
will cut across power, transport, finance, and so on.
Illegal Mining and Community Inclusiveness:
Illegal miners make up most of the industry’s activities thereby short-changing the
potentials of the sector because their activities are not captured in the system. However,
with the enactment of the Mining Act, foreign investors with the necessary permits and
licences are guaranteed smooth operation of their legitimate business in the country. This
will allow for such operations to have meaningful contributions towards community
inclusiveness in the long term.
6.5 Recommendation for Liquidity Challenge in the Mining Sector
As established, the tax incentives and the joint venture partnership with the government are very
useful for the growth of the sector. However, this has not essentially addressed the liquidity
challenges of the smaller indigenous firms in the sector. We have looked into the sector and have
come up with a solution that will ease the liquidity gridlock in the sector and open up the sector
to private equity, FPI’s and pension fund assets
6.5.1 Government Backed Corporate Bond
We propose a government backed corporate bond issuance by the prospective investor who
wants to access liquidity for exploration and mining. The backing of the government will provide
comfort for prospective investors.
6.5.2 Proposed Criteria for Qualification to Issue Government Backed Bonds
As a result of the strategic focus of this bond issuance, the criteria need to be stringent to prevent
an abuse of the process. The following are recommended:
Listing of issuing company on the Local Exchange to ensure that the company complies
with Global best practice for disclosure and transparency.
Possess a five year dividend paying history to qualify for pension assets.
We believe that this initiative, in addition to the already existing strategy highlighted, will help
deliver sustainable growth to a sector that has huge prospects.
38
6.0 AGRICULTURE
Prior to and during the colonial days in Nigeria, agriculture was the mainstay of the economy
and contributed significantly to pre and post-colonial developments. During this era, active
informal employment in the sector stood at 70% of the entire population and contributed over
60% to the GDP. Export commodities such as cocoa, rubber, cotton, palm oil, palm kernel,
groundnut and coffee were grown in commercial quantities and provided the foreign income
needed for capital formation and developmental projects.
This role changed dramatically in the early 1970s following the commercial drilling of oil in the
Southern part of the country as government unwittingly shifted attention from agriculture to
sweet crude. At the most critical state, the sector’s contribution to the economy dropped to 13.5%.
The danger of this development became obvious when at the heart of oil boom collapse in late
1970s and early 1980s, the effect of the perennial neglect on the sector became clear as Nigeria
became a net importer of staple food items which it used to exporter in large quantities in the
50’s and 60’s.
7.1 Agriculture Renaissance
As oil contribution to the economy continued to stall - heightened by recent oil price crises and
need to provide multiple streams of income to the system - the need for spontaneous and rapid
development of the Agriculture sector is inevitable. Though, the current government has been
audacious in formulating and implementing policies that would drive further growth in the
sector, more needs to be done. Among major flagship measures already adopted or in progress
to drive development and investment into the sector are:
Provision of N200bn Commercial Agriculture Credit Scheme - a concessionary credit scheme
designed for single-digit lending to agriculture.
Construction of silos and warehousing complexes to be used for storage, outlet and
standardization.
Setting up of 300 one-stop agro-input services delivery, especially in the areas of fertilizers,
seeds, agro-chemicals and mechanization.
Provision of export handling, preservation and conditioning centers which will include
washing, drying and storage chambers, sorting, grading and packaging facilities, storage
crate handling and cargo facilities.
Implementation of a strategic master plan for rural infrastructural development.
Aggressive implementation of a power development program.
Implementation of guarantee minimum price mechanism by the government to ensure
guaranteed offtake of agricultural products such as grains.
39
7.2 Capital Market Activities in the Sector
Currently, there are five (5) quoted firms operating in the Agriculture sector of the market and
are classified into three sub-sectors; crop production, fish farming and livestock production. We
have focused on highlighting current developments and prospects in the three leading firms in
the industry because these firms have greater weight and prospects for capital formation and
deployment.
