Nigeria_The Road Ahead

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NIGERIATHE ROAD AHEAD

October 2009Macroeconomic Update


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Contents

Executive Summary 2

Introduction: The Road To Global Recovery 3There Is Optimism In The Air 3

America And China: Playing A BIG Role 4

Uptrend Promising, But Absolute Recovery May Be Premature 5

Global Commodities Recovering 7

Sustaining Growth Beyond 2010 7

Nigeria: Polity, A Stable Terrain? 8

What Policy Direction? 8

Niger Delta Amnesty Deal: Solution Proffered 8

Power: Not On All Phases 9

Petroleum Products Subsidy: Phasing Out? 10

The Economy: Resilient, But Challenges Abound 11

Dwindling Revenue 11

Expenditure: Closer To Budget... 12

...But Overall Fiscal Position May Deteriorate in H2 2009 12

Output Growth: Strong, Against All Odds 13

Inflation: Upward Pressure Looms 14

Currency: Downside Risk Prevalent 14

External Reserves: Stable Outflows, Slower Inflows 14

The Financial Sector: Questions Asked 17

Banking Sector: Major Shake Up 17

Capital Markets: Equities Out...Bonds In 19

Markets Outlook 20

Money & Currency Markets: Sustained Stability Desired 20

Real Estate: Deleveraging Throws Up Opportunities 21

Stock Market: Uncertainty Lingers, But Value Remains 22

Bond Market: Long Maturities Drive Stellar Performance 23

Disclaimer 24

Contacts 25

Nigeria: The Road Ahead


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The first half of 2009 was challenging and full of uncertainties for the world economy. Nevertheless, the upshot was

mixed and interesting on both the domestic and global scenes. After a depressing Q1 2009 - a carryover from the slump

in the previous year, the global economy saw a deceleration in its rate of decline in Q2. Hopes of recovery appear

brighter across the board, and thus, raise questions as to whether a sustainable recovery is in sight. Economic indicators

showed improvements in production and trade levels, while stock markets rallied on new optimism of a global recovery

Global demand appears to have responded positively to expansionary fiscal and monetary policies, especially stimulus

actions by America and China, leading to a recovery in global commodity prices. Many advanced economies

experienced baseline growth, while others, a slowdown in their rate of decline. Amid this optimism, the IMF still expects

the global economy to contract by 1.4% on an annualised rate in 2009, and anticipates growth by 2.5% in 2010, it

believes the recovery process will be slow, uneven and subject to the particular characteristics of each countrys

economy.

Consensus projections indicate that the effect of the global crisis on emerging and developing countries will be less

severe, and their recovery, faster, given the low level of their integration with the global economy. However, it is

interesting to observe mixed results in the economies of sub-Saharan Africas two largest economies. South Africa and

Nigeria, which together make up about 56% of the regions economic output, tell slightly different stories. While South

Africa, the more-developed of the two economies, experienced a marked decline, Nigeria, against all odds, continues to

report output growth well above the 6% the country has averaged in the last five years. This compelling growth however,

has not been void of noticeable shortcomings.

In 2009, Nigerias revenue continued on its downward trend from previous years, owing mainly to petroleum production

declines caused by militant activities in the Niger Delta region. Total federally collected revenue dropped 44% between

Q2 2008 and Q2 2009 amid the critical need to develop infrastructure. Overall, the economys output continues to

improve as Q2 GDP rose 6.73% compared to 5.56% during the corresponding period of the previous year. The non-oisector was responsible for the significant growth in GDP through the contributions of agriculture, wholesale and retai

trade. Given the negative contributions of the oil sector towards GDP growth, Access Investments & Securities (AIS)

Research expects GDP growth for 2009 to decline to about 4.5%, a less impressive figure relative to the official

projection of 5.3%.

While Nigerias output level continues to appear favourable, harmonising the countrys fiscal and monetary policies

towards shaping a more robust economy becomes the ultimate challenge. The lingering effects of the bold decisions that

has rattled the banking industry, the looming inflationary pressure resulting from the federal governments proposed

removal of the petroleum subsidy, and exchange rate stability in the face of fast depleting external reserves, are issues

that the Central Bank of Nigeria (CBN) has to grapple with. New developments relating to corporate governance and riskmanagement in Nigerias banking system following failures in capital market and downstream oil and gas portfolios, are

charting a new direction for Nigerias financial sector. While we perceive heightened risks in the short term, our outlook

for Nigeria and prospects for investments remain positive.

Executive Summary


2 October 2009


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-7.0

-4.5

-2.0

0.5

3.0

5.5

8.0

10.5

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

%

Unite d States United Kingdom GermanyFrance Japan ChinaIndia

Source: IMF

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

2007 2008 2009 2010 (f)

%

World output Advanced economies

Euro area Emerging economies

Africa Sub-Sahara

There Is Optimism In The Air

After the depressing performance in the fourth quarter (Q4) of 2008 extended into Q1 2009, the

global economy appears to be on the path to a recovery. Although there were improvements inthe world economy in Q2 2009; it remains mired in a recession. Q2 2009 GDP data for many

economies shows that the rate of deterioration has eased, suggesting that recovery is imminent

as we approach 2010. In spite of recent optimism, the stabilization process will be slow and

uneven, with many countries still struggling to combat recessionary forces. The International

Monetary Fund (IMF) is hopeful that there will be an upturn in global activity by about 2.7%

(higher than it had projected in April) by 2010. The monetary authority, however, still expects the

global economy to contract by 1.4% in 2009, in line with its April 2009 projection. The projection

signifies expectations of a v-shaped global recovery buoyed by continued favourable counter-

cyclical measures. However, this brings the following decisive questions to the fore: is the worst

over, and has the recession bottomed out?

Introduction: The Road To Global Recovery


3 October 2009

Chart 1: Quarterly GDP Growth of Selected Countries (2008-2009)

The recent signals of a recovery are indicative of the measured success of the expansionary

macroeconomic (fiscal and monetary) policies implemented by various countries governments.

The combination of lower interest rates, easing of credit, state guarantees, and the recapitalization

of banks by various governments, has helped reduce uncertainty, bolstered confidence and

demand in many economies. However, the degree and pace of recovery will be unique for each

country.

The idea of using a fiscal stimulus program to manage an economy through a recession has once

again proven to be popular in combating a severe economic downturn. An attestation to the

success of the Keynesian fiscal stimulus theory was its successful implementation in bringing to

an end the great depression of 1929, the longest and most severe decline the world has ever

seen to date. The recession had lingered then because governments, especially Americas under

President Hoover, failed to adopt the initiative between 1929 and 1932.

Source AIS Research

Chart 2: Annual GDP Growth by Regions (2007-2010)

Q2 2009 GDP data in man

economies show that the

rate of deterioration has

eased and thus suggestiv

of an imminent recovery a

we approach 2010

The combination of lower

interest rates, credit easin

state guarantees, and ba

recapitalization bygovernments, have helpe

reduce uncertainty


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Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09World 3136 3378 3486 3834 3898 4313 4306 3420 2678 2883

North America 427 461 461 491 497 543 538 457 371 380

South & Central America 108 125 132 139 139 167 178 123 97 116

Europe 1360 1419 1419 1597 1655 1795 1661 1350 1134 1185

Asia 914 1001 1076 1140 1102 1223 1298 1079 810 904

Others 325 371 397 467 505 583 630 410 266 299

Memorandum items

European Union (27) 1257 1310 1308 1469 1518 1643 1517 1235 1034 1085

Intra-trade 873 893 879 995 1044 1116 1010 815 703 725

Extra-trade 383 416 429 474 474 527 507 421 331 360

America And China: Playing A BIG Role

China launched a US$585 billion (RMB 4 trillion) stimulus package in November 2008. Funds were channelled to

domestic projects such as infrastructure and mining, amongst other measures including a loosening of the countrys

monetary policy. The ripple effects of these actions bolstered domestic demand and production, as well as the

opportunity for foreign companies (especially American ones) to reduce their exports overhang through renewed

Chinese demand. In its March 2009 quarterly on China, the World Bank had forecast that stimulus spending would

represent 4.9% of the 6.5% GDP growth projections for China in 2009.

