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FINANCIAL DERIVATIVES COMPANY LIMITED
Volume 1, Issue 11
February 12, 2011
Bi-monthly Economic &
Business Update
CBN creates a forex (forward) market in Nigeria
CBN’s announcement allowing trading in forward contracts and futures options in
Inside this issue: the Nigerian foreign exchange market was greeted with indifference by end users.
CBN creates a forex 1 This is because many see forex hedging as unnecessary and an additional expense
(forward) market in Nige-
ria with no value-add. When you analyse the exchange rate trend in Nigeria, you will
MPC moves from neutral 4 see an historical level of stability in its value relative to the U.S dollar. The Nigerian
to contractionary stance:
Hikes MPR by 25 basis
authorities had unofficially maintained a pegged value against the greenback over
points the years. The last time there was any major adjustment in the forex value of the
Nigeria’s Eurobond debut 5 Naira was in late 2008. At the time under Governor Soludo, the Naira was sharply
at 7%p.a. yield
devalued by 30% from N118.5/$1 to N155/$1 in two months. The parallel market
Economic Indicators & 6
Market adjusted in tandem and in some cases exaggerated to N190/$1.
International Perspective 10
Stock Market 16 One could argue today that since currency adjustments are usually unexpected
An Arab Awakening 18 and swift, currency hedge should be a necessary cover against the negative impact
of exchange rate exposure. However, before 2008, the Naira had traded within the
band of +/- 4% for a period of seven years. Therefore apart from the shock of 2008
during the global financial crisis, when most countries had to make some signifi-
cant adjustments, the Naira has been a relatively stable currency.
Financial Indicators:
Inflation Rate (Dec) 11.80%
7 year FGN bond 9.20 p.a Therefore the question now is why introduce the hedge products in a market that
2010 GDP growth 7.85% historically and fundamentally does not require the additional cost to importers.
MPR (Jan 2011) 6.50p.a. The reasons are not far-farfetched and they are stated below.
Exchange rate (Official) N149.90/$1
(Parallel) N155/$1
Oil Price $103pb No better time for initiating a forward market
Oil Production (Dec) 2.15mbpd
There is no better time to introduce forwards and options contracts than now. The
External Reserves $34.8bn
Nigerian currency is definitely heading towards current and capital account con-
vertibility. The Nigerian government had earlier accepted the article VIII of the
International Monetary Fund (IMF) terms of agreement, which encourages coun-
Page 2 FDC Bi-monthly Economic & Business Update
tries to move towards currency convertibility and reduce forex market seg-
mentation and imperfections.
In an efficient market like most others, currency and price volatility are a
natural and constant phenomenon. Efficient markets usually metamorphose
into sophisticated markets, which allow informed buyers and sellers to
hedge their positions to mitigate risks. Nigeria’s flow of imports is changing
in favour of countries that have deliberately and strategically embark upon
competitive devaluations.
Chart 1 : Major Import Partners
The charts show that countries like China, U.S. are gaining market share at
the expense of the EU where the currency is relatively strong. This supports
the argument that Nigerian importers are becoming not only value but price
and currency sensitive or elastic in their demand behaviour. That is why
there are more Kia, Hyundai cars and Tata buses than BMW’s and Mercedes
amongst imported cars.
Source : EIU, FDC
Manufacturers also need to plan and guarantee margins on imported raw
materials or finished goods. These are some of the reasons why the hedging
of the Naira is likely to become very prevalent amongst the leading manufac-
turers and corporates in 2011/2012.
Last but not the least, but infinitely more important is the question of the
cross border borrowing. The differential between borrowing in Nigeria and
in the Euromarkets is so wide for an equivalent level of risk. This is leading Manufacturers also need to plan
most subsidiaries and affiliates of multinational to raise short term funding and guarantee margins on im-
ported raw materials or finished
from international banks in U.S. dollars or Euros.
goods. These are some of the rea-
sons why the hedging of the Naira
Since repayment of these facilities is in forex and their sales are in Naira, the is likely to become very prevalent
need to cover forex exposure has become all the more imperative. amongst the leading manufactur-
ers and corporates in 2011/2012.
In conclusion, one can say that the forward markets in Naira, which is now
being initiated by the CBN will soon erupt into something much larger than
was originally anticipated. It will make planning easier and smoothen the
peaks and troughs of currency swings in what is one of Africa’s most potent
frontier markets.