Okomu Oil Palm Company Plc
Currently stands as the lead quoted firm operating in the sector: Its operations primarily
covers oil palm and rubber production, extraction and processing. It was incorporated in
1979 and operates in Edo State. It is a member of Socfinal Group of Luxembourg which
owns 62.6% of the company's shares with Nigerians owning the balance of 37.47%. It
recently acquired 11,400 hectares of land and plans to establish 10,000 hectares of oil palm
plantation on it within the next 3 years. This is expected to lead to a doubling of Crude
Palm Oil (CPO) output from the company. The products are palm oil, palm kernel oil,
palm kernel cake, banga (package) and rubber cup lumps.
Okomu Oil Palm established a trend right from Q1 2015 through Q3 2015. The company
has been able to scale down cost related items especially cost of sales, distribution, sales
and marketing expenses. This has helped to free up fund leading to improved bottom line.
Though, finance cost (interest on long term loan) steadily maintained uptrend within
these periods, it was not significant to attract a red flag. As market awaits Okomu’s Q4
2015, we strongly believe that this trend will be maintained and we expect this to boost
the company’s earnings potential.
Presco Plc
A fully-integrated agro-industrial establishment: It specializes in the cultivation of oil
palm, extraction, refining and fractionation of crude palm oil into finished products. Its
fractionation plant is the first of its kind in West Africa. It recently forayed into rubber
plantation. This is to serve the purpose of diversifying its operations and protecting the
company from exposure to global commodity crisis. The company has commenced
investment on 14,000 hectares of land for rubber and oil palm plantations expected to be
additional income generator by the end of this decade. Presco was incorporated in
Nigerian in September 1992 and its’ operation is base in Edo State. The current
shareholding structure is as follows; Siat Group (60%) and Nigerian Investors (40%).
40
The Company’s products are sold locally in Nigeria and are sold directly to customers
comprising wholesalers, consumers and industrial users. Some of these are Nestle Nigeria
Plc, Friesland Food WAMCO Nigeria PLC, Kraft Foods (Cadbury), Kentucky Fried
Chicken (KFC), Golden Pasta Company Limited, Fan Milk Plc and Dangote Group. Our
estimates show that the total local palm oil processing capacity is significantly below the
total demand. This gives a lot of room for growth to meet demand.
Livestock Feeds Plc
A pioneer in the manufacturing and sales of animal feeds and concentrates in Nigeria:
The firm was incorporated in 1963 by Pfizer as a subsidiary to the pharmaceutical business
unit which had been introduced to Nigeria few years earlier with the aim of providing to
the market a high quality nutritional animal products. The company has an installed
nationwide mill capacity of 40 metric tonnes per hour (MT/hr) on a network of 12
franchise millers across the country. With this capacity, Livestock Feeds is the dominant
brand and benchmark in the industry. At peak of business, the company controls 55% of
the market share. Currently, UAC Nigeria Plc own 51.01% of the firm, First Capital Trust
Limited holds 8.02%, Cashcraft Asset Management Limited hold 5.06% while Nigerian
shareholders hold the remaining 35.91%.
Although, private sector initiatives in poultry production, breeding and rearing of small
and large ruminant animals are common, these activities are mostly on a small-scale.
Currently, the poultry industry depends almost entirely on the importation of exotic
breeds of parent stock of birds because the local capacity cannot support the immense
demands by the economy. The current ban imposed on the importation of frozen chicken
and beef should therefore, create even greater investment opportunities for the private
sector in the poultry industry.
41
8.0 BANKING
The Nigerian Banking sector was a sector in the eye of the storm almost all through 2015. The
NSE Banking index lost 23.59%, the worst performing index for the year (Figure 16). The poor
performance of the sector was expected, as a result of the strategic role that banks played in the
economy and considering that the wider economy struggled in 2015.