Likewise, the US, the worlds largest economy, launched its US$787 billion stimulus package through its American

Recovery and Reinvestment Act of 2009 in February. This legislation provided for federal tax cuts, increased

unemployment benefits and other social welfare provisions, and domestic spending in sectors such as infrastructure

energy, health care, and education. By virtue of the fact that America and China account for about a third of world

output, stimulus actions by both countries are bound to have an overarching impact on the global economy during these

difficult times.


4 October 200

Chart 3: Quarterly Exports (2007-2009) Chart 4: Quarterly Imports (2007-2009)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

US$Billion

World North America United States

Brazil Europe United KingdomGermany Asia Japan

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

US$Billion

Wo rld North Ameri ca Un ited States

Brazil Europe United Kingdom

Chart 5: Quarterly Exports By Region (2007-2009) in US$ Million

Source: WTOSource: WTO

Source: WTO


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3,000

4,000

5,000

6,000

7,000

8,000

Jan-0

8

Mar-08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-09

May-0

9

Jul-09

600

800

1,000

1,200

1,400

1,600

Jan

-08

Mar-

08

May

-08

Jul-08

Sep

-08

Nov

-08

Jan

-09

Mar-

09

May

-09

J u l 0 9

Uptrend Promising, But Absolute Recovery May Be Premature

Although the expectation is for little or no economic growth in advanced countries

until 2010 according to analysts opinions, many countries have shown promising

signs of recovery. In the following sub-section, we highlight the performances of

selected global powers.

US: Returning Consumer Confidence?

The American economys woes, rooted as they are in two sectors, financial ser-

vices and housing, appear to have begun to abate. House prices and new-home

sales improved slightly in Q2 2009, while significant part of the financial sector

experienced a strong recovery and a return in inter-bank confidence and activities.

Recent data also reflects a slowdown in the rate at which unemployment was ris-

ing. The aid provided to the automobile industry may have contributed to the eas-

ing in the rate at which companies were downsizing, although projections show

that the labour market is still set to experience a continuous rise in unemployment.

The equity markets picked up and further strengthened on optimism of a likely re-

covery, evidenced by the performance of the S&P 500 index, which surpassed the

1,000 mark, and is 56% above the recent low seen in March 2009. Likewise, the

Dow Jones Industrial Average (DJIA) rose by 47% as of September 2009 from the

recent low recorded in March 2009. On the downside, increased savings levels by

consumers and the de-leveraging of balance sheets by businesses and house-

holds alike continue to dampen investments, further corroborating projections of

low output in the near term .

UK: Still In Recession

Q2 2009 figures in Europes third largest economy indicate that the rate of decline

in general activities might be easing, as quarter-on quarter (QoQ) GDP dropped by0.7%, compared to a negative rate of 2.4% in Q1 2009. Improvements in the hous-

ing sector also gave indications of renewed optimism. According to the Organiza-

tion for Economic Corporation and Development (OECD), the UK economy will

shrink by about 4.7% in 2009, and will emerge last from the recession among the

worlds advanced countries. The report considered the UKs financial challenges

as the UK government has expended US$175 billion through the Bank of Eng-

lands quantitative easing programme, an amount considered huge relative to the

size of the UK economy. While the IMF agrees that the UK banking sector is frag-

ile, it however expects the UK to experience gradual but sluggish growth.

Euro Area: Seeing Improvement, But Still WeakThe economic situation in the Euro Zone continued to be a weak one. Macro-

economic policies continue to support the zone but unemployment is still on the

rise. Euro-zone GDP fell by 4.8% in Q2 against a decline of 4.9% in Q1. Germany,

the regions largest economy, saw exports rise in Q2 amid a minimal increase in

productivity. Exports for the Euro-zone fell 17.7% in Q2, compared to a decline of

16.8% in Q1. For most countries in the zone, the banking sector is frail and the

outlook for consumption and productivity is not impressive.


5 October 2009

Chart 6: S&P 500 (2008 - 2009)

Chart 7: DAX Xetra (2008 - 2009)

Chart 8: FTSE (2008 - 2009)

Source: Bloomberg

Source: Bloomberg

1,700

2,000

2,300

2,600

2,900

3,200

3,500

Jan

-08

Mar-

08

May

-08

Jul-08

Sep

-08

Nov

-08

Jan

-09

Mar-

09

May

-09

Jul-09

Source: Bloomberg


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3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Japan: Out Of Recession

After the countrys economy contracted by 4% in Q1, Japans economy pulled

itself out of recession by growing by 0.9% in Q2. Signs of an increase in ex-

ternal demand for Japanese products, a gradual depletion of surplus invento-

ries, a new stimulus programme, and a boost in public spending are all likely

indicators of growth for the Japanese economy. The fear of an export over-hang is remote, as global demand appears to have picked up, especially Chi-

nese demand for Japanese products. Contrary to the positive factors high-

lighted above, the Japanese domestic economy still faces the twin challenges

of rising unemployment and lower wages. In addition, the countrys exports

base still requires significant improvements in demand from the West. Expec-

tations are that the Japanese economy will see relative growth in 2010.

China: Bright Spot Amid Recession

Chinas economy positively responded to monetary and fiscal stimulus

programs by the government resulting in China being the best performing

economy globally with GDP performance of 7.9% in Q2 (compared to 6.1% in

Q1). With loose monetary policy as its focus, the Chinese government en-

abled the countrys banking system to make new loans at twice the level re-

corded in the first half of 2008. The success of the worlds third largest econ-

omys stimulus plan has been one of the few bright spots of the global reces-

sion. The credit boost has engendered confidence and strengthened the

economy. The government, however, is trying to adjust its stimulus to forestall

a possible asset bubble as prices in the housing market are rising at an annu-

alised rate of 10%.

Sub-Saharan Africa: The Risks Have RisenThe global crisis has severely affected the sub-Sahara African (SSA) market

in 2009 as weak global demand affected African exports and the credit crunch

weakened remittance flows and tourism. Growth continues to recede as ex-

port volumes and prices decline, and the provision of sustainable fiscal policy

responses proved challenging to policy makers. The two largest economies of

SSA, South Africa and Nigeria, account for 56% of SSAs GDP and are on a

rocky road to survival. South Africa, Africas largest economy, slid into reces-

sion after it contracted by 3% in Q2, on declines in the activities of major sec-

tors including manufacturing, wholesale and retail trades, hospitality, finance,

real estate, and agriculture. The tale is slightly better but not without pain in

Nigeria, where GDP rose by 6.7% during Q2 on the back of strong agriculturalproduction, wholesale and retail trade, but with a negative contribution to

growth from crude oil, the countrys main earner. The statistics office pro-

jected that Nigeria would grow at 5.3% in 2009, a much lower figure than the

governments budgeted growth of 8.9%. However, availability of liquidity, re-

duced external reserves and currency management in the face of key infra-

structure deficits are critical issues facing the country.


6 October 2009

Chart 9: Nikkei 225 (2008 2009)

Chart 10: Hang Seng Index (2008 2009)

Chart 11: JSE ASI (2008 2009)

10000

14000

18000

22000

26000

30000

Jan

-08

Mar-

08

May

-08

Jul-08

Sep

-08

Nov

-08

Jan

-09

Mar-

09

May

-09

Jul-09

6600

8100

9600

11100

12600

14100

15600

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

S e p 0 9

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg


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Chart 12: Selected Commodities Prices (2008 -2009)

Global Commodities Recover

Commodity prices continue to recover due to the anticipation of a resurgence in global demand.

