Ease of Doing Business Report: Nigeria’s Policy Reforms Bearing Fruit!


Monday, November 06, 2017 8:58AM /Afrinvest Research 

Against the backdrop of several deep-seated structural challenges stifling operating environment for businesses, Nigeria has persistently been ranked low by the World Bank in its Ease of Doing Business (EODB) report. Out of the 190 countries surveyed for 2017, the report ranked Nigeria 169th - a negligible improvement from 170th of 189 countries in 2016. On average, the country ranked 158th of 189 countries surveyed in the last 5 years and 37th of 48 countries in Sub-Saharan Africa for 2017.

Borrowing a leaf from several countries that have implemented ease of doing business reforms within a very short time (Kenya for example undertook 5 reforms which moved her ranking upwards by 21 places to rank amongst the top 100 countries in 2017), the Nigerian government took several steps towards improving the Nation’s ranking by setting a target of moving 20 places higher in 2018 and eventually breaking into the top 100 economies by 2019.


To this end, the Presidential Enabling Business Environment Council (PEBEC) was set up to remove the administrative bottlenecks associated with doing business in Nigeria. At the tail end of 2016, the operational arm of PEBEC - the Enabling Business Environment Secretariat (EBES) agency - became functional with a delivery span of 2 years to implement the reforms of PEBEC.

The PEBEC’s two key Executive Bills - Collateral Registry Bill & Credit Services Bureau Bill - were passed into law with the objective to aid access to credit for SMEs. Furthermore, the PEBEC made strides in reducing the number of agencies in Nigerian ports to allow ease of entry and exit of goods and people. Accordingly, the impact of these reforms were evident in the recently released Doing Business 2018 report titled “Reforming to Create Jobs” as Nigeria moved up 24 places (surpassing the target of 20) to 145th and ranked in the top 10 most improved countries.


The key areas Nigeria improved the most include: 1) Starting a business (online registration of businesses and reduced turnaround time); 2) Getting construction permits; 3) Registering property; 4) Getting credit; and 5) Payment of taxes (electronic payment and filing).

To consolidate on these gains, the PEBEC has kicked off its National Action Plan 2.0 (NAP 2.0) which is in line with objectives laid out in the Economic Recovery & Growth Plan (ERGP) and aims to spread the reforms implemented across some MDAs as well as Lagos and Kano in the initial 60-day NAP launched in February 2017, to more states and government MDAs.

In our view, the achievements and ongoing efforts on ease of doing business are laudable, more so that the target set for 2018 was surpassed; yet, feasible reforms, especially in areas where the country is poorly rated such as Getting Electricity and Trading across Borders, need to be given utmost priority in order to truly attain a competitive and attractive business environment.

October Purchasing Managers’ Index (PMI) Survey… Economy Shows Further Expansion

The CBN released its PMI report for the month of October in the week, with both Manufacturing and Non-Manufacturing sectors showing further expansions. Manufacturing PMI settled at 55.0 points, 0.3 points lower than September but above the baseline threshold of 50.0 points. This indicates the manufacturing sector expanded for the seventh consecutive month in October, albeit at a slower pace relative to previous month.


The Non-Manufacturing PMI rose 0.4 points M-o-M to 54.9 points, suggesting activity in the sector improved at a faster pace relative to previous month. The upbeat performance of both the Manufacturing and Non-Manufacturing sectors is not surprising, given improving macroeconomic stability anchored by rebound in FX liquidity and cyclical recovery in the oil market.


We expect PMI data in subsequent months to stay robust as we remain confident on near term economic prospects on the back of stronger FX earnings and structural reforms by policy makers. Hence, we retain our FY:2017 and FY:2018 growth forecasts of 1.2% and 2.6% respectively.

Global Equity Market Review and Outlook

Global equity markets were largely bullish this week as oil also gathered momentum. Oil prices sustained a recent rally to close the week at US$60.96/b as market expressed confidence in extended supply cuts by OPEC while a boost in demand from China has had similar effects. Most of the indices under our coverage closed the week in the green with Kenya’s NSE 20 (+4.2%), Egypt’s EGX 30 (+2.6%) and Japan’s Nikkei 225 (+2.4%) leading the way.

In the Developed markets, the UK FTSE All Share rose 0.8% W-o-W despite the Bank of England’s (BOE) decision to raise its benchmark rate by 25bps to 0.50%- the first of such interest rate hike in a decade. The market however sustained gain due to perceived “dovish” comments by the BOE on interest rate hike which subsequently hit the Pound Sterling.


The U.S NASDAQ added 0.6% while the S&P 500 closed flat as investors remain watchful of potential American tax reform after US Republican legislators released an ambitious plan to overhaul the Tax system.