The sector also witnessed a lot of policy changes, last of which was the reduction in the bench
mark interest rate by 200 basis points from 13% to 11% in the last Monetary Policy Committee
(MPC) meeting for 2015. Other major policies that affected the banking sector in 2015 were:
The implementation of the Treasury Single Account
The closure of the rDAS/wDAS foreign exchange window
The cancellation of direct foreign currency deposit into domiciliary accounts
The harmonization of the CRR for both the public and private sector deposits to 20% after
tinkering with both of them in the course of the year
The widening of interest rate corridor by 200 bps above and 700 bps below the benchmark
interest rate
Figure 16: NSE Banking Index Movement, 2015
Source: NSE, GTI Research
The major wake-up call for the banking sector was the implementation of the TSA, which
effectively cancelled out cheap deposits from public sector available for the banks to deploy into
assets. The crash in crude oil prices also put a major question mark on asset quality for a sector
with huge exposure to the oil and gas space.
050
100150200250300350400450
NSEBNK
42
The banks continued their trend of low credit extension to the real sector in 2015, with more of
their assets skewed towards risk free government instruments and CBN guaranteed interbank
placements.
The implementation of the TSA and the tinkering with the CRR created a huge volatility in both
the OBB and the Call rates. Both rates went as high as 95% (call rate in February 2015) and 85%
(OBB in February 2015).
8.1 Aftermath of TSA Implementation
The implementation of the TSA is no longer news. The effect of the sudden removal of public
sector deposits from the grasp of Nigerian banks and how they hope to remain competitive in an
economy in turmoil is the major headline for investors. The first impact noticed after the TSA
implementation (even from the hike in CRR for public sector deposit to 75%) was the surge in
borrowing cost (interest expenses).
The major soft landing for most banks in 2015 (considering the sluggish growth in loan books)
was the high interest rate regime of the CBN which was aggressively executing its mandate of
exchange rate stability and inflation control. The stronger growth in the exposure of banks to
government securities (bonds and treasury bills) which are non-taxable income for the banks gave
some respite to the banks in 2015 and helped most banks declare moderate earnings growth (at
least up till Q3 2015).
….2016 reality check for Nigerian banks
In a bid jump start the real economy by unlocking liquidity for the government to invest in
infrastructure and revitalize the real sector, the CBN reduced the MPR from 13% to 11%. Based
on the focus of the government to effectively diversify the economy and rebuild ailing
infrastructure, the smart money is a further reduction of the MPR to 10% before the end of H1
2016. The reduction in the MPR means that the coupon rates on FGN bonds will be reduced.
Considering that one of the associated problems of monetary policy easing especially in Nigeria
is an uptick in inflation (which has already started trending upwards as shown in Figure 17),
fixed income (especially FGN Bonds and treasury bills) will be unattractive at least until H2
43
Figure 17: Two-Year Consumer Price Index, Nigeria
Source: CBN, GTI Research
8.2 Headwinds
The Nigerian economy like most emerging markets will face several headwinds in the New Year.
Economies hugely exposed to crude oil revenue for governance are taking drastic measures to
reduce the hard push engendered by low crude oil price and poor economic diversification. We
have highlighted headwinds for the Nigerian economy into two categories in order to account
for the economic and industrial concerns.
8.2.1 Economic Headwinds
Crude oil prices are expected to remain under pressure in 2016
Interest rate cuts are expected in 2016 which will make bonds unattractive
Inflation is expected to continue its uptick
8.2.2 Sector Headwinds
Asset quality challenges as the threat to the economy persists (higher loan loss provision)
Higher borrowing cost
Lack of bankable projects due to weak economic base
Capital Adequacy
Inconsistent policies by the CBN
However, despite the highlighted challenges in the sector, we expect the sector to play an
active role in the economic reform drive of the government. The focus on economic
diversification and infrastructure reform will open up a lot of opportunities for banks to
close the year with marginal growth in earnings.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Two-Year CPI Indicators
All Items All Items Less Farm Produce Food
44
Our opinion that banking is a volume driven business will play actively into how banks will
perform in 2016. In terms of growth for 2016, we are of the opinion that the top tier banks
will have the upper hand compared to tier two banks based on the following:
Tier one banks have a larger capacity to absorb shocks
Tier one banks have a higher capacity to create assets which will be very instrumental in
supporting the huge level of economic reforms to be undertaken. This will boost their
earnings prospects.