Crude oil prices have been on the rise since their December and February lows, and now hover

above US$70/bbl. Energy prices continue to be driven by speculation, and by hopes of a global

economic recovery, even as market fundamentals remain weak. In spite of the fact that US oilconsumption is still on the decline, a rally in demand from other countries continues to push

prices up. Other commodities such as agricultural produce and metals (base driven in part by

improving US Home Sales figures, whereas the sharp fall in the Dollar Index-the US dollar

pegged against 6 major currencies, supported the rally in precious metals such as gold. Assets

traded in US dollar terms appreciate in value terms when the dollar weakens, thus, a further

weakening of the dollar will support a strong rally in gold prices.


7 October 2009

Other commodities such

as agricultural produce,base and precious metals

have equally recovered

on hopes of economic

recovery

Sustaining Growth Beyond 2010

AIS Research maintains its position that the World economy is set for an upturn in performance.

We believe that the speed of the recovery depends on strong and perceptive policy implementa-

tion. We note that financial system impairments and the rebuilding of savings in countries that

have suffered asset price erosion might slow down the process of recovery. In addition, weak de-

mand from countries with current account deficits such as the US could hamper growth in export

dependent countries.

In conclusion, further fiscal injections through clearly defined and insightful macroeconomic poli-cies remain the catalyst for growth in the mid to near term. Emerging economies account for

about 40% of the world's business (or US$25 trillion a year), thus we expect that China and In-

dia's projected GDP growth of 9.6% and 6.5% in 2010, respectively, would spur demand and ac-

celerate international trade, thereby leading a full-blown global economic recovery in 2010.

We note that financial

system impairments and

rebuilding of savings in

countries that have

suffered asset price ero-

sion might slow down the

process of recovery.

Source: Bloomberg

40

60

80

100

120

140

160

180

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Cocoa Soybeans Crude Oil Copper Coal


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What Policy Direction?

The focus of President YarAduas administration is encapsulated in the 7-point agenda which

calls for a revolution in the supply of power and energy, food security, wealth creation,

transportation, land reforms, security, and education. However, it is unclear if the administra-

tions economic policy would take a market or social orientation, given actions such as the

reversal of the sale of government owned refineries and delay of the governments privatisation

programme. The agenda offers Nigeria a guideline to success but despite its efforts, the gov-

ernment has yet to meet its set target. This delay in implementation, coupled with the current

challenges thrown up by the global economic downturn would appear to be limiting factors in

Nigerias vision of ranking among the top 20 economies by 2020. We think that issues such as

the critical power deficiency and finding a lasting solution to the problems in the Niger Delta

region are of utmost importance and require swift action if Nigeria is to meet its vision 2020

goal.

Niger Delta Amnesty Deal: A Solution Proffered

In June 2009, President YarAdua offered an amnesty deal to militant groups in the Niger Delta

in a bid to bring a lasting solution to the problems in the region. The amnesty is for repentant

militants who unconditionally surrender their arms and ammunition and renounce militancy. The

deal, which elapsed on October 4, 2009, was also extended to all persons under prosecution

for offences associated with militant activities before the cut-off date. In reaction to the amnesty

deal, major militant leaders have since declared their intentions to give up militancy while others

have already surrendered their weapons. Some other militant factions have criticised the deal

stating that there has not been an international component to it. They believe that involving the

international community might prevent the government from reneging on its commitment to the

deal. Critics say the plan does not address any of the militant's key demands: jobs, economicdevelopment and a greater share of oil wealth for the region, and thus, might not be an all-in

solution to the Niger Delta problem. So far, the deal appears to have recorded some measure

of success, as there has been a decline in insurgency, while crude production is up to 1.8 mil-

lion bbl/d against year-lows of 1.6 million bbl/d. Despite this development, main militant group,

Movement for the Emancipation of the Niger Delta (MEND), have threatened to resume attacks

after a cease-fire expired on September 15. Although production has risen slightly during this

cease-fire period, we fear that the militants could resume attacks on oil facilities if talks break-

down. The violence in the Niger Delta cost the country about US$1 billion in lost oil revenue last

year, as global energy investors are wary of Nigeria.

30

50

70

90

110

130

150

Apr-08

Jun-08

Jul-08

Aug-08

Oct-08

Nov-08

Dec-08

Jan-09

Mar-09

Apr-09

May-09

Jul-09

Aug-09

Sep-09

1600

1650

1700

1750

1800

1850

1900

1950

2000

2008

3Q08

4Q08

1Q09

2Q09

May-0

9

Jun-0

9

Jul-09

Aug-0

9

Sep-0

9

'000 bbl/d %

Average Crude Production % of Opec


8October 20

Nigeria: Polity, A Stable Terrain?

We think that issues suc

the critical power deficie

and finding a lasting solu

to the problems in the N

Delta region are of utm

importance and require s

action if Nigeria is to m

vision 2020.

Chart 13: Bonny Light (2008-2009) Chart 14: Crude Production (2008-2009)

So far, the deal appears

have recorded some me

ure of success, as there

been a decline in insur-

gency, while crude produ

tion is up to 1.8 million bb

against year-lows of 1.6

million bbl/d

Source: OPECSource: EIA


10/26

05

10

15

20

25

30

35

Electricity

Generated as at Q2

2009

Dec 2009 Target Nigeria's Estimated

Requirement


9

October 20

Power: Not On All Phases

With US$16 billion of expenditure and eight years of democratic rule under former president,

Olusegun Obasanjo, the Nigerian government failed to make any appreciable improvement in

its power sector. This critical situation has prompted the YarAdua administration to make the

power sector one of its focal points. The administration has declared that its immediate goal is

to improve power generation to 6000 MW/day by the end of 2009. Nigerias average power

generation at the end of Q2 2009 stood at a historical low of 1,503.4 MW/h. Government offi-

cials have blamed a shortage of gas for the low levels of generation. There have been squab-

bles between the Power Holding Company of Nigeria (PHCN) and the Nigerian Gas Company

(NGC) over pricing. NGC claims that PHCN is not paying the right price for this scarce re-

source and would rather supply to those who will. This pathetic power situation continues to

douse industrial production and the overall economic development of the country. Since en-

ergy is the engine that drives industrialization and development, a sound energy policy would

directly and indirectly create jobs. We think that the December 6000 MW target is unattainable

given the current level of generation, investments and attendant gas shortages.

The administration has declared that its immediate

goal is to improve power

generation to 6000 MW/da

by the end of 2009.

Chart 15: Quarterly Electricity Generation Index (2007-2009)

Chart 18: Electricity Generation, Target & RequirementChart 17: Quarterly Industrial Production Index (2007-2009)

Chart 16: Electricity Generation (2004-2009)

150

155

160

165

170

175

180

185

190

195

Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

1990=100

110

112

114116

118

120

122

124

126

128

130

Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

1990=100

0

500

1000

1500

2000

2500

3000

2004 2005 2006 2007 2008 Q2 2009

MW/H

Source: CBN

Source: CBN Source: CBN

Source: CBN, NERC


11/26


10

October 20

Petroleum Subsidy: Phasing Out

There are plans by the Nigerian government to remove the subsidy on petroleum products and

completely deregulate the downstream oil sector. The huge strain placed on government

finances by the expenditure on this subsidy for the 2008 fiscal year is likely to have prompted

this announcement. In 2008, the Nigerian government spent N633.2billion on this subsidy (30%

of the countrys overall recurrent expenditure). Although the subsidy for 2009 will fall short of

2008 figures because of the decline in oil prices, its removal will undoubtedly raise other

issues.

