By Babajide Komolafe, Michael Eboh, Nkiruka Nnorom, Franklin Alli & Naomi Uzor
Economic experts have called for cautious optimism following significant improvement recorded in some economic indices in the third quarter of the year as a result of the tight monetary policy measures of the Central Bank of Nigeria (CBN).
Reviewing the performance of the economy in the third quarter, experts who spoke to Financial Vanguard said that though most economic indices performed positively during the period with possibility of doing better in the fourth quarter, there are still factors in the global and local economy which pose serious threats to future economic performance.
In the third quarter, the official exchange rate dropped by 12 kobo to N155.78, while inflation rate dropped to 11.7 per cent. Also, cost of funds in the interbank money market moderated downwards by 500 basis points. These improvements facilitated inflow of foreign exchange which prompted the nation's external reserve to rise to $41.16 billion from $36.77 billion in the second quarter.
The nation's capital market also recorded its highest growth with market indices growing by more than 20 per cent. Market capitalization rose by 20.12 to close the third quarter at N8.282 trillion, while the All-share index rose by 20.43 per cent or 4,412.07 basis points to close the quarter at 26,011.64 points from 21,599.57.
Experts attributed these developments to a number of factors, particularly the measures introduced by the CBN in the second quarter to further tighten money supply, the inclusion of Nigeria in the JP Morgan Government Bond Index-Emerging Market (GBI-EM), renewed interest by foreign investors in the Nigerian capital market and the commencement of a number of new initiatives by the NSE designed to enhance market efficiency.
CAPITAL MARKET: SWF, retail bond trading and improved results fuel optimism
A significant improvement was recorded in transactions in the Nigerian Stock Exchange, NSE, in the third quarter, as the key indices for measuring performance in the secondary segment of the capital market appreciated by 20 per cent.
In particular, the value of listed equities appreciated by N1.387 trillion as the market capitalization rose by 20.12 to close the third quarter at N8.282 trillion from N6.895 trillion at which it opened.
The All-share index, another key performance indicator rose by 20.43 per cent or 4,412.07 basis points to close the quarter at 26,011.64 points from 21,599.57 points at which it opened. This is compared to a loss of 17.75 per cent recorded in the corresponding period of 2011.
With this development, the capital market has recorded an appreciation of about 27 per cent since the beginning of the year. The value of listed equities, represented by the market capitalization grew by 26.64 per cent or N1.742 trillion from N6.54 trillion at which it started the year, while the Index has garnered 25.47 per cent or 5,281.01 basis points since the beginning of the year from 20,730.63 points recorded in the beginning of the year.
The improvement was occasioned by renewed interest by foreign investors in the Nigerian capital market, impressive results declaration by companies in the market and the commencement of a number of new initiatives by the NSE designed to enhance market efficiency.
According to analysts at FSDH Securities Limited, led by its Managing Director/Chief Executive Officer, Mr. Ese Onosode, looking at the All-share index on a quarter-to-quarter basis, it appreciated by 20.43 per cent in third quarter, 4.19 per cent in the second quarter, but dropped by 0.38 per cent in the first quarter of 2012, adding that as at September 28, 2012, the Index attained 26,001.63 points, the highest in the last 19 months.
On a month-on-month basis, Onosode said, the NSE Index appreciated in seven months, while it depreciated in two months, noting that the highest gain was recorded in September 2012, with a growth of 9.52 per cent.
According to him, the restrictive monetary policy stance of the Central Bank of Nigeria, CBN, maintained high yields on Federal Government of Nigeria (FGN) Bonds in the market and attracted investors into that segment of the capital market.
In addition, he explained that the announcement by JP Morgan of the inclusion of FGN Bonds on the JP Morgan Government Bond Index-Emerging Market (GBI-EM) generated foreign investor's interest in the Bond, causing yields to drop towards the end of the quarter.
(http://vml1.s3.amazonaws.com/wp-content/uploads/2011/03/CBN.jpg?9d7bd4) (http://www.vanguardngr.com/2011/03/stress-test-unity-wema-banks-emerge-stronger-cbn-gov/cbn-38/)CBN governor, Sanusi Lamido He said, "Some of the factors that drove performance in the capital market include: impressive company earnings from quoted companies, good company corporate actions (dividends and bonuses), attractive valuation of quoted companies, commencement of Market Making activities, Securities Lending and the Short Selling initiatives. Other factors are: stability in foreign exchange rate, a moderation in the inflation rate, increase in external reserves and increase in the price of oil (Bonny Light) at the international market."
Also, analysts at Asset & Resource Management Company Limited, ARM, said the Nigerian capital market performed well ahead of its global peers, adding, however, that foreign investors accounted for 81 per cent of trading in the NSE, supported by cheap capital finding its way into Emerging Markets on the back of continued quantitative easing from major central banks across the globe.