Bismarck J. Rewane
Page 4 FDC Bi-monthly Economic & Business Update
CBN Moves from neutral to contractionary Stance:
Hikes MPR by 25 basis points
The Monetary Policy Committee (MPC) in its first meeting of 2011 surprised
the market by increasing the anchor interest rate the MPR by 25 basis points
to 6.25% p.a. A 25 basis point is not substantial, relative to the inflation gap.
The difference between inflation and short term interest rates is still above 4%
p.a. What is most significant is the CBN move from a neutral to contradic-
tory (tightening) stance. This move in normal times sends a signal to banks
and financial institutions that liquidity is going to be tighter and thus there
will be a general increase in interest rates across all the maturity buckets on
the yield curve. The CBN move is also considered as bold and independent
because contractionary monetary policy is pro-cyclical i.e. money is more
expensive, at a time when the FGN move at increased expenditure is counter-
cyclical and stimulative of growth, but could be inflationary.
Therefore, as is typical in most economies, the monetary authorities worry
about inflation whilst the fiscal authorities are concerned with growth.
The MPC pushed up the anchor rate but left the asymmetric corridor un-
changed. (A change in this corridor only makes borrowing or depository
money with the CBN by commercial banks more or less expensive)
The MPC made a much more decisive move by increasing the cash reserves
ratio to 2% and the liquidity ratios from 25% to 30%. This is a much more
fundamental change in the liquidity picture. It will alter the IS/LM curve to
the left and lead to an increase in the interest rate structure.
Why is the CBN doing this when inflation is declining?
The reasons are not that difficult to understand. Most Central Banks have According to BOS, year-on-year
moved from reacting to historical inflation data and now track and tackle inflation rate declined for the
anticipatory inflation. The time lag between policy measures and effective fourth consecutive time in Decem-
result in Nigeria could be long as 120-180days. Therefore it is not prudent for ber 2010 to 11.8%.
the CBN to continue with a reaction or feedback monetary policy strategy or
a time of fiscal imbalances in the economy. The CBN is of the view that infla-
tionary pressures are building as a result of the fiscal dominance of the econ-
omy. This view is reinforced by the proneness of government spending to
leakages.
The economy is also vulnerable to the gross inefficiency associated with gov-
ernment expenditure. The MPC noted that the level of government borrow-
Page 5 FDC Bi-monthly Economic & Business Update
ing to fund its monthly recurrent expenditure will lead to overheating which In conclusion, one can say that the
will spill over into inflation. These moves by a much more independent MPC forward markets in Naira, which is
now being initiated by the CBN
where the voting patterns suggest there is a healthy debate is very comfort-
will soon erupt into something
ing to the analyst community.
much larger than was origi-
nally anticipated.
Also the gradual but noticeable shift from bank regulatory emphasis to infla-
tion targeting and monetary policy shows that The CBN is moving back to its
mandate. We had accused the CBN of being too distracted from its ke6y ob-
ject6ive by focusing too much on banking systematic risks.
Fortunately, ever since the MPC meeting Oil prices have surged, (thanks to
Tunisia and Egypt), the External reserves have increased sharply so also FGN
revenue. The spectre of a wild fiscal deficit is no longer haunting Nigeria and
therefore at least for we have not much to worry about. But this is just for
now, there is a temporary reprieve, the fundamental weaknesses remain sub-
dues but pronounced and will erupt when oil prices return to normal and the
need to finance the infrastructure gap becomes desperate.
Bismarck J. Rewane
Nigeria’s Eurobond debuts at 7% p.a. yield
The much-awaited Nigerian Eurobond hit the market on Friday, 21 January
2010 with a lot of fanfare. The bond, which was priced at a 7% p.a. was 2.5
times oversubscribed. The markets had feared that the issue may be under-
subscribed even the FT wrote expressing doubts based on fiscal leakages.
Most institutional Investors who are mostly underweight in Emerging Mar-
ket (EM) instruments have developed a huge appetite for EM risks. Apart
from its attractive yields, it also offers diversification. Nigeria with its
proven oil reserves and 152 million population clearly fits this profile.
Laudable Intention, wrong timing Ghana, perceived as a much more
A window of opportunity has however been opened for corporates to access efficiently managed economy was
the international debt market. But a very expensive window it seems. The able to secure a coupon of 6% p.a.
7%p.a. benchmark yield is on the high side. Ghana, perceived as a much on it’s $750 million debt issue from
more efficiently managed economy was able to secure a coupon of 6% p.a. on the same market 3 years ago.
it’s $750 million debt issue from the same market 3 years ago. Some argue
that it is not the risk but timing that was responsible for the pricing advan-
tage.