Various bodies including the Labour, Trade Union, Petroleum and Natural Gas Senior Staff

Association of Nigeria (PENGASSAN), National Union of Petroleum and Natural Gas Workers

(NUPENG) and civil society groups have opposed the policy on the ground that it will lead to a

hike in product prices. Data from the Petroleum Products Pricing Regulatory Authority shows

that the expected open market price for Premium Motor Spirit (PMS or gasoline) as at October

12, 2009 is N94.74 per litre, 46% above the current recommended retail price of N65. A price

increase could create inflationary pressures, dampening any hopes of achieving price stability

in the short run. Also, swings in oil prices could mar product pricing and availability, thereby

creating uncertainty and planning challenges for many businesses. However, a significant

advantage of the subsidy removal is that it will free up government funds for developing other

critical areas. Another consideration is that it will align Nigeria with the G20 nations as far as

fossil fuel policy is concerned even though the underlying reasons at this point differ. Although

no timing was given, the G20 leaders have put forward a proposal to stop subsidizing fossil

fuels, in an attempt to reduce emission of green house gases.

For Nigeria, we see long-term benefits in the removal of the subsidy and the full deregulation of

the downstream petroleum sector as it will create a truly free market and encourage invest-

ments in this sector. In the short term however, we believe that as long as the country dependssolely on importation, complete deregulation, if not properly managed, could lead to unstable

prices in goods and services.

Data from the Petroleum

Products Pricing Regula

Authority show that the e

pected open market pric

Premium Motor Spirit (P

or gasoline) as at Septem

30, 2009 is N94.74 per li

46% above the current r

ommended retail price o

N65.

Chart 19: Petroleum Products Pricing Model

Phasing out the subsidy

fossil fuel will align Niger

with the G20 nations eve

though the underlying resons at this point differ.

Source: PPPRA

Cost of products as quoted on Platts Oil gram+ Costof transporting 30, 000 mt (30kt)product from North West Europe to West Africa

Cost incurred on the trans-shipment of imported petroleum products from the mothervessel into daughter vessel

Cargo dues (harbour handling charge) charged by the Nigeria Ports Authority (NPA) fuse of Port facilities

Cost highlighted above at prevailing N/US$ rate

This is the tariff paid for use of facilities at the Jetty by the marketers to move productthe storage depots.

For depot operations covering storage charges and other services rendered by the deowners

Direct Product Cost

Cost of fund of imported product including cargo financing based on LIBOR+5% premfor 30 days. Also includes inertest charge on the subsidy element

Cost of imported products delivered into the Jetty depots. It is made up of componenhighlighted above

Include Retailers, Transporters, Dealers, Bridging Fund and Administrative charge. Thamounts to N13.20 per litre

Sum of all costs highlighted above


12/26

Source: CBN

Dwindling Revenue

Nigerias revenue continues to decline amid the global economic downturn. Falling oil prices and

production constraints in the erratic Niger Delta region are the main reasons for this decline.Over the last five quarters to Q2 2009, federally collected revenue dropped by 44% from N1,880

billion in Q2 2008 to N1,045 billion by the end of Q2 2009. Oil revenue was down 55% over the

period compared to a 9% rise in non-oil revenue. The growth in non-oil revenue over this time is

attributable to an increase in customs and excise duties, value added tax (VAT) and company

income tax. The non-oil share of revenue grew from 17% in Q2 2008 to 33% by Q2 2009, while

the share attributable to oil dropped from 83% to 67% over the same period. Given this trend in

oil revenue, we expect that federally collected revenue will fall below the budgeted N5,305 bil-

lion by year-end.


Over the last five quarterto Q2 2009, federallycollected revenue hasdropped 44% from N1,880 billion in Q2 2008 toN1, 045 by the end of Q22009.

11October 200

The Economy: Resilient, But Challenges Abound

Chart 20: Quarterly Federally Collected Revenue (2008-2009) Chart 21: Quarterly Revenue (2008-2009)

Chart 22: Oil Share of Revenue (2004-2008) Chart 23: Non-Oil Share of Revenue (2004-2008)

0

500

1000

1500

2000

2500

Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

N'Billion

Oil Non Oil

0

500

1000

1500

2000

2500

BudgetActualBudgetActualBudgetActualBudgetActualBudgetActual

Q2 2009Q1 2009Q4 2008Q3 2008Q2 2008

N'Billion

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2004 2005 2006 2007 2008

Total revenue Oil revenue Oil (% of total Revenue)

N Bill ion

01000

2000

3000

4000

5000

6000

7000

8000

9000

2004 2005 2006 2007 2008

Total revenue Non Oil revenue Non Oil (% of total)

N Billion


Source: CBN


13/26

Expenditure: Closer To Budget...

The government appears to be containing expenditure amid its dwindling revenue. For much of

2008, actual expenditure shows a wide variance with the budget (66%, 104% and 70% in Q2, Q3

and Q4 respectively). In 2009, the difference between the actual and budgeted expenditure

narrowed to 10% in Q1 and 11% by Q2. The overall fiscal deficit has widened over the last five

quarters as federal government retained revenue (federally collected revenue less disbursementsto states and local governments) continues to fall short of expenditure, rising from 2% in Q2 2008

to 6% by Q2 2009. Financing the deficit required the government to increase borrowing through

the additional issuance of bonds. As a result, domestic debt rose 20% from N2,339 billion to

N2,813 billion over the five quarters. External debt has risen at a much slower pace compared to

domestic debt. Q2 2009 data show that over the last five quarters, external debt rose 13% from

N490billion in Q2 2008 to N551billion by Q2 2009.


12 October 2009

Our estimates indicate

that fiscal deficit will fall

over 6% of GDP in 2009

almost doubling the 3.9

target.

In 2009, the difference

between actual and budg

eted expenditurenarrowed to 10% in Q1

and 11% by Q2.

Chart 24: Expenditure Chart 25: Domestic Debt

Chart 26: External Debt Vs Fiscal Deficit (YoY) Chart 27 Fiscal Deficit (QoQ)

...But Overall Fiscal Position May Deteriorate In H2

A review of the fiscal data over the last five quarters suggests a softening is imminent. We expect

Nigerias fiscal position to deteriorate in the second half of the year as the factors that have led to

this trend (unstable oil prices and Niger Delta challenges) have not abated. Also, with the federal

governments commitments to fast track the development of infrastructure particularly in the power

sector, we expect that expenditure will closely match or exceed the budgeted figure. Our esti-

mates indicate that fiscal deficit will rise above 6% of GDP in 2009, almost double the 3.9% target.

Our model assumes:

Oil prices will average US$60 per barrel for the year

Crude oil production will average 1.8 million barrels per day

An average exchange rate of N150/US1

N'Billion

-

200

400

600

800

1,000

1,200

Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

Actual Budget

0

5

10

15

20

25

30

35

0

500

1000

1500

2000

2500

3000

Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

N'Billion %

Domestic Debt % of GDP


Source: CBNSource: CBN

-400

-300

-200

-100

0

Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

N'Billion

Overall Deficit % of GDP-10.0%

10.0%

30.0%

50.0%

2004 2005 2006 2007 2008

External Debt (%GDP)


14/26

Output Growth: Strong, Against All Odds

Available data from the National Bureau of Statistics (NBS) shows that the economy expanded by

6.73% in Q2 2009, against a 5.65% growth in Q2 2008. This unexpected strong growth is on the

back of a challenging economic environment. According to the CBN, growth was largely driven by

contributions from agriculture, wholesale and retail trade. The contribution from oil which had

dampened growth in the past 3 years, improved but remained in negative territory at -1.72%

compared to -4.51%, -4.54% and -4.76% in 2006, 2007 and 2008 respectively. The NBS forecasts

real GDP growth of 5.33% for 2009, while AIS Research estimates GDP growth of 4.5% for the

year. We expect agriculture to continue to drive non-oil growth given its large contribution (43%),

but the oil sector will inhibit overall growth for the year. On the whole, Nigerias growth for 2009 is

set to outperform the rest of SSA (1.5%) and the world (-1.4%).


13 October 200

According to the CBN,

growth was largely drive

by contributions from

agriculture, wholesale a

retail trade.