A further incentive from a valuation standpoint is the fact that most of the banks are currently
trading at less than their book value position which makes them very attractive (including the
tier 1 banks). Some of the banks tipped to sustain and/or improve performance in 2016 include
Zenith Bank Plc, Guaranty Trust Bank Plc, United Bank for Africa and Stanbic IBTC Bank (for the
strength of its investment banking subsidiary)
9.0 MANUFACTURING
According to Nigeria’s renowned business man; Alhaji Aliko Dangote, “The unprecedented crash
of crude oil price in the international market and subsequent devaluation of the Naira are both
pointers to the fact that massive agricultural revolution coupled with local manufacturing are the
saviors for the Nigerian economy” as productivity is an internationally acceptable measure of
economic performance.
The Nigerian manufacturing sector which is hugely reliant on its agricultural output does not
match many countries in productivity, hence emphasis must be placed on ensuring the challenges
surrounding both sectors are speedily addressed.
With a value of N3.57 trillion in 2010, the manufacturing sector represented 6.55% of total real
GDP in that year. This figure grew by N948.80 billion or 26.51% in 2011 to reach N4.52 trillion or
7.79% of real GDP in that year and by N1.06 trillion or 23.44% in 2012 to reach a value of N5.58
trillion or 7.79% of real GDP in that year (Figure 18).
Growth was highest in 2013, at N1.64 trillion or 29.42%, so that the contribution of the
manufacturing sector reached N7.23 trillion or 9.03% of real GDP, a record high not achieved in
decades. The manufacturing sector remains the fastest growing sector contributing to the
country’s GDP according to trends and historical data.
Regardless of infrastructural deficit, manufacturing has continued to grow strongly hence a better
infrastructural backbone will drive the sector to its full potential. The sector is capable of boosting
the Nigerian economy as both foreign and local investors would find the sector more attractive
45
for investment. The components of the sector include food, beverages and tobacco, oil refining,
cement, textile, apparel and footwear and wood and wood products and so on as shown in Figure
19.
Figure 18: Historical Contribution of Manufacturing Sector to GDP
Source: NBS, GTI Research
Figure 19: Composition of the Nigerian Manufacturing Sector, 2013
Source: NBS, GTI Research
46
9.1 Challenges
The manufacturing sector has some peculiar challenges that has hindered its growth especially
in the face of global economic concerns for growth and throughputs. As depicted in Figure 20,
these challenges include:
Accessibility to finance needed for maintaining and upgrading manufacturing plants.
Inadequate infrastructure (power, roads, water supply, and so on): top of this list is the
steadily rising overhead cost of powering the manufacturing plants.
Heavy dependency on agricultural input, which itself is vulnerable to shocks.
Government bureaucracy as taxes on production are high and rising while subsidies on
products are falling.
Insufficient local supply to meet manufacturing demands thereby leading to high
importation of raw materials.
Figure 20: Distribution of Challenges in the Manufacturing Sector
Source: GTI Research
9.2 Opportunities
The manufacturing sector presents reasonable economic benefits and investment opportunities
which include:
Contribution to yearly exports thereby serving as a foreign exchange revenue source (Figure
21)
Creation of more jobs
Lack of Infrastructure
42%
Insufficient access to credit 35%
Insuffiecient demand for product
23%
Challenges of Manufacturing
47
Transfer of technical expertise hence increase in employable human capital
Development of state beneficial social infrastructures via Corporate Social Responsibility
Figure 21: Contribution of Manufacturing Sector to Export
Source: NBS, GTI Research
10.0 INDUSTRIAL GOODS
The industrial goods sector was the only sector that closed in the green in 2015. The sector
recorded a 1.27% gain driven by gains in companies like Dangote Cement and Lafarge Africa.
Beyond having the single largest quoted company on the Nigerian Bourse listed in its index, the
sector is also strategically positioned to leverage on the infrastructure revamp focus of the
country.