Performance in the Eurasia Regions was positive this week, led by gains in Japan’s Nikkei 225 (+2.4%) and Germany’s XETRA DAX (+1.9%). Japan’s positive week was buoyed by a boost in foreign investment following strong corporate earnings. Hong Kong’s Hang Seng (+0.6%) and France’s CAC 40 (+0.2%) were similarly bullish. The BRICS equities markets were however largely bearish as 3 of 5 indices closed the week in the red.


The Brazil Ibovespa fell the most, down 3.5% W-o-W while the Russia RTS and China Shanghai Comp fell 2.2% and 1.3% respectively. Alternatively, India’s BSE Sens (+1.6%) and South Africa’s FTSE/JSE All Share (+1.6%) were the two gainers this week.

The African markets indices all closed the week higher. Kenya’s NSE 20 added the most up 4.2% as foreign investors’ confidence – illustrated by positive net-purchases - was restored as political tension, which has plagued the country for months, eased. Egypt’s EGX 30 followed, rising 2.6% whereas the Nigeria All Share Index and Ghana GSE gained 1.3% and 0.6% respectively.

Domestic Equity Market Review and Outlook

In a reversal of the negative trend in the domestic equity market in the previous week, investors’ appetite for equities strengthened in the week as the benchmark All Share Index (ASI) advanced on 4 of the 5 trading sessions. The week started off bullish, with the ASI up 6bps as investors took position in banking stocks - ZENITH (+1.1%) and UBA (+2.5%).


On Tuesday and Wednesday, the bullish performance was sustained as the ASI gained 54bps and 56bps respectively. However, on Thursday, profit-taking in NIGERIAN BREWERIES (-3.2%) and DANGCEM (-0.2%) halted the positive streak as the benchmark index lost 3bps. Nonetheless, we saw a rebound on Friday as the market added 0.2% to close the week positive.


Consequently, the benchmark index gained 1.3% W-o-W to close at 36,939.59 points while YTD return expanded to 37.5%. Likewise, market capitalization added N251.2bn to close at N12.8tn. However, activity level was mixed as average volume traded declined 2.3% to 361.1m units while average value traded inched 8.0% higher to N3.7bn.

Performance across sectors was largely bullish W-o-W. The Insurance index advanced the most, up 1.5% W-o-W on the back of price appreciation in MANSARD (+7.4%) and NEM (+6.3%). Similarly, the Oil & Gas and Industrial Goods indices rose 1.4% apiece W-o-W as MOBIL (+3.5%) and DANGCEM (+3.7%) recorded gains.


Similarly, the Banking index climbed 0.3% W-o-W as investors took position in UBA (+6.3%) and ACCESS (+2.3%). On the flipside, the Consumer Goods index was the only loser, shedding 0.1% against the backdrop of profit-taking in UNILEVER (-6.5%) and NIGERIAN BREWERIES (-4.6%).  

Investor sentiment as measured by market breadth was flat at 1.1x as 33 stocks advanced against 29 stocks that declined. The best performers were UPL (+26.3%), LEARNAFRCA (+19.0%) and FLOURMILL (+18.2%) while the worst performers were AIRSERVICE (-18.3%), LINKASSURE (-13.3%), and UNILEVER (-6.5%).


In the coming week, we expect the positive performance to be sustained given the increasingly favourable condition in the oil market – a major anchor of the business cycle. Following a broadly positive performance and investor sentiment this week, we expect the market to sustain momentum as knock-on effect of the oil rally buoys investors' appetite for Nigerian assets.

Foreign Exchange Market Review and Outlook

The CBN injected US$195.0m into the inter-bank foreign exchange market on Tuesday in an effort to maintain stability in the Naira’s exchange value. Accordingly, the interbank rate appreciated from N359.49/US$1.00 on Monday to N355.85/US$1.00 by midweek; however, the rally was reversed on Thursday (N360.40/US$1.00) with an unchanged close on Friday (N360.40/US$1.00), representing a 9 kobo W-o-W deprecation.


Similarly, the official rate traded within a tight band, marginally depreciating 15 kobo to N305.90/US$1.00 from last week’s close of N305.75/US$1.00. In continuance of recent trend in the parallel market, the Naira traded flat at N363.00/US$1.00 all through this week. At the I&E Window, the NAFEX rate pulled back losses on Monday (down 8bps to N360.61/US$1.00) and Tuesday (down 6bps to N360.83/US$1.00) to close the week at N360.57/US$1.00, implying a 7 bps loss W-o-W.

Despite primary market auctions held this week, activity level in the I&E Window weakened relative to previous weak as total turnover fell to US$527.8m (as at Thursday 2nd November) relative to US$750.8m in the same period last week.

In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures for the 12 instruments on the calendar stood at US$2.9bn as at Thursday 2nd November from US$3.0bn the previous week. The APR 25 2018 remains the most subscribed instrument with a total value US$591.0m while the least subscribed is the May 30 2018 at US$134.27m.

