Economic Fact Q1 2015
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ECONOMIC REVIEW The global economy is yet to witness significant growth improvement as the economy of developed countries such as the United States is showing some level of moderation. According to the U.S. Bureau of Economic Analysis, the Gross Domestic Product (GDP) in the United States expanded at a seasonally adjusted annual rate of 2.20% in fourth quarter (Q4) 2014, down from 3.90% recorded in third quarter (Q3) 2014. The deceleration in real GDP growth in the fourth quarter primarily reflected a rise in imports, decline in federal government spending, deceleration in non-residential fixed investment and exports that were partly offset by acceleration in personal consumption expenditures, rise in private inventory investment, and acceleration in state and local government spending. The Federal Open Market Committee (FOMC) on 18 March 2015, emphasized on improved labour conditions within the United States, with strong job gains and a lower unemployment rate. Accordingly, the United States Bureau of Labour Statistics in February 2015 reported a decrease in unemployment rate to 5.50% from 5.70% in January 2015. The FOMC further recognized that household spending is rising moderately as decline in energy prices has improved household purchasing power. Contrary to most analyst expectation of possible hike in interest rate at the recently concluded FOMC meeting, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2.00% target over the medium term. In the United Kingdom, the British GDP advanced by 2.70% year on year in Q4 2014 up from a 2.60% increase over the same quarter of the previous year and the highest since 2007. This was driven by rise in consumption, investment and net trade. On the other hand, the unemployment rate for the Brits according to Office for National Statistics stood steady at 5.70% in the three months to January 2015, the lowest since mid-2008. Similarly, the Euro zone, despite the battle with deflation which currently stands at - 0.20% in February 2015 up from -0.50% in January 2015 recorded a slight improvement in the annual GDP growth rate from 1.20% in Q3 2014 to 1.30% in Q4 2014. The Chinese economy has continued to demonstrate a muted expansion as the annual GDP growth rate remained steady at 7.30% in first (Q1) 2015 and Q4 2014. In addition, exports in China decreased to $169.19 billion in February 2015 from $196.36 billion in January 2015. Export growth has been a major component supporting China's rapid economic expansion as export of goods and services constitute 30% of GDP. Corroborating slower than usual growth in China’s economy, the National Bureau of Statistics of China reported that despite the ease on restriction to owning homes, China’s newly built house prices decreased 5.70% in February 2015 relative to the same month of the previous year; thus representing the largest drop on record. This was due to fears by citizens and investors that the price of the houses may decline further. At the home front, the Nigerian economy’s GDP advanced by 5.94% year-on-year in the last quarter of 2014, slightly down from a 6.23% increase in the previous period. It is the lowest figure in five quarters due to a slowdown in the services sector. According to the National Bureau of Statistics (NBS), services sector expanded 6.15%, compared with a 7.61% rise in the previous period. Internal trade went up 5.32%, slowing from a 6.81% increase in Q3 2014; finance and insurance grew by 8.14% while real estate activities increased by 5.96%. Also, the annual inflation rate inched up for the third consecutive month to 8.40% in February 2015 from 8.20% recorded in January 2015 according to the data released in March by the National Bureau of Statistics (NBS). All major divisions that contribute to the index increased at a faster pace during the period, the only exception being Recreational and Culture Division which increased at a slower pace. The faster pace growth in items that drive headline index was also evidenced in both the Food and Core sub-indices. The imported food sub-index rose by 9.40% (year on year), 0.2 percentage points from January. The rise in annual inflation for the third consecutive month is largely attributable to the falling naira which has steadily pushed up prices of imported food items. MARKET REVIEW In the domestic equities market, going into 2015, the key dominant theme was the heightened political risk on account of 2015 general elections. As such, the equities market opened the year on