With Nigeria’s acute infrastructure inadequacies and the focus of the government to make it right,
the likes of Dangote Cement (with about 75% of the total cement market in Nigeria), Lafarge
Africa, and Cement Company of Northern Nigeria (CCNN) are in pole position to record
significant growth in earnings in 2016. The industrial goods sector will also leverage on the
proposed 2016 budget of N6.08 trillion which has 29 percent (N1.76 trillion) allocated to capital
expenditure. We expect the industrial goods sector to once again perform better than other indices
in 2016.
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10.1 Hot Stocks
Dangote Cement
Dangote Cement is Africa's leading cement producer with three plants in Nigeria and
plans to expand into 13 other African countries. The Group is a fully integrated quarry-
to-customer producer with production capacity of 29 million tonnes in Nigeria and new
operations set to begin across the rest of Sub-Saharan Africa. The Group plans to have 42
million tonnes capacity by the end of 2016 and 50-60 million tonnes of production,
grinding and import capacity in Sub-Saharan Africa by 2016. Dangote Cement's Obajana
plant in Kogi State, Nigeria, is the largest in Africa with 13 million tonnes capacity across
four lines. The Ibese plant in Ogun State has four cement lines with a combined installed
capacity of 12 million tonnes. The Gboko plant in Benue State has 4 million tonnes
capacity. Over time, Dangote Cement has eliminated Nigeria's dependence on imported
cement and is transforming the nation into an exporter of the product serving neighboring
countries.
Dangote Cement is investing several billions of dollars to build manufacturing plants and
import terminals across Africa. Apart from the plants mentioned earlier, current plans are
for integrated or grinding plants in Nigeria, Republic of Congo, Liberia, Tanzania, Kenya,
Zambia, Ivory Coast and Ghana.
Lafarge Africa
Lafarge Africa is the second largest cement manufacturer in Nigeria. Even though the
company hasn’t been as aggressive as Dangote cement, the company besides being the
second in Nigeria in terms of market share, also has plants in South Africa. We are of the
opinion that the company will also record good earnings growth in 2016 due to the
expansion drive expected in the country.
Cement Company of Northern Nigeria (CCNN)
If CCNN continues to consolidate on its near monopolistic advantage in the North
Western space, without playing for size with its bigger competitors, then the company’s
revenue is sustainable. Furthermore, the current owners of the company has also
commenced the construction of a new cement plant in the South -South zone; though it is
yet to be determined if the earnings from the new cement plant will be consolidated with
the earnings from CCNN, we bolster the strategy of building new smaller plants in
different locations to meet local market demands. We are of the opinion that rebuilding
of the North Eastern infrastructure after the era of insurgency will boost earnings capacity
of the company.
49
OUTLOOK 2016
…. to be or not to be
50
11.0 THE OUTLOOK FOR 2016
11.1 The 2016 Budget
The proposed 2016 budget of N6.08 trillion ($30.53 billion) (awaiting approval from the National
Assembly), themed “the Budget of Change” assumes a deficit of N2.22 trillion ($11.15 billion)
which represents 2.16% of the country’s GDP. It is based on the following macro-economic
assumptions:
Real GDP growth of 4.37%
Exchange rate of NGN199.10/US$
Crude oil price of US$38/barrel
Daily oil production of 2.2 mbpd
Total revenue of N3.86 trillion
Positively, the total revenue forecast of N3.86 trillion ($19.39 billion) represents 11.7% increase
over 2015 levels. Meanwhile, aggregate expenditure for the 2016 budget is projected at N5.82
trillion ($29.23 billion), representing 26.2% increase over 2015 levels and comprises of; Recurrent
Expenditure of N2.35 trillion ($11.8 billion), Capital Expenditure of N1.76 trillion ($8.85 billion),
Debt Service N1.36 trillion ($6.83 billion) and Statutory Transfers of N351.4 billion ($1.76 billion)
as shown in Figure 22.
We are very excited about this budget given that the Capital Expenditure has been given an
improved consideration at N1.76 trillion, representing 215.908% growth over 2015 allocation. This
in our view will give fair attention to infrastructural development needed to boost economic
development and growth.