On the back of the rally in oil prices and re-balancing of FGN debt in favour of external borrowings, we expect external reserves to continue to accumulate in the near term. As such, we expect the CBN to sustain frequency of interventions and the Naira to continue to trade within a tight band at all segments of the FX market in the near term.

Money Market Review and Outlook

In the money market this week, interbank rates trended lower on the first four trading days due to improved system liquidity attributable to Retail SMIS refund and OMO & T-bills maturity which offset OMO mop-ups by the Apex bank. However, interbank rates spiked on Friday as banks provisioned for SMIS auction. At the start of the week, Open Buy Back (OBB) and Overnight (OVN) rates closed at 18.0% and 20.0% respectively, higher than 15.8% and 18.8% recorded the previous Friday, as system liquidity weakened from a deficit of N8.3bn to N103.1bn.


The widening deficit was consequent on the OMO mop-up on Friday which took N92.5bn out of the system while another OMO auction was floated on Monday which had an initial offering of N50.0bn with a total sale of N8.8bn. Rates further moderated on Tuesday as OBB and OVN closed at 17.2% and 19.3% respectively as system liquidity improved to a deficit of N39.1bn.

Similarly, on Wednesday, rates declined further as OBB and OVN closed at 9.4% and 10.2% respectively as system liquidity improved due to Retail SMIS refund while on Thursday, OBB and OVN rates trended significantly lower to 6.3% and 7.0% respectively. This decline was consequent on OMO maturity and T-bills repayment of N431.2bn and N100.8bn respectively which buoyed liquidity balance of DMBs at market open to N502.0bn.


In line with recent trend, interest in the OMO auction floated by the CBN on Thursday was subdued as the bank sold N11.4bn worth of OMO bills relative to N320.0bn offered. However, on Friday, rates rose as banks provisioned for the CBN FX Special SMIS; hence, OBB and OVN rates rose to 36.3% and 39.4%, up 20.5% and 20.6% W-o-W respectively.

Sentiment in the Treasury Bills market stayed bullish due to improvement in system liquidity during the week. Hence, average yield on benchmark bills declined 38bps W-o-W to 17.5%. There was a T-bills auction on Wednesday, where-in investors continued to aggressively bid for longer dated bills although rates were barely changed relative to the last auction. N6.3bn, N6.7bn and N88.0bn of the 91-Day, 182-Day and 364-Day bills were issued at 13.1%, 15.3% and 15.6% respectively.

In the coming week, an OMO maturity of N233.8bn is scheduled to hit the system and we expect rates to remain around similar levels despite continued OMO mop ups by the CBN.

Bonds Market Review and Outlook

The domestic sovereign bonds market traded slightly bullish in the week with average yield moderating 0.2% W-o-W as investors’ appetite for long dated instruments stayed strong though more activities remained noticeable at the shorter end of the bond yield curve. Average bond yield opened the week flattish after closing at 15.3% on Monday (from 15.3% close in the previous week) and remained stable at that level for Tuesday.


By mid-week however, average yield moderated by 14bps to settle at 15.2% following positive sentiment towards short and medium dated instruments though average yield on long dated bonds traded flat. The bullish sentiment was sustained into Thursday as average yield further declined by 3bps and eventually closed on Friday within the positive territory as it settled at 15.2% (moderating 1bp day on day) from the previous week’s close of 15.3%.


Whilst we have noticed improved investor attraction for bond securities since the Apex Bank started guiding towards a moderation in short term T-bills and OMO rates, we somewhat attribute the rather bullish investor sentiment on bonds to increased confidence in the credit status of the Federal Government of Nigeria following the slight rally in crude oil prices during the week (Brent crude price traded 1.3% higher W-o-W to close at US$60.92/b).

Sub-Saharan African Eurobonds Performance during the week was mixed though the improvement in commodity prices boosted sentiment across board.  Average yield on most of the sovereign instruments in our coverage moderated, signalling improved investor confidence. Investor sentiment was more in favour of Zambian Eurobonds as Yield on the average tapered by 34bps followed by Gabon (-30bps), Ghana (-24bps) and Kenya (-22bps).


Nigerian Eurobonds yields on average moderated 15bps W-o-W to settle at 4.8% with all the bonds currently trading at premium to par value. The Kenyan, Zambian and the Nigerian Eurobonds remain the best performing YTD with 10.5%, 9.7% and 8.4% respectively.

Contrarily, performance across the Nigerian Corporate Eurobond was broadly negative as sell sentiment prevailed W-o-W across all Corporate Eurobonds but FIDELITY 2018.  Yields on FBNH 2020 (+2.3%), FBNH 2021 (+0.45%) and ZENITH 2022 (+0.15%) rose the most.


DIAMOND 2019 has the highest price return (26.3%) YTD. We expect sentiment to stay moderate next week as we expect the gains from this week’s improvement in commodity prices to sustain bullish momentum in the SSA Eurobonds market.


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