Still Waiting for Policy Direction


Tuesday, November 15, 2016 8:47 AM /FSDH Research

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

The Organization of Petroleum Exporting Countries (OPEC) asserts that global economic growth is expected at 2.9% and 3.1% in 2016 and 2017, respectively.

The International Monetary Fund (IMF) have indicated that economic activity in Sub-Saharan Africa has decelerated sharply against the backdrop of lower commodity prices and a less-supportive global environment.

The insulation of the Nigerian economy from the vagaries of oil price volatility remains the sustainable solution to the pressure on the external reserves.

The United States (U.S.) Energy Information Administration (EIA) in its monthly report for October 2016 showed that Brent crude oil prices are forecast to average US$43/b and US51/b in 2016 and 2017, respectively.

The IMF added that the GDP in Nigeria is expected to contract in 2016 by 1.7% because of the disruption in oil production, with a forecast growth of 0.6% in 2017.

We expect the inflation rate to increase to 18.42% in November 2016, from 18.33% in October 2016.

The persistence of foreign exchange shortages makes the intervention of the Central Bank of Nigeria (CBN) at the foreign exchange market necessary despite the adoption of the flexible exchange rate policy.

The yields on fixed income securities are expected to be higher in November 2016 because of the elevated inflationary expectation.

The equity market may not witness improvement in activities towards the end of the year because of the current weak macroeconomic environment, and low liquidity in the equity market.

Global Developments
In the countries we monitored, the prices of government bonds depreciated in more countries in October 2016 than they appreciated. The 8.8% September 2023 Turkey Government Bond and the 7.60% April 2021 Russia Government Bond both recorded the highest month-on-month price decrease of 1.65% and 1.29% to 95.10 and 96.37, respectively.

The 12.71% June 2022 Kenya Government Bond recorded a month-onmonth price increase of 1.67% to 100.57. This was followed by the 3.52% February 2023 China Governmment Bond.

Nigeria Bond closed the month at negative real yield. Other bonds we monitored closed the month at positive real yields. The Kenya Government Bond offers the most attractive real yield amongst the selected bonds in October 2016.

The advance estimate from the United States (U.S.) Bureau of Economic Analysis (BEA) showed that the growth in the U.S. economy beat market expectations.

It recorded an annualized growth rate of 2.9% (quarter-on-quarter) in Q3 2016, higher than the 1.4% recorded in Q2 2016 and beating market expectations of 2.5%.

It is the strongest growth rate since Q1 2014, as exports recorded the highest growth in three years. The U.S. unemployment rate stood at 4.9% in October 2016, compared with 5% in the previous month.

The inflation rate in the U.S. went up by 1.5% (year-onyear) in September 2016, higher than the 1.1% in August 2016 and in line with market expectations. It is the highest inflation rate since October 2014.

The Global GDP
The Organization of the Petroleum Exporting Countries (OPEC) asserts that global economic growth is expected to pick up in the HY2 2016 and gather more momentum in 2017.

OPEC however maintained its global growth forecast at 2.9% and 3.1% for 2016 and 2017, respectively. The U.S. growth forecast remains unchanged for 2016 and 2017.

However, given the slowing recovery in the labour market and the severe impact from declining investments, the trend in US growth will need close monitoring. Growth in Japan and the Euro-zone also remains unchanged for 2016 and 2017.

The forecasts for major emerging economies also remain at the same levels as in the previous month, with the exception of Russia, which was revised up to a decline of 0.6% in the current year, taking into consideration a better-than-expected development in the first half. Numerous uncertainties for global economic growth in the remainder of 2016 and for 2017 remain.

Among these uncertainties are: policy issues across the globe bear considerable weight, as do monetary policy decisions, which remain important in the near term. It added that the central banks policy decisions need close monitoring as monetary stimulus is becoming increasingly less effective. The impact of low or negative interest rates may also be taken into consideration.

Regional Economic Growth
Sub-Saharan Africa: The International Monetary Fund (IMF) has indicated that economic activity in sub-Saharan Africa has decelerated sharply, against the backdrop of lower commodity prices and a lesssupportive global environment. The region’s output is only expected to expand by 1.4% in 2016, the worst growth performance in more than 20 years.

The loss in momentum over the last two years has been on par with the deep slowdowns of previous decades. The report added that a modest recovery is possible in 2017, to slightly less than 3%. The report showed that major risks to the growth outlook is from macroeconomic inbalances and heightened policy uncertainty prevalent in several of the region’s largest economies.

The three largest comoodity exporting countreis are Nigeria, Angola and South Africa. The IMF added that in the face of strong financial and economic pressures, the policy response in many of the hardest-hit countries has been slow and piecemeal.

This is it said, is often accompanied by stopgap measures such as central bank financing and the accumulation of arrears, and leading to rapidly rising public debt. In oil-exporting countries with flexible regimes, exchange rates have been allowed to adjust only with reluctance, resulting in strong pressures on deposits and foreign exchange reserves.

Thus, the delayed adjustment and ensuing policy uncertainty have been deterring investment and stifling new sources of growth, making a return to strong growth rates more difficult.

Nigeria’s Capital Importation Update
he total capital imported into the Nigerian economy in Q3 2016 was US$1.82bn, a fall of 33.7% from US$2.75bn recorded in Q3 2015, but an increase of 74.84% from Q2 2016.

This is according to the National Bureau of Statistics (NBS). The highest level of capital imported was in August 2016, representing the highest level since July 2015. Capital imported in September 2016 stood at US$649.76mn, representing the second highest level of capital imported in any month in Q1 2016 and Q2 2016.

