FOMC to Maintain Federal Fund Rate at Current Level


Friday, March 11, 2016 05:53PM / FSDH Research

Executive Summary

The major highlights of the Monthly Economic and Financial Market Outlook report are:

         The Federal Open Market Committee (FOMC) of the United States (U.S.) Federal Reserve System (The Fed) will meet this month

         We expect the FOMC to maintain the Federal Funds Rate (FFR) at the current level

         We expect the National Assembly (NASS) to pass the 2016 Budget Proposal this month. Subsequently, the Federal Government is expected to start borrowing to finance the budget

         The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will meet in March. We expect a decision on its foreign exchange rate management.

         We maintain our foreign exchange rate forecast range of US$1/N230-US$1/N240

         The inflation rate is expected to increase to 9.85% in February 2016

         The weak recovery in the crude oil price may not be sustained given the weak global demand and increasing supply

         We expect the demand pressure at the foreign exchange market to continue on account of the decline in foreign exchange inflows

         The combination of economic and financial factors show that the interest rates is set to rise in the month of March 2016

         We expect the equity market to appreciate in March 2016 because of earnings releases and dividend declarations.

         The yields on the fixed income securities are expected to increase in the month of March 2015

        We expect appreciation in the prices of some value stocks in the month of March


Global Developments

The prices of government bonds depreciated in more countries in February 2016 than it appreciated. The Argentina Government Bond recorded the highest month-on-month price decrease of 3.83% to 94.25 in February 2016. This was followed by the 7.75% February 2023 South Africa Government Bond with a decrease of 1.03% to 92.35.

The 7.60% April 2021 Russia Government Bond recorded the highest month-on-month price increase of 1.97% to 92.54. The Argentina Bond and the Russia Bond closed the month at negative real yields. Other bonds we monitored closed in the month at positive real yields. The real yield on the Kenya Bond remains the most attractive amongst the countries we monitored, followed by the Egypt Bond.


According to the Bureau of Economic Analysis (BEA) of the United States (U.S.), the U.S. Real Gross Domestic Product (GDP) grew at an annual rate of 1% in Q4 2015, compared with 2.0% in Q3 2015. The BEA added that consumer spending and imports grew less than previously estimated while business inventories were revised higher. For the year 2015, the BEA reported that real GDP increased by 2.4%, unchanged from 2014. Consumer spending was the largest contributor to growth in 2015.


Meanwhile, China's annual inflation rate stood at 1.8% in January 2016, up from 1.6% in December 2015 and reaching the highest figure since August 2015. The food prices increased by 4.1%; while non-food cost rose at a slower 1.2%.

The Global GDP

The global Gross Domestic Product (GDP) is forecast at 3.2% in 2016. This is according to the Organization of the Petroleum Exporting Countries (OPEC) monthly oil market report, February Edition. OPEC revised the growth forecasts across geographic regions, with the exception of the Euro-zone.


It expects the U.S. to grow by 2.2% in 2016. The declining industrial production and the developments in the labour market will drive the expected growth in the U.S. Japan’s 2016 growth is forecast at 0.9%. Growth rates in China and India for 2016 are forecast at 6.3% and 7.5%, respectively. Meanwhile, the deepening recessions of Brazil and Russia have led to major revisions in the outlooks for both economies.


An important reason for the latest GDP adjustments was the impact of lower oil prices on the global economy, with producer countries facing lower output levels and significantly slowing investments. Both have affected the global GDP growth levels. The positive effects for the consumer are limited due to the after-effects of the ‘Great Recession’. Despite these adjustments, the risk to global economic growth remains tilted toward the downside.


The report added that many country-specific economic challenges remain, and geopolitical issues and their potential spill-over into the real economy may add to this risk. Also, central bank policies will continue to constitute an influential factor amid lower global inflation.


Domestic Real GDP

The Nigerian economy grew by 2.79% in 2015, compared with 6.22% in 2014. In Q4 2015 the economy grew by 2.11% (year-on-year), compared with 5.94% in the corresponding period of 2014 and 2.84% in Q3 2015. FSDH Research earlier released a growth forecast of 3.07% for 2015.


The oil sector recorded a decline of 8.28%, compared with the growth of 1.06% recorded in Q3 2015. On a quarter-on-quarter basis, the oil sector also decreased by 19.10%. The oil sector contributed approximately 8.06% to the real GDP in Q4 2015, lower than the 8.97% and 10.27% contributions in Q4 2014 and Q3 2015, respectively.


The non-oil sector recorded a growth rate of 3.14% in Q4 2015, lower than the 6.44% recorded in the corresponding period in 2014, but higher than the 3.05% recorded in Q3 2015. The growth in the activities recorded in the Trade, Crop Production, and Information and Communication sectors drove the non-oil sector.