Page 6 FDC Bi-monthly Economic & Business Update
The timing argument is more acceptable in our view. Ghana’s economy is
beginning to take on a more positive dimension. The country has a well diver-
sified economy, resources ranges from oil to commercial deposits of bauxite
and a much sought after Cocoa in the light of political instability in Ivory
Coast. The Country has sorted out its power sector and electricity supply in
the country is steady relative to Nigeria. Ghana’s fiscal concerns have been
adequately navigated since 2008 when the market had reservations about
fiscal management.
A benchmark higher than the Norm
Nigerian multinationals and corporate with financial clout have issued debts
in the Euro market with better spreads than the current benchmark. The risk
is that some of these short term instruments will now be re-priced at higher
rates than the current coupon rates.
If the yield on the Government bond is higher than what the market is offer-
ing, lenders may have to re-price their loans upwards in response to the out-
come of the bond issue. They may choose to raise interest rates higher than
the benchmark or at best match the benchmark. So the question remains. Is
the international investment community sending a signal to the government?
The risk of this benchmark issue therefore is that it might inadvertently lead
to a much higher debt service cost on an aggregate basis.
Adedayo Ayeni
Economic Indicators And Markets
Oil Price
World oil prices fell sharply to a 10 week low in New York in response to
Chart 2 : Spot Oil Price (Sweet Oil)
Mubarak’s exit from office as Egypt’s president. The market had priced in the
risk of disruption to oil shipments due to a closure of the Suez Canal. Crude
for March delivery fell by $1.15 to $88.58pb. Strangely Bonny light and Brent
Sweet crude climbed 56 cents to close at $101.43 pb.
Thus Nigeria revenue prospects remain bright in spite of this change in
Egypt. In this crisis period we have noticed a sharp widening of the premium
Source : WSJ
of Bonny to West Texas Intermediate to $15.85. The gap last year was a mere
Page 8 FDC Bi-monthly Economic & Business Update
76 cents. According to Bloomberg the tightness in the Bonny light market is
happening at a time when demand by refiners for distillate-rich crudes has
gone up seasonally. Bloomberg believe that oil prices have been immensely
correlated to stability.
The Nigerian president once again reiterated his wish that the petroleum in-
dustry bill (PIB) will be passed in this session of the National Assembly
(NASS). The petroleum minister had pronounced earlier that it would be
passed last September. It is probably inconceivable that the bill in its present
form will be debated and passed at the current session of the NASS.
Oil
For all the hand-wringing about rising oil prices over the past decade, their
For all the hand-wringing about
impact on the global economy has been far less painful than previously. Re- rising oil prices over the past dec-
cord highs barely earned a cameo as a villain in the recent recession, while ade, their impact on the global
they played a starring role in 1973-74, 1980-81 and 1990-91. This is because the economy has been far less painful
world has not faced a true oil supply shock in 20 years. than previously.
Fears of such a low-probability, high-impact event have emerged for the first
time since the 2003 Iraq war amid chaos in Egypt and concern that troubles
could spread to other autocratic regimes in the region, collectively responsible
for a third of global supply. A closure of the Suez Canal and associated pipe-
lines would divert some 3 per cent of global output, while a far more serious
blockage of the Straits of Hormuz would block 17 per cent of global oil trade.
The ultimate nightmare scenario is instability in top producer Saudi Arabia,
which produces more than a 10th of all crude. To put this into context, the
1973 Arab oil embargo affected 7 per cent of global output, sparking a trebling
of prices and the worst recession in four decades. The 1979 Iranian revolution
and subsequent Iran-Iraq war affected a 10th of output and was nearly as
damaging.
There are some mitigating factors, though. Unlike the 1970s, developed na-
tions have large strategic stockpiles today (equivalent to about 500 days of oil
crossing Egypt, for example) even as their oil intensify per unit of economic
output has nearly halved since the 1970s. But do not take comfort from the
fact that each of the three recessions following price shocks was milder than
the preceding one. Economist Nouriel Roubini points out that each spike was
milder and slower than the preceding one too.
Given today’s ultra-loose monetary policy in many countries, some worry that
a supply shock could spark dreaded stagflation. Like oil crises, stewards of
Page 9 FDC Bi-monthly Economic & Business Update
the fragile global economy should hope that this is a phrase that remains in
the pages of economics textbooks, not newspapers.