They said, "Despite the NSEASI tepid performance in half year 2012 (4.2 per cent), a resurgence ensued in third quarter, as most sectors rallied. In our past reports, we had noted that part of our positive outlook for the rest of the year were partly hinged on some market catalyst, such as the timing of NSE reforms as well as low fixed income yields – which began in the third quarter, due to the announcement of Nigerian Bonds included on the JP Morgan Bond Index.
"Coincidentally, these factors materialized in Q3, further reinforcing our overall view of the market. "The Banking sector had an impressive +24.8 per cent return buoyed by attractive valuations as GTB, Zenith Bank and First Bank posted better-than-expected results; further boosting institutional interest."
Also speaking, Managing Director/CEO, Cowry Asset Management Limited, Mr. Johnson Chukwu, expressed optimistm that by the time the National Bureau of Statistics, NBS, published the third quarter macroeconomic report, the Nigerian economy would report further improvements in the major economic indicators.
His optimism was hinged on the country's daily oil production which he said averaged above 2.2 million barrels per day during the third quarter.
According to him, "foreign exchange reserve has risen to $41.2 billion as at the end of September, inflation rate dropped to 11.7 per cent in August and is expected to drop further in September. Power supply has been improving and this is expected to impact on both the cost of goods and household disposable income."
Wale Oluwo, Head, Investment banking Group, BGL Securities Limited observed that at six per cent, the economic growth for third quarter was robust. He added that foreign investment inflows also appeared to have increased based on the CBN data that Nigeria recorded up to $3 billion in foreign direct inflow.
However, "There is still a huge debate about the reliability of the growth data being published by the federal bureau of statistics," he said.
However, the analysts are of the view that the Sovereign Wealth Fund, the commencement of retail bond trading on the Nigerian Stock Exchange, market making and improved results expected from companies will help drive activities in the capital market in the fourth quarter.
According to Onosode, the release of Q3 results by quoted companies, expectation of good 2012 financial year corporate actions, macroeconomic stability and the activities of market makers to provide liquidity for the equities market.
(http://vml1.s3.amazonaws.com/wp-content/uploads/2012/04/Ngozi-Okonjo-Iweala.jpg?9d7bd4) (http://www.vanguardngr.com/2012/04/ngozi-the-man-for-the-job/ngozi-okonjo-iweala/)Finance Minister, Ngozi-Okonjo-Iweala He said, "Also, commencement of the activities of the Sovereign Wealth Fund (SWF) as some of the fund will be invested in FGN bond and Nigerian equities. The drop in yields on fixed income securities should boost activities in the equities market.
"Another major factor to expect is the commencement of retail bond trading on the floors of the NSE. The equities market still has upside potential and we expect the market to appreciate by 5.2 per cent in Q4 2012, culminating in a return of 32.05 per cent for the year 2012."
Speaking in the same vein, Wale Oluwo, said, the market is likely to benefit indirectly from the recent JP Morgan inclusion of Nigerian bonds in their emerging market index, saying that as international investors buy into Nigerian bonds, they are also likely to take advantage of the equities market window.
In their own view, the analysts at ARM said, "Indeed while global markets are still driven by fundamentals, sentiments are increasingly becoming a larger factor in this risk on/risk off environment. In our view, this increases the likelihood of an 'event risk' throwing markets into turmoil in Q4 2012. Thus, even as we expect continued uptick on the local bourse, looming global macro headwinds in the background could irrupt into the scene with little warning changing market perception and sparking a sell-off.
"In such an environment, we believe that while quality will not be immune to such a development, they still provide better downside protection, especially if central banks respond in a concerted manner to such an event as they likely will.
"As our prescription for equities will incorporate a balanced approach that maintains substantial exposure to high quality stocks but with tactical allocation to best positioned value stocks that have the strongest short-term earnings growth prospects."
MONEY MARKET: Operators want tight monetary stance retained
Despite the appreciation of the naira and decline in inflation rate recorded in the third quarter of the year, money market operators said that the CBN should maintain the measures put in place to tighten money supply in the economy.
It would be recalled that the apex bank in a bid to further tighten money supply in July raised the cash reserve requirement of banks to 12 per cent from 8.0 per cent.
Also to reduce foreign exchange speculation the CBN reduced the amount of foreign exchange banks can hold per time or the Net Open Position (NOP) limit to 1.0 per cent of shareholder's fund
In addition to these the CBN banned banks indebted to it from trading in the interbank foreign exchange market and the interbank money market. These measures according to money market operators, though unpopular with banks were effectively in stabilizing the exchange rate and reducing the inflation rate.