Chart 28: Quarterly GDP Growth (2008-2009) Chart 29: Oil vs Non-Oil % Contribution (2008-2009)

Chart 30: Sector Contribution To GDP (2008) Chart 31: Annual GDP Growth (2006-2009)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

%

10

12

14

16

18

20

22

24

75

77

79

81

83

85

87

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

Oil Non-Oil

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2006 2007 2008 2009

%

AIS Research Estimate


Source: CBN, AIS Re-Source: CBN

42.07

4.13

17.54

0.31

2.9

1.83

3.79

0.46

17.33

9.63

Ag ri cultur e Manufactur ing Petr oleum and Natur al Gas

Solid Minerals Telecommunications Building and Construction

Finance and Insurance Hotel and Restaurants Wholesale and Retai l Trade

Others


15/26


Events such as a rise in oi

prices, governments plan

to remove the petroleum

products price subsidy and

the usual spending aheadof the Christmas and New

Year seasons are likely to

create inflationary pressur

by the final quarter of the

year.

The measures introducedby the CBN, coupled withrecent oil price recoveryand stability in crude pro-duction, appear to havebeen successful...

14 October 200

Inflation: Upward Pressure Looms

After peaking at 14.6% in February, headline inflation eased to 10.4% in September 2009. The

increase in food prices has been the primary driver of inflation for some time. We expect that

the rise in food prices will moderate further due to improvements in the supply of agricultural

produce as we enter the harvesting season. The main threat to price stability is in non-food or

core inflation. Although we expect core inflation to head southward, in coming months, events

such as a rise in oil prices, the governments plan to remove the petroleum products subsidy

(which would force an increase in the price of energy and transportation) and the usual

spending ahead of the Christmas and New Year season is likely to create inflationary pressure

in the final quarter of the year. However, we think that as the economy adjusts to the changes

highlighted, inflation may ease as we approach the second half of 2010.

Currency: Downside Risk Prevalent

Following the re-introduction of the Wholesale Dutch Auction System (WDAS) in June 2009,

the foreign exchange market showed signs of stabilizing. The CBN had introduced the Retail

Dutch Auction System (RDAS) after the Naira depreciated against the U.S dollar in December2008. In that month alone, the local currency lost 16% at the official window because of over-

whelming demand (spurred by repatriations and speculation). Spreads between the inter-bank

and Bureau De Change (BDC) rates widened against the official rate; from 0.2% and 4.4% to

6.2% and 8.8%, respectively. The depreciation and high volatility witnessed in late 2008 and

first half of 2009 adversely affected many businesses, increasing production costs for local

manufacturers, particularly those that depend largely on imports. The measures introduced by

the CBN, coupled with a recovery in the price of oil and improved stability of crude production,

appear to have successfully reduced the spreads at the various currency auction windows and

improving the stability of the Naira. As at the end of September 2009, the spread between the

auction and BDC rates had narrowed to 4% as the naira strengthened on weaker demand.

However, we still see downside risks to the currency since FX supply is strongly linked to

volatile oil prices.

External Reserves: Stable Outflows, Slower Inflows

As alternative channels for sourcing foreign exchange dried up because of the global downturn,

the Nigerian government was forced to dip into its foreign exchange reserves. Nigerias

reserves have dropped from a high of U.S$63 billion in October 2008 to US$44 billion as at

October 2009, a fall of 33%. It is important to note however that a combination of weaker FX

demand, an increase in oil production, and a recovery of oil prices has supported a marginal

build up of external reserves over the past month (reserves up from a low of US$41 billion in

September to US$44 billion in October). Further downside risks exist considering the fact thatthe U.S dollar has lost ground against other major currencies such as the Euro, British Pound

and Yen. We believe that if Nigerias oil earnings fail to improve, its external reserves will come

under pressure and the Naira will struggle against the US dollar.

Nigerias reserves havedropped from a high ofU.S$63 billion in October2008 to US$44 billion as aOctober 2009


16/26

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.045.0

Jan-04

May

Sept

Jan-05

May

Sept

Jan-06

May

Sept

Jan-07

May

Sept

Jan-08

May

Sep

Jan-09

May

%

All I tems I ndex Core Food Index

0.0

4.0

8.0

12.0

16.0

20.0

Jan-08

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan-09

Feb

Mar

Apr

May

Jun

Jul

Aug

%

All- items Core Food

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2004 2005 2006 2007 2008

N'Billion

Imports Exports

- 100,000 200,000 300,000 400,000 500,000 600,000

US

China

France

UK

Netherlands

Germany

Italy

India

BrazilRussia

N'Million


15October 200

Chart: 32: YoY Inflation (2008-2009) Chart 33: 12 Month Moving Average Inflation (2008-2009)

Chart 34: YoY Inflation (2004-2009) Chart 35: Top Non-Oil Imports (2008)

Chart 36: Oil Exports By Region (2008) Chart 37: Trade (2004-2008)

- 1 00 ,0 00 20 0,0 00 30 0, 00 0 4 00 ,0 00 50 0, 00 0

Africa

Asia

Europe

U.S

Americas

(Without

U.S)

Thousand bbls

Source: NBSSource: NBS

Source: CBN

Source: NBS Source: CBN

Source: CBN

0.0

5.0

10.0

15.0

20.0

25.0

Jan-0

8Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan-0

9Feb

Mar

Apr

May

Jun

Jul

Aug

%

All Items Index Core Food Index


17/26


16

October 2009

Chart 38: Quarterly Macro Indices (2007-2009)2nd Qtr 07 3rd Qtr 07 4th Qtr 07 1st Qtr 08 2nd Qtr 08 3rd Qtr 08 4th Qtr 08 1st Qtr 09 2nd Qtr 09

GROSS DOMESTIC PRODUCT(at 1990 Constant BasicPrices)

Growth rate (%) 5.5 6.6 7.8 5.8 5.2 6.0 8.2 4.85 5.

Oil Share of GDP (%) 18.7 18.6 18.0 21.6 16.7 16.9 15.8 19.0 14

Non-Oil share of GDP (%) 81.3 81.4 82.0 78.4 83.3 83.1 84.2 81.0 85

GROSS DOMESTIC PRODUCT (at current Basic Prices)

Growth rate (%) 26.9 12.99 38.70 14.35 17.52 14.77 15.13

Oil shate of GDP (%) 29.7 45.7 31.0 46.31 37.50 35.20 37.92

Non-Oil share of GDP (%) 70.3 54.3 69.0 53.69 62.5 64.8 62.08

MONEY & CREDIT

Narrow Money (M1) (%) -4.0 17.5 11.9 20.2 -4.1 4.5 7.4 -3.9 -3

Broad Money (M2) (%) 2 9.3 7.9 14 -0.2 12.7 2.3 -1.9 0

Narrow Money (M1) (%) 0.6 18.3 32.4 45.9 39.9 45.2 56.9 -3.9 -7

Broad Money (M2) (%) 11 21.3 30.9 37.7 37.4 54.1 57.8 -1.9

Aggregate Credit (Net) (%) 20.9 324.6 52.4 35.8 17.7 4.4 27 -2.6

Aggregate Credit (Net) =N='b) 330.9 1,404.80 2,141.40 2,907.40 613.2 5,391.80 4,820.80

Credit to Government (Net) (%) -14.2 11.7 -5.6 -5 -7.8 -18.9 -17.2 -9.6 15

Credit to Government (Net) (=N='b) -3,117 -2,752.60 -2,908.10 -3,054 -195.9 -3,230.00 -2,674.50 -3,405.60 -2,879.

BY CBN -3,596.90 -3,818.40 -4,074.40 -4,474.00 61 -5,107.60 -4,097.80 -4,658.20 -4,348.BY DMB 480 1,065.80 1,166.30 1,420.10 -256.9 1,877.60 -1,423.30 1,252.60 1,4

Federal Government Deposits (=N='b) 4,718.40 4,963.70 4,171.50 4,548.20 4,498.70 4,745.20 5,475.30 5,059.40 4,812.

