Year. Recovery Prospects. Economic & Financial Market: Review & Outlook. FSDH Research

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1 Economic & Financial Market: Review & Outlook Year 2010 Disclaimer Policy This publication is produced by FSDH Securities Limited (FSDH Sec) a subsidiary of First Securities Discount House Limited (FSDH) solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of the FSDH for actions taken as a result of Information provided in this publication. Recovery Prospects

2 Contents 2 Executive Summary 3 Key Economic, Financial and Social Indicators Economic Highlights World Economic Growth Nigeria s Sovereign Rating Gross Domestic Product (GDP) Telecommunications Industry Crude Oil External Reserves External Debt Domestic Debt Inflation Rate Financial Market Bond Market The Equities Market Return Analysis Money Market Foreign Exchange Market Fiscal Projections for Outlook for The World Economy The Nigerian Economy Fixed Income Securities Equities Market Recommended Stocks Most Capitalized Stocks in Return on New Listings in Top Performers in Top Losers in

3 EXECUTIVE SUMMARY World Economic Growth The World Economic Outlook (WEO) of the International Monetary Fund (IMF), October 2009 edition, asserted that the global economy appears to be expanding, pulled up by the strong performance of Asian economies and modest recovery in other parts of the world. It added that growth in most advanced economies is dependent on government stimulus packages. The IMF noted that the global economy is expected to expand by 3.1% in 2010 as against the contraction of 1.1% in Although the forecast growth of 3.1% for 2010 is below the pre-crisis growth rate of 5.20% in 2007, it represents an upward revision to the forecast of 2.5% for 2010 released in the WEO update, July 2009 edition. In addition, a Research Note released by IMF on December 30, 2009 focusing on Commodities Outlook for 2010 notes that commodity prices are expected to increase further in 2010 as world economic activities expand after the unprecedented global crisis. Noting the fast recovery in the world economy, the Monthly Oil Market Report of the Organization of the Petroleum Exporting Countries (OPEC), January 2010 edition, expects that the world economy will grow by 3.1% in 2010, affirming the IMF growth rate forecast for The OPEC growth forecast also represents an upward revision from 2.9% released in December report. The report noted the challenges for the Organization for Economic Cooperation and Development (OECD) have not gone away completely and the region is still dependent on government-led support. According to the report the US economy is expected to grow by 1.19% in 2010 on account of weak private consumption. Japan is expected to grow by 1.1%, despite the recent stimulus package, while the Euro-zone forecast is at 0.6%. China and India remain the bright spots for the anticipated growth in 2010, with growths of 8.8% and 6.7%, respectively. Nigeria Retains BB- Sovereign Rating Fitch Ratings maintained the BB- Sovereign Rating on Nigeria, which is the same rating given on May 28, The new rating released on July 09, 2009 stated that, Nigeria obtained a sovereign rating of BB- same as it was in the previous assessment. The local currency rating was also maintained at BB-, reflecting the impressive development of domestic debt market since The report noted that debt market accounts for about 90% of public debt and since November 2008 has extended maturities up to 20 years. Meanwhile, Standard & Poor (S&P) lowered Nigeria s ratings outlook to negative from stable, citing falling oil revenues, which it says were hurting public finances. S&P was nervous over falling reserves and unorthodox policy measures that risked undermining foreign investor confidence. It however affirmed Nigeria s BB- foreign currency and BB local currency long-term sovereign credit ratings. It forecasts a current account deficit of 7.2% of GDP for 2009, but a fiscal surplus of 6.3% for GDP Available data released by the National Bureau of Statistics (NBS) shows that on an aggregate basis, the economy when measured by the Real Gross Domestic Product (GDP), grew by 7.07% in Q3, 2009 as against 6.13% in the corresponding quarter of The growth rate is higher than the growth rate of 5.98% recorded in Meanwhile, the target growth rate for the year 2009 as contained in the 2009 Federal Government budget is 7.5%. The growth in the economy was driven largely by non-oil sector in However in 2009, recovery in the oil sector which started in Q2 2009, following the Amnesty deal of the Federal Government, accelerated the GDP growth rate. Crude Petroleum and Natural Gas, which accounted for 15.54% of the GDP at constant basic prices as at Q recorded a growth rate of 2.01% in Q and 0.71% in Q Looking at the percentage distribution of real GDP at 1990 constant basic prices by activity sector, as at 9months 2009, Crop Production contributed the highest with 41.27%. This was followed by Wholesale & Retail Trade with 16.97% and Crude Petroleum & Natural Gas 15.54% respectively. Crude Oil The Monthly Oil Market Report of the Organization of the Petroleum Exporting Countries (OPEC), December 2009 edition attributes the increase in the crude oil prices in the last months in 2009 to the expectations of economic growth in the year 2010 and the positive impact on demand, as well as US Dollar depreciation against other major currencies. OPEC noted that as a result of the financial crisis, 2009 was a difficult year for oil demand. OECD demand contracted by 1.8mb/d and non-oecd oil demand fell to one third of its previous growth, increasing by only 0.4mb/d, consequently, world oil demand decline by 1.4mb/d in 2009; down from an initial projection of positive growth of 0.9mb/d. External Reserves According to the CBN Nigeria s external reserves position as at December 31, 2009 stood at US$42.41bn, representing a drop of 19.98%, compared to US$53bn as at December 31, Notwithstanding the decline in the level of external reserves as at end-december 2009, the CBN said it was satisfied that the level of reserves remained robust and significantly higher than initially projected at the beginning of the year notes that there has not been much accretion to the external reserves despite the increase in the price of oil in the international market and the improvement in oil output due to the relative peace in the Niger Delta. We are of the opinion that the CBN may have limited the amount of foreign earnings that go to the external reserves in order to meet the growing demand for foreign exchange in Nigeria. External Debt Available information from the Debt Management Office (DMO) shows that the total external debt stock as at September 30, 2009 stood at US$3,863.92mn. This represents an increase of 3.86% over US$3,720.36mn as at December 31, The current position is also higher than the position as at June 30, 2009 which stood at US$3,719.24mn. The breakdown of the debt showed that 88% was owed to Multilateral (which includes World Bank Group, International Fund for Agricultural Development (IFAD), African Development Bank Group International Development Bank (IDB) and Economic Development Fund (EDF). The balance of 12% was owed to Non-Paris Group of creditors. Meanwhile, the National Assembly has cautioned the Federal Government against contracting any new external loan as it seems there is no improvement in physical infrastructure to show for the loan. 3

4 Domestic Debt As at September 2009, DMO put the country s domestic debt stock at N3,058.19bn, up 31.82% from N2,320bn as at December 31, 2008 and up from N2,812.79bn as at June The breakdown of the total debt stock shows that the FGN Bonds accounted for N1,848.99bn, representing 60.46%; Nigerian Treasury Bills (NTBs) accounted for N753.58bn, representing 24.64%, Treasury Bonds(TBs) accounted for N392.07bn, representing 12.82%; Promissory Note (PN) which was introduced in September 2009 accounted for N63.06bn, representing 2.06% and Development Stocks (DSs) accounted for N0.52bn representing 0.02%. Inflation Rate The latest Consumer Price Index (CPI) for the month of December 2009, released by the National Bureau of Statistics (NBS), showed that inflation rate (year-on-year) in Nigeria stood at 12.00%, a decrease of 3.1% from 15.10% as at December 31, 2008 and a decrease of 0.4% from 12.40% recorded in November Inflation in Nigeria decreased continuously between February and September 2009 to 10.4%, close to the target of a single digit figure. Meanwhile, the hope of single digit figure was dashed as the inflation rate maintained a consistent upward trend from October through November before it decelerated in December The huge liquidity in the financial system coming from the quantitative easing of the CBN, fiscal expansion and rising global commodity prices in the favour of weak consumer output in Nigeria led to the rising inflation rate. FGN Bonds As at the end of 2009, the DMO, on behalf of the Federal Government of Nigeria (FGN), offered a total of N614.44bn worth of FGN Bonds, 19.31% higher than the N515bn offered in 2008.The total subscription in 2009 was N1,249.16bn, up by 46.08% from N855.14bn subscribed in The subscription level in 2009 at % was 37.25% higher than the subscription level of % recorded in 2008.The total amount of FGN Bonds sold in 2009 was N711.50bn, up by 43.98% from N494.18bn sold in The DMO is working to renew the interest of retail investors in FGN Bonds, as the current shareholding is skewed in favour of institutional investors. Also, the various regulatory bodies in the financial market are working to encourage the development of the corporate bond market as an alternative source of funding to equities and bank loans. maintains that the Federal Government should help the development of corporate bonds market by making investment in the instrument tax free in order to encourage issuance of bonds at competitive coupon rates. Equities Market The Nigeria Stock Exchange All Share Index (NSE ASI) closed the year 2009 at 20, points, down from 31, points at the end of year 2008, representing a loss of 33.78%, marginally lower than the loss of 45.77% recorded in In a similar development, the market capitalization recorded a loss of 28.29% in 2009 to close at N4,989.39bn (about US$33.69mn). This was against the loss of 31.66% recorded in the preceding year to close at N6.96trn. The equities investors lost about N1.97trn in value of investment in Looking at the quarterly performance of the equities market in 2009, it recorded a negative growth in Q1 2009, as it lost 36.88% to close at 19, points. However, in Q the NSE All-Share Index (NSE- ASI) recorded a positive return of 35.31% to close at 26, points. In Q3, 2009, the NSE ASI recorded a loss of 17.86% to close at 22,065 points, while it closed at 20, points with a loss of 5.61% in Q4, The NSE ASI recorded its highest and all time high of 66, points on March 05, 2008 after which the Index trended downwards to end the year. In terms of trading activities for year 2009, a total of bn shares worth N677.11bn were traded in 1.72mn deals. This is against bn shares worth a total of N2.33trn traded in 3.49mn deals in The average value of shares traded during the year is N2.73bn, while the average volume of shares was mn in an average of 6,922 deals. Money Market The money market ended the year on a relatively liquid note in contrast to the tightness that dominated the first half of the year and the year This was due to quantitative easing strategies employed by the CBN to ensure stability in the Nigerian financial system and the monthly allocations from the Federation Account Allocation Committee (FAAC) during the period under review. Consequently, inter-bank rates dropped in response to the relative liquidity that dominated the market. Available data from the Financial Market Dealers Association (FMDA) indicates that the Average Prime Lending rate to the economy stood at 18.67% in 2009, up from 17.43% in The average interest rate on savings account stood at 3.44% in 2009, marginally down from 3.50% in The average interest rate on Term Deposit (12 months) stood at 11.69% in 2009, up from 10.24% in In our opinion, at 15.23% spread, the gap between the average prime lending rate and the average savings rate is too wide and may not encourage capital formation to stimulate sustainable economic growth in the country. The operators continue to justify the wide spread because of the high cost of doing business in Nigeria occasioned by infrastructural deficiencies. Looking at 7-day NIBOR for 2009, the rate closed lower at 6.92% from 14.79% as at the end of The lowest rate recorded in 2009 was 5.67% as against 9.12% in The highest rate recorded was 26.08% in 2009, up from 18.68% in The highest rate in the 7-day NIBOR was recorded in first half of The rate was driven up as some of the bank that experienced liquidity crisis were borrowing at very high rates in order to attract funds. The lowest rate was recorded in last quarter of the year, due mainly to the fact that the inter-bank market was awash with funds as most banks did not extend credits to the real sector of the economy. The average rate for 2009 was 13.81%, while it was 12.61% in The average rate of 8.50% in Q4, 2009 is lower than the average rate of 14.08% recorded in Q3, A review of the 90-day NIBOR indicated that it closed 2009 at 15.29%, down from 16.71% as at the end of The lowest rate recorded in 2009 was 11.71% as against 12.28% in The highest rate was 25.69%, up from 18.88% in 2008, while the average rate recorded in 2009 was 17.50%, up from 14.71% recorded in The average rate of 15.45% for Q4, 2009 was lower than 17.41% recorded in Q3, At the primary market auctions for the government securities, CBN offered N250bn worth of 364-day NTB in 2009, higher by 28.21% from N195bn offered in At the 91-day NTB auctions, a total of N333.07bn was offered, which 4