Figure 22: Budget Expenditures, 2016
Source: 2016 Appropriation Bill, GTI Research
N2.35trn38%
N1.76 trn 29%
N1.36 trn, 22%
N0.351bn6%
N0.300bn5%
Budget Expenditures
Recurrent Expend. Capital Expend. Debt Services Statutory Transfers Intervention Funds
51
This is apt and timely given that the economy has struggled in recent quarters with a sluggish
growth rate of 2.84% in Q3 2015 against 6.23% in previous year (Q3 2014). We are equally excited
that this budget did not give greater funds allocation to debt servicing than capital expenditure
as was observed in 2015.
Though, the crude oil benchmark was priced at almost par to prices of crude oil in the
international market as at the time the budget was constructed, unfortunately, prices have
dropped significantly below the benchmark.
In our view, the current benchmark provides little leeway for adjustments as oil prices have
dropped below $38/barrel, a development that could see fiscal deficits widen if it lingers. Though,
the oil production assumption of 2.22 mbpd falls short of 2014 figure by 3.5%, but for this to be
met, the government would have to increase security provision around oil installations given the
recent increased activities of vandalism.
The government plans to finance the budget deficit by a combination of domestic borrowing of
N984 billion, and foreign borrowing of N900 billion totaling N1.84 trillion. This is equivalent of
2.16% of Nigeria’s GDP and will take our overall debt profile to 14% of GDP. Although Nigeria’s
debt to GDP figure remains well within acceptable fiscal limits compared to other countries,
concerted efforts should be taken to avoid escalation to unhealthy levels.
11.2 Global Economy …projected to grow by 3.4% in the midst of gloomy oil prices
The world economy enters 2016 with bigger challenges than witnessed at the fall of 2015. The
crude oil price which opened the year at $37.28 per barrel looks likely to drop below $25 before
Q1 2016. This would likely worsen the fiscal cliff of some emerging economies tied to oil as major
revenue source.
China remains in the midst of a delicate rebalancing act which will de-emphasize GDP growth in
favour of structural, financial, and energy reforms. Russia and Brazil continues to struggle as a
result of pressured commodities prices, while the US appears to be the sole “bright spot" in the
global economy. Despite these challenges, the International Monetary Fund (IMF) has projected
the world economy to grow at 3.4% in 2016. This is hinged on the continuous expansion of the
US economy and moderate recovery in the Eurozone boosted by lesser input cost of energy and
gas.
52
11.3 2016 Economic Tailwinds …to be
“Nigeria is either on the verge of a great economic turnaround story or on the pathway to
Economic oblivion”.
It is no longer news that the present government is focused on the recovery of looted funds by
corrupt officials and on that score, the government has been fairly successful. Also, the president
received critical acclaim for his choices of those he nominated to be on his cabinet.
The current 2016 budget proposal of N6.08 trillion which is aimed at jumpstarting the economy
gives us a ray of hope. Assuredly, about 30% of this budget has been earmarked for capital
expenditure to provide respite to overstretched and dilapidated infrastructures thereby
providing a boost to the economy.
Considering all the above, the trigger points that will boost the economy in 2016 are as follows:
Anti- corruption
Fiscal responsibility
Expansionary budget
Economic diversification
11.4 2016 Economic Headwinds …not to be
11.4.1 Falling Oil Prices
We equally noted that the government has shown interest in boosting employment in income
generating sectors of the economy such as; Agriculture, Mining, Power, Energy and Real Estate.
This is supported by better allocation provided to the sectors in the proposed budget. We are
optimistic that this will address some of the macro economic challenges currently facing the
country.
Moreover, based on percentage contribution to real GDP (as at Q3 2015), five key sectors will be
the focal points for output growth in 2016;
Agriculture
Quarrying & Mining
ICT
Manufacturing and
Real Estate
These sectors collectively account for 64.25% of Nigeria’s GDP, with Agriculture having the
singular highest contribution of 26.79%. With the recent success recorded in the fight against
53
insurgency in the North East (Borno, Adamawa, Kano, Yobe and Bauchi States), agriculture
output may likely be boosted. The government’s current fight on corruption and financial
leakages is equally another pointer with a clear message of proper democracy (no longer business
as usual) to public office holders. We believe that if this is effectively pursued, funds recovered
from this source can be channeled into other growth areas of the economy.