Credit to Private Sector (%) 14.8 20.6 21.5 18.1 13.6 10.4 7.9 2.1 3

Credit to Private Sector (=N='b) 3,447.80 4,157.40 5,049.50 5,961.30 809.1 7,474.70 8,066.30 8,226.40 8,305.

Private Sector Deposits (=N='b) 15.8 11.6 70.5 54.8 63.4 163 339.6 280.5 291

Aggregate Credit (%) 340.4 86.3 184.1 35.8 51.6 56.8 100.6 -2.6

Credit to Government (%) 50.4 -51.9 -60.5 -5 -13.9 -36.4 -12.3 -9.6 7

Credit to Private Sector (%) 14.8 62 96.8 18.1 33.9 47.8 59.5 2.1 6

Basic Money (=N='b) 858.3 898.3 1,195.30 1,200 1.517.8 1,247.20 1,497 1,239.40 1,239.

(Growth Rate. %)

Currency in Circulation (=N='b) 722.3 960.8 891.8 891.8 918.3 976.4 1,155.30 1,037.80 1,006.

Bank Reserves (=N='b) 245 647 827.4 308.2 599.5 270.8 393.8 346.3 284

Money Supply (=N='b) 4,458.50 4,811.70 6,486.20 7,998.20 7,982.90 8,960.70 9,180.90 8,997.80 9,0

NTB SALES (=N='b)NTB Sales at Primary Market 359.9 327.1 689.6 399.5 569 188.8 264.2 235.6 341

NTB Sales at OMO (N'B) 743.6 847.7 1,684 484.3 919 861.5 0 62.29 185

INTEREST RATES (%)

Inter bank Call Rate (Weighted Average) 8 8.13 8.25 10.21 10.4 12.83 14.01 15.27 14.

Minimum Rediscount Rate/Monetary Policy Rate 8 8 9.5 10 10.25 9.45 9.75 9.75

Treasury Bill Rate

Savings Deposit Rate 3.81 3.51 3.23 2.97 2.97 3.06 3.17 2.91 2.

Deposit Rates (Consolidated) 7.75 7.67 7.47 7.86 9.67 9.92 10.45 9.67 10.

Average Term Deposit Rates 9.04 9.05 8.69 9.35 10.78 11.06 11.67 12.27

7 Days 5.59 5.83 5.54 5.38 5.55 5.64 7.06 6.97 6.

1 Month 10.38 10.5 9.9 10.51 11.71 11.52 12.1 12.85 12.

3 Months 10.37 10.45 9.87 10.71 12.19 12.22 12.76 13.85 13.

6 Months 9.96 9.67 9.49 9.98 11.94 12.33 12.74 13.57 13.

12 Months 8.11 7.46 7.75 9.48 11.16 12.28 12.68 13.43 12.

Over 12 Months 9.85 9.69 9.56 10.01 12.14 12.38 12.66 13.23

Prime Lending Rates 17.3 14.48 16.49 16.05 15.86 15.97 16.03 18.34 19.

Maximum Lending Rates 18.16 15.63 18.24 18.17 17.9 18.1 19.79 22.24 22.

Average Lending Rates

Real Interest Rrate (Max. Lending Rate) 12.34 11.53 11.64 10.37 5.08 3.3 4.69 7.14 11.

Real Interest rate (Ave. Deposit Rate) 1.31 3.57 2.09 1.55 -1.22 -4.88 -4.65 -2.83 0.

CAPITAL MARKET

All share Value Index

Market Capitalization (=N='t) 8.9 9.2 13.3 15.3 14.2 10 7 7.2 8

Value of Shares Traded (=N='b) 330.5 231.3 582.4 990.4 743.1 475.6 150.8 106.9 199

Volume of Shares Traded ('b) 37.8 35.9 37.7 68.6 53.1 45.6 23.7 19 27

Source: CBN


18/26

Total Equity (N'Billion)

Intercontinental Bank 200

Oceanic Bank 217

Union Bank 119

Afribank 152

Finbank 11Bank PHB 247

Equitorial Trust Bank 32

Spring Bank 35

Wema Bank 25

Total 1038

Total CBN Bailout 620

Total Bailout (as a % of Total Equity) 60%

Banking: Major Shake Up

On August 14, 2009, the newly appointed CBN governor, Sanusi Lamido Sanusi, rattled the en-

tire banking industry, and the country as a whole, with major board changes in some Nigerian

banks. This followed a joint audit of the 24 banks by the CBN and Nigerian Deposit Insurance

Corporation (NDIC) to ascertain the financial soundness of the industry. The initial examination

of the first set of 10 banks in August, resulted in the removal of the executive management of

five banksAfribank, Intercontinental Bank, Union Bank, Oceanic Bank and Finbank. The result

of the examination showed that the aforementioned banks had excessively high levels of non-

performing loans totalling N1,143 billion (48% of collective loans) from exposures to the capital

markets and oil and gas sector. These bad loans, attributable mainly to poor corporate govern-

ance and weak risk management practices within these banks, have led to huge provisioning,

and as such, have seriously impaired the liquidity and solvency of these banks. Liquidity ratios

for the five banks ranged from 18% to 24%, below the regulatory minimum of 25%. The CBN

injected N420 billion into these banks due to their systemic importance (These banks own39.93% of industry total loans and 29.99% of deposits).

The results for the other 14 banks were announced in October, and this time, four other banks,

namely, Bank PHB, Equatorial Trust Bank (ETB), Spring Bank and Wema Bank, were found

wanting. Like the initial five, the executive management of three of the four banks were sacked,

while non-executives of Spring and ETB were also removed. A fifth bank, Unity Bank was

adjudged to have insufficient capital, but a healthy liquidity position. N200 billion was injected by

the CBN into the four banks as liquidity support and long term loans, bringing the total amount of

money injected so far to N620 billion. These four banks, along with Unity Bank have been

mandated by the CBN to explore options for recapitalisation to shore up capital adequacy and

liquidity positions.

The asset quality and capital audit of all 24 banks was designed to restore confidence in the

banking sector by providing a reliable assessment of the scale of the industrys margin loan and

oil & gas exposure and to outline measures to appropriately deal with the situation.


The CBN sacks the ex-ecutive management ofeight banks Afribank,Intercontinental Bank,Union Bank, OceanicBank, Finbank, BankPHB, Equitorial TrustBank and Spring Bank

17October 200

The Financial Sector: Reform 2.0

Chart 39: Equity Capital Of Affected Banks Prior To The CBN Action

examination showed thatmost of the banks hadexcessively high level ofnon-performing loansfrom exposures to capitalmarket and oil and gasexposures.

Source: Banks last published annual reports, CBN

The asset quality and

capital audit of all 24 Ni-

gerian banks is designed

to restore confidence in

the banking sector by

providing a reliable as-

sessment of the scale of

the industrys margin loa

and oil & gas exposure

and to outline measures

to appropriately deal with

the situation.


19/26

0%

20%

40%

60%

80%

100%

120%

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

-20

-10

0

10

20

30

40

50

60

70

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

%

QM1 QM2 CM1 CM2

Capital Erosion, Liquidity Risks: Additional Funding Needed...

Prior to the industry-wide audit, the banking industry was thought to be adequately capitalised. The

fallout of the examination by the CBN governor has, however, proved otherwise. The high levels of

loan-loss provisioning needed will put a severe strain on capital adequacy and liquidity levels, re-

quiring many banks to seek additional funding. Given the state of the equities market, an attempt

at equity offerings will likely prove futile. Thus, debt offerings appear set to become the primarysource for banks to meet their capital shortfall. Already, a number of banks First Bank, UBA and

GTB have received shareholders approval to issue bonds. We expect many more banks to follow

suit in order to meet their liquidity and capital adequacy requirements.

