Nigeria Half Year 2016 Outlook: Clear Picture; Dim Outlook - Cordros Capital

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Monday, July 25, 2016 3:15pm /Cordros Capital

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Global

Feeble and More Fragile Growth
The available data indicates that the global macroeconomic conditions remain fragile thus far in 2016. Specifically, economic activities in the developed economies, excluding a few large members, have been largely subdued while several large emerging markets and developing economies have not shown any sign of recovery from their economic challenges of 2015. 

Nigeria

Security – The Threat of Terrorism: Boko Haram Out, Avengers In
Although, the Buhari's administration listed improving security as one of the priorities of its administration and appears to have gained strong opposition against Boko Haram, rising violence among the Fulani herdsmen and farmers in local communities, the resurgence of militants in the Niger Delta, as well as, the demand for the restoration of Biafra by the Igbo secessionist groups provide a warning that security threats are spreading to more parts of the country. 

Growth – Unresolved Headwinds; Sombre Prospects
In March, we had revised our growth projection for the year to 2.5% (from 3.8%) following the slower-than-expected start to the year. Recovery in economic activity is likely to be modest over the second half, but with significant downside risks. Consequently, we have revised our growth estimate for 2016 to a more modest 0.08%.

Fiscal Policy – A Clouded Arena
Nigeria's fiscal policy space over the first half of 2016 significantly fell short of expectations with the delayed signing of the 2016 budget into law, and the condition is being exacerbated by the ongoing sabotage of crude oil facilities resulting in a colossal oil revenue loss. 

Monetary Policy – H2'16: Higher Rates and Higher Degree of Certainty
We project a 300bps interest rate hike over the second-half of the year from 12% to 15% as inflationary pressures curtail the CBN's expansionary ambitions.  In as much as we expect a modest improvement in economic activity in H2'16 following the passage of the 2016 budget and reduced structural bottlenecks like the petroleum scarcity, our inflation forecast remains high and depicts our expectation of further monetary policy tightening.  

Exchange Rate – Confrontation with Realities
Important to mention that the CBN has struggled to adjust to the new economic realities resulting from the collapse in crude oil prices.  These struggles have been especially highlighted with regards to exchange rate strategy, which has been characterized by various policy somersaults. 

Rising Inflation – A Fresh Can of Worms
Nigeria's inflation rate maintained an uptrend throughout the first half of the year, hitting multi-year highs, with seemingly high volatility in each of the months. We estimate the CPI to average 18.2% in H2-2016, bringing our inflation outlook for the year to a less conservative 15.7%. 

Equities – First Half Rally Restores Confidence in Domestic Investors…  
Sentiments were mixed in the Nigerian equities market over H1, with the bulls dominating overall, and leading the benchmark index to a 3.34% gain. The rally on the domestic bourse was largely driven by the expectation and eventual announcement of government economic policies and decisions. Our view going into the second half is that the positive market environment witnessed in the first half do not point to a more sustainable recovery for equities. 

Fixed Income – Only one direction
The rising inflation expectation and recent exchange rate pronouncements posit an increased likelihood for further yield expansion in H2'16. A threat to our forecast is the possibility for lower than expected bond supply to fill the hole from plummeting fiscal revenues. 

Financial Services - H2'16: A Storm is Brewing
The Central Bank of Nigeria's recent (July 4, 2016) decision to replace the board and management of SKYEBANK,  after the bank breached some key regulatory ratios (NPL, CAR, and Liquidity), sparked fears of the worst i.e.  a 2008-09 style banking crisis where the CBN took over eight DMB's. 

Consumer Goods - Stay Calm; Don't Be Deceived By What you See
The first quarter results of our consumer goods universe broadly exceeded consensus (including Cordros'), but given that the macroeconomic environment has deteriorated even further, we are quite mindful of how the strong start influences our earnings expectations going forward.

Cement - Caution! Looming Concerns
For 2016FY, we look for Nigerian cement revenue, EBITDA and PAT declining on account of structural headwinds which we do not expect to subside over the second half.

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