The exchange rate not only stabilised but also appreciated in the three segment of the market namely official, interbank and parallel market. At the official market the naira appreciated by 12 kobo as the official exchange rate dropped to N155.78 from N155.9. The naira also appreciated by N4.45 at the interbank market and by N5 at the parallel market.
The inflation rate defied general expectation s as it fell to 11.7 per cent in August as against 12.8 per cent in July.
"I want to say Q3 was good to us. And I am looking at the economy from two perspectives, the inflation rate and the exchange rate, because these two prices are major players in any economy that depends on importation like ours", said Mr. E. Ola, a Fixed Income and Currency analyst.
He said. "In the last two months we have seen the exchange rate stabilized, we give kudos to the CBN for all its measures to stabilize the exchange rate. This has been a major driver of the inflow into the government securities that we have seen recently, because any foreign investor that wants to invest in your economy will look at the stability of the exchange rate so that by the time he wants to take exit his investment, his money is still intact.
"So this is what the CBN has been able to assure investors, it has said come, in the next two to three months, this is the amount of stability you are going to see in the exchange rate. This is what people require before they put their money into any economy, and if you observe, in Q3 the exchange rate was really stable and that was when we had the July MPC and the September MPC, and this has help to grow the economy.
And again looking at the inflation rate, it has actually beaten everybody to it. Nobody expected it to be at 11 per cent today. We were all thinking it will be at 13 or 12.5 per cent but today it is at 11 per cent. Nigeria is still an import dependent economy, so if we are able to pin down the naira, there won't be imported inflation.
"That is why to me, Q3 was very good to us, and if we are able to gauge the inflow (of foreign exchange) that we had in Q3 compared to other quarters, we will see that inflow was quite high and that was what impacted the external reserves currently at $41.34 billion, and you will observe that we had a lot of accretion to the reserves in Q3. So if you look at it the economy, Q3 was really good and that is why I am expecting growth rate of above 7.0 per cent for the quarter."
(http://vml1.s3.amazonaws.com/wp-content/uploads/2011/03/Arunma-Oteh1.jpg?9d7bd4) (http://www.vanguardngr.com/2011/03/nse-threatens-afribank-securities-28-others/arunma-oteh1/)Arunma Oteh, DG-SEC Speaking on the outlook for the fourth quarter, Ola said, "Q4 is always very interesting. People start making preparation in October against December and again we may see some investors exiting the market towards December. Some guys will want to take their profit and exit for the year and say lets see what will happen in January. So may be after January MPC, they may want to come back.
"So we feel we may see a lot of volatility, and that is why we are waiting for next month's MPC now, to see what will happen. But we are going to see a lot of pressure on the foreign exchange, because people will start opening Letters of Credits, LCs, lot of importation by manufacturers against December. So we are going to see a lot of pressure on the foreign exchange market.
I don't see the CBN dropping the MPR, in fact that is going to be the cue. If the CBN should drop the MPR there is going to be a run on the foreign exchange rate. What is happening in Kenya today is a good example of what we should expect. When Kenya cuts its MPR by 300 bases points to 13 per cent, we saw a run on their exchange rate. So I am very sure the CBN will be very careful about saying they want to drop the MPR. But if they maintain the MPR at 12 per cent then we should expect a full scaling for the naira."
A senior bank treasurer, who spoke on anonymity, also commended the tight monetary policy stance of the CBN. He said, "The economy recorded positive performance in Q3. This is because of some policy measures put in place by the CBN which were not popular to banks but has worked. The reduction in the Net Open Position (NOP) at the meeting before the last of the MPC, the NOP was reduced from three to one per cent. We saw the effect and we have seen relative stability of the exchange rate at the interbank.
"Since then the naira has not traded above N158 per dollar and CBN has also been doing N155.73, and the black market also came down to N158 from N160 and it has been there for about two months now. So this means that policy has worked. On the interest rate, yes, if you look at the securities market, they have been relatively good. Treasury bills rate have been coming down and bonds as well, rates have also been coming down.
"But what has majorly affected the market is the CRR, which was moved from 8.0 to 12 per cent. And what we have seen is that it has increased the cost of risk assets because it has also reduced the ability of banks to create risk assets, though I don't think that is what we want to encourage, but somehow it has helped. We have seen that inflation is coming down because their motive is that they want to target inflation by tightening liquidity in the system and that has helped.
"So relatively, I think third quarter was a very good quarter. We also had a very good development, the JP Morgan Bond Index. Nigeria has been listed, the second country in Africa, only South Africa has been listed, and on the basis of that there are indications that about $1.5 billion dollars might be coming into the Nigerian market as a form of foreign investment.
"So there are so many serious indications that as a result of the exchange rate that have been improving, there have been a lot of this supply, because as these investors are coming in with dollars, it is increasing the supply of foreign exchange in the market and that is why we are having this appreciation.