5 represents an increase of 32.79% from N250.82bn offered in At the secondary segment of the market, the CBN introduced the Expanded Discount Window Operation (EDW) in 2009 to ease the liquidity crunch in the financial system as a result of the secondary impact of the global economic and financial crisis. At the Open Market Operations Repurchase (OMO Repo) & Expanded Discount Window (EDW), the CBN injected a total of N2,194.49bn into the system, while it withdrew a total of N2,285.35bn, representing a net withdrawal of N90.87bn from the system in We note that the CBN replaced the EDW operation and said it would not contract any new loan nor extend any maturing obligation. It further said all banks are required to liquidate their obligations under the EDW facility at maturity. Foreign Exchange Market The analysis of the transactions in the official foreign exchange market in 2009 showed that the CBN increased the amount of foreign exchange it offered in the foreign exchange market in order to reduce the effect excess demand would have on the depreciation of the value of the local currency. The CBN offered a total of US$22,040mn through the Retail Dutch Auction System (RDAS), and Wholesale Dutch Auction System (WDAS). The offer represents an increase of % over the US$7,140mn offered in The value of the Nigerian Naira depreciated in all the three segments of the market against the US Dollar in The inter-bank, parallel and official markets depreciated by 7.02%, 9.58% and 12.84% respectively, compared with depreciation of 12.37%, 14.83% and 18.26% recorded in the official, parallel and inter-bank markets respectively in Outlook for 2010 Global Economy The highlights of the consensus from the International Organisations such as the IMF and OPEC on the outlook of the world economy in 2010 are: The world economy is projected to grow at about 3.1%, a significant growth rate given the actual negative growth rate of 1.1% in With continued efforts to ease credit strains as well as expansionary fiscal and monetary policies, the global economy is projected to experience a gradual recovery in Commodities Outlook for 2010 is anticipated to be bullish. Demand is expected to continue to rise at a solid pace as industrialization continues in emerging and developing economies. The world oil demand is expected to grow in It is projected at 85.2mb/d. OPEC crude demand is projected to average 28.6mb/d while non-opec crude demand is projected at 56.60mb/d. Meanwhile, the Non-OPEC supply is projected at 51.3mb/d a marginal increase of 0.5% from the 2009 supply of 51mb/d. Optimistic price of oil in 2010 is projected at US$85/b while the pessimistic is projected around US$65/b. The Nigerian Economy The current global economic and financial crises had serious implications for the performance of the Nigerian economy in We observe that the global economic and financial landscapes are improving at a fast pace and the outlook is good. The Nigerian economy, being part of the global economic village should move in line with the rest of the world. Although there are current and potential political issues that need to be resolved in order to move the country forward, we believe the relevant parties will work together to resolve the crisis before it degenerates to an uncontrollable situation that could cause a collapse of the country s burgeoning democracy. The recent rising price of crude oil at the international market with the improved oil production in Nigeria following the Amnesty program of the FG to the militants in the Niger Delta area, in addition to the fact that the unspent portion of 2009 capital budget allocation will be added to 2010 fiscal year should improve the fiscal position of the FG in The current average oil price to date at US$78.25/b is higher than the 2010 budget benchmark oil price of US$57/b. The 2009 budget is predicated on an oil price assumption of US$57/b, oil production of 2.088mb/d an average exchange rate of N150/US$1 (average so far US$148.22/US$1). In the year 2010 the outlook of inflation rate in Nigeria will be influenced by the expected fiscal expansion, quantitative easing strategy of the CBN to boost outputs & ensure credit creation in the financial system, supply bottleneck inherent in the economy as a result of the infrastructure deficits and expected rise in commodities prices. All these factors will exert inflationary pressure on the consumer price index in 2010, thus our forecast inflation rate is in the range of 12.5% -14.5% to end the year. The weakening US Dollar as a result of restructuring of international investment from US Dollar denominated financial instruments to other commodities like Gold may help the value of Naira to appreciate in nominal term against the US Dollar. In addition, the rising price of crude oil at the international market, in the face of improving oil production, may improve the foreign exchange earning capacity of the country with its positive impact on the foreign exchange rate. Given these dynamics, we are persuaded to release a forecast exchange rate for 2010 in the region of N140US$1- N145US$. We doubt the ability of the proposed Asset Management Company (AMC) to produce the desired results as we believe a major constraint remains the transfer pricing of toxic assets. We however expect increased acquisition activities in banking industry in Given the structure of the economy which is in favour of Agriculture, and the progress recorded so far in the oil & gas sector, we are comfortable to release a GDP growth rate of between 7% and 8% in As the price of oil improves in the international market and oil output improves in the Niger-Delta area of the country, Nigeria should be able to increase its exports and consequently improve external reserve by about 12.5% to US$53.01bn to end the year

6 Fixed Income Securities In the next six months, the policy thrust of the CBN should be expansionary, just as we have in other emerging markets around the world. This policy is necessary to boost outputs and stimulate aggregate demand with a view to generating employment in the country. We recognize that expansionary monetary policy at this time may be inflationary, which may reduce the real return on fixed income securities or in some cases lead to negative real returns, but we believe a moderate rising inflation rate in the country is necessary to boost outputs. In addition, the efforts of the CBN should be directed towards persuading banks to begin lending to the real sector of the economy. Looking a the current structure of MPR at 6% with 2% above and 4% below, the CBN effective lending rate to Deposit Money Banks(DMBs) as bank of last resort is 8% while banks are required to place their excess funds with CBN at 2%. In the next six months, expects CBN to remove both the 2% above the MPR and 4% below the MPR. Doing this will lower the effective lending rate to DMBs to 6%. We expect inter-bank rates to trend downward on account of the expected monetary and fiscal expansion in Also the CBN guarantee of inter-bank placements and pension funds placements should increase activities in the inter-banks placement and prevent inter-bank liquidity crunch. We expect that the FIRS, DMO, FMF and Market Operators will finalize the challenges to the effective take-off of active Corporate Bond issuance and trading before the end of Q1, This will create another investment outlet for the excess fund in the financial market and reduce excessive oversubscription of the FGN bonds. Thus we expect the prices of FGN Bonds to trend downward and this will improve the yields of the bonds. We expect the new FGN Bonds issue for the year 2010 to carry low coupon rates. such foreign credits. This will boost the expansion drive of manufacturing companies and petroleum marketing companies and position them for better profitability in the quarters ahead. As the global economy and financial market improve, we expect a return of some hedge funds and portfolio managers in the Nigerian equities market as we believe it offers some unique opportunities. In addition, the expected drop in interest rate in the money market in 2010 should be a good development for the equities investors Bearing unforeseen circumstances in the nation s polity that will affect the equities market negatively; we expect the equities market to appreciate in The factors that should support the expected appreciation in 2010 include: the global recovery that we expect; the improvement we expect at the macroeconomy level in Nigeria and some sectoral recovery prospects that exist for quoted companies. Given these factors, we are persuaded to release a forecast growth rate in the NSE ASI in the region of 15% and 20% to end the year Forecast for 2010 Global GDP Growth Rate (%) 3.1 Nigerian GDP Growth Rate (%) 7-8 Crude Oil Price (US$/b) Inflation Rate (%) Exchange Rate (NGN/US$1) External Reserves US$ bn External Debt US$ mn 4,420 Domestic Debt N bn 4,250 MPR (Effective Lending Rate) % 6.00 NSE ASI (%) Equities Market Our review of the equities market shows that a number of the highly capitalized stocks across the sectors on the Nigerian Stock Exchange (NSE) are trading at their support prices as their share prices have refused to drop below certain price levels. We are of the opinion that there may still be some unresolved problems in the Nigerian Banking industry, the drastic actions of the CBN, especially in dissolving the board of the troubled banks and making them to make provisions for all non-performing loans have substantially addressed the problems in the sector. We expect a dramatic drop in corporate benefits that Nigerian banks will declare for the period ended December 31, This is expected to improve at the end of the current year as the banks profitability improves. The commitment of the CBN to guarantee all foreign credit lines to the Nigerian bank will ensure that large companies in Nigeria that have ability to access funds through their banks will continue to enjoy 6

7 KEY INDICATORS IN NIGERIA GDP (N trn) (at 1990 Current Prices) 6.68 # Real GDP Growth Rate (%) 7.07 # Oil Sector GDP Growth Rate (%) 0.71 # (4.5) (5.1) (4.51) 0.50 Non-Oil Sector GDP Growth Rate (%) 8.33 # Inflation Rate (Year-on-Year) % Inflation Rate (12 Months Average) % External Debt Stock (US$ bn) 3.86 # Interest Paid on External Debt (US$ mn) # Domestic Debt Stock (N tri) 3.06 # Interest Paid on Domestic Debt (N bn) # * External Reserves (US$ bn) Credit to the Private Sector(N bn) 9,026.1 V 7,400 4,600 2, , Net Domestic Credit(N bn) 5,938.1 V 5, , , Total Population (mn) * Unemployment Rate (%) 11.80^ Banks Total Assets(N bn) 15,851 V 17,031 10,431 6,738 4,389.3 Banks Non-Performing Loan (%) * Total Banks Deposits (N bn) 5,318.3 V 5,475 5,358 3,441 2,478 Exchange Rate (N/US$1), Official Appreciation (Depreciation), N/US$, (%) (12.84) (12.37) Exchange Rate (N/US$1), Parallel Time Deposit (Over 12months) % Prime Lending Rate (%) Monetary Policy Rate (MPR) (% ) NSE All Share Index Growth Rate (%) NGN (33.78) (45.77) NSE All Share Index Growth Rate (%) US$ (46.62) (58.14) day T-Bill Rate (%) day T-Bill Rate (%) day T-Bill Rate (%) Sources: NBS, CBN, NSE, NPC, DMO, MMAN, Budget Office, National Population Commission, Estimate; # Q3 2009; *Provisional Data; V July,

8 IMF and OPEC noted that the world economy is expected to expand by 3.1% in 2010 Unemployment will present a major challenge in many advanced economies and poverty will continue to challenge many developing economies 1.1 The World Economy The view of a better global economic outlook for 2010 expressed by various international organizations has been buttressed by the International Monetary Fund (IMF) in a news conference in Washington on January 14, According to the IMF Managing Director, Strauss-Kahn, the global economy is recovering significantly faster than previously expected, but growth in most advanced economies is still dependent on government stimulus packages. He added that while emerging market economies especially in Asia were leading the recovery, most advanced economies were still sluggish, with private demand weak and unemployment continuing to rise. The IMF Boss urged governments not to relax stimulus measures too early in the mistaken belief that a strong recovery had taken hold, and suggested that they could shift stimulus packages towards employment-creating projects. In addition, a Research Note released by IMF on December 30, 2009 focusing on Commodities Outlook for 2010 notes that commodity prices are expected to increase further in 2010 as world economic activities expand after the unprecedented global crisis. It added that the effect of the recent global crisis have been to reduce prices somewhat below their 2008 peaks, but demand is expected to continue rising at a solid pace as industrialization continues in emerging and developing economies. Reviewing the recent improvements in the world economic activities, the IMF noted that the global economy is expected to expand by 3.1% in 2010 as against the contraction of 1.1% in Although the forecast growth of 3.1% for 2010 is below the pre-crisis growth rate of 5.20% in 2007, it represents an upward revision to the forecast of 2.5% growth rate for 2010 released in the WEO Update, July 2009 edition. Going foreword, IMF said policy forces that are driving the current rebound will gradually lose strength, as real and financial resources, although gradually building, remain weak. Specifically, fiscal stimulus will diminish and inventory rebuilding will gradually lose its influence. Meanwhile, consumption and investments are gaining strength slowly, as financial conditions remain tight in many economies. The IMF said GDP in the advanced economies is projected to expand sluggishly through much of 2010, with unemployment continuing to rise until later in the year. Annual growth rate in 2010 for the advanced economies is projected to be about 1.25%, following a contraction of 3.5% in In emerging economies, real GDP growth is forecast to reach almost 5% in 2010, up from 1.75% in The rebound will also be driven by China, India, and a number of other emerging economies. Other emerging economies are staging modest recoveries, supported by policy stimulus and improving global trade and financial conditions. The IMF noted that as prospects have improved, commodity prices have staged a comeback from lows reached earlier this year, and world trade is beginning to pick up. The triggers for this rebound are strong public policies across advanced and many emerging economies that have supported demand and eliminated fears of a global depression. Together these measures reduced uncertainty and increased confidence, fostering an improvement in financial conditions, evidenced by strong rallies across many markets and a rebound of international capital flows. However, the environment remains very challenging for lower-tier borrowers. Unemployment will present a major challenge in many advanced economies, and poverty will continue to challenge many developing economies. It stressed that the evidence available suggests that unemployment rates typically tend to rise significantly and remain higher for many years after financial shocks. In order to limit the extent of job destruction, IMF recommends slower wage growth or even wage cuts for many workers. 8