Unlike in the prior quarters, where Other Loans was responsible for majority of the increase, a number of investments types contributed to the quarterly increase. Year-on-year (y-o-y), the capital importation declined for each broad type: Foreign Direct Investments (FDIs), Foreign Portfolio Investments (FPIs), and Other Investments. FDIs recorded the largest decline of 52.54% y-o-y, compared with declines of 45.05% and 8.80% for Other investment and FPIs respectively.

FDIs recorded an increase of 84.84%, while Other Investments recorded an increase of 7.80%. FPIs regained its position as the largest investment type and accounted for 50.51% of the foreign capital in Q3 2016. FDIs and Other investment accounted for 30.80% and 18.69% of the total capital imported during the period, respectively.

A significant portion of the FPIs was recorded from debt financing as portfolio investment in Bonds and Money Market Instruments took the lead. Portfolio Equity on the other hand recorded a decline of 28% quarter-on-quarter, but the increase in other types of portfolio investment more than offset the decline from equity.

Bonds increased from zero in the Q2 2016 to US$369mn in Q3 2016 while Money Market Instruments increased by 509% from US$57.5mn. This is the first quarter since Q2 2007 in which Equity was not the largest part of Portfolio Investment.

Equity at US$201.12mn remains considerably subdued relative to previous highs of US$4,930mn in the Q1 2013 and US$3,875mn in Q2 2014. This highlights the fact that equity investment has been hit severely by the recent economic events.

Inflation Rate
The inflation rate remained elevated in October 2016. However, there was an observed slow-down in the month-on-month inflation rate reflecting a slow-down in inflationary pressure.

The inflation rate increased further in October 2016 to 18.33%, from 17.85% in September 2016. The inflation rate in October 2016 was driven by the faster growth in all major divisions of the Headline Index. Year-on-year (y-o-y), the Food Price Index (FPI) increased by 17.10% in October 2016, from 16.60% in September 2016.

The FPI was driven by higher prices of Bread and Cereals, Fish, and Meat. The Core Index increased by 18.10% in October 2016, higher than 17.70% recorded in September 2016.

In October 2016, the largest increases in the Core Index were recorded in the Housing, Water, Electricity, Gas and Other Fuels as well as, Fuels and Lubricants for Personal Transport Equipment and Education.

We estimate that the inflation rate would be at 18.42% in November 2016 as shown on table 5 below

Movement in the External Reserves
The demand pressure on the external reserves in the face of low foreign exchange receipts persisted in October 2016. We note that the external reserves recorded consistent increase towards the end of October 2016.

The critical elements to increasing the level of external reserves position lies in the improvement in the state of infrastructure

The recent accretion to the external reserves started from October 20, 2016. The inflow from international money transfer operators was the major reason for the increase in the external reserves.

There was also a marginal increase in oil production, which also boosted the external reserves. The 30-day moving average external reserves declined by 2.36% to US$23.95bn as at end-October 2016, from US$24.53bn at end-September 2016.

It increased by 0.21% to US$23.95bn as at October 31, 2016 from US$23.90bn on October 20, 2016. The average external reserves stood at US$29.1bn in October 2016, from US$24.9bn in September 2016.

The insulation of the Nigerian economy from the vagaries of oil price volatility remains the sustainable solution for the pressure on the external reserves. The FGN should step up its actions at improving the business environment in order to stimulate productive economic activities.

Crude Oil Market and Bonny Light Price
The daily crude oil production in Nigeria increased by 6.29% to 1.52mbpd in September 2016, from 1.43mbpd in August 2016. This is based on the secondary data available from the Organization of the Petroleum Exporting Countries (OPEC) report for the month of October 2016.

The total OPEC crude oil production from secondary sources was 33.39mbpd in September 2016, an increase of 0.66% from 33.17mbpd over the previous month. The OPEC production level in September 2016 is 3.39mbpd higher than its collective production quota of 30mbd/d.

Crude oil production output increased mostly from Iraq, Nigeria, Libya, Iran, Kuwait, and United Arab Emirates; while production recorded the largest drop in Saudi Arabia, Venezuela, Gabon, and Angola.

The U.S Energy Information Administration (EIA) in its monthly report for October 2016 indicated that Brent crude oil prices are forecast to average US$43/b in 2016 and US$51/b in 2017, respectively. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent in 2016 and in 2017.

The current values of futures and options contracts suggest high uncertainty in the price outlook. The recent activity of U.S. onshore producers, along with expectations of higher U.S. production in 2017, is one of the drivers for lowering EIA’s Brent crude oil forecast.

According to the data from Thomson Reuters, the Bonny Light oil price decreased by 5.60% to US$46.84/b as at end-October 2016, from end-September 2016. The average price of Bonny Light was US$50.32/b in October 2016, an increase of 4.49% from the average price of US$48.16/b recorded in September 2016.

Foreign Exchange Rate
We observed inflows from the international money transfer operators in October 2016 and it had positive impacts on the value of the Naira. The Naira appreciated by 2.35% at the parallel market to close at US$1/N468 at end-October 2016 from US$1/N479 as at end-September 2016.

The average exchange rate at the parallel market depreciated by 6.84% to stand at US$1/N466.08 in October 2016, compared with US$1/N434.20 in September 2016. The inter-bank market appreciated in October 2016.

As at end-October 2016, the value of the Naira closed at US$1/N308.81 at the inter-bank market, an appreciation of 0.91% from US$1/N311.62 at end-September 2016. The persistence of foreign exchange shortages makes the intervention of the CBN at the foreign exchnage market necessary despite the adoption of the flexible exchange rate policy.

In our opinion, the value of the Naira can be enhanced by the diversification of Nigeria’s exports. This is also an important channel for fostering economic growth and increasing the resilience of the Naira against the U.S. Dollar, through infrastructure upgrade and trade openness

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