Culled from the Financial Times( February 3 2011)
Oil Production Chart 3 : Oil Production
An estimated 2.15 mbpd of crude was produced in December according to
data from the Organization of Petroleum Exporting Countries (OPEC). This
is above the 2010 average of 2.10 million bpd. Oil production for January is
expected to average 2.3 million bpd in the light of the calm experienced so
far in the region since the start of the year. No recent attacks have been re-
corded in the region. The expectation is that this situation will be maintained Source : OPEC
at least till the election period. Fears still persist on the ability to maintain Chart 4 : Oil Rig Count
calm in the region during the run up to the elections and during the process
itself. Shell released its fourth quarter results to a dismayed investment com-
munity. It missed analyst estimates but it recorded an increase of 5% in 2010
oil and gas output to 3.3. Million bpd. It recorded an increase of 115, 000 bpd
in Nigeria due to improved security conditions in Nigeria Delta and facility
locations.
NIBOR Source : Baker Hughes
Interest Rates
Short term interest rates receded as Money Supply increased after the
Chart 5 : Interbank Rates
monthly allocation shared by all arms of government was paid to the banks. NIBOR(% p.a.)
In January there was a past payment of N150bn from the excess crude ac- 16
14
count in addition to the traditional statutory allocation. The total amount
12
10
8
disbursed was N205bn which is 2%% of December Money supply. The re- 6
4
sponse of the market where short term rates decline by 200 basis points
2-Feb
4-Feb
6-Feb
8-Feb
11-Jan
13-Jan
15-Jan
17-Jan
19-Jan
21-Jan
23-Jan
25-Jan
27-Jan
29-Jan
31-Jan
10-Feb
5-Jan
7-Jan
9-Jan
shows the shallowness of the Nigerian Interbank market and how vulnerable ON 7 day 30 day 60 day 90 day
the markets are to short term savings and shocks. Source : MMA/FDC
Chart 6 : FAAC Disbursement
Call, 7 day, 30 day and 60 day facilities currently stand at 10% p.a,10.5%
p.a,11.9% p.a, and 12.88% p.a.
In the first two weeks of February OBB increased by 250 basis points. On Feb
2, the CBN debited the banks with a huge sum in respect of the CRR. The
banks have since adjusted and market has absorbed its effect. The outlook is
for some further tightening but not enough to destabilize the market or
prompt a sharp re-pricing of risk assets.
Source : Federal Min. of Finance/
Page 10 FDC Bi-monthly Economic & Business Update
Exchange rate Chart 7 : External Reserves
The Naira remained stable at the official rate but strengthened by 1.6% at the
parallel market in the last two weeks of January. The Naira holds at N150.3/
$1 and N154.5/$1 at the official and parallel market respectively. The spread
between the official and parallel rates has gradually narrowed and is cur-
rently at the lowest level since mid-December. The spread is currently at
N4.19.The exchange rate is still quite high as the parallel market rate has av-
eraged N156/$1in the last two weeks. The parallel market rate has gradually
Source : CBN
trended downward since the middle of January. Pressure therefore seems to
be easing in the market. The CBN has sold $2.25 billion in the eight auctions
held in January, meeting 80% of total demand. Demand for forex increased
by 37% in January. Fears that the impending elections will serve to drive up
exchange rates and further devalue the Naira have subsided in recent days.
The CBN has however re-iterated its commitment to stabilize the exchange
rate by its continued intervention in the forex market to keep the exchange
rate within the range of plus or minus 3 percent around N150 /$1.
External Reserves grow by 6.7% to $34.8 billion in two weeks
Nigeria’s external reserves currently stand at $34.8 billion. This is an increase Chart 8 : Exchange Rate
of 6.7% in 2weeks over the closing balance of $32.6 billion as at January 2011.
The depletion of the reserve has been touted as one of the reasons why some
investment firms did not subscribe to Nigeria’s $500 million Eurobond issue.
Oil production for of 2.15 mbpd in December was above the 2010 average and
oil price is currently above $100 per barrel. Although the CBN has said it will
ensure reserves do not deplete any further, it remains to be seen how this will
be achieved given past antecedents. The CBN also has attempted to offer ex-
planations on how the external reserves were depleted in 2010 in the Mone- Source : CBN
tary Policy Committee (MPC) communiqué.
Adedayo Ayeni
International Perspectives
Inflation Rekindled In Nonchalant Markets
By Mike Dolan
Central banks are pump-priming at the most aggressive pace in decades, gov-
ernments are hiking sales taxes, food and energy costs are surging -- and yet
investors seem strangely casual about inflation risks.
