Economic Research Economic Report Monthly update research@armsecurities.com.ng +234 1 270 1652 2 November 2012 Economic Update -- October 2012 Economic Snapshot Inflation Data/Indices September2012 MoM YoY Prev YoY Food 1.1% 10.2% 9.9% Core* 0.4% 13.1% 14.7% Imported food 1.1% 16.7% 17.0% Energy 2.5% 18.6% 20.5% Currency Markets Rate Daily chg YTD USDNGN 157.06 0.04% -3.23% EURNGN 203.55 0.02% -2.99% GBPNGN 253.06 0.31% 0.59% JPYNGN 196.65-0.25% -6.79% Monetary Aggregates Latest (N bn) MoM YTD M2 14,040.71 2.8% 0.1% CPS 14,928.46 0.3% 1.7% NCG -1,580.33-8.2% 118.7% NFA 8,251.79 2.3% 11.3% NDC 13,348.13 1.4% -4.4% External Position Q2 2012 Latest QoQ* YoY Trade Balance (N bn) 3,317.50-42.2% 29.1% External Reserves ($ bn) 42.6 16.5% 30.6% Foreign Debt ($ bn) 6.03 2.1% 41.4% Growth Data Q2 2012 Latest (N bn) % of total YoY Real GDP 199,831.6 100% 6.28% Agriculture 81,316.3 40.69% 3.9% Oil 27,669.2 13.86% -0.73% Telecoms 14,394.7 7.28% 29.77% Wholesale and trade 34,213.8 17.12% 8.61% Analyst(s) Wale Okunrinboye adewale.okunrinboye@arm.com.ng Food inflation comes under flood pressures The National Bureau of Statistics reports that YoY headline inflation continued its downward trend shedding 40bps in September to 11.3% despite a 34bps MoM rise to 1.01%. Food inflation rose 30bps from August levels to 10.2% YoY and 50bps MoM to 1.1% while core inflation rose 0.41% MoM and eased to 13.1% from 14.7% YoY. The NBS attributes the rise in food prices to increase in prices of tuber crops like potatoes and yams whose main harvest begins in mid-september and were therefore largely affected by recent floods as well as the lagged effect of a surge in the bread prices following the 15% increment in wheat import tariffs in July 2012. We had expected a more pronounced acceleration in food prices which put our expectations for single digit inflation in Q1 2013 at risk. However, whilst an assessment of the extent of damage from the flooding is still ongoing, reports from the Agriculture Ministry has sought to allay fears about an impending food crisis based on claims that the main harvest for most food crops were already concluded and in storage prior to the floods. Also, as we noted in earlier reports, improved storage reported by the National Food Reserve Agency, may have helped sustain tame food inflation in 2012. We still expect food inflation to surpass H1 2012 trend in coming months based on the floods, and have revised our FY estimates to ~12% even as we temper our expectations for single digit inflation in 2013. However, we believe a better assessment may only be available from Q4 2012 CPI readings.
Figure 1: Headline and Food Inflation Food MoM Headline YoY Food YoY 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.5% 1.0% Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Source: NBS, Portfolio inflows continue to provide support for Naira gains The naira continues to firm against the USD at the interbank, as having gained 3% Q3 2012, it entered into N156/$1 territory briefly, however it closed at N157.06/$1 gaining 0.28% over October. The WDAS rate continues to hold firm at the N155.7/$1 range it gained 0.02%. Naira gains at the interbank have been largely on account of strong portfolio flows in a continuation of the trend witnessed in Q3 2012 and have seen official dollar demand at the WDAS in October plummet by 28% to $1.1 billion from their September 2012 total. The period also recorded the lowest sales at the WDAS($43.5million) a~3year low stretching back to November 2009 which drove 3% MoM rise in the foreign reserves to $42.6billion in October its highest level in almost three years.
Figure 2: Foreign reserve accretion and Import cover 50000 12 40000 30000 10 20000 8 10000 0 6 10000 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 4 20000 30000 40000 Source: CBN, External Reserves Accretion (US$' Million) Number of Months of Imports Equivalent 2 0 With no change in MPC policy indicated, we believe outlook for the Naira is hinged on developments on the supply side. In particular, we believee further moderation in interbank inflows in Q4 2012 may push demand back into the official where we expect increased pressures from food imports to weigh in the aftermath of recent floods. This may be exacerbated by possible downturn in global risk sentiment in Q4 12 anchored on renewed focus on US fiscal problems, Eurozone event risk and persistentt EM growth deceleration which would almost certainly lead to a reversal of portfolio inflows and new demand pressure on the WDAS. In this regard we maintain our view that recent strength in the NGN/ /USD is associated with heightened risk of reversals and expect near to medium term weakness whose extent will largely be determined by global events.
Figure 3: WDAS Sales Total Monthly Sales (US $) Average Auction Sales (US $) 3,000 2,500 2,000 1,500 1,000 500 400 350 300 250 200 150 100 50 Source: CBN, Money Supply and Interest Rates Data available from the CBN shows that in September, Credit to the private sector grew by 0.3% MoM to N14.9billion which amounts to a deceleration in YoY growth by 240bps to 34.4%. However, net credit to the government continues to trend lower on account of improved cash management by the government via the Treasury Single Account, decelerating 8.2% MoM on the heels of a 1.4% decline in August 2012. The decision by the CBN at its last MPC meeting to leave base rates unchanged saw deposit and lending rates in September 2012 mirror their August rates with deposit-lending spreads holding steady at 15%-23% with only a 1pps decline in the upper bound over September. Money market yields rose again on the average in October following dramatic declines over Q3, probably reflecting a 24% increase in net OMO issuance relative to September.