a negative note and continued the bearish run throughout the quarter. Consequently, the All Share Index (“ASI”) in January recorded the highest ever loss in January over the last six years losing 14.70%. Following the bearish run witnessed in January, we saw a rebound in the market in early days of February in the run up to the general elections but this was short-lived by the postponement of the election by six weeks as that initially triggered panic in the market causing a free fall. As a result the ASI returned -8.38%. During the quarter, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) met twice in January and March, maintaining status quo on all the monetary policy tools as the Monetary Policy Rate (MPR) was held constant at 13.00%. The committee at both MPC meetings held in Q1 2015 emphasized that the decision made at the November 2014 MPC meeting is still adequate to ensure stability in the economic and financial system. In another development, following the placement of Nigeria on a negative watch list by JP Morgan due to the less liquid flow of dollars within the system, the apex bank increased the Net Open Position (NOP) limit of banks from 0.10% to 0.50% of the bank’s shareholders fund. This is to enable the banks take some position in the provision of foreign currency to meet genuine demand in the system. In the currency market, the USD/NGN experienced severe pressure earlier in the quarter as foreign investors continued to reduce their exposure to emerging and frontier markets like Nigeria. As such, the USD/NGN further depreciated by 11.22% from N182.00 levels to N205.00 due to shortage of dollar flows and increased demand from exiting foreign investors as well as genuine demand from importers. In a bid to calm the pressure on the USD/NGN and close the gaps in foreign exchange market, the CBN on 18 February 2015 scrapped the Retail Dutch Auction System (RDAS) and Wholesale Dutch Auction System (WDAS). In light of this, the new forex market consists of two segments i.e. the inter-bank foreign exchange market (where 90.00% of forex transactions are carried out) and the Bureau De Change (BDCs). The apex bank’s intermittent intervention in the market and the sale of dollars by oil multinationals also cushioned the pressure at the interbank. As a result, the USD/NGN which opened the quarter at N183.01 depreciated by 8.76% to close the quarter at N199.05. Also, the foreign exchange reserve declined by circa 13.55% from $34.47 billion to $29.79 billion owing to the increased demand of dollars and the decline in crude oil prices. In addition, the apex bank on 03 March 2015 commenced the operation of the Treasury Single Account (TSA) system which seeks to pull all the funds meant for the Federal Government i.e. MDAs (such as Federal government Ministries, Departments and Agencies) into a single account in the coffers of the CBN. By implication, some funds such as FAAC allocation belonging to the Federal government which ordinarily would have flowed into the system via the deposit money banks are now retained in the TSA by the CBN. Furthermore, the apex bank revised the Cash Reserve Ratio (CRR) monthly averaging debit to bi-monthly averaging debit in a bid to ensure excess liquidity is timely mopped up from the system. These measures should significantly improve CBN’s ability to effectively manage the liquidity in the system. In light of these developments, yields across the curve took on a hawkish trend due to the increased sell off by foreign investors or lack of active participation following the negative watch placed on Nigeria. Yields rose by an average of 250 basis points across the curve with greater movement experienced at the short end of curve as banks sold their short dated securities particularly treasury bills due to tight liquidity in the system causing a rise in yields by circa 200 basis points. In the bond market, yields peaked at 16.50% during the quarter due to the sell off by foreign investors on the back of negative watch placed on Nigeria for JP Morgan’s GBI-EM Indexes. Yields assumed a new level of about 100bps decline relative to its quarter high as calm had returned to the market with positive outlook around the conclusion of presidential elections and anticipated peaceful transition. OUTLOOK We remain less optimistic concerning the release of Q1 2015 result by companies listed on the Nigeria Stock Exchange as we opine that the results of these companies will be significantly impacted by the exchange rate devaluation and reduced consumer spending especially in the Fast