Page 12 FDC Bi-monthly Economic & Business Update
For sure, there's a powerful argument that recession has left too much spare
capacity in the labor markets, housing, factories and office space of the big
western economies to allow price bottlenecks to drive consumer price infla-
tion higher.
But for all the debt-hobbled economic funk in parts of the United States,
Europe and Japan, global growth at large is still well above trend rates in ex-
cess of 4 percent and global monetary policy is switched to ultra loose.
Many of the biggest developing economies, such as China, India, Russia, Bra-
zil, Turkey and Indonesia, continue to grow briskly and inflation is running at
a 5 to 10 percent clip.
"The pick-up in input prices has come through globally, not just in the emerg-
ing world. Higher inflation in the emerging world has implications for the
developed world," Janet Henry, economist at HSBC, told reporters this week
when flagging the biggest quarterly rise in the inflation component of HSBC's
emerging markets index in more than two years.
In essence, aggregate global demand affects global prices regardless of slack
in the west.
Energy prices are up almost 20 percent in the past three months. Sugar, corn,
soybeans and coffee prices are up more than 20 percent over the same period,
some up more than 50 percent through 2010. Add tax rises, like Britain's 2.5
percentage point increase in value-added taxes to 20 percent this month, and
even more pressure builds.
Stripped To Nought
You can strip all these "volatile" twists out of inflation but many people's real
experience of prices does have an impact.
As many groups -- not least wage bargainers and social groups defending the
poor and old -- grow weary of policymakers and wage setters ignoring such
substantial rises in their cost of living, inflation expectations among the public
at large are starting to gain some traction.
The University of Michigan's consumer survey on one-year U.S. inflation ex-
pectations jumped back to 3.0 percent last month from 2.2 percent in Septem-
ber. The Bank of England's equivalent indicates one-year inflation expecta-
Page 13 FDC Bi-monthly Economic & Business Update
tions have jumped to 3.9 percent -- almost twice the bank's 2 percent target.
And yet financial markets in the United States and euro zone continue to price
inflation-protected debt securities with implied inflation rates of less than 3
percent on a five-year horizon.
So does relaxed policy and relatively nonchalant market pricing mean every-
thing's in hand? Well, there are a few worriers -- and not just commodity bulls
and gold bugs.
Morgan Stanley's chief U.S. economist Richard Berner and his team reckon
U.S. inflation is nearing an "inflection point" and will soon start to move
higher from the current 1.1 percent.
"By midyear, we think investors' outlook for inflation will begin to change as
the forces pushing inflation higher start to gain the upper hand," Berner told
clients. If so, are central banks such as the Federal Reserve and the Bank of
England -- who are not only pinning interest rates close to zero but still ac-
tively printing money -- justified in remaining so comfortable with a big out-
put gap?
Output Gap Errors
Well, this is where it gets trickier. One of the biggest academic criticisms of
policymakers' failure to prevent rampant double-digit inflation in the 1970s
was that they completely misjudged the extent of the economy's spare capac-
ity, which is nigh on impossible to see in real time.
Berner at Morgan Stanley also adds the wrinkle that the direction in which the
output gap is moving, and not just its overall level, may have major effects on
inflation rates and expectations. This he calls the "speed effects."
In effect, it means a trough in operating rates or a peak in jobless rates has an
impact not only on cyclically-sensitive global prices like energy and food but
also in areas like rents, which are a major component of U.S. consumer price
indexes. Although U.S. vacancy rates remain high, they are falling fast and
rents are up almost 5 percent in the year through November, according to
data cited by Morgan Stanley. All this may also imply that, faced with huge
sovereign debts and variety of lingering financial stability problems, the
world's central banks are prepared to become a little more "flexible" with in-
flation targets and goals.
Page 14 FDC Bi-monthly Economic & Business Update
In a paper on inflation targeting last month, Swedish Riks bank board mem-
ber Lars Svensson highlighted among other things the extension of time hori-
zons for reaching those targets from two to three years recently in Britain,
Sweden and Norway. Yet greater tolerance of higher inflation in the short run
may still have a profound effect on markets and expectations. For investors, it
may be wise to expect a bumpier ride from now.
Culled from Reuters, January 2011
Angola's capital: Costly even for Croesus
The trials and tribulations of visiting an African boomtown
The Angolan capital calls itself the “New Dubai” and there certainly are simi-
larities with the emirate. Luanda has vast oil wealth. If they could only get
visas, which are rarely granted, tourists would flock to its beaches and nearby
game parks. Following the opening of a modern airport, flights arrive non-
stop from Europe and America.