Table 1: Average Yields 91-day 182-day 365-day October 13.67% 13.20% 12.81% September 13.17% 13.31% 12.35% August 14.09% 14.92% 14.22% Source: FMDA, ARM, Research The yields on Nigerian bonds have come off the rally that saw them shed 400bps on the back of the mid-august announcement of Nigeria s inclusion in the JP Morgan EM Bond index. Yields on the 2017 and 2019 shed 0.4% and 0.3% to close at 13.31% and 13.22% respectively while the 2022 climbed 2% to close at 13.1%. On the other hand, yields on Nigeria s Eurobond shed 30bps over the October to close at ~4.46%. The Federal Government has announced plans to reduce outstanding domestic debt considerably and finance some of its spending over 2013-15 via a series of multilateral loans (totaling $7.9 billion) and a $1billion Eurobond next year. While this should have a favourable impact on yield dynamics, the government is set to exceed its 2012 borrowing targets by as much as 35% which will impinge on its credibility in the markets even as recent yield declines and high base rates continue to cap potential gains. While the currency pressures moderated, we believe the MPC is not inclined to make a significant cut to base rate at its final meeting in November, having cited an uncertain external environment in their last, and therefore see no major reversals to the status quo. However, if Q4 inflation trend remains downbeat in the face of recent flood we see a potential dramatic drop in inflation driving pressure for a cut in base rates in Q1 2013 which could significantly change outlook for yields.
Trade and External Position It is reported that Nigeria lost about ~20% of its oil production capacity to shut-ins triggered by floodwaters in October, which saw oil production levels plummet to between 2.1-2.3mbd from a reported provisional average production of 2.6mbd in Q3 2012. Nevertheless, with post-flooding production at levels reported, this claim provides support to earlier reports of an uptick in oil production to ~2.7mbd coming from off-shore fields (onshore fields reportedly lost ~500K bpd to flooding 1 ) and gradual recovery in onshore production can be expected to provide some support for Q4 oil exports, which took a hit in October on the back of these losses. Nevertheless the development of new oil fields in the US has coincided with a decline in Nigeria s exports to the US down by 37% and 32% to 74million barrels in H1:2012 from H1:2011 and H2:2011 respectively. Although, this has been replaced by increasing Asian demand, particularly from India, price discounts to Asian buyers which led to Bonny Light and Forcados trading at an almost unprecedented discount to Brent crude in October have constrained expected revenues as have recent outages in domestic production and continued crude oil theft. In addition, spotty reliability of Nigerian crude supplies, exacerbated by force-majeures declared by oil majors recently, continue to help drive a contraction in spreads between Nigeria s benchmark crude prices and Brent. 1 From Bloomberg reports citing DPR Spokesman.
Figure 4: Bonny Light and Brent Crude prices 120 118 116 114 112 110 108 106 104 102 differential Brent($) Bonny($) 7 6 5 4 3 2 1 0 1 2 3 Source: Bloomberg, However, we note recent encouraging economic data from the US and China on annualized economic growth and PMI should provide support for oil demand outlook which should moderate downside risk to trade balances from oil prices in the near term. For non-oil trade, Q2 trade GDP indicates that the decline in real incomes has slackened aggregate demand, which alongside inflation data suggest increased substitution towards domestic staples and declining imports. On the whole, outlook is mixed. Conflict in the Middle East and monetary stimulus in developed economies should continue to support global oil prices while new tariffs on certain import items including cement, flour, wheat and rice as well as weaker domestic demand will likely continue to reduce imports and provide support for the current account for the foreseeable future. On the other hand, possible significant drops to crude oil prices and/or an unexpected breakthrough in conflicts between an increasingly unstable Iranian regime and the West will simultaneously hit volume sales and prices, putting trade balance
in a precarious position. A crisis that leads to a sharp reversal in portfolio flows with deteriorating global outlook has also become a more potent threat to Nigeria s current account/reserves in the light of substantial recent inflows. In the near term, we also expect modest increase in food imports in response to domestic flooding. Key triggers in global outlook should become clearer post the November leadership change in China, and upcoming US elections which could change geopolitical balances, particularly in the Middle East. However, as with currency outlook and yield outlook, we believe that balances are dominated by risk considerations. GDP The primary change to our domestic growth outlook is driven by the potential impact of recent floods which has reduced our (and consensus) estimates for food output in 2012. With Agricultural production still the dominant contributor to output with a ~40% share and, with H1 sector growth already 180bps lower than the preceding half-year at 4.0%, we expect the agricultural sector to weigh on FY 12 headline growth. In addition, oil output has reportedly fallen sharply in Q3 2012 due to flood outages leading us to temper our earlier optimism for growth in H2 2012 and cut our 2012 growth forecast range to 6.0%-6.5%. However as we highlighted earlier, we believe these numbers will be overshadowed by the planned rebasing of Nigeria s GDP in Q4 2012, suggesting that growth outlook should play favourably on investment sentiment over the near term. As such we do not believe growth concerns will feature heavily with investors in the near term. Longer term, we expect GDP growth to resume its upward trajectory, driven by lower base in both oil and Agricultural output in 2012 and, hopefully, the materialization of a number of impending positive policy developments in credit, agriculture, power, infrastructure and energy to name a few.
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