Moving Consumer Goods and Industrial sectors. Also, we expect the Banking sector to continue to face regulatory headwinds as the apex regulator continues to tighten liquidity in a bid to curb inflation and stabilize exchange rate. However, upon the successful conclusion of elections and peaceful transition of government, we expect to see significant improvement in investors’ sentiments as the election has been the single largest factor driving market sentiments. Consequently, if oil prices are sustained at about an average of US$55 per barrel, we expect the overall market performance to be positive in second quarter (Q2) 2015. On the domestic scene, we expect increased liquidity in the system owing to over N1 trillion OMO maturities, N500 billion bond maturity (i.e. 4.00% April 2015 FGN Bond) and FAAC inflow of circa N200 billion for the respective months in Q2 2015. In addition, the Q2 2015 bond issuance calendar released by the Debt Management Office showed a reduction of circa 16.50% in the proposed volume of bonds to be issued in Q2 2015 compared to the actual volume issued in Q1 2015. In light of this, we expect to see yields decline early in the quarter across the curve by circa 100 basis points due to the huge liquidity expected in the system and pressure from investors seeking outlets for their maturities. Furthermore, in a bid to stem the impact of the excess liquidity in the system, we envisage increased issuance of OMO bills by the CBN. As a result, we expect yields in the treasury bills space should trade within a range of 13.50% to 14.50% in Q2 2015 while bond yields should hover around 15.00% level for the same period. In another vein, we expect that the successful conclusion of the Presidential election with a new president elect in the person of Retired General Muhammadu Buhari should restore reasonable level of confidence to investors with regards to investing in Nigeria. Possibly, the current downgrade of Nigeria from BB- to B by S & P could be reversed in the near term as the major component of uncertainty surrounding Nigeria has been laid to rest. Consequently, we expect yields in both the treasury bills and bonds market to continue to chart a downward trajectory as renewed interest in Nigeria by the foreign portfolio investors should drive prices up and increase the downward pressure on yields. Stanbic IBTC Asset Management Limited Quarterly Economic Review Q1:2015 CONTACT US: Jide Allo or Ehis Uzenabor WEALTH HOUSE Plot 1678 Olakunle Bakare Close Off Sanusi Fafunwa Victoria Island Lagos P. O. Box 71707 Victoria Island Telephone: +234 (0) 1 2801266 Ext 2315: 1423, Fax: +234 (0) 1 2805442, 2805443 Website: www.stanbicibtcassetmanagement.com
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Economic facts about Nigeria
Transcript of Economic Fact Q1 2015
ECONOMIC REVIEW The global economy is yet to witness significant growth improvement as the economy of developedcountriessuchastheUnitedStatesisshowingsomelevelofmoderation. According to the U.S. Bureau of Economic Analysis, the Gross Domestic Product (GDP) intheUnitedStatesexpandedataseasonallyadjustedannualrateof2.20%infourth quarter(Q4)2014,downfrom3.90%recordedinthirdquarter(Q3)2014.The deceleration in real GDP growth in the fourth quarter primarily reflected a rise in imports, decline in federal government spending, deceleration in non-residential fixed investment andexportsthatwerepartlyoffsetbyaccelerationinpersonalconsumption expenditures,riseinprivateinventoryinvestment,andaccelerationinstateandlocal government spending.TheFederalOpenMarketCommittee(FOMC)on18March2015,emphasizedon improvedlabourconditionswithintheUnitedStates,withstrongjobgainsandalower unemploymentrate.Accordingly,theUnitedStatesBureauofLabourStatisticsin February2015reportedadecreaseinunemploymentrateto5.50%from5.70%in January2015.TheFOMCfurtherrecognizedthathouseholdspendingisrising moderatelyasdeclineinenergypriceshasimprovedhouseholdpurchasingpower. Contrarytomostanalystexpectationofpossiblehikeininterestrateattherecently concludedFOMCmeeting,theCommitteeanticipatesthatitwillbeappropriatetoraise thetargetrangeforthefederalfundsratewhenithasseenfurtherimprovementinthe labour market and is reasonably confident that inflation will move back to its 2.00% target over the medium term. In the United Kingdom, the British GDP advanced by 2.70% year on year in Q4 2014 up from a 2.60% increase over the same quarter of the previous year and the highest since 2007.Thiswasdrivenbyriseinconsumption,investmentandnettrade. Ontheother