"So when you look at what happened generally, I also share the view that third quarter was very good for the country, there was a whole lot of improvement. Foreign reserves have also improved from $34 billion in the second quarter to $41 billion. That is a big jump. So there were lots of improvements."
On the outlook for the fourth quarter, he said, "I expect the Q4 to close the way we closed at Q3 because may see more improvement. The $1.5 billion JP Morgan money we are expecting is just beginning to come in. so by the time that comes in, we expect that foreign exchange will improve as well.
"The money is coming from investors that are coming to invest in Nigeria, because we are listed on that index, which means our bond is now out there trading, and that is a boost for us, and that is why you now see foreign investors coming, because there is market for our bonds. And we have seen it happen. Bonds that were trading at a price of N98, N70, are trading at a premium now, they have gone over N100. So prices have been appreciating.
I still believe it is too early in time, given that the inflationary pressure is still there, for them to drop policy rates. I think they will still keep the policy rate up there, they should still keep the policy rate. We should close the year at 12 per cent MPR, because if you act now based on this positive indices and then drop the policy rate, and we are looking at this energy cost and all that is still going to come, which means these can still take inflation up, and then you will begin to hike interest rates again. So I think they will still close the year at 12 per cent."
Reviewing the economy in the third quarter, Mr Bababtunde Obaniyi, an economic expert said that, "Going by the stability we have seen in power generation and distribution whereby micro economic agents are beginning to reap the benefits of stable power supply, meaning that for Q3 performance, especially for manufacturing, if you had constant power, your own cost of generating should actually drop. So that boosts the profit margins for micro economic agents such as the small businesses, and they will feel the impact of this in the bottom line.
"So looking at macroeconomics from Q2 to Q3 this year, I think Q3 was the best, going by the statistics that has been put out, and I think the economy has the potential to sustain this growth or even surpass it in the fourth quarter because we still expect the IPPs to bring on board about 4000 mega watt. So we are very optimistic on the outlook.
"So I will say the economic performed really well in Q3, we were able to save more, we were able to keep the interest rate at a good level, we were able to defend our currency, and the naira gained more, we were able to keep the inflation rate. So all these key parameters showed that the economy fared well in Q3 compared to Q1 and Q3. REAL SECTOR: NACCIMA scores trade & investment sector low
Nigeria Association of Chamber of Commerce, Industry, Mines and Agriculture (NACCIMA), scored the performance of Trade and Investment sector of the economy abysmally low, saying: "The sector has not reached the desired potential in the past thirteen years.
In a review of the economy in the third quarter/52nd independence anniversary of Nigeria, the National President of NACCIMA, Dr. Ademola Ajayi, noted: "Critical analysis of Nigeria's trade & investment sector since 1999 till-date, showed that despite government's efforts the sector is yet to meet the expectations of Nigerians and the business community.
"For over 13 years of Nigeria's democracy, the trade & investment sector has not reached the desired potential as about 50 per cent of the population still languish in abject poverty as they live below the poverty line of US$ 1.25 a day, while Nigeria is still "fire fighting" in meeting the several provisions of the Millennium Development Goals (MDGs), including ensuring gradual reduction of poverty by 50 percent come year 2015."
"Available information to us revealed that while the nation witnessed various Government's initiatives, programmes and reforms at the three levels of Governance to drive their Agenda, a lot of energy was dissipated on self inflicted crisis management while at the same time we continue to struggle with the "bubble-bust" pattern characteristic of past oil price cycles, the resultant impact on the national economy is yet to translate to the favourable result/outcome expected by the business community and the masses at large."
On development that impacted on the sector, he pointed to macro-economic development, saying:" The following indicators speak for themselves: Exchange Rate, since 2012 stabilized within a band of N155 and N161: US Dollar; inflation rate went up from 10.3 per cent in December 2011 to 11.7 percent in August, 2012.
Similarly, interest rate remained double digit, hovering between 17 percent and 28 percent as against a single digit rate anticipated by business operators. Some Banks are already offering single digit interest rate to SMEs; and capacity utilisation in real sector manufacturing production hovers around 45 per cent.
"NACCIMA believes that the on-going economic reforms programmes of the Federal government and state government when fully implemented would definitely open up numerous trade and investment opportunities. "Already, foreign investors have taken advantage of the reforms in such areas as the telecommunication sector, and the power and energy sector.
NACCIMA and other chambers of commerce are willing and prepared to provide relevant business information and assistance on the request to foreign investors visiting and wishing to do business with the Nigerian counterparts, in promoting such mutually rewarding business relationships; NACCIMA hopes to work in partnership with any willing research institutions, equipment and line manufacturers to drive their initiatives to success," he said.
Vanguard Nigeria