9 OPEC believes the world economy is improving and raised its forecast for 2010 The impact of the necessary adjustments on poorer segments of the labour force could be cushioned with earned income tax credits or similar programs that limit the social repercussions of wage adjustments. In addition, better job matching and education and training can help limit job and wage losses. Poverty could increase significantly in a number of developing economies, notably in sub-saharan Africa, where real GDP per capita contracted in 2009 for the first time this decade. Continued donor supports from advanced economies are to sustain hard-won macroeconomic stability gains. shares the opinion of the IMF that sustaining the recent pick up in the world economy should be the primary focus of policy makers around the world in order to protect the hard-won macroeconomic gains in developing countries. We noted in our earlier report that the current clean-up in the Nigerian banking industry should improve liquidity conditions in the economy and ensure financial system stability that will promote sustainable economic growth in the interest of the overall economy. Noting the fast recovery in the world economy, the Monthly Oil Market Report of the Organization of the Petroleum Exporting Countries (OPEC), January 2010 edition, expects that the world economy will grow by 3.1% in 2010, affirming the IMF growth rate forecast for The OPEC growth forecast also represents an upward revision from 2.9% released in December report. The report noted the challenges for the Organization for Economic Cooperation and Development (OECD) have not gone away completely and the region is still dependent on government-led support. According to the report the US economy is expected to grow by 1.19% in 2010 on account of weak private consumption. Japan is expected to grow by 1.1%, despite the recent stimulus package, while the Euro-zone forecast is at 0.6%. China and India remain the bright spots for the anticipated growth in 2010, with growths of 8.8% and 6.7%, respectively. Table 1: World Trade Growth (Actual Vs Forecast )% World Trade Volume (11.9) 2.50 Imports Advanced Economies (13.7) 1.2 Emerging & Developing Economies Exports (9.5) 4.6 Advanced Economies (13.6) 2.0 Emerging & Developing Economies (7.2) 3.6 Table 2: Regional GDP Growth (Actual Vs Forecast)% World (1.1) 3.1 USA (2.7) 1.5 Japan 2.3 (0.7) (5.4) 1.7 Euro-zone (4.2) 0.3 Emerging & Developing Economies China India Africa Source: World Economic Outlook (WEO), October 2009 Update The positive views of the positive global economy and the financial stability in 2010 also conform with the views and comments expressed by the world leaders and policy makers at the G-20 summit in Pittsburgh, as well as at the annual meeting of the International Monetary Fund/World Bank in Istanbul. IMF is expected to release its World Economic Outlook (WEO) report, for the year 2010 on January 26. 9

10 The recovery in the oil sector following the amnesty deal accelerated the GDP growth rate in Nigeria FSDH Research disagreed with the IMF GDP Growth rate forecast for Nigeria at 2.9% & 5% for 2009 & 2010 respectively 1.2 Nigeria Retains BB- Sovereign Rating Fitch Ratings maintained the BB- Sovereign Rating on Nigeria, which is the same given on May 28, The new rating released on 9 July, 2009 stated that, Nigeria obtained a sovereign rating of BB- same as it was in the previous assessment. Nigeria s rating rationale was due to earlier reforms by Nigeria, such as saving of oil windfalls, which has resulted in an accumulation of foreign assets, and banking consolidation resulting in a well-capitalized banking system as well as Nigeria s strong overall and public net external creditor position and low government debt, have all helped cushion the economy against the collapse in oil price, global recession, a reversal of capital flows and the banking sector s exposures to a sharp fall in equity prices. Nigeria s public debt/gdp ratio at 12% in 2008 was much lower than the 27% BB median. Nigeria also have very strong external balance sheet compared to rating peers. This it said after allowing for a more orderly adjustment to lower oil prices by drawing on reserves saved in the Excess crude account, coupled with 20% exchange rate depreciation. Meanwhile, the local currency rating was also maintained at BB-, reflecting the impressive development of domestic debt market since The report noted that debt market accounts for about 90% of public debt and since November 2008 has extended maturities up to 20 years. It added that with the sharp fall in oil revenues, this is now a source of fiscal financing flexibility for the Federal Government. It also noted that a few states have also started to raise funds for development spending from the domestic bond market. Meanwhile, Standard & Poor (S&P) lowered Nigeria s ratings outlook to negative from stable, citing falling oil revenues which it says were hurting public finances. 1.3 Gross Domestic Product (GDP) Available data released by the National Bureau of Statistics (NBS) shows that on an aggregate basis, the economy when measured by the Real Gross Domestic Product (GDP), grew by 7.07% in Q3, 2009 as against 6.13% in the corresponding quarter of The growth rate is higher than the growth rate of 5.98% recorded in Even though the performance of the economy in 2008 was good in the light of the global economic recession, it fell below the target of 9.8% for the year. Meanwhile, the target growth rate for the year 2009 as contained in the 2009 Federal Government budget is 7.5%. The growth in the economy was driven largely by non-oil sector in However in 2009, recovery in the oil sector which started in Q2 2009, following the Amnesty deal of the Federal Government, accelerated the GDP growth rate. Crude Petroleum and Natural Gas, which accounted for 15.54% of the GDP at constant basic prices as at Q3 2009, recorded a growth rate of 2.01% in Q and 0.71% in Q In 2008, oil GDP contracted by 6.19%. The International Monetary Fund (IMF) in its World Economic Outlook (WEO) October 2009 edition released a forecast Real GDP growth rate of 2.9% and 5% for Nigeria in 2009 and 2010 respectively. In swift reaction to this report, released a report to disagree with the forecast of the IMF. We maintained in our report that the Nigerian economy would grow in 2009 between 4% and 5%. We added that Nigerian economy has the capacity to grow in double digit if the power problem can be resolved. In solving the problem in this important sector of the economy, we maintain our recommendation that the Power Holding Company of Nigeria Plc (PHCN) be completely privatized. 10

11 Q1, 07 Q2, 07 Q3, 07 Q4, 07 Q1, 08 Q2, 08 Q3, 08 Q4, 08 Q1, 09 Q2, 09 Q3, 09 Growth Rate The nominal GDP as at 9months, 2009 was estimated at N17.97trn, an increase of 1.41% over the same period in 2008 As at 9months 2009, the cumulative GDP figure at 1990 constant basic prices stood at N506.89bn, up from N476.61bn in 9months As at the end of 2008 the figure increased to N672.20bn. We note that in 2008, the highest GDP figure was recorded in Q4 2008, boosted by the festive season and improved growth in both the Agriculture and Manufacturing industries. 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% GDP Growth Rate Constant Basic Prices) 7.80% 7.10% 7.22% 7.07% 6.60% 5.70% 5.50% 5.65% 6.13% 4.64% 4.50% 15% 10% 5% 0% -5% -10% GDP at 1990 Constant Price - Growth Rate % (Oil & Non-oil), (Q1, 08 - Q3, 09) 10% 8% 9% 8% 8% 8% 8% 2% 1% Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09-5% -7% -6% -7% -8% Oil GDP Non-Oil GDP Comparing quarter on quarter, real GDP increased by 0.94% in Q3, 2009 over the level in the corresponding period of 2008, on account of increase in production in the oil sector of the economy. The nominal GDP as at 9months, 2009 was estimated at N17.97trn, an increase of 1.41% over N17.72trn recorded in the corresponding period of The GDP figure as at 9months 2009 was 26.05% lower than the N24.30trn recorded in Given the fact that the Q4, 2008 GDP accounted for 27.07% of the 2008 figure; we expect the GDP in 2009 to be higher than the nominal GDP in The oil sector continued with its increased output, which commenced in Q2, 2009, a departure from the contractions recorded in earlier quarters. 11

12 Crop production contributed the highest share of 41.27% to the GDP as at 9months 2009, followed by Wholesale & Retail Trade with 16.97% GDP@ Current Basic Prices 2008-Q3, 2009 (N' Trillion) Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 GDP@ 1990 Constant Basic Price 2008-Q3, 2009 (N' Billion) Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 NBS attributed the improved performance witnessed in the oil sector in the Q3, 2009 to the improvement in oil output as a result of the various interventions by government in the peace process in the Niger Delta Region. noted earlier that the Amnesty programme and other initiatives of the government will improve oil production and subsequently increase revenue from oil. The oil sector contributed about 15.54% to real GDP in 9months, 2009, compared to the contribution of 17.35% in The NBS estimated about trn barrels of crude oil and condensates for Q3, 2009 with an average daily production of 2.15 million barrels per day (mbd), compared to the mbd produced within Q3, 2008 with a corresponding average daily production of 2.14mbd. These figures with their associated gas components resulted in a growth rate, in real term of 0.71% in Oil GDP in Q3, 2009, compared to the decline of 6.08% for the corresponding period of Looking at the percentage distribution of real GDP at 1990 constant basic prices by activity sector, as at 9months 2009, Crop Production contributed the highest with 41.27%. This was followed by Wholesale & Retail Trade with 16.97% and Crude Petroleum & Natural Gas 15.54% respectively. According to NBS, the non-oil sector continued to be the major driver of the economy in spite of the fact that it trended slightly downward in Q3, 2009, when compared with 2008 figure. The sector recorded 8.33% growth in real terms in Q3 2009, compared with 8.95% recorded in 12

13 The decline in the growth rate of manufacturing activities was due to poor supply of energy and increased cost of fund The non-oil GDP growth rate of 8.33% in Q was slightly higher than the 8.27% recorded in Q2, 2009, but lower than 8.93% recorded in Q The major agricultural activities in 2009, like other years, are harvesting activities for the farming season in the Northern part of Nigeria and late season crops harvesting in the South West. Agricultural output in Q3, 2009 grew by 5.99%, compared to 6.27% in 2008 and 6% in Q3, 2008 but slightly lower than the growth of 6.10% recorded in Q2, The marginal reduction in growth rate recorded by the sector in 2009 could be attributed to the general adverse effect of flooding due to increase in volume of rainfall in some parts of the country. The sector was also affected by the recent drop in the price of agricultural commodities following the global financial and economic crisis. The NBS is of the opinion that the general drop in food prices may have discouraged farmers to harvest all the crops to full potentials. The overall picture is also reflected in the Consumer Price Indices, published by the NBS which indicated that the average year-on-year change in food inflation in November, 2009 was 13.5% as against 18.10% in same period of Looking at the wholesale and Retail trade, there was a slow down in growth rate comparing quarter on quarter. In Q3, 2009, the sector recorded growth in real terms of 11.89% compared with 16.30% in the same period of 2008 and down from 14.02% as at full year The decrease in Q3, 2009 was attributed to the liquidity squeeze in the banking sector. Telecommunications & Post sector maintained its accelerated growth in Q3, 2009 recording the highest sectoral growth of 34.69% in Nigeria. The sector recorded a real GDP growth rate of 34.69%, compared to 33.63% and 34.56% recorded in Q2, 2009 and corresponding period of Manufacturing activities increased relative to the level recorded in Q2, 2009, but decreased when compared with the corresponding period in It recorded a decline in growth rate from 8.43% in 2008 to 8.36% in 2009, but an improvement over 8.17% recorded in Q2, The development is traceable to the poor supply of energy, increased cost of funds and decline in output of manufactured goods arising from relocation of some manufacturers to Ghana, and weak demand. The sector however improved compared to the preceding quarter of 2009 due to increased production activities in preparation for the festive season and the hosting of the FIFA Under-17 World Cup by Nigeria in the early part of the fourth quarter of GDP at 1990 Constant Basic Prices % Distribution (Q3, 2009) Crop Production Wholesale & Retail Crude Petroleum & Natural Gas Electricity Telecommunication Other Manufacturing Financial Institutions Livestock Road Transport Real Estate Building & Construction Fishing Others