...As Credit Growth Contracts

As expected, the availability of credit to the private sector has decreased substantially as banks

have become more focused on recovering outstanding debts and appear increasingly reluctant to

extend new lending facilities. Provisional data from the CBN indicates that YoY credit growth

slowed to 30% in August 2009 compared to 59% in January 2009 and the highs of over 100% in

2008. We expect credit growth to fall for the rest of this year. Despite a reduction in the benchmarkinterest rate, expectations are that as the credit squeeze sets in, corporate and consumer lending

rates will remain high. In July, the CBN cut the monetary policy rate (MPR) to 6% from 8% and in a

move to further ease rates and boost lending, guaranteed inter-bank lending. These measures

helped ease inter-bank call rates from over 20% in July, to below 10% in October.


High level of provisioninwill put a severe strain obanks capital adequacyand liquidity levels.

18 October 2009

Chart 40: YoY Credit Growth (2008-2009) Chart 41: Quarterly & Cumulative Aggregate Money Supply (2007-2009)

YoY credit growth sloweto 22.9% in July 2009compared to 26.7% in

June and highs of over100% in 2008.

0

5

10

15

20

25

30

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

%

CALL 7 Days

Chart 42: Call & 7-Day NIBOR (2009) Chart 43: 90-Day NIBOR (2009)

10

12

14

16

18

20

22

24

26

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

%




20/26

10%

60%

25%

5%

CBN Banks & DHs Non-Bank Public Sinking Fund

60

70

80

90

100

110120

Dec-0

8

Jan-0

9

Mar-09

Apr-09

May-0

9

Jun-0

9

Jul-09

Aug-0

9

Sep-0

9

%

Equities Vs Bonds

0

20

40

60

80

100

120

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

US$'Billion

15,000

25,000

35,000

45,000

55,000

65,000

75,000

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Capital Markets: Equities Out...

Although the post-sub prime crisis risk aversion of foreign investors has contributed to reduced

foreign direct investment (FDI) and a fall in stock market values, domestic factors such as the

margin loan overhang, the state of the banking industry and the weaker economic outlook re-

main the main underlying causes of the continuing stock market depression. Bank stocks, which

account for more than 50% of the Nigerian Stock Exchanges market capitalisation, have borne

the brunt of investors anxiety. Primary offerings in the equities market, which were prevalent

throughout 2007 and in the first quarter of 2008, have virtually disappeared.


19October 2009

...Bonds InAs mentioned earlier, the depressed state of the equities market is already leading many

corporates to launch debt issues as an alternative source of capital. The bond market, historically

dominated by the federal government, will not only see an influx of corporates, but also state

governments and government parastatals. Following the July 2009 directive by the CBN for

banks to reduce their public sector exposure, we expect that the debt capital market will be the

main focus of capital raising efforts, for state governments and public sector establishments.

While this may be the much needed catalyst for the development of the Nigerian bond market,

we fear that many companies, particularly those with unfavourable credit ratings will record little

success as many institutional investors will only consider higher rated companies. Since Nigerian

investors will be expected to deal with debt instruments that they have hitherto been unaccus-

tomed to, comprehensive market enlightenment and education will be required for successful

issuances. However, the higher return and lower volatility that bonds attract vis--vis equities in

the short term provides a compelling case for investment consideration.

Chart 44 NSE All-Share Index (2008-2009)

Chart 46: Returns in 2009-Bonds vs. Equity (Rebased)

Along with the depressedstate of the equities mar-ket, we think that reasonsfor corporate preferencefor debt issues at this timincludes balance sheetleveraging, instilling discipline in management andimproving returns for equholders

Chart 45: Market Capitalisation (2008-2009)

Chart 47: Composition Of Domestic Debt Holders (Q2 2009)

Factors such as marginloan overhang, the stateof the banking industryand weaker economicoutlook remain the under-lying causes of continuedmarket depression.

Source: NSESource: NSE

Source: AIS Research Source: FDHL


21/26

Money & Currency Markets

Sustained Stability Desired

With the CBNs guarantee of unsecured interbank dealings and the rate cut from 8% to 6%, webelieve stability has been achieved in the interbank market. There has been an improvement in

the risk perception Nigerian banks have with their peers and this is reflected in the reduced vola-

tility in interbank rates. We expect that the CBN will remain vigilant in its regulation of interbank

transactions. In the foreign exchange market, while there has been some stability following the

reintroduction of WDAS and reduced demand over an increasingly difficult business environ-

ment, we see downside pressure on the local currency due to the over-dependence on oil earn-

ings. If volatility in oil prices persists, crude production levels remain impaired by the Niger Delta

crisis, and external reserves continue to drop, the naira is likely to remain vulnerable to further

depreciation. We would like to see further diversification of the Nigerian economy across other

sectors besides petroleum to attract foreign direct investment (FDI) as an alternative to

petrodollars.


In as far as oil price vola-tility lingers, crude pro-duction levels impaired bythe Niger Delta crisis, andexternal reserves contin-ues to drop, the naira islikely to remain vulnerablto further depreciation

20October 200

Markets Outlook

Chart 48: Call Rates (2009) Chart 49: 90 Day NIBOR

Chart 50: Inter-bank FX Rate (2009) Chart 51: Spread Between Inter-bank & Parallel Market Rates

0

5

10

15

20

25

30

Jan

-09

Fe

b-0

9

Mar-

09

Apr-

09

May

-09

Jun

-09

Jul-09

Aug

-09

%

CALL 7 Days

10

12

14

16

18

20

22

24

26

Jan

-09

Fe

b-0

9

Mar-

09

Apr-

09

May

-09

Jun

-09

Jul-09

Aug

-09

%

-5%

0%

5%

10%

15%

20%

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Au

-09

Sep-09

Oct-09

NoInter

bank

Marke

t

135

140

145

150

155

160

Jan-0

9

Feb

-09

Mar-0

9

Apr-09

May-0

9

Jun-0

9

Jul-09

Aug-0

9

Sep-0

9

Oct-09

N/US$

No Interbank Market

Source: FMAN, AIS ResearchSource: FMAN

Source: FMAN Source: FMAN


22/26

Real Estate

As Global Real Estate Prices Struggle

Global real estate prices have taken a beating since the global financial crisis began. All aspects

of real estate have been affected including public and private, equity and debt, residential and

commercial. Data from the Philippines based Global Property Guide shows that real estateprices across the globe continue to fall, however, we have begun to observe a slowdown in the

rate of decline and in some cases a positive month on month price movement. Consensus

estimates suggest a recovery in 2010. The table below shows quarter-on-quarter (QoQ) prices

(in %) for selected markets.


Available data from Philip

pines based Global Property Guide shows that reaestate prices across theglobe continue to fall.

21

October 200

Will Nigeria Follow?

Although comprehensive housing data on the Nigerian market is not readily

available, we believe that the recent shake up in the banking industry and

weak economic conditions will combine to force a correction in real estate

prices, particularly at the high end. We expect that as banks continue with

their loan recovery efforts, the forced sales of the properties of high profiledebtors are bound to occur, leading to a rise in supply of high-end real

estate assets and corresponding price declines. Also, as banks grapple with

toxic assets, corporate restructuring and related industry issues, we expect

branch expansion plans to be placed on hold in the near term. We believe

bank expansion has been a contributing factor to the rise of property prices

since the consolidation exercise in 2005. During this time, bank branch lo-

cations have increased by 32% from 3,468 in 2006 to 4,591 in 2008 across

almost all major cities within Nigeria. A sharp decline in demand for high-

end residential and commercial real estate is almost inevitable given the

reasons stated earlier. However, we expect that the low-end and mid-

income residential properties market will hold steady given the large deficit

in this section of the real estate market.

Chart 53: Nigeria Housing Deficiency (Million unit

De-leveraging Throws Up Opportunities

It is highly likely that most real estate developments were undertaken by

highly leveraged firms and individuals. Also, many leveraged positions in

the capital market and with oil and gas loans used real estate as security.