The nominal GDP stood at N25.93trn in Q4 2015. This represents an increase of 7.12% from N24.21trn recorded in Q4 2014, and higher by 1.11% from N24.31trn recorded in Q3 2015. In Q4 2015, the services sector contributed 54.30% to the GDP, followed by Agriculture at 24.18% and Industries at 21.52%.


The negative growth in industries may be linked to the foreign exchange restrictions and the weak purchasing power in the country.


Nigeria’s Capital Importation Update

The total capital imported into the Nigerian economy in 2015 was US$9.64bn, a fall of 53.53% from US$20.75bn recorded in 2014. The National Bureau of Statistics (NBS) released this data. On a quarterly basis, each consecutive quarter of 2015 recorded a larger annual fall than the previous quarter.


Capital inflows in Q3 2015 and Q4 2015 were 58% and 65.40% respectively; lower than in the corresponding quarters of 2014. The capital imported into the Nigerian economy totalled US$1.56bn in Q4 2015, a decrease of 43.34% from US$2.75bn recorded in Q3 2015. The level of capital imported between 2012 and 2014 was markedly higher than in preceding years.


The following factors are responsible for the drop in 2015


         The impact of the oil price

         The rate hike in the U.S.

         Unpredictable macroeconomic environment

         The foreign exchange demand management strategy of the Central Bank of Nigeria (CBN)


Portfolio Investment was the largest component of imported Capital in Q4 2015, accounting for 61.18%. Within Portfolio Investment, Equity accounted for 83.16%, compared with 87.20% in Q3 2015.


Money market Instruments, which was the second largest component and accounted for 16.81% of portfolio investment. Investment in the form of bonds nearly stopped entirely, falling by 98.61%. Other Investment accounted for 30.91% of capital importation in Q4 2015.


Foreign Direct investments (FDIs) in the form of Equity declined sharply by 83.10% in Q4 2015. Despite an accompanying rise of 17.17% in the other Capital component of FDI, Equity constituted 98.23% of Foreign Direct investment in Q4 2015.


In Q4 2015, the Banking sector was the largest sector, importing US$193.49mn. After being a relatively unimportant sector for the last few years in terms of capital importation, Electrical became the second largest importer of Capital, possibly pointing to increased investments in the sector as a result of the sector’s deregulation in recent years.


The sectors with the largest importation of capital into Nigeria in 2015 are telecommunications, banking, financing, production/manufacturing, electrical, servicing, trading, agriculture, oil and gas, and construction.

The UK and U.S. remained the first and second largest providers of Capital investment for Nigeria.


Telecommunication Industry

The total number of subscribers for telecommunication services increased to 148.43mn in September 2015, representing an increase of 12.52% from 131.91mn in September 2014. Most of the increase in the number of subscribers was attributable to the Global System for Mobile Communications (GSM) subscriptions.


The GSM subscribers dominate with 98.52% of the total, followed by Code Division Multiple Access (CDMA) with 1.36% of the total, whilst fixed wired and wireless make up 0.08% and 0.04% respectively.


MTN remains the largest provider of GSM subscriptions, accounting for 42.10%. The second largest provider was Globacom, which accounted for 21.09% of subscriptions, similar to Airtel’s share of 20.98%. Etisalat accounts for the least number of subscriptions at 15.83% of the total, but it is the fastest growing operator.


The total number of internet subscribers with the GSM operators stood at 97,060,548 as at September 2015. This represents 65.39% of the active GSM lines. 69.96% of Globacom subscribers also have internet subscription, compared with 56.95% of Airtel subscribers. The ratio is 66.40% and 66.96% for Etisalat and MTN respectively.


The largest provider of internet services is MTN, but as with mobile subscriptions, this figure has been falling consistently; over the last 12 months. MTN’s share of the market fell from 52.30%, to 43.10% in September 2015.


By contrast, Etisalat increased its share of the market from 7.85% to 16.07% over the same period, The share of internet subscriptions accounted for by Globacom and Airtel were relatively stable in September 2015. Globacom and Airtel accounted for 22.26% and 18.27% of the market share for internet.


Incoming porting activities shows that a total of 20,349 subscribers joined a different provider in September 2015. Etisalat continued to be the number one beneficiary, and accounted for 12,898 (63.38%) of incoming porting activities. Airtel and Globacom received 26.28%, and 7.40% of subscribers respectively, and MTN received the least, accounting for only 599 or 2.94%.

This was the eleventh consecutive month that Etisalat accounted for more than 60%. In total, Etisalat have gained 63.34% of all incoming porting activity since September 2014.

The slowdown in the economic activities have affected activities in the sector. However, there are still a lot of growth opportunities in the internet segment.


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