But if prices in Dubai seem inflated, they have nothing on Luanda. Last year
Angola’s capital was the most expensive city in the world, according to Mer-
cer, a New York-based consultancy. A bog-standard hotel room costs $400, a
non-alcoholic drink in the lobby $10 (though a mere $2 in a supermarket). An
underwhelming hotel buffet is $75 and a pizza on the street $25.
A taxi-ride within the city easily adds up to $50, especially since the taxi com-
pany–the only one in town–starts the meter as soon as the car leaves the de-
pot. There are no cruising cabs. A standard flat costs $10,000-$15,000 a month
to rent or at least $1m to buy. A supermarket sold a melon for $100 to a
Frenchman at Christmas. He tried to sue the retailer for profiteering in a local
court last month, presenting a picture of the melon plus the receipt. The judge
threw out the case for lack of evidence: the Frenchman could not provide the
court with the original melon, since he had eaten it.
Officialdom rarely favours outsiders. Your correspondent was walking along
a seafront road between the presidential palace and the national police com-
mand when a policemen asked to see his passport. Two Japanese business-
men were caught in the same dragnet. Meeting blank incomprehension, the
policeman wrote $10 into the sand with a stick. When this failed to elicit the
required backhander, the copper stammered, “Angola… polícia… bandidos.”
Culled from The Economist, February 2011
Page 16 FDC Bi-monthly Economic & Business Update
Stock Market Chart 9 : Market Cap. By Sector
Stock Market Review
The Nigerian stock market tried to recover from a string of loss making ses-
sions. It has gained marginally in the last few days. The month of February
has been dominated by scepticism and negative sentiment after a January
rally in the Nigerian stock market. In all the market has lost 3.5% in market
capitalisation and wealth in a fortnight. Source : FSDH/FDC
Chart 10 : Market Capitalisation
This comes on the back of a strong rally across all sectors in January. The Ni-
gerian stock market gained 8.32% in January, 5.68% below the global average
of 14%. Most stock markets gained substantially in January. The global rally
continued in spite of violent protests in Tunisia and Egypt and the spike in
world oil prices.
In Nigeria, investors reacted initially to the marginal spike in the MPR and
the expectation that there would be a general increase in interest rates. Typi- Source : FDC, NSE
cally stock market prices usually decline when interest rates increase. Our
view was that the market should have rallied because of some certainty and
Chart 11: Peer Capital Market
clarity on the Nigerian political scene. Also the spike in oil prices is expected
YTD (%)
to increase government revenues and liquidity in the system. Investors re- 25
20
mained indifferent to the positives and stayed mainly on the sidelines. In Feb- 15
S. Africa
DJIA USA
10
China
Japan
ruary, the average daily turnover has declined from an average of 5.2bn in
EMI
5
0
DJIA USA Japan Egypt China S. Africa Emerging
January to 3.3bn.
-5
markets
-10 MSCI Index
-15
-20
The market witnessed price declines in some notable stocks with the greatest Source : The Economist /FDC
decliners being Niger Insurance, Vitafoam, RT Briscoe, Unity Bank and Nige-
Table 1 : Peer Market Index
rian Banks Manufacturing Company; and advancers were Neimeth Cham- Peer Market Index YTD
pion breweries, Berger paints, N.E.M Insurance and Spring Bank. (%)
DJIA USA + 17.4
Japan +13.6
Our analysis suggests that most active investors in the last quarter were inter- Egypt -15.2
China +20.00
national institutional investors. This group were shocked at the news of 57
S. Africa +20.20
brokerage firms being suspended for capital inadequacy and co-mingling of Emerging markets +12.20
clients and proprietary funds. Equally surprising was the calibre of brokerage MSCI index
firms that failed the capital adequacy, test. Some of the big firms have now Source : Economist
complied but the reputational damage remains incalculable.
Nigeria is trailing the MSCI index
by over 6% meaning that it is not
As stated in this report, Guinness Nigeria released H1 results. The perform- benefitting from the huge flow of
ance was flat but stronger than anticipated. The stock has remained relatively money into emerging markets. Its
share of the global flow of portfolio
unchanged. The company is optimistic about the H2 performance.
funds is declining.