We advise that the government should channel its resources towards widening the tax system to
ensure that the untaxed segments are brought into the tax bracket. When this is done, the
proposed N1.45 trillion revenue from Non-oil revenues, comprising Company Income Tax (CIT),
Value Added Tax (VAT), Customs and Excise duties, and Federation Account levies would be
achieved.
With our eyes on the above scenarios, we anticipate a real GDP growth rate of 4.5% in 2016 fiscal
year.
11.4.2 Inflationary Pressures …increased liquidity a major disincentive
The MPC’s reduction of MPR and CRR at the last MPC meeting for 2015 in order to boost banking
system liquidity will to some extent create a challenge to inflation management in 2016. Other
areas of concern are the Federal Government's 30% planned capital expenditure for 2016 fiscal
year, further rise in electricity tariff in Q1 2016 and the ongoing forex liquidity restrictions (for an
import dependent economy).
These are likely sources of further pressure on price levels. Given that the MPC’s last decisions
on MPR and CRR were taken in order to give flesh to the planned 2016 budget anchored on
jumpstarting the economy, we do not anticipate immediate reversal on MPR or CRR by the MPC
in H1 2016. This leaves the CBN with OMOs for short term mop up of expected increase in
liquidity. Given the above analysis, we expect an uptick in headline inflation in 2016 with an
average of around 9.8% for the year. The challenge is how CBN manages the expected pressures
in order to keep it within or close to her upper limit which is yet to be communicated.
11.4.3 Exchange Rate …risks lingers as the external pressures intensified
The persistent poor performance of the Naira against competitive foreign currencies continues to
be a concern considering the structural imbalance within the economy. The CBN’s defense of the
Naira in 2015 came at a high cost and resulted in depletion of the nation’s foreign exchange
reserves to US$29.1bn as at December 30, 2015. Unfortunately, the pressure continues considering
that at the unofficial market the exchange rate is in the region of NGN300 to US$.
54
We expect that the Federal Government and the CBN will eventually succumb to the pressure
and finally devalue the currency one more time. The expected impact for the capital market will
be a rebound as soon as this policy is implemented considering that that FPI’s will throng back
into the market to take advantage of the opportunities in a market that has shed so much value.
12.0 CONCLUSION
The year 2016 has all the trimmings of another very difficult year for both the domestic (Nigerian)
and Global economy. However, it also has the pecks of marking the turnaround and awakening
of the largest economy in Africa.
In our 2015 outlook captioned ‘’diamond in the rough’’, we painted the scenario of an economy
with huge potentials for growth despite economic headwinds, one of which was the heightened
election risk.
This year, the successful conduct of the elections and peaceful transition of power is one of the
major tailwinds for this year’s growth prospects. As highlighted (2016 headwinds, not to be)
above, there are still so many challenges to worry about in 2016, most of which the grinding
impact on the economy is already being felt. With crude oil prices still plummeting (Royal Bank
of Scotland forecasts a drop to $10 per barrel) and the arbitrage window between official exchange
rate and parallel market rates widening by over 50%, it is obvious that the administrators of this
economy clearly have a lot on their plates.
A lot rides on the 2016 budget and how soon it is implemented. We are optimistic that the pass
through effect of the budget will be positive and if adequately implemented, the 30% capital
expenditure focus of the budget will anchor the diversification drive of this government and
jumpstart the real sector. With monetary policy easing (started in the twilight of 2015), we
acknowledge the risk of heightened inflation in the short term. However, with the strong anti-
corruption stance of the new regime, we believe that the rate of budget implementation will be
higher compared to what was obtainable. This will ensure that appropriated funds are effectively
deployed to economically viable sectors. This in turn will create jobs, boost local manufacturing,
export capacity and will ultimately curtail inflationary traits in the long term (Table 4).