14 notes that the current slow down in credit creation by the financial institutions in the country as a result of the huge provisioning arising from the bad loans, are capable of slowing down economic activities in the country. The CBN should continue to work out modalities to encourage banks to resume lending to the real sector of the economy. According to the National Bureau of Statistics (NBS), the structure of the Nigerian economy as at September 2009 in terms of sectoral contribution to the GDP are: Agriculture:45.35%; Crude Petroleum & Natural Gas:15.54%; Telecommunication & Post Services:3.48%; Finance & Insurance:3.20%; Manufacturing:3.49%; Wholesale and Retail Trade:16.97% and Others:11.97%. Sectoral Distribution of GDP at Constant Basic Prices (%) Q3, The install capacity of mn lines is made up of GSM, CDMA and fixed wired/wireless in proportion of 83.49%, 10.09% and 6.42% respectively Agriculture Manufacturing Finance & Insurance Others Crude Petroleum & Natural Gas Telecommunication & Post Wholesale & Retail Trade 1.4 Telecommunications Industry The deregulation of the telecommunications sector over the last few years has been largely positive, giving rise to increased level of private sector participation; increased range of quality services available to users; effective reduction of costs of acquiring and using the services; increasing level playing field to service providers via the removal of bottlenecks hitherto created by the monopoly operator and creation of direct and indirect employment opportunities for skilled, semi-skilled and unskilled citizens. According to the Nigerian Communications Commission (NCC), The installed capacity in the industry as at October, 2009 stood at mn lines, an increase of 29.40% over the installed capacity of mn lines as at December 31, The installed capacity is made up of Mobile GSM, Mobile CDMA and Fixed Wired/Wireless in the proportion of 83.49%, 10.09% and 6.42%, respectively. There were mn active telephone lines, representing 49.30% of the installed capacity while there were mn unused capacity, representing 50.7% of the installed capacity as at October, The active lines were made up of mobile (GSM): 63.25mn representing 87.96%; mobile (CDMA): 7.29mn representing 10.14%; and fixed wireless 1.366mn representing 1.90%. A further analysis of the active lines in relation to the installed capacity shows that 51.94% of the GSM installed capacity is active, 49.53% of CDMA installed capacity is active while 14.59% of the fixed wired/wireless installed capacity is active. 14

15 The market share of the GSM operators in Nigeria as at September 2009 are: MTN Nigeria Communications Limited, 46.36%; Globacom Limited: 26.18%; Zain Limited (formerly CELTEL): 24.09%; EMTS Limited trading as Etisalat: 2.96%; and M-Tel Limited: 0.41%. The market share of the CDMA Mobile operators as at September 2009 are: Visafone Limited: 36.23%; Multilinks-Telcom: 26.03%; Starcomms Limited: 21.84% and Reliance Telecoms (Reltel):15.90%. Meanwhile, the market share of the first seven fixed wired/wireless operators as at September, 2009 are: Starcomms Limited: 69.85%; Reliance Telecoms (Reltel): 9.19%; NITEL: 4.37%; Multilink-Telcom: 3.52%; O Net (Odua Telecom): 2.63%; 21st Century: 2.34%% and Intercellular: 2.04%, while other operators accounted for 6.05% of the market share. Market Share of CDMA Mobile Operators in Nigeria as at Sept (%) Market Share of GSM Operators in Nigeria as at Sept (%) Visafone Multilinks Starcomms Reltel MTN GLOBACOM ZAIN ETISALAT M-TEL Market Share of Fixed Wired/Wireless Operators in Nigeria as at Sept % 9.19% A review of the telecommunication market as at September, 2009 shows that MTN Nigeria Communications Limited, had the highest subscribers amongst the GSM operators, Visafone had the highest subscribers amongst the CDMA Mobile operators; while Starcomms had the highest subscribers amongst the Fixed Wired/ Wireless operators. 6.05% 2.04% 2.34% 4.37% 3.52% 2.63% Starcomms Reltel NITEL Multilinks O'Net 21st Century Intercellular Others Teledensity which measures the proportion of telephone lines in relation to the population in the country, stood at 51.36% at October 2009, up from 45.93% as at December, The graph below shows the teledensity and was calculated based on a population estimate of 126million people up till December 2005; from December 2006, teledensity was based on a population estimate of 140million. Also, teledensity up to 2006 was based on number of collected lines, while teledensity from December 2007 was based on active subscribers. 15

16 (%) 60 Teledensity in Nigeria(2001-Oct. 2009) Q Q Q Oct At US$61.04/b oil price is 35.64% higher than the FGN benchmark of US$45/b for 2009 fiscal year 1.5 Crude Oil The Monthly Oil Market Report of the Organization of the Petroleum Exporting Countries (OPEC), December 2009 edition attributes the increase in the crude oil prices in the last months in 2009 to the expectations of economic growth in the year 2009 and the positive impact on demand, as well as US Dollar depreciation against other major currencies. The report noted that while 2009 will go on record for large parts of the globe as the worst year since the Great Depression, a meltdown in the world financial system has been successfully evaded through unprecedented and concerted global efforts. It noted that 2009 would close on a positive note, with most countries in the Organization for Economic Cooperation & Development (OECD) emerging from recession by Q and stronger than expected growth observed in emerging markets. OPEC noted that as a result of the financial crisis, 100 One Year Daily Oil Basket Price 2009 was a 80 difficult year for 60 oil demand, following the 40 sharp decline 20 seen in the 0 previous years. OECD demand contracted by 1.8mb/d and non-oecd oil demand fell to one third of its previous growth, increasing by only 0.4mb/d. Consequently, world oil demand decline by 1.4mb/d in 2009; down from an initial projection of positive growth of 0.9mb/d. OPEC expects a synchronized global upturn in the world economy in It said the debate is now focusing on the strength of the recovery and whether the remaining substantial obstacles to a smooth recovery will imply a bumpy ride ahead or even a temporary set back in growth as exit policies take hold and economies have to cope with less government support. 16

17 notes that there has not been much accretion to the external reserves despite the increase in the price of oil in the international market and improved output in Nigeria OPEC added that following two years of sharp declines, world oil demand is forecast to return to a growth of 0.8md/d in The contraction in OECD demand is expected to narrow to 0.13mb/d not only from the recovery in Europe and the Pacific, but also from expected growth in the US economy. Given the expected recovery in the US growth of the US economic recovery, the bulk of the country s oil demand is expected to come in the second half of Non-OECD countries will contribute 0.9mb/d of total world demand growth, with China and Middle East accounting for almost half of the increase. However, the report noted that there is a high degree of uncertainty in the forecast for world oil demand in Looking at the performance of oil in 2009, the OPEC Reference Basket attained a high of US$77.88/b and a low of US$38.14/b in 2009, compared to a high of US$140.73/b and a low of US$33.36/b in The average price of the OPEC oil reference basket in 2009 was US$61.04/b lower than the average of US$94.48/b recorded in At US$61.04/b oil price is 35.64% higher than the FGN budget benchmark of US$45/b for 2009 fiscal year. Meanwhile, the OPEC reference basket as at Thursday, January 21, 2009 stood at US$74.54/b. had noted the improvement in International Oil data in its Q2, 2009 outlook and expected an upward trend in oil price for the remaining part of External Reserves According to the CBN Nigeria s external reserves position as at December 31, 2009 stood at US$42.41bn, representing a drop of 19.98%, compared to US$53bn as at December 31, Notwithstanding the decline in the level of external reserves as at end-december 2009 the CBN said it was satisfied that the level of reserves remained robust and significantly higher than initially projected at the beginning of the year It added that if the elevated price of crude oil in the international market in recent months remained, then, given improvement in the level of output with peace in the Niger Delta, there is likely to be an improvement in the level of foreign reserves. It added that a strong reserve position enhances the CBN s ability to maintain exchange rate stability and protect the currency from speculative attack. The CBN had earlier stated that the decline in reserves is likely to moderate in the last two quarters of 2009 owing to the expected rise in international crude oil demand arising from reports of improvement in the recovery prospects in the US and other developed countries and in the relatively favourable outlook for growth in some important emerging economies. notes that there has not been much accretion to the external reserves despite the increase in the price of oil in the international market and the improvement in oil output due to the relative peace in the Niger Delta. We are of the opinion that the CBN may have limited the amount of foreign earnings that go to the external reserves in order to meet the growing demand for foreign exchange in Nigeria. 17

18 US$bn External Reserves ( ) Health and Social welfare accounts for the highest share of the total external debt as at September External Debt Available information from the Debt Management Office (DMO) shows that the total external debt stock as at September 30, 2009 stood at US$3,863.92mn. This represents an increase of 3.86% over US$3,720.36mn as at December 31, The current position is also higher than the position as at June 30, 2009 which stood at US$3,719.24mn. The breakdown of the debt showed that 88% was owed to Multilateral (which includes World Bank Group, International Fund for Agricultural Development (IFAD), African Development Bank Group International Development Bank (IDB) and Economic Development Fund (EDF). The balance of 12% was owed to Non-Paris Group of creditors Looking at the external debt by economic sector, Health & Social Welfare accounted for the largest share of US$643.31mn: representing 16.65% of the total. This is closely followed by Energy (Electricity): US$638.40mn representing 16.52% of the total, followed by Agriculture: US$560.39mn representing 14.50% of the total. The DMO asserted that the slight increase in the current debt stock compared to that of June 30, 2009 is as a result of additional disbursements on International Development Association (IDA), African Development Fund (ADF) and IFAD loans. Meanwhile, the National Assembly had cautioned the Federal Government against contracting any new external loan as it seems there is no improvement in physical infrastructure to show for the loan. In Q3, 2009 the actual external debt service payments amounted to US$143.23mn. The breakdown of the payment are: Principal: US$114.56mn representing 80%; Interest/Service Fee: US$27.94mn representing 19.5%; Deferred Principal: US$0.09mn representing 0.1%; 5.35% External Debt By Economic Sector as at Sept % 5.30% 22.58% 16.65% 14.50% 16.52% Deferred Interest US$0.02mn representing 0.0%; Penalty (Late) Interest nil; Commitment Charge:US$0.88mn representing 0.6% and Other Charges: nil while Nigerian receive a waiver of US$0.26mn. 8.53% Agriculture Education & Training Energy-Electricity Health & Social Welfare Road Transport Scientific & Tech. Equip Water Supply Others 18

19 External Debt By Economic Sector as at Sept Q3 Actual External Debt Service Payment 2009 in US$mn 22.58% 14.50% 8.53% 3.8% 10.56% 16.52% 47.7% 48.5% 5.35% 5.30% 16.65% Agriculture Energy-Electricity Road Transport Water Supply Education & Training Health & Social Welfare Scientific & Tech. Equip Others Multilateral Non Paris Commercial Non Paris Bilateral Table 3: External Debt Oustanding by Economic Sector (September 30, 2009) US$mn Economic Sector Amount % of Total Economic Sector Amount Outstanding % of Total Outstanding Agriculture Irrigation & Related Act Air Transport Manufacturing Exclusive Textile Education & Training Monetary Policy Energy - Electricity Multisector Energy - Gas Other Environment Rail Transport General Road Transport Ground Transport Rural Development Health & Social Scietific & Tech Equip Welfare Housing & Urban Telecommunications Development Industrial Water Supply Development Investment TOTAL 3, Domestic Debt As at September 2009, DMO put the country s domestic debt stock at N3,058.19bn, up 31.82% from N2,320bn as at December 31, 2008 and up from N2,812.79bn as at June The breakdown of the total debt stock shows that the FGN Bonds accounted for N1,848.99bn representing 60.46%; Nigerian Treasury Bills (NTBs) accounted for N753.58bn, representing 24.64%, Treasury Bonds(TBs) accounted for N392.07bn, representing 12.82%; Promissory Note (PN) was introduced in September 2009 and it accounted for N63.06bn, representing 2.06% and Development Stocks (DSs) accounted for N0.52bn representing 0.02%. 19