Page 17 FDC Bi-monthly Economic & Business Update
The outlook for February remains mixed. The AMCON is expected to issue
tradable bonds in replacement of the non-tradable. This will inject an extra
N250bn if liquidity into the system. The total FGN Treasury bill issued in
January was oversubscribed by 45% indicating that liquidity is not con-
strained.
The signing of the MOU’s between the rescued banks and others is likely to
be a game changer. We expect a loss of interest in the rescued banks’ shares
because they will be integrated into the acquiring banks capital. Nigeria is
trailing the MSCI index by over 6% meaning that it is not benefitting from
the huge flow of money into emerging markets. Its share of the global flow of
portfolio funds is declining.
Guinness reports earnings
Guinness Nigeria plc (GUINNESSNL) released unaudited results for 1H11.
Despite continuing good top line performance (+10% y/y), the profit growth
continued to be lagging our expectations (+2.2% y/y vs our previous forecast
of +16% y/y at this stage). However, the management expects a strong profit
performance in 3Q11 (3m to Mar-11) and therefore we expect that EPS
growth of 21% y/y is achievable for the full FY11. The share price has come
off almost 12% since reaching the 12m high of NGN 230 on 25 Jan-11, and
therefore we upgrade our recommendation to HOLD, with a fair value of
NGN 212.43.
Guinness Nigeria’s holding company, Diageo, reported that the key diver of
the GN’s performance has been strong net sales growth and positive price/
mix by the Harp Lager (double digit net sales growth), the brand which has
been prioritised and has been making inroads in the lager space traditionally
dominated by Nigerian Breweries’ Star Lager. Reduction in stock outs as
well as advertising campaigns that increased trade and consumer confidence
in the brand resulted in a volume growth of 19% despite two price increases
during the period. According to management, the good performance from its
beer brands volume growth caused it to gain volume market share.
Malta Guinness continued to benefit from the bottle re-launch and improved
distribution, which drove net sales growth of 18%. Guinness volume was up
slightly, but net sales were flat due to the focus on the 450ml pack size. Smir-
noff Ice performed well as off trade momentum behind the can format in-
creased distribution and drove 34% net sales growth.
Culled from African Alliance Research
Page 18 FDC Bi-monthly Economic & Business Update
Diageo Releases Results
Yesterday Diageo plc, the parent company of Guinness Nigeria plc
(GUINNESSNL), East African Breweries Limited (EABL KN) and Guinness
Ghana Breweries Limited (GGBL GN) released results for 1H11.
The Africa operations saw strong net sales growth (+10% y/y) especially in
lager, due to improved distribution, and key spirits segments returned to
growth.
Nigeria: Net sales in Nigeria grew 10%, propelled by the double digit
growth of Harp. Reduced stock outs and advertising campaigns increased
trade and consumer confidence in the brand as demonstrated by volume
growth of 19% despite two price increases in the first half. Malta Guinness
continued to benefit from the bottle re-launch and improved distribution,
which drove net sales growth of 18%. Guinness volume was up slightly, but
net sales were flat due to the focus on the 45cl pack size. Smirnoff Ice per-
formed well as off trade momentum behind the can format increased distri-
bution and drove 34% net sales growth.
East Africa: The East Africa hub delivered 12% volume growth and 10% net
sales growth as the economy continued to recover. Negative price/mix was
driven by a significant increase in duties which caused consumers to shift
into value spirits and beer. However, Guinness net sales were up 6% despite
price increases on the back of excise duty increases. Improved distribution
increased Senator volume which in turn drove 17% net sales growth. Tusker
also delivered strong results growing net sales 15% as a result of volume
growth in Uganda and price increases.
Ghana: Guinness volume in Ghana declined due to January 2010 excise duty
and price increases, but double digit net sales growth from Star and Gulder
lagers and non-alcoholic Alvaro, and significant growth in spirits compen-
sated for Guinness performance.
Bismarck J. Rewane & Sheila Ojei
An Arab awakening
Middle Eastern commentators look back 95 years to find a challenge to the
established order as momentous as that now taking place. “This is history in
the making, a replay of the great Arab revolt,” says Jamal Khashoggi, a
prominent Saudi analyst, referring to the 1916 uprising against Ottoman rule
that began in what is now his country.
Page 20 FDC Bi-monthly Economic & Business Update
Just as that uprising swept across the region, so too this year has one nation
after another felt a new force. Since a vegetable vendor in a restive Tunisian
town doused himself with petrol and burnt to death in a December protest
against unemployment and corruption, the flame of popular defiance has
travelled across the Arab world.