hand,theunemploymentratefortheBritsaccordingtoOfficeforNationalStatistics stood steady at 5.70% in the three months to January2015, the lowest since mid-2008. Similarly,theEurozone,despitethebattlewithdeflationwhichcurrentlystandsat-0.20% in February 2015 up from -0.50% in January 2015 recorded a slight improvement in the annual GDP growth rate from 1.20% in Q3 2014 to 1.30% in Q4 2014.TheChineseeconomyhascontinuedtodemonstrateamutedexpansionastheannual GDP growth rate remained steady at 7.30% in first (Q1) 2015 and Q4 2014. In addition, exportsinChinadecreasedto$169.19billioninFebruary2015from$196.36billionin January2015.ExportgrowthhasbeenamajorcomponentsupportingChina'srapid economicexpansionasexportofgoodsandservicesconstitute30%ofGDP. CorroboratingslowerthanusualgrowthinChinaseconomy,theNationalBureauof Statistics of China reported that despite the ease on restriction to owning homes, Chinas newly built house pricesdecreased 5.70% inFebruary2015 relative tothe same month of the previous year; thus representing the largest drop on record. This was due to fears by citizens and investors that the price of the houses may decline further. At the home front, the Nigerian economys GDP advanced by 5.94% year-on-year in the last quarter of 2014, slightly down from a 6.23% increase in the previous period. It is the lowest figure in five quarters due toa slowdown in the services sector. According to the NationalBureauofStatistics(NBS),servicessectorexpanded6.15%,comparedwitha 7.61%riseinthepreviousperiod.Internaltradewentup5.32%,slowingfroma6.81% increaseinQ32014;financeandinsurancegrewby8.14%whilerealestateactivities increased by 5.96%. Also,theannualinflationrateinchedupforthethirdconsecutivemonthto8.40%in February2015from8.20%recordedinJanuary2015accordingtothedatareleasedin MarchbytheNationalBureauofStatistics(NBS).Allmajordivisionsthatcontributeto theindexincreasedatafasterpaceduringtheperiod,theonlyexceptionbeing RecreationalandCultureDivisionwhichincreasedataslowerpace.Thefasterpace growth in items that drive headline index was also evidenced in both the Food and Core sub-indices. The imported food sub-index rose by 9.40% (year on year), 0.2 percentage points from January. The rise in annual inflation for the third consecutive month is largely attributabletothefallingnairawhichhassteadilypusheduppricesofimportedfood items. MARKET REVIEW Inthedomesticequitiesmarket,goinginto2015,thekeydominantthemewasthe heightenedpoliticalriskonaccountof2015generalelections.Assuch,theequities market opened the year on a negative note and continued the bearish run throughout the quarter. Consequently,the All ShareIndex (ASI) in January recordedthe highest ever lossinJanuaryoverthelastsixyearslosing14.70%.Followingthebearishrun witnessedinJanuary,wesawareboundinthemarketinearlydaysofFebruaryinthe runuptothegeneralelectionsbutthiswasshort-livedbythepostponementofthe election by six weeks as that initially triggered panic in the market causing a free fall. As a result the ASI returned -8.38%. During the quarter, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) met twice in January and March, maintaining status quo on all the monetary policy toolsastheMonetaryPolicyRate(MPR)washeldconstantat13.00%.Thecommittee atbothMPCmeetingsheldinQ12015emphasizedthatthedecisionmadeatthe November2014MPCmeetingisstilladequatetoensurestabilityintheeconomicand financialsystem.Inanotherdevelopment,followingtheplacementofNigeriaona negative watch list by JP Morgan due to the less liquid flow of dollars within the system, theapexbankincreasedtheNetOpenPosition(NOP)limitofbanksfrom0.10%to 0.50% of the banks shareholders fund. This is to enable the banks take some position in the provision of foreign currency to meet genuine demand in the system. In the currency market, the USD/NGN experienced severe pressure earlier in the quarter as foreign investors continued to reduce their exposure to emerging and frontier markets like Nigeria. As such, the USD/NGN further depreciated by 11.22% from N182.00 levels toN205.00duetoshortageofdollarflowsandincreaseddemandfromexitingforeign investorsaswellasgenuinedemandfromimporters.Inabidtocalmthepressureon the USD/NGN and close the gaps in foreign exchange market, the CBN on 18 February 2015scrappedtheRetailDutchAuctionSystem(RDAS)and WholesaleDutchAuction System (WDAS). In light of this,thenew forex market consists of two segments i.e. the inter-bank foreign exchange market (where 90.00% of forex transactions are carried out) andtheBureauDeChange(BDCs).Theapexbanksintermittentinterventioninthe marketandthesaleofdollarsbyoilmultinationalsalsocushionedthepressureatthe