20 The DMO altered the structure of the domestic debt in 2009 to make government pay less interest The structure of the domestic debt as at December 2008 shows that FGN Bonds, NTBs, TBs, and DSs accounted for 62.30%, 20.34%, 17.34%and 0.02% respectively. We observed that the proportion of the FGN Bond in total domestic bonds in 2009 dropped compared to the 2008 relative value, while the proportion of NTBs in 2009 increased than the relative value in views this development as a deliberate action by the DMO on behalf of the FGN to reduce its interest burden as it was more expensive to service FGN Bonds than NTBs in In Q3 2009, the domestic debt service payments including refinancing were N194.34bn. Of the N194.34bn paid in Q3 2009, N124.29bn representing 63.95% of the amount paid represents the principal while N70.06bn representing 36.05% of the total is the total interest within the period. Domestic Debt Outstandinding by Instrument Type as at Sept % 24.64% 12.82% 0.02% 2.06% The huge liquidity in the financial system and rising global commodity price, in the favour of weak consumer output in Nigeria led to the rising inflation rate FGN Bond TBs Treasury Bonds Development Stock Promissory Notes 1.9 Inflation Rate The latest Consumer Price Index (CPI) for the month of December 2009, released by the National Bureau of Statistics (NBS), showed that inflation rate (year-on-year) in Nigeria stood at 12.00%, a decrease of 3.1% from 15.10% as at December 31, 2008 and a decrease of 0.4% from 12.40% recorded in November Inflation in Nigeria decreased continuously between February and September 2009 to 10.4% close to the target of single digit figure. Meanwhile, the hope of a single digit figure was dashed as the rate of inflation maintained a consistent upward trend from October. The huge liquidity in the financial system coming from the quantitative easing of the CBN, fiscal expansion and rising global commodity prices in the favour of weak consumer output in Nigeria led to the rising inflation rate. According to NBS, the Composite Consumer Price Index (CCPI) rose by 0.37% to points in the month of December 2009, compared to 0.66% observed in November The percentage change in the average CPI for the twelve-month period ended December 2009 over the average of the CPI for the previous twelve-month period was 12.4%.This was slightly lower than what was recorded by making similar comparison in November, 2009 and December Meanwhile, core Inflation (that is all items less farm produce and energy) stood at 9.30% year-on-year, representing 2.19% decrease from 11.49% recorded in November

21 Core inflation (ie all items less farm produce and energy) stood at 9.30% in December Inflation Movement (January, 2008-Dec. 2009) Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Year-on-year change (%) 12-month average change (%) Since the beginning of the year 2009, inflation rate recorded the lowest level of 10.40% in September, while the highest figure of 14.60% was recorded in February Meanwhile, earlier released a forecast inflation rate of between 9.5% and 11.5% to end the year The huge subscription recorded in the FGN Bonds was on account of flight to safety by investor 2.0 Financial Market 2.1 Bond Market Investors apathy in the stock market and the quest for safety of investments funds in 2009 was reflected in the huge subscription recorded on the FGN Bonds in had reported earlier that the huge subscription recorded in the Bonds was on account of flight to safety by investors as investors were trading returns for safety. Consequently the prices of the Bond maintained upward trend most of the time, causing it to trade at premium to its par price and low yields. As at the end of 2009, the DMO, on behalf of the Federal Government of Nigeria (FGN), offered a total of N614.44bn worth of FGN Bonds, 19.31% higher than the N515bn offered in 2008.The total subscription in 2009 was N1,249.16bn, up by 46.08% from N855.14bn subscribed in The subscription level in 2009 at % was 37.25% higher than the subscription level of % recorded in 2008.The total amount of FGN Bond sold in 2009 was N711.50bn, up by 43.98% from N494.18bn sold in The DMO is working to renew the interest of retail investors in FGN Bonds, as the current shareholding is skewed in favour of institutional investors. Also, the various regulatory bodies in the financial market are working to encourage the development of the corporate bond market as an alternative source of funding to equities and bank loans. maintains that the Federal Government should help the development of the corporate bond market by making investment in the instrument tax free in order to encourage issuance of bonds at competitive coupon rates. The DMO offered 3-year, 5-year, 10-year and 20-year FGN Bonds during the period under review the same tenors it offered in Most of the bonds offered in Q4, 2009 were new issues. It is good to note that the 20-year FGN bond auctions continued to receive huge subscription level during the period with an average subscription level of %. The longer- 21

22 tenor bond introduced in 2008 was part of the efforts of the government to restructure the country s domestic debt portfolio to longer tenor. The DMO is working to renew the interests of retail investors in the FGN Bond as the current shareholding is skewed in favour of institutional investors Comparing tenor to tenor, the 3-year FGN Bonds issued in 2009 received an average higher coupon than the 3-year bonds issued in All 3-year FGN Bonds offered up to April, 2009 were re-openings and they carried a coupon rate of 9.92%, while the new issue in May carried a coupon rate of 10.50% up till December, 2009 auction. The highest coupon rate on 3-year FGN Bonds issued in 2009 was 10.50% while the lowest was 9.92%. A total of N230bn worth of FGN Bond was sold in 2009, higher by 2.22% from N225bn sold in The Bond received higher subscription of % up from % in All the 5-year FGN Bonds issued in 2009 were re-openings and on the average received higher coupon rates than the 5-year bonds issued in The coupon rate on all the 5-year FGN Bonds issued in 2009 was 10.50%. This rate was same as the highest coupon rate of 10.50% on the 5-year FGN Bond issued in A total of N190bn worth of 5-year FGN Bond was sold in 2009, up by 18.75% from N160bn in In October 2009, the 10-year FGN bond was re-introduced for the first time, replacing the earlier 5 year Bonds. It was offered in the two auctions that took place in the fourth quarter, this was unlike the several appearances the 10-year Bond had in A coupon rate of 7% was maintained on the two auctions lower than 10.70% maintained in A total of N30bn worth of10-year FGN was offered, lower by 75% from N120bn offered in The bond was % subscribed to stand at N66.32bn, while a total of N30bn 10-year FGN bond was eventually sold. A coupon rate of 15% was maintained on the 20-year FGN Bond issued from January to April There was new issue in May and a coupon rate of 12.49% was maintained on the issue until November where there was a new issue, which carried a coupon rate of 8.50%. A total of N185.44bn was offered in 2009, while subscription stood at N458bn, an increase of % over what was offered; however, a total of N220bn worth of 20-year FGN bond was eventually sold. The total FGN Bonds issued in 2009 compared with 2008 is presented on the Table 4 & 5 below. 22

23 Table 4: 2009 FGN BONDS ISSUE Date Issued Tenor (Years) Amount Offered (N bn) Total Subscription (N bn) Subscription Level (%) Amount Allotted (N bn) Coupon Rate (%) 28 January January January February February February March March March April April April May May May June June June July July August August August Sept Sept Sept Oct Oct Oct Nov Nov Nov TOTAL ,

24 Table 5: 2008 FGN BONDS ISSUE Date Issued Tenor (Years) Amount Offered (N bn) Total Subscription (N bn) Subscription Level (%) Amount Allotted (N bn) Coupon Rate (%) 25 January January February February March March April May May June June July July August August Sept Sept Oct Oct Nov Nov Nov TOTAL

25 15-Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-09 Thousands Quoted banks declared all time record and unimaginable losses & provisions in 2009 The NSE ASI dropped by 33.78% in 2009, lower than the loss of 45.77% recorded in 2008; while the equities investors lost about N1.97trn in The Equities Market The turbulent global financial and economic crisis that started late 2007 continued to impact the performance of the equities market in This is in addition to the Nigerian banks specific crisis that led to all time record and unimaginable losses and provisions that the quoted banks declared. The combination of these factors led to investors loss of confidence and apathy in the market. Consequently, highly capitalized stocks dropped values significantly. Also, rate of unemployment increased as companies affected by the hostile economic environment had to employ cost-cutting measure to remain competitive, which had a negative multiplier effect on investors sentiments and consumption patterns. Also, as observed in our Economic & Financial Market: Outlook & Review for 2009, a significant portion of the funds that left the market for the primary market (Private Placement) are still locked-in, as many of the issues have not yet applied to the NSE for listing. Available data from the NSE reveals that inflow by foreign investors during 2009 was in excess of N241.74bn, representing 31.32% of the aggregate market turnover, an increase, when compared with the N153.46bn recorded in The NSE added that following modest recoveries in their home countries, some foreign investors returned to the Nigerian, while new investors sought opportunities, considering the key attributes of high returns, liquidity and safety of investments. The Nigeria Stock Exchange All Share Index (NSE ASI) closed the year 2009 at 20, points, down from 31, points at the end of year 2008, representing a loss of 33.78%, marginally lower than the loss of 45.77% recorded in In a similar development, the market capitalization recorded a loss of 28.29% in 2009 to close at N4,989.39bn (about US$33.69mn). This was against the loss of 31.66% recorded in the Index Movement in 2009 preceding year to close at N6.96trn. The equities investors lost about N1.97trn in value of investment in Looking at the quarterly performance of the 6.00 equities market in 2009, it 1.00 recorded a negative growth in Q1, 2009, as it lost 36.88% to close at 19, points. However, in Q the NSE All-Share Index (NSE-ASI) recorded a positive return of 35.31% to close at 26, points. In Q3, 2009, the NSE ASI recorded a loss of 17.86% to close at 22,065 points, while it closed at 20, points with a loss of 5.61% in Q4, The NSE ASI recorded its highest and all time high of 66, points on March 05, 2008 after which the Index trended downwards to end the year. Some of the factors responsible for the bearish trend recorded during the year 2009 are: 25

26 Billions Billions (N) Return % The NSE recorded average return of 21.82% and 17.23%in Naira and US Dollar terms between A switch of portfolio in favour of fixed income assets. 2 Massive sale of securities used as collateral for margin loans 3 The continued impact of the financial and economic crisis which started in the US and spread across the globe. 4 Investors apathy towards investment in the equities, which further depressed the market. 5 Loss of confidence in the market following the audit of CBN in the banks 6 High losses and provisions recorded by banks. A cursory look at the yearly return of the NSE ASI, between 2000 and 2009 shows that the NSE recorded its highest loss of 45.77% in 2008 followed by the loss of 33.78% in The NSE recorded an average return of 21.82% in Naira term and 17.23% in US$ term between 2000 and This is a good return especially when compared with the risk free rate of about 8.50% as at December, 2009 and the inflation rate of 12.40% as at November, Table 6: Yearly Return on NSE ASI ( ) Year Return (N %) Return (US$ %) (4.76) (45.77) (58.14) 2009 (33.78) (46.62) Yearly Return on the All Share Index ( ) In terms of trading activities for year 2009, a total of bn shares worth N677.11bn traded in 1.72mn deals. This is against bn shares worth a total of N2.33trn traded in 3.49mn deals in The average value of shares traded during the year is N2.73bn, while the average volume of shares was mn in an average of 6,922 deals. VALUE VOLUME 2,451 2,101 1,751 1,401 1,

27 FSH Banking Index recorded the highest risk adjusted return while FSDH Insurance recorded the highest volatility Looking at the sectoral performance of the FSDH Indices in 2009, FSDH Manufacturing & Allied Index was the only index that recorded appreciation while other FSDH sectoral indices recorded losses, with the FSDH NSE ASI Vs FSDH Sectoral Indicies ( ) Insurance index 200.0% recording the highest loss of 62.34%, while the FSDH Banking index recorded the lowest loss 150.0% 100.0% of 42.78%. The FSDH Banking Index recorded 50.0% the highest average return in the 5-year 0.0% period, while the FSDH -50.0% Petroleum Marketing Index recorded the lowest. Looking at the risk % NSE ASI Banking Insurance Manufacturing Petroleum (measured by standard deviation) associated with the sectoral indices, Insurance sector recorded the highest risk followed by the banking sector. In spite of the high risk associated with the banking index, it recorded the highest return when adjusted for risk using Sharpe Ratio. The negative Sharpe Ratio for the manufacturing and petroleum marketing indices indicates that they performed lower than a risk less asset. The risk less assets used here is the 20-year FGN Bond with coupon rate of 8.5%. Table 7: 9months Performance of the NSE and FSDH Indices ( ) Index year Average Standard Deviation Sharpe Ratio NSE ASI (33.78) (45.8) (0.03) BANKING (42.78) (57.10) INSURANCE (62.34) (53.90) (14.00) MANUFACTURING & ALLIED (43.70) (0.11) PETROLEUM MARKETING (61.65) (7.00) (13.94) (5.37) (0.05) FSDH Manufacturing & Allied Index Up 16.20% (a gain of 3.36% in US$) The relative impressive performance of some manufacturing stocks, especially the highly capitalized stocks in the face of the global economic and financial meltdown was responsible for the appreciation recorded in the FSDH Manufacturing & Allied Index. Meanwhile, a number of the manufacturing companies that imported raw materials or had credit lines exposure from foreign banks, which were not hedged against exchange rate movement, recorded increased operating and financing costs, and in some cases led to huge losses. Another important factor that limited the extent of the price decline in this sector is the fact that most of the products of the companies in this sector have low elasticity of demand to economic factors; such as income and price. Therefore, the revenues were less affected by the economic crisis. However, we note the possible negative impact of the current job cuts in the financial sector on aggregate purchasing power in the long run. 27