Given that banks attempts at recovering questionable loans will lead to

many forced sales, two scenarios are likely to play out. Firstly, a number of

distressed sales will facilitate a general reduction in real estate prices. This

could present bargain opportunities in some cases and help bring pricing in

line with new investor expectations. Secondly, weaker pricing of high-end

real estate could occur due to the less favourable economic conditions. Go-

ing forward, real estate prices will likely favour equity investors and both

private and pooled funds such as Real Estate Investment Trusts (REITs).

The REIT market in Nigeria is relatively under-developed, and as such, pro-

vides ample investment opportunities. On the other hand, given the high

interest rate on available mortgages and banks new cautious approach

toward lending, we think debt financing will be harder to come by.

56

16

12 12

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2003 2004 2006 2007 200

Source: CBN

Chart 52: Prices In Selected Markets

Source: Global Property Guide

Countries Q1'08 Q1'09 q-o-qQ1

China-Shanghai 28.3 1.76 -0.

Germany -4.03 -1.28 -2.

Japan-Tokyo 5.17 -1.46 -1.

US (FHFB) -3.18 -2.23 1.

South Africa -0.83 -8.3 -1

France -2.03 -10.41 -0

UK (Nation wide) 0.28 -19.01 -4.

UAE 59.71 -35.31 -42

Singapore 21.76 -22.7 -13


23/26

0

5

10

15

20

25

30

35

40

45

50

Jan-

09

Feb

-

09

Mar-

09

Apr-

09

May-

09

Jun-

09

Jul-09

Aug-

09

Sep-

09

US$'Billion

-40%

-35%

-30%

-25%

-20%

-15%-10%

-5%

0%

2-Jan

22-Jan

11-Feb

3-Mar

23-Mar

12-Apr

2-May

22-May

11-Jun

1-Jul

21-Jul

10-Aug

30-Aug

19-Sep

9-Oct

Stock Market

Uncertainty Lingers, But Value Remains

We expect a bleak outlook for the equities market for the rest of 2009. With no offerings recorded

since Q4 2008, the primary issues market has ground to a halt. Various analysts had held the view

that the stock market would rebound in Q2 2009 and close the year in positive territory. AISResearch does not share this view. Our view is that the market is likely to close the year in negative

territory with the index closing at around 23,000 (a negative return of 27%). Two main factors

support our position. Firstly, we think that the uncertainty in the banking industry has further

dampened investor confidence, bearing in mind that bank stocks alone account for over 50% of

market capitalisation. We expect investor confidence will remain dented until all of the dust

surrounding the CBNs capital audit settles. We eagerly await audited financials come December

31, the financial year-end, to get a clearer picture of the state of Nigerias banking sector. We do not

expect to see these December 31 year-end financials until Q2 2010, given that banks will now have

to adopt the International Financial Reporting Standard (IFRS) in reporting their results. Secondly,

we think that many banks still have propriety positions and stocks pledged as collateral on their

books, and thus will take advantage of short rides to de-leverage. We expect these two factors to

combine with a weaker economic outlook to keep the stock market depressed for the rest of 2009.

However, we expect that the opportunities created as a result of price corrections will support a

strong rebound in 2010, but we also anticipate that this will be accompanied by increased volatility.


Our view is that the

market is likely to closthe year in negativeterritory with the indexclosing at about 23,00

22

October 200

Access to professionainvestment managemservices offer the bespotential for out perfoance.

Managed Portfolio, Careful Stock Selection Key To Investment Success

We expect that the stock markets recent poor performance will leave many investors disillusioned

about investing while those still willing to do so will seek sound investment advice and deep re-

search. Hence, access to professional investment management services offers the best potential for

stellar performance going forward. We recommend companies with strong business fundamentals

in the banking, consumer, building and construction sectors. Banks that successfully rise above the

CBN audit and common year-ends without major challenges will be the most sought after. Even

though we anticipate that the real estate sector will struggle, we believe that the building and con-

struction sector will continue to benefit from the governments increased focus on infrastructure-

development, while a broad range of blue chip manufacturing companies will thrive due to sustained

consumer spending.

Chart 54: NSE, Year To Date Loss Movement (2009) Chart 55: Market Capitalisation (Year To Date)

Source: AIS Research Source: NSE

We expect opportunitcreated as a result ofprice corrections to suport a strong rebound2010, but anticipate ththis will be accompan

by increased volatility


24/26

0

2

4

6

8

10

12

14

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20YJan Mar Oct

0%

5%

10%

15%

20%

25%

30%

3yr 5-7yr 10-20yr

1,200

1,250

1,300

1,350

1,400

1,450

1,500

Jan-09

Jan-09

Feb-09

Mar-09

Mar-09

Apr-09

May-09

Jun-09

Jun-09

Jul-09

Aug-09

Aug-09

Sep-09

Oct-09

Bond Market

Long Maturities Drive Stellar Performance

As discussed earlier, the primary issuance market, historically dominated by sovereign bonds,

looks set to face an avalanche of corporate and state bonds. In 2009 thus far, the bond market

has returned over 17% and outperformed the equities market by 38%. The 20-year bonds have

returned an average of 30%, 10-year bonds have returned over 20%, while the short end bonds

have barely returned 10% year to date. As investors seek higher returns, the long term instru-

ments are becoming more attractive. We think that the long tenor bonds offer a greater risk/

reward profile than short end instruments. Thus, we hold the view that short term bonds should

be held to maturity to mitigate fluctuations in interest rates.


23

October 2009

Chart 56: Average Bond Price Performance (Year To Date) Chart 57: Access Bank Nigeria Government Bond Index (YTD)

Chart 58: Yield Curve (2009) Chart 59: Composition Of Domestic Debt Holders (Q2 2009)

The 20-year bonds havereturned an average of30%, 10-year bonds havereturned over 20%, whilethe short end bonds havereturned barely 10% yearto date.

Source: FDHL

Source: Access BankSource: FDHL, AIS Research

Source: FMAN

63%

23%

14%

0%

FGN Bonds Tbi ll s Tre asury Bonds De ve lopment S toc ks


25/26


24 October 2009

Disclaimer

This report has been issued and approved by Access Investment & Securities Limited (AIS), a wholly owned subsidiaryof Access Bank Plc. It has been prepared without regard to the circumstances and objectives of those who receive it.This publication is for information purposes only. AIS makes every effort to use reliable and comprehensive information.The information contained herein does not constitute an offer to buy or sell any security or to participate in any tradingstrategy. Any investments discussed may not be suitable for all investors as the appropriateness of an investment orstrategy will depend on an investor's circumstances and objectives. We therefore recommend that investors independ-ently evaluate particular investments and strategies, and encourage them to seek advice from professional financialadvisers.

The value of and income from your investments may vary due to changes in interest rates, foreign exchange rates,

securities prices, market indexes, operational or financial conditions of companies and other factors. Past performance isnot necessarily a guide to future performance. Estimates of future performance are based on assumptions that may notbe realized. We are under no obligation to inform you of changes in our opinions or information in AIS ResearchPublications.

AIS and/or any connected company may or may not have in the future a relationship with any of the entities mentioned inthis document for which it has received or may receive in fees or other compensation in the future.

This report may not be reproduced, distributed or published by any recipient for any purpose without prior writtenconsent of AIS. AIS is licensed by the Securities and Exchange Commission (SEC) to conduct investment business inNigeria.


26/26


ContactsResearch

Pabina [email protected]+234 1 7301476

Ajibola [email protected]+234 1 7301476

Sales

Pamela [email protected]

+234 1 2714554

Portfolio Management

Felix [email protected]+234 1 7301474

Olateju [email protected]+234 1 7301474

Private Equity

Adekunle [email protected]+234 1 7301474

Access Investments & Securities Limited,14a, Idowu Taylor Street, Victoria Island,Lagos,Nigeria.

Telephone: +234 1 2714554, 7301476Fax: +234 1 2714553Email: [email protected].

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