Nigeria Strategy Report H1 2014 - ARM Research


Monday, February 24, 2014 1:03 PM / ARM Research


Over the next few weeks, we will feature excerpts from our core strategy document – the Nigeria Strategy report. The report communicates our understanding on key happenings in global and domestic financial markets in 2013 and provides our insight on what we believe will be the major themes underpinning investor sentiment in 2014.


The prospect of  an end to the era of heightened monetary stimulus roiled global financial markets in 2013 with a more marked impact on asset prices across emerging markets where economic growth continued to show hints of fundamental weakness. As the global liquidity tide retreats over 2014, we believe investor sensitivity will heighten towards country-specific macro-economic and political concerns as a wave of elections take place across major emerging markets with significant implications for Nigerian capital markets. We begin the series with a look at the major themes that dominated the global economic and financial landscape 2013.


Review of Global Economy and Markets


New lease of life in mature markets…


Global GDP remained weak in 2013 with the IMF estimating growth at 3.1% — 10bps slower than in 2012— though a decidedly upbeat picture of the global economy emerged with broad based acceleration in growth in H2 13. Nonetheless, the tectonic shift in drivers of global GDP from EM to DM is generating macroeconomic tensions as the US Federal Reserve now appears set to significantly moderate the size of its Large Scale Asset Purchase (LSAP) program. The fall-out of the initial ‘tapering’ announcement in June drove significant volatility across global financial markets with marked deterioration in EM currency and asset prices over 2013. However, the US Fed held back till December when improving labour market data firmed convictions about a much more robust economic undertone.


Significantly, whilst 2013 US GDP growth was estimated 90bps slower than 2012 at 1.9%, output growth in H2 13 averaged 3.7% after the fiscal sequester cuts hobbled growth in H1 13. In addition, US unemployment rate in December declined to 6.7%-- its lowest level since October 2008. Other indicators suggest cyclical advancement with S&P Case-Shiller index of house price rising 13.7% over 2013—the most in eight years. These improvements, despite the 17-day government shutdown in Q3 on account of continuing political squabbles in Congress which brought the US to the brink of a debt default, provided the basis for the US Federal Reserve decision to commence the ‘tapering’ of its $85billion monthly LSAP program. The increased optimism in the strength of US economy reflected in financial market performance with equity markets posting their strongest gains since 2009 whilst US Treasuries posted their first annual loss since 1994.

Europe continued to experience signs of improvement with growth in the core economies firming up, supported by modest improvements in the periphery countries. In contrast to previous periods, the political front provided no negative surprises in H2 13 with Angela Merkel winning the re-election in Germany thereby removing any potential risks to the Outright Monetary Transactions (OMT) which was designed to reduce yields on debt of periphery nations. Also, Italy finally drew a firm line on recent squabbles with the ouster of Silvio Berlusconi from the Italian Senate. This political calm provided the ambit for progress on necessary ‘austere’ structural reforms with the IMF estimating a 50bps YoY rise in Europe’s fiscal contraction to GDP to 1% in 2013. On the monetary front, the ECB surprised markets by cutting its benchmark rate to a record low of 0.25% in November to sustain improvements which were capped by Ireland exiting the 67.5billion euro ($90.9billion) bailout program in December with a subsequent successful return to international debt markets.

The combined effect of the recovery in output growth and further policy support resulted in a thaw in the euro-zone recession with GDP contraction decelerating 30bps YoY to -0.4% in 2013. Elsewhere, improving credit conditions in the UK and greater fiscal consolidation that resulted in a 175bps YoY moderation in the fiscal deficit-to-GDP ratio to 4% in 2013 helped drive 1.4pps YoY expansion in output growth rate to 1.7%. 

Financial markets across Europe have since provided their verdict with Euro Stoxx and UK FTSE 100 appreciating by 18% and 14% respectively in 2013 (vs. 14% and 6% in 2012) even as debt spreads between German and periphery debt narrowed over the year. Rating agencies also acknowledged progress strides with upgrades on Italian, Greek, Spanish and Irish debt over 2013.

The IMF projects a 30bps YoY expansion in Japanese GDP growth to 1.7% in 2013, propelled by sizable fiscal and monetary stimulus programs which drove 21% depreciation in the yen in 2013 but helped boost private demand and export growth. In addition, the weakening yen spurred a progressive rise in inflation to five year highs in December 2013 (1.3%) placing it on course to meet the BoJ’s 2% inflation target. Although, Shinzo Abe finally began to unfurl hints of his third ‘arrow’ of Abenomics which seeks to reform the massive protectionist policies on Japanese labour market, agriculture, health care, trade and tourism, exact details remain elusive.

Furthermore, risks appear on the horizon with the Japanese government pressing ahead with the 3pps increase in consumption tax to 8% in early 2014 which the IMF and BoJ estimate should push inflation towards the 2% inflation target but with the likely downside of being a drag on GDP growth. Nonetheless, the record Y95.9trillion fiscal budget announced by Abe in December and the still loose monetary policy in place provide scope for northward push in exports as the yen weakens. Ultimately a lot rests on the ability of the Japanese government to effectively carry out much promised structural reforms which should provide support for long term growth. However, Japanese markets have responded with optimism to the earlier two ‘arrows’ with the Nikkei posting a 57% gain in 2013 (2012: 23%) as earnings of Japanese exporters improved on the yen weakness.

…as juvenile spurt slows further for Emerging markets

Emerging markets growth continued to weaken in 2013 with the IMF estimating YoY GDP growth at 4.9% - 20bps slower than in 2012. (2011: 6.4%) reflecting a combination of structural deceleration in China and softening commodity prices for natural resource exporters like Russia and Brazil. This weakness is further exacerbated by heightened financial market volatility post-tapering that has exposed a soft underbelly of EM growth.

Chinese GDP growth continued to slacken in 2013 in line with the guidance by the new Premier for mean growth rate of 7.5% though fresh concerns emerged over the Chinese financial system after money market rates spiked in June and December prompting liquidity injections by the PBoC. These concerns are a fall-out of the Chinese government’s reluctance to provide further stimulus to fuel export driven growth model. Although the new authorities released a new raft of reforms—at the Third Plenum in November—which seek to relax wide ranging regulations across currency appreciation, interest rates and one-child policy, the adjustment process to rebalance growth towards domestic consumption will likely extend subdued single digit growth into the medium term.

India’s growth also continued to decelerate, impeded by reticence of policy makers to implement critical reforms necessary to stimulate economic growth. This was compounded by rising inflation and significant rupee depreciation which drove the new RBI governor – Raghuram Rajan— to implement rate hikes in 2013.

The downdraft in commodity prices continued to negatively impact macroeconomic conditions in commodity exporters with estimated growth in Brazil and Russia  declining 230bps and 20bps YoY to 1.3% and 2.4% respectively. Overall the tepid macroeconomic conditions underpinned a subdued EM equity market performance relative to DM in 2013.


2014 will likely see further divergence in growth trends with a much firmer outlook for DM growth and more softness in EM where sustained commodity price weakness and the onset of political cycles narrow scope for less populist measures nevertheless necessary to stimulate growth. This will likely be exacerbated by financial market volatility as the US Fed normalises monetary policy with the right-sizing of its QE program. Overall, the IMF forecasts global growth to expand 70bps to 3.7% in 2014 mainly on stronger recovery across DMs whose consequent policy actions will likely constitute negative spill-overs for EM driving continued subdued growth.


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