28 We note the possible negative impact of the current job cuts in the financial sector on aggregate purchasing power FSDH Manufacturing & Allied Index was the only sectoral Index that recorded appreciation during the year The FSDH Manufacturing & Allied Index was the only index among the FSDH Indices that appreciated as at the end of the period under review. The index recorded an appreciation of 16.20% (3.36% gain in US$) to close at points FSDH Mfg & Allied Index Vs NSE ASI- Rebased following the gains recorded in the share prices of Benue Cement (Up % to N43.01), PZ Cussons (Up % to N25.00), Unilever (Up 78.23% to N18.50), GlaxoSmithkline (Up 52.59% to N22.40), 0.00 Nigerian Breweries (Up 29.79% to N29.79), Guinness (Up 28.14% to Mfg. & Allied Index NSE ASI Rebased N127.50), Nestle (Up 25.10% to N239.50), Lafarge WAPCO (Up 17.65% to N30.00), Flour Mills (Up 12.54% to N36.00) and UACN (Up 6.21% to N36.75). There were depreciation in the share prices of R.T. Briscoe (Down 64.04% to N6.15), Julius Berger (Down 53.62% to N25.79), Presco (Down 44.61% to N5.60), Nigerian Bottling Company (Down 39.11% to N21.42), NAHCO (Down 38.05% to N7.18), Ashakacem (Down 32.10% to N11.55), Okomu Oil (Down 26.99% to N22.75), UPDC (Down 26.01% to N19.86), 7-Up Bottling (Down 23.85% to N29.40), Dangote Flour (Down 22.12% to N9.93) and Dangote Sugar Refinery (Down 2.58% to N15.10). FSDH Insurance Index Down by 62.34% (a loss of 75.18% in US$) The insurance sub-sector received its own hit from the FSDH Insurance Index Vs NSE ASI global economic and Rebased financial crisis. Rising unemployment and declining fortunes of large companies reduced the patronage of insurance products. In addition, the crash in stock and property markets resulted in huge provisions and investment loss for the insurance Insurance Index NSE ASI Rebased companies. Consequently, insurance companies share prices were downgraded to reflect the impact of these dwindling fortunes. It is also worth mentioning that insurance penetration in Nigeria is very low. There are a number of policies which can promote insurance business in Nigeria that are not currently implemented. We recommend that Nigerian Insurers Association (NIA) should work closely with National Insurance Commission (NAICOM) to ensure compliance with existing laws in the land that can boost insurance business. 28

29 Operators should be more involved in the development of products for the industry s customers. They should also be more aggressive in distribution of their products. NIA should work closely with NAICOM to ensure compliance with existing laws in the land that can boost insurance business Currently, banks are hesitant to extend credits to oil marketers, due to the fact that some of the banking woes came from the petroleum marketing companies With a depreciation of 62.34% (75.18% loss in US$) in contrast to a depreciation of 53.86% in 2008, the FSDH Insurance Index closed the year at points, down from points in the preceding year as a result of the losses recorded in the share prices of Equity Assurance (Down 90.12% to N0.50), Law Union & Rock (Down 82.71% to N0.51), Intercontinental WAPIC (Down 70.98% to N1.10), Niger Insurance (Down 70.15% to N0.97), International Energy (Down 64.94% to N1.49), Cornerstone Insurance (Down 67.50% to N0.52), Lasaco Assurance (Down 66.67% to N0.59), N.E.M Insurance (Down 64.14% to N0.52), Standard Alliance Insurance (Down 63.09% to N0.55), Mutual Benefit Assurance (Down 56.76% to N0.64), AIICO Insurance (Down 55.87% to N0.79), Continental Re-insurance (Down 36.11% to N1.15), Prestige Assurance (Down 36% to N4.00) and Linkage Assurance (Down 26.47% to N0.50). FSDH Petroleum Marketing Index Dropped by 61.65% (a loss of 74.49% in US$) The depreciation in the Petroleum Marketing Index was not unexpected as a FSDH Petroleum Mkting Index Vs NSE ASI Rebased result of the massive drop in the price of oil at the international oil market. A number of petroleum marketing companies recorded huge losses from the sharp drop in the price of unregulated petroleum product (diesel). In addition, 0.00 there was a delay in the payment of the FGN subsidy to the oil marketers, which Pet. Mktng. Index NSE ASI Rebased increased the financing costs to these operators. Currently, banks are hesitant to extend credit to oil marketers, due to the fact that some of the banking woes came from the petroleum marketing companies. The implication of the cut back in credit is that oil marketers are sourcing funds at higher rates and this is reducing the bottom line; the effect of which is passed to the share price. However, we strongly believe that full deregulation of the downstream sector is the principal solution to the problem in the sector. The FSDH Petroleum Marketing Index recorded a depreciation of 61.65% (74.49% loss in US$) to close at points. The loss in the index was due to losses recorded in the share prices of African Petroleum (Down 88.60% to N33.51), Mobil Oil (Down 70.17% to N98.80), Conoil (Down 64.76% to N27.63), Chevron (Down 56.36% to N69.79) and TOTAL (Down % to N149.00). However, there was appreciation in the share price of Oando (Up 17.78% to N93.99). FSDH Banking Index Dropped by 42.78% (a loss of 55.62% in US$) The excessive exposure of banks to oil & gas industry and the stock market through margin lending and lack of adherence to both good risk management framework and corporate governance, 29

30 As at the last count, about N2trn worth of provisions had been made The major problem for the AMC would be the transfer pricing of the toxic assets which the recent CBN/NDIC audit exposed in the banking industry, led to declaration of losses in the banking industry. The non-disclosure of these risk assets created a lot of uncertainty in the financial market; that some operators over reacted to in some cases. Following clear evidence of share price manipulation instituted by some banks, there was an FSDH Banking Index Vs NSE ASI Rebased Banking Index NSE ASI Rebased uncontrollable heat in the system. As at the last count, about N2trn worth of provisions had been made. Some of the banks are of the opinion that they will recover part of the provisions in the 2010 financial year. doubts the ability of the banks to recover up to 10% of the provisions. But we are of the opinion that the clean-up of the banks financials and the injection of N620bn by the CBN into the troubled banks should enable them to start business on a clean slate. But strict risk management framework and good corporate governance should be adhered to strictly in order to move the industry forward. The sack of some bank CEOs also introduced another dimension to the crisis. The effect of these factors led to sharp drop in the share prices of banking stocks which caused the FSDH Banking Index to fall by 42.78%. Other stocks have now replaced a number of banking stocks which used to appear as part of the 10 most capitalized stocks. As at December 31, 2009, the banking sub-sector of the NSE account for about 43.38% of the market capitalization, compared to 52.22% in The establishment of the Asset Management Company (AMC) with a view of buying up the toxic assets in the banking industry is at an advanced stage. We however believe that the major problem for the AMC would be the transfer price. This would limit the impact of the proposed company on the capital market and on the equities market in particular. At the moment there are indications that some foreign banks are showing interest in acquiring substantial stakes in the Nigerian banks especially the banks that were rescued by the CBN. The FSDH Banking Index depreciated by 42.78% (55.62% loss in US$) to close at points, in contrast to an depreciation of 57.11% in Depreciation in the share prices of Intercontinental Bank (Down 87.56% to N1.61), Bank PHB (Down 87.11% to N1.32), Oceanic Bank (Down 85.98% to N1.69), Afribank (Down 73.47% to N2.55), Union Bank (Down 60.53% to N6.00), Skye Bank (Down 36.09% to N5.49), First Bank (Down 33.44% to N14.05), Stanbic IBTC (Down 31.47% to N7.47), UBA (Down 17.87% to N10.80) and Zenith Bank (Down 7.27% to N13.60). However, there were appreciation in the share prices of GT Bank (Up 50.19% to N15.50), FCMB (Up 19.33% to N7.16) and Access Bank (Up 7.50% to N7.60). Currently GT Bank is the most profitable bank per share in the Nigerian banking industry. 30

31 The FSDH Ethical Index appreciated marginally by 1.05% (11.79% loss in US$) to close at points. The FSDH 20-Nigerian Equity Growth Index (NEGI) depreciated by 33.63% (46.47% loss in US$) to close at points, while the FSDH 40-Nigerian Equity Value Index (NEVI) lost 28.28% (41.12% loss in US$) of its value to close at points. A cursory look at the sectoral contribution to market capitalization as at December 31, 2009 shows that the Banking sector had the highest contribution to the market capitalization with 43.38% as shown on Table 8 below. Banking Breweries Sectoral Contribution to the Market Capitalization Dec Food/Bevergaes & Tobacco Building Materials Petroleum Marketing Conglomerates Insurance The Foreign Listings Information Communication Construction 43.28% 12.38% 5.70% 1.26% 12.28% 6.20% 5.26% 4.90% 3.90% 3.40% 1.34% Table 8: Sectoral Contribution to the Market Cap. as at December 31, 2009 Sector Contribution % Banking Breweries Food/ Beverages & Tobacco Building Materials 6.20 Petroleum (Marketing) 5.26 Conglomerates 4.90 Insurance 3.90 The Foreign Listings 3.40 Information Communication 1.34 Construction 1.26 Others 5.70 The top gainer was CCNN while the top loser was Capital Oil & Gas Table 9 FSDH Sectoral Indices Vs NSE ASI: 2009 Indices Return in Naira (%) Return in Dollar (%) FSDH Banking (42.78) (55.62) FSDH Insurance (62.34) (75.18) FSDH Manufacturing & Allied FSDH Petroleum Marketing (61.65) (74.49) Other Top Gainers and Losers Other top gainers during the year were: Cement Company of Northern Nigeria (Up % to N12.46), Northern Nigeria Flour (Up 54.31% to N21.85), Vitafoam (Up 21.51% to N5.65) and Union Ventures & Petroleum (Up 5% to N0.63); while other top losers were: Capital Oil (Down 95.73% to N0.59), Wema Bank (Down 93.49% to N0.93), First Aluminum (Down 88.94% to N0.50), Finbank (Down 88.09% to N0.53) and Ikeja Hotel (Down 87.82% to N0.87). 31

32 A cursory look at some of the World Stock market performance in 2009 compared with Nigeria shows that the NSE was the second least performing market among the selected markets. Also, the GSE All Share Index and Cairo SE Gen closed the period under review in a positive note, while other selected markets closed the year on a positive note. Table 10: Some Selected Stock Market Indices as at December 31, 2009 North / Latin America YTD Change (%) YTD Change (%) Africa Dow Jones Industrial Average NSE All- Share index (33.78) S& P 500 Index JSE All-Share Index (South Africa) NASDAQ Composite GSE All- Share Index (Ghana) (46.58) Brazil Stock Market Index Cairo SE Gen (Egypt) (10.97) Swiss Market Index NIKKEI 225 Index (Japan) FSTE 100 Index (UK) BSE 30 Index (India) CAC 40 Index (France) Hang Seng Index (Hong Kong) DAX Index (Germany) SMSI Index (Spain) Some Selected Stock Markets Performance, December 31, 2009 Hang Seng Index (Hong Kong) BSE 30 Index (India) NIKKEI 225 Index (Japan) Cairo SE Gen (Egypt) GSE All-Share Index (Ghana) JSE All-Share Index (S/A) NSE All-Share Index SMSI Index (Spain) DAX Index (Germany) CAC 40 Index (France) FTSE 100 Index (UK) Swiss Market Index Brazil Stock Market Index NASDAQ Composite S&P 500 Index Dow Jones Industrial Average