interbank. As a result, the USD/NGNwhichopenedthe quarter at N183.01depreciated by8.76%toclosethequarteratN199.05.Also,theforeignexchangereservedeclined bycirca13.55%from$34.47billionto$29.79billionowingtotheincreaseddemandof dollars and the decline in crude oil prices. In addition, the apex bank on 03 March 2015 commenced the operation of the Treasury SingleAccount(TSA)systemwhichseekstopullallthefundsmeantfortheFederal Governmenti.e.MDAs(suchasFederalgovernmentMinistries,Departmentsand Agencies)intoasingleaccountinthecoffersoftheCBN.Byimplication,somefunds suchasFAACallocationbelongingtotheFederalgovernmentwhichordinarilywould have flowed into the system via the deposit money banks are now retained in the TSA by theCBN.Furthermore,theapexbankrevisedtheCashReserveRatio(CRR)monthly averaging debit to bi-monthly averaging debit in a bid to ensure excess liquidity is timely mopped up from the system. These measures should significantly improve CBNs ability toeffectivelymanagetheliquidityinthesystem.Inlightofthesedevelopments,yields acrossthecurvetookonahawkishtrendduetotheincreasedselloffbyforeign investorsorlackofactiveparticipationfollowingthenegativewatchplacedonNigeria. Yieldsrosebyanaverageof250basispointsacrossthecurvewithgreatermovement experiencedattheshortendofcurveasbankssoldtheirshortdatedsecurities particularlytreasurybillsduetotightliquidityinthesystemcausingariseinyieldsby circa200basispoints.Inthebondmarket,yieldspeakedat16.50%duringthequarter due to theselloff byforeign investorsonthe back of negativewatch placedon Nigeria for JPMorgans GBI-EMIndexes.Yields assumed anew level of about 100bpsdecline relativetoitsquarterhighascalmhadreturnedtothemarketwithpositiveoutlook around the conclusion of presidential elections and anticipated peaceful transition. OUTLOOKWe remain less optimistic concerning the release of Q1 2015 result by companies listed ontheNigeriaStockExchangeasweopinethattheresultsofthesecompanieswillbe significantlyimpactedbytheexchangeratedevaluationandreducedconsumer spendingespeciallyintheFastMovingConsumerGoodsandIndustrialsectors.Also, weexpecttheBankingsectortocontinuetofaceregulatoryheadwindsastheapex regulatorcontinuestotightenliquidityinabidtocurbinflationandstabilizeexchange rate.However,uponthesuccessfulconclusionofelectionsandpeacefultransitionof government,weexpecttoseesignificantimprovementininvestorssentimentsasthe election has been the single largest factor driving market sentiments. Consequently, if oil pricesaresustainedataboutanaverageofUS$55perbarrel,weexpecttheoverall market performance to be positive in second quarter (Q2) 2015. Onthedomesticscene,weexpectincreasedliquidityinthesystemowingtooverN1 trillion OMO maturities, N500 billion bond maturity (i.e. 4.00% April 2015 FGN Bond) and FAAC inflow of circa N200 billion for the respective months inQ22015.Inaddition, the Q22015bondissuancecalendarreleasedbytheDebtManagementOfficeshoweda reductionofcirca16.50%intheproposedvolumeofbondstobeissuedinQ22015 comparedtotheactualvolumeissuedinQ12015.Inlightofthis,weexpecttosee yieldsdecline early in thequarteracross the curve bycirca100 basispointsdue to the hugeliquidityexpectedinthesystemandpressurefrominvestorsseekingoutletsfor theirmaturities.Furthermore,inabidtostemtheimpactoftheexcessliquidityinthe system,weenvisageincreasedissuanceofOMObillsbytheCBN.Asaresult,we expect yields in the treasury bills space should trade within a range of 13.50% to 14.50% in Q2 2015 while bond yields should hover around 15.00% level for the same period. In another vein, we expect that the successful conclusion of the Presidential election with a new president elect in the person of Retired General Muhammadu Buhari should restore reasonable level of confidence to investors with regards to investing in Nigeria. Possibly, the current downgrade of Nigeria from BB- to B by S & P could be reversed in the near termasthemajorcomponent ofuncertaintysurroundingNigeriahasbeenlaidtorest. Consequently,weexpectyieldsinboththetreasurybillsandbondsmarkettocontinue tochartadownwardtrajectoryasrenewedinterestinNigeriabytheforeignportfolio investors should drive prices up and increase the downward pressure on yields.
Stanbic IBTC Asset Management Limited Quarterly Economic Review Q1:2015 CONTACT US: Jide Allo or Ehis UzenaborWEALTH HOUSE Plot 1678 Olakunle Bakare Close Off Sanusi Fafunwa Victoria Island Lagos P. O. Box 71707 Victoria Island Telephone: +234 (0) 1 2801266 Ext 2315: 1423, Fax: +234 (0) 1 2805442, 2805443 Website: www.stanbicibtcassetmanagement.com