We expect a lot of activities in the fixed income market as a result of the expected higher
government participation to fund the deficit budget. We expect bench mark MPR to close 2016 at
12% (currently 11%) as the CBN proactively tries to curb excess liquidity which the budget
implementation will trigger in the course of the year. We expect this to happen between the third
and the fourth quarter, not earlier. In the off chance that the CBN relaxes more of its tight currency
controls currently in effect and agrees to a devaluation of the Naira (which is clearly becoming
55
imminent), the fixed income market will witness renewed interest in Nigerian sovereign debt
instruments from FPI’s in 2016. We are optimistic of this strategy as it will surprise fixed income
investors on the upside.
Our expectation for the equities is slightly contrarian to popular consensus. We are aware that
the bearish trend in the market is triggered by macro-economic pressure. We are of the opinion
that the pass through effect of the devaluation of the local currency (provided the anti-graft war
is sustained and the focus on economic growth persists) has been understated. We believe that
the equities market has as much chance to rebound as it has to crash further beyond current levels.
Our objective opinion is that the market will keep reacting to the steps being taken by the
administrators of the economy (fiscal & monetary) rather than the end result. We are cautious in
our optimism because of the possibility of policy inconsistencies. However we are optimistic that
the market will close cautiously in the green. We expect the All Share Index to close 2016 slightly
above 28,000 (about +1.2%).
Table 4: Overview of Nigeria’s Economic Outlook and Projections
Source: GTI Research
Overview of Nigeria’s Economic Outlook/Projections
2015A 2016F
GDP 3.5E 4.5
Inflation 9.6 9.8
Exchange Rate NGN199.10/US$ NGN250.00/US$
Oil Price p/b $34.04 $25.45
Oil as % of GDP 10.5%E 8.01%
Non-oil as % GDP 89.5%E 91.99%
Agriculture% of GDP 27%E 35.01%
Money Market Mixed Positive
MPR 11% 12%
Bond Market Mixed Positive
Equity Market Weak (-17.36%)
Cautious Optimism
(+1.2%)
NB- A=Actual, E=Estimated and F=Forecast
56
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CONTACT INFORMATION
GTI SECURITIES LIMITED
GTI CAPITAL LIMITED
Research Kehinde Hassan: [email protected]
Kanayo John: [email protected] Basirat Salami: [email protected]
Korede Ologun: [email protected]
Chuks Anyanwu: [email protected]
Investment Advisory
Ojo Olayinka: [email protected]
Business Execution & Support
Benjamin Asiotu: [email protected]
Business Operations
Harriet Ogirri: [email protected]
Internal Control & Compliance
Jerry Adebiy: [email protected]
Managing Director
Amos Aledare: [email protected]
GTI Trading Floor
Nnamdi Obi: [email protected]
HEAD OFFICE
GTI House,
4, Tinubu Street, Central Business District,
Marina-Lagos
Tel: 234-1-2772481
Email: [email protected]
Website: www.gti.com.ng
Branches
Ikeja: 127, Awolowo Way, Ikeja-Lagos
Surulere: 1,Tafewa Balewa Crescent, Surulere-Lagos
Ibadan: 2nd Floor, Cocoa House, Dugbe-Ibadan
58
DISCLOSURE
Conflict of Interest
GTI Securities Ltd and its sister companies within the GTI Group may execute transactions in securities
of companies mentioned in this document and may also perform or seek to perform investment banking
services for those companies mentioned herein. Trading desks may trade, or have traded, as principal
on the basis of the research analyst(s) views and report(s).
Analyst Certification
Where applicable, the views expressed in this report accurately reflect the analysts' views about any and
all of the investments or issuers to which the report relates, and no part of the analysts' compensation
was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate
finance transactions expressed in the report.
Disclaimer
This report by GTI Securities Ltd is for information purposes only. While opinions and estimates therein
have been carefully prepared, the company and its employees do not guaranty the complete accuracy of
the information contained herewith as information was also gathered from various sources believed to
be reliable and accurate at the time of this report. We do not take responsibility therefore for any loss
arising from the use of the information.
For enquires/research queries, please send an email to [email protected]