33 New Listing African Alliance Insurance Plc Afromedia Plc Beco Petroleum Products Plc Courteville Investment Plc Crusader Nigeria Plc E-Tranzact International Plc Guaranty Trust Assurance Plc Honeywell Flour Mills Plc IHS Nigeria Plc MTECH Communications Plc Pinnacle Point Group Plc Portland Paints & Products Nigeria Plc Resort Savings & Loans Plc Delisting BCN Plc Christlieb Plc Epic Dynamics Plc Ferdinand Oil Mills Plc Footwear Accessories Manufacturing & Distribution Plc Liz Olofin & Company Plc Oluwa Glass Company Plc Universal Trust Bank Plc. Supplementary Listing Afribank Nigeria Plc African Petroleum Plc AIICO Insurance Plc Benue Cement Company Plc Capital Oil Plc Custodian & Allied Insurance Plc Crusader (Nig) Plc Ecobank Transnational Incorporated Plc Finbank Plc Finbank Plc First Aluminum Nigeria Plc GT Bank Plc Ikeja Hotel Plc Intercontinental Bank Plc Longman Nigeria Plc National Sports Lottery Plc Oando Plc R.T. Briscoe Plc Royal Exchange Plc Union Diagnostics & Clinical Services Plc University Press Plc Technical Suspension Cadbury Nigeria Plc Eterna Oil Plc 33

34 Also, the share prices of Cappa & D Alberto Plc, Oando Plc, Bank PHB Plc, Spring Bank Plc and Stokvis Nigeria Plc were placed on technical suspension. While, the name of Dunlop Nigeria Plc was changed to DN Tyre & Rubber Plc Memorandum Listing Lotus Capital Halal Investment Fund CCNN recorded the highest performance due to capital appreciation and dividend payment 2.3 Return Analysis Our return analysis for the entire market in 2009 showed that only nineteen (19) stocks recorded gains to end 2009, most of which was due to capital appreciation, cash dividend and bonus issues. The best performing stock was Cement Company of Northern Nigeria Plc (CCNN) leading with a return of %. CCNN achieved this return due to the capital appreciation recorded in its share price from N5.33 as at December 31, 2008 to N12.46 as at December 31, The appreciation was driven by the release of good quarterly results and benefits, which shows an improvement over the previous year. Others include Benue Cement Company a return of %, PZ Cussons %, GT Bank 97.43% and Unilever 84.78%. On the other hand, Capital Oil led the losers chart with a total loss of 95.73% as a result of decline in its share price from N13.83 to N0.59. Others on the losers list are: Wema Bank 93.49%, Equity Assurance 90.12%, First Alumium 88.94% and FinBank 88.09%. 2.4 Money Market The money market ended the year on a relatively liquid note in contrast to the tightness that dominated the first half of 2009 and the year This was due to quantitative easing strategies employed by the CBN to ensure stability in the Nigerian financial system and the monthly allocations from the Federation Account Allocation Committee (FAAC) during the period under review. Consequently, inter-bank rates dropped in response to the relative liquidity that dominated the market. In a bid to abate the effect of the current global economic and financial crises, the CBN conducted a forensic examination on the Nigerian banks to determine the health of the banks in light of the global economic and financial crises. Following the conclusion of the examination, 9 banks were found to have liquidity problem and inadequate capital to sustain their operations. Consequently, CBN injected about N620bn into the troubled banks to ensure that they continue on a going concern basis. The status of the Nigerian banks after the CBN and the Nigeria Deposit Insurance Corporation (NDIC) examinations is shown on the table 11 below: 34

35 CBN injected N620bn into the troubled banks to ensure that they continue on a going concern basis Table 11: Nigerian Banks Status after CBN-NDIC Examination Bank Status Bank Status Access Bank Cleared United Bank for Africa Cleared CitiBank Nigeria Cleared Zenith Bank Cleared Diamond Bank Cleared Unity Bank **** Ecobank Nigeria Cleared Afribank Bailed-out Fidelity Bank Cleared Bank PHB Bailed-out First Bank of Nigeria Cleared Equatorial Trust Bank Bailed-out First City Monument Bank Cleared Finbank Bailed-out Guaranty Trust Bank Cleared Intercontinental Bank Bailed-out Skye Bank Cleared Oceanic Bank Bailed-out Stanbic IBTC Bank Cleared Spring Bank Bailed-out Standard Chartered Bank Cleared Union Bank Bailed-out Sterling Bank Cleared Wema Bank Bailed-out ****Adjudged to have insufficient capital but not in grave situation because it has a healthy liquidity position. In order to chart a way forward for the financial market and boost confidence among stakeholders, the Monetary Policy Committee (MPC) of the CBN convened seven meetings in The following are the measures announced through the MPC communiqué during each of the meetings. MPC meeting of January 14, 2009: Measures: The reintroduction of the of the Retail Dutch Auction System (RDAS) Cash-backed foreign exchange purchase under RDAS Non-transferability of purchased funds in the inter-bank forex market Return of unutilized funds at purchase rate within 5 days Fortnight publication of purchases made on behalf of customers Interest earned on letters of credit established and for which settlement has not been effected will be repatriated to the CBN for repurchase at the bid rate at the time of purchase Foreign exchange Net Open Position (NOP) of banks reduced from 10% to 5% Commitment to Section 15(4), of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act of 1995, which guarantees unconditional transferability of funds in respect of loans, and portfolio and foreign direct investments into Nigeria. Meeting of February 09, 2009: Measures: MPR unchanged at 9.75% Open Market Operations (OMO) will be directed towards effective liquidity management Meeting with CEOs to address the re-pricing of existing facilities by banks as well as wide spread between lending and deposit rates Manage exchange rate within the band of +/-3% Difference between CBN buying and selling rates not more than 1%; while banks and BDCs will not be more than 1% and 2% respectively around CBN rate. Meeting of April 08, 2009: Measures: Reduction of MPR from 9.75% to 8% Reduction of liquidity ratio from 30% to 25% 35

36 Reduction of Cash Reserve Requirement (CRR) from 2% to 1% CBN to fully underwrite N200bn special agricultural fund and ensure implementation. Meeting of May 21, 2009: Measures: Synchronization of short-term instruments with DMO s issuance of FGN Bonds Fully liberalize forex market with the reintroduction of WDAS Increase in NOP for banks from 1% to 2.5% Non requirement of banks to return of unutilized funds at purchase rate within 5 days Removal of requirement that banks transact forex at 1% around CBN rate CBN to participate in the inter-bank forex market at prevailing rate RDAS transaction twice weekly Approval-In-Principle (AIP) granted to 50 non-bank Class A BDCs Government Agencies and Oil Companies have discretion to sell forex at the inter-bank or to CBN Meeting of July 07, 2009 first meeting of Sanusi Lamido as Governor of the CBN: Measures: MPR reduced from 8% to 6%. Introduce interest rate corridor of +/-200 basis points around MPR, with standing lending facility at 8% and rate on standing deposit facility at 4% Guarantee of inter-bank and Pension Fund Administration (PFAs) transactions on CBN s discretion Banks to publish their accounts with sufficient disclosure Moral suasion for banks to bring down the lending rates in line with economic realities WDAS to replace RDAS with a view to improving supplies of foreign exchange Meeting of September 01, 2009: Measures: Keep MPR unchanged at 6% Maintain interest rate corridor at +/-2% around MPR Approve-In-Principle the establishment of an Asset Purchase Facility Fund Meeting of November 03, 2009: Measures: Maintain MPR at 6%, the rate on standing lending facility will remain 2% above the MPR, while the rate on standing deposit facility 4% below the MPR Quantitative easing to bridge the gap estimate at about N500bn between the levels of current monetary aggregates and benchmark levels for 2009 Purchase of loans by banks under the AMC to be based on terms aimed at strengthening the balance sheet with a focus on asset quality. Temporary ban placed by the CBN on the use of Bankers Acceptances (BAs) and Commercial Papers (CPs) lifted. To waive the 1% general provision on non-performing loans of banks for the year ended December 31, The policy pronouncements of the MPC outlined above shaped the Nigerian financial landscape in

37 Meanwhile, the MPC held its first meeting in the year 2010 and the following measures were announced: Meeting of January 04-05, 2009: MPR unchanged at 6%, with asymmetric corridor of interest rate remaining at 2% above the MPR and 4% below the MPR CBN to extend the guarantee on all inter-bank transactions to December 31, 2010 MPC approved Monetary Programme for 2010/2011 and the Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal years 2010/2011. Available data from the Financial Market Dealers Association (FMDA) indicates that the Average Prime Lending rate to the economy stood at 18.67% in 2009, up from 17.43% in The average interest rate on savings account stood at 3.44% in 2009, marginally down from 3.50% in The average interest rate on Term Deposit (12 months) stood at 11.69% in 2009, up from 10.24% in In our opinion, at 15.23% spread, the gap between the average prime lending rate and the average savings rate is too wide and may not encourage capital formation to stimulate sustainable economic growth in the country. The operators continue to justify the wide spread because of the high cost of doing business in Nigeria occasioned by infrastructural deficiencies Interest Rates Interest Rates in Nigeria ( ) MPR TBILL 91 TBILL 182 Deposit Rate SAVINGS A/C 365 Days Prime Lending MPR The Injection of Funds into the money market was principally from FAAC and Quantitative easing strategies of the CBN A cursory look at the Nigerian Inter-Bank Offered Rate (NIBOR) showed that there was a general decline in interbank rates to end 2009 due to the monetary injections into the economy principally from FAAC and the quantitative easing strategies of the CBN. Looking at 7-day NIBOR for 2009, the rate closed lower at 6.92% from 14.79% as at the end of The lowest rate recorded in 2009 was 5.67% as against 9.12% in The highest rate recorded was 26.08% in 2009 up from 18.68% NIBOR Yield Curve as at Dec 31, 2008 & Dec 31, Day 30 Day 60 Day 90 Day 180 Day 365 Day 31-Dec Dec-08 37

38 Thousands Thousands Thousands The inter-bank market was awash with funds as most banks did not extend credits to the real sector in The highest rate in the 7-day NIBOR was recorded in first half of The rate was driven up as some of the bank that experienced liquidity crisis were borrowing at very high rates in order to attract funds. The lowest rate was recorded in last quarter of the year, due mainly to the fact that the inter-bank market was awash with funds as most banks did not extend credits to the real sector of the economy. The average rate for 2009 was 13.81%, while it was 12.61% in The average rate of 8.50% in Q4, 2009 is lower than the average rate of 14.08% recorded in Q3, A review of the 90-day NIBOR indicated that it closed 2009 at 15.29%, down from 16.71% as at the end of The lowest rate recorded in 2009 was 11.71% as against 12.28% in The highest rate was 25.69%, up from 18.88% in 2008, while the average rate recorded in 2009 was 17.50%, up from 14.71% recorded in The average rate of 15.45% for Q4, 2009 was lower than 17.41% recorded in Q3, At the primary market auctions for the government securities, CBN offered N250bn worth of 364-day NTB in 2009, higher by 28.21% from N195bn offered in At % level of subscription, N542bn worth of bids was subscribed in 2009, while N539.30bn, representing a subscription level of % in 2008 was recorded. A total of N250bn worth of 364-day NTB was sold, higher by 29.68% from N192.78bn sold in Day NTB 182-Day NTB AMOUNT AMOUNT AMOUNT Sold Issued Subscribed FY 2008 FY ,340 1, AMOUNT Issued AMOUNT Subscribed FY 2008 FY 2009 AMOUNT Sold A total of N526.91bn worth of 182-day NTB was offered and sold, down by 59.18% over N1,290.71bn offered in The level of subscription over the amount offered was % as N946.03bn worth of bid was received. Total sale in 2009 was down by 45.91% from N974.17bn sold in A total of N200.56bn worth of 182-day NTB was repaid into the system, leading to an outflow of N326.36bn in At the 91-day NTB auctions, a total of N333.07bn was offered, which represents an increase of 32.79% from N250.82bn offered in The level of subscription was %, as N621.67bn worth of bids was received, while AMOUNT Issued 91-Day NTB AMOUNT Subscribed FY 2008 FY 2009 AMOUNT Sold 38

39 Thousands N333.07bn was sold. A total of N287.52bn worth of bill was repaid leading to an outflow of N45.55bn in 2009 through 91-day NTB. The CBN said all banks were required to liquidate their obligations under EDW at maturity At the secondary segment of the market, the CBN introduced the Expanded Discount Window Operation (EDW) in 2009 to ease the liquidity crunch in the financial system as a result of the secondary impact of the global economic and financial crisis. At the Open Market Operations Repurchase (OMO Repo) & Expanded Discount Window (EDW), the CBN injected a total of N2,194.49bn into the system, while it withdrew a total of N2,285.35bn, representing a net withdrawal of N90.87bn from the system in We note that the CBN replaced the EDW operation and said it would not contract any new loan nor extend any maturing obligation. It further said all banks are required to liquidate their obligations under the EDW facility at maturity. The average discount rate on the 365-day NTB in 2009 was 5.01% while it was 9.19% in the corresponding period of the preceding year. The lowest and the highest rates in the period were 4.75% and 6.75% as against 7.65% and 10.49% recorded respectively in The average discount rate on the 182-day NTB in 2009 was 4.75% while it was 8.86% in The lowest and the highest rates in the period were 2.55% and 8.39%, as against 5.20% and 9.55% recorded respectively in The average discount rate on the 91-day NTB in 2009 was 3.66% lower than 8.86% in The lowest and the highest rates in the period were 1.89% and 8.39%, as against 5.20% and 9.55% recorded respectively in The low rate recorded at both the primary and secondary market of the NTB Market was due to investors flight to safety, as investors moved to government securities as a safe haven for their financial assets. 2.5 Foreign Exchange Market The analysis of the transactions in the official foreign exchange market in 2009 showed that the CBN increased the amount of foreign exchange it offered in the foreign exchange market in order to reduce the effect excess demand would have on the depreciation of the value of the local currency. The CBN offered a total of US$22,040mn through the Retail Dutch Auction System (RDAS), and Wholesale Dutch Auction System (WDAS). The offer represents an increase of % over the US$7,140mn offered in The amount sold at US$22,087.84mn in 2009 was 0.22% higher than the amount offered at US$22,040mn. WDAS & RDAS (Q3, 08- Q4, 09) q1 08 q2 08 q3 08 q4 08 q1 09 q2 09 q3 09 q4 09 Amount Offered ($m) Total sales ($m) 39

40 Looking at the quarterly transactions, the CBN offered US$5,900mn, while it sold US$5,808.93mn in Q1 2009, the amount sold was 1.54% less than what was on offer. In Q2 2009, the CBN offered US$5,1504mn, while it sold US$6,613.15mn, the amount sold was 28.41% higher than the amount offered. In Q3 2009, the CBN offered US$7,000mn, while it sold US$6,277.47mn; this was 10.32% lower than the offer. In the last quarter (Q4 2009), the CBN offered a total of US$3,990mn, a decrease of 15.08% over the US$3,388.30mn sold. The value of Nigerian Naira depreciated in all the three segments of the market against the US Dollar in 2009 The average premium between the parallel market rate and the official market rate in 2009 was 7.88% against 2.45% in The value of the Nigerian Naira depreciated in all the three segments of the market against the US Dollar in The inter-bank, parallel and official market depreciated by 7.02%, 9.58% and 12.84% respectively, compared with depreciation of 12.37%, 14.83% and 18.26% recorded in the official, parallel and inter-bank markets respectively in We note that the CBN closed the inter-bank market for a considerable part of the first half of the year in order to avert excessive speculation on the naira, which was capable of causing uncontrollable depreciation. The quarterly analysis of the value of the naira shows that naira in Q depreciated against the US$ in all the three segments of the markets. It depreciated by 11.01% and 23.37% in the parallel and official markets respectively, while the inter-bank was closed during the quarter. In Q the naira appreciated against the dollar by 5.88% at the parallel market and depreciated 0.72% at the official market. In Q3 2009, only the parallel market rate appreciated by 2.50% while the official and inter-bank market rates (the inter-bank market was re-opened in Q3) depreciated by 0.39% and 9.32% respectively. In Q4 2009, the parallel market appreciated while the official and inter-bank markets depreciated. At the parallel market, the value of the Naira appreciated by 3.21%, while it depreciated by 0.30% and 0.53% at the official and inter-bank markets respectively. The average premium between One year Foreign Exchange Price Movement the parallel market rate and the official market rate in 2009 was 7.88% higher than the premium of 2.45% in The average premium between the parallel market rate and the official market rate in the first half of the year 2009 was 12.58% this was higher than the average premium in the second half of the year at 3.51%. The high premium in the first half of the year was due to speculative activities by the operators in the Inter Bank CBN Parallel parallel market. The highest premium recorded in 2009 was 20.33%, while the lowest premium recorded during the period was 1.11%. The liberalization of the forex market and other forex measures implemented in the market in the second half of the year helped lower the premium between the parallel market rate and the official market rate. At the inter-bank market, the value of Naira depreciated by 7.02% to close at N149.45/US$1 from N139.65/US$1 as at the end of December, In the parallel market, Naira depreciated by 9.58% to close at N151/US$1 from N137.80/US$1 at the end of December While at the official market the 40

41 value of Naira depreciated by 12.84% to close at N148.10/US$1 from N131.25/US$1 at the end of December, A further analysis of the exchange rate in 2009, showed that the average exchange rate recorded in the official market was N147.04/US$1, up from N117.72/US$1 in The minimum and maximum exchange rates recorded in 2009 and 2008 were N131.25/US$1 and N151.91/US$1, up from N116.55/US$1 and N140/US$1 respectively. At the inter-bank market, the average exchange rate in 2009 was N150.43/US$1, up from N119.12/US$1 in The minimum and maximum exchange rates recorded in 2009 and 2008 were N136.30/US$1 and N158.61/US$1 from N116.63/US$1 and N140/US$1 respectively. At the parallel market, the average exchange rate in 2009 was N160.21/US$1, up from N120.72/US$1 in The minimum and maximum exchange rates recorded in 2009 and 2008 were N137.80/US$1 and N184/US$1 from N118.80/US$1 and N140/US$1 respectively. 41

42 About 90% of the MDAs capital expenditure is directed to 5 key priority sectors 3.0 Fiscal Projections for 2010 The fiscal projections analyzed here were derived from the President Yar Adua s speech and the detailed fiscal framework projections delivered to the Joint Session of the National Assembly on behalf of the President. The Budget 2010 speech points out that about 90% of Ministries, Departments and Agencies (MDAs) capital expenditure is directed to 5 key priority sectors, namely: Critical Infrastructure; Human Capital Development; Land Reform & Food Security; Physical Security; Law & Order and the Niger Delta. It added that government will continue with the key public sector financial management reforms with greater emphasis on increasing non-oil revenue through the reform of the Customs Service and the Federal Inland Revenue Service (FIRS), as well as the audit of independently generated revenue. As with the Federal Government budgets over the last five years, the 2010 budget proposal was prepared against the background of a medium-term fiscal framework, which takes account of forecast revenue and expenditure over the period The Federal Government proposes an aggregate expenditure of N4,079.65bn for 2010 as against N3,101.81bn approved in 2009 representing a growth of 31.52%. The expenditure is made up of Statutory Transfers N180.28bn (4.42% of the total), an increase of 6.11% over N168.62bn (5% of the total) in 2009; Debt Service: N517.07bn (12.67% of the total) an increase of 82.29% over N283.65bn (10% of the total) in 2009, and Ministries, Departments and Agencies (MDAs): N3,382.30bn (82.91% of the total) an increase of 27.66% over N2,649.54bn (85.42% of the total) in The debt services is made up of Domestic Debt Services: N478.16bn representing 92.47% (80.31% in 2009) and Foreign Debt Service:N38.92bn representing 7.53%(19.69% in 2009). The MDAs spending is made up of Recurrent (non-debt) Expenditure: N2,011.48bn (49.31% of the total), an increase of 23.61% over N1,627.29bn (52.46% of the total) in 2009, while Capital Expenditure: N1,370bn (33.60% of the total) an increase of 34.10% over N1,022.81bn (32.96% of the total) in Key Assumptions and Targets of Budget 2010 Oil price of US$57/b (US$45/b in 2009). Crude oil production of 2.088mb/d (2.292mb/d in 2009). GDP growth rate of 6.11% (8.90% in 2009). Inflation rate at 11.20% (8.90% in 2009). Exchange rate of N150 to US$1 (N125 to US$1 in 2009). 42

43 The proposed budget deficit represents 4.79% of GDP as against 3.02% of GDP in 2009 On the basis of these assumptions, the gross federally collectible revenue is forecast at N6,211.60bn up by 17.08% from N5,305.31bn approved for The total revenue is made up of oil revenue: N4,293.15bn (representing 69.12% of the total) as against N3,114.82bn in 2009 (representing 58.71% of total); non-oil: N1,747.18bn (28.13% of total) as against N1,972.97bn in 2009 (37.19% of total) and grants & special levy: N171.27bn (2.76% of the total) as against N217.51bn (4.10% of the total) in Taking into account the revenue sharing formula, the total FGN retained revenue is estimated at N2,517.06bn an increase of 11.12% over N2,265.21bn approved for Given the shortfall in the FGN projected revenue over the expenditure, the proposed budget deficit is N1,562.60bn, up from N811bn in 2009 and represents 4.79% of GDP as against 3.02% of GDP in The deficit will be financed from FGN share of signature bonuses: N150bn, proceeds of ongoing privatization: N107.21bn, FGN s share of proposed Economic Commission for Africa (ECA) of 2010: N309.13bn; International Bond: N75bn; E-Payment Transfer & RTGS Transfer: N26.44bn, Domestic Borrowing: N867.48bn, Sales of Government Property: N9.56bn; Refund of Loans by States: N1.37bn; Transfer of Interest by DMO: N3.2bn; and transfers from CBN Abuja: N13.22bn. Expenses Head Change Statutory Transfers % Debt Service % Recurrent (non-debt) Exp. 2, , % Capital Expenditure 1, , % Total 4, , % Composition of Oil Revenue Amount (N'bn) Crude Oil 2, Petrolum Profit Tax 1, Royalties & Others Total Oil Revenue 4, % of Oil Revenue to Total Revenue 69.12% Composition of Non-Oil Revenue Amount (N'bn) Company Income Tax Value Added Tax Customs & Excise Duties FGN Independent Revenue Grant & Special Levy Total Non- Oil Revenue 1, % of Non- Oil Revenue to Total Revenue 30.88% Gross Federally Collectible Revenue 6, Budget Parameters Change Bench Mark Oil Price (US$ p/b) % Crude Oil Production (million b/d) % Inflation Rate 11.20% 8.20% 3.00% GDP Growth Rate 6.11% 8.90% -2.79% Exchange Rate NGN/USD % 43

44 N'bn Available data from the Budget Office of the Federation indicates that between 2005 and 2010 (est.) payroll, aggregate good & services accounted for about 61% of the total expenditure of the FGN Ministries, Departments and Agencies(MDA), leaving only 39% to the capital expenditure. Currently, the revenue that accrues to the federation account (main pool) is shared using the following formula: Federal Government of Nigeria(FGN) : 48.50% State Government (SG): 26.72% Local Government (LG): 20.60% Special Funds (SFs): 4.18% The special funds is distributed among The Federal Capital Territory (FCT): (1%); Ecological & Derivation: 1%; Statutory Stabilisation: 0.5% and Development of Natural Resources: 1.68%. 4,000 3,000 2,000 1,000 - Breakdown of MDA Spending ( e) 1,371 1, ,018 1, e Payroll good & services Capital Distribution of Federation Account(Main Pool) 4% 21% 48% 27% FGN State LG Special Funds is of the opinion that the National Assembly will increase benchmark oil price to about US$60/barrel in line with reality. We also expect about N500bn unspent portion of the 2009 capital projects to be added to the revenue projections in The combination of these factors should reduce the proposed budget deficit for 2010 and subsequently reduce the amount of domestic borrowing by the FGN. Thus the risk of rising interest rate as a result of huge domestic borrowing will be reduced. The FGN should however be committed to full implementation of the budget in order to improve the welfare of the people. 44