Hunkered down in his presidential palace in Cairo, 10km away from the
centre of vast protests on Tahrir Square, Hosni Mubarak on Tuesday con-
ceded that he would quit. Last night it remained uncertain whether his 29-
year rule would endure even until elections due in September.
Tuesday’s fury sweeping through Egypt jolted leaders elsewhere in the
Middle East into action. By midday, Jordan’s King Abdullah had sacked his
government, mandating a new prime minister to reform the political sys-
tem. The next morning, Ali Abdullah Saleh, Yemen’s president, had also
internalized the message from Tahrir Square, telling his impoverished na-
tion he would not seek re-election in 2013 nor put forward his son in his
place. “No extension, no inheritance, no resetting the clock,” he declared.
In the most dramatic display of people power witnessed in the region’s post
-colonial age, the Arab street has risen from its torpor. This Arab awakening
has already pushed out one long-time ruler – Tunisia’s Zein al-Abidine Ben
Ali – and has proved that the colour of change need not be Islamist, as lead-
ers had claimed in their pursuit of lifetime power.
In Egypt, as in Tunisia, the young people who initiated the street cam-
paigns were educated, internet-savvy activists with no political affiliation.
They were enthusiastically joined by secular as much as by Islamist voices.
After watching the fervor unleashed in the past month, young Syrians, Bah-
rainis, Algerians and even the quiescent Libyans are turning to Facebook
and Twitter to call for their own “day of rage”. As Mr. Khashoggi puts it:
“The 25-year-old unemployed today has become the strong man.”
But however inspiring the stirring of the Arab street is found, the democ-
ratic transformation of a region that has lagged behind the rest of the world
in human rights and freedoms is not yet guaranteed.
True, the assumption that the Arab world can remain mired in authoritari-
anism, aided by western support and a web of mukhabarat – intelligence
services – has been demolished, as the wall of fear has collapsed. From
Page 21 FDC Bi-monthly Economic & Business Update
White House officials to bankers on Wall Street and pundits in London, the
long-held belief that repressive regimes are the basis of Middle Eastern stabil-
ity has been torn apart.
“We will pretty soon be talking about the pre-Tunisia and post-Tunisia Arab
world,” says Abdulkhaleq Abdulla, a professor at Emirates University in Du-
bai. “The leaders in the region are intimidated – they are really scared today.”
But if Tunisia was the spark of the Arab awakening, Egypt, the largest Arab
country with 80m people and the region’s historic leader, is where the battle
for the future of the Middle East is being fought and where the aspirations for
change will need to be consolidated. “Egypt’s impact on the region would be
massive, whether the transition is peaceful or violent,” says one Arab diplo-
mat. “Egypt is a bellwether state: when it moved towards the Soviet bloc,
many Arab states followed; when it turned towards the west, many Arab
states followed; and when Islamism became a leading trend in Egypt, it also
did in other parts of the Arab world.”
One of the most remarkable aspects of Egypt’s uprising is the extent to which
it has mirrored the Tunis revolt. The same slogans and the same tactics were
taken up by the protesters, though with an added touch of famed Egyptian
humour. “Please go – my hand is hurting,” proclaimed one placard bran-
dished aloft. Similar slow-moving, grudging, confused concessions were
handed down by Mr. Mubarak. Crucially, however, the Egyptian regime is
trying to ensure that the outcome of the two uprisings is different.
In Tunisia, the protests continued long after Mr. Ben Ali’s departure, ensuring
that corrupt members of his family were rounded up, the ruling party was
weakened if not destroyed and the transitional government was to their lik-
ing. In Cairo as in Tunisia, the military has sacrificed its longtime leader, Mr.
Mubarak, whether he stays until September or leaves office today. But it ap-
pears to be now seeking to save the regime.
The day after Mr. Mubarak announced he would not contest the next election,
the government declared the crisis over. Go home, your demands have been
met, the military said. Life was returning to normal, added the government,
as it unblocked the internet and let banks reopen.
When the protesters called for more demonstrations, the baltagia – hired
Page 22 FDC Bi-monthly Economic & Business Update
thugs from the slums, often used to intimidate opponents during election
campaigns – were unleashed on the pro-democracy movement. By Wednes-
day, the imposing Tahrir Square, which took its name – Liberation – from the
1952 officers’ overthrow of the monarchy, again became the field of battle for
Egypt’s future.
Just as the Egyptian youth were watching and learning from Tunisia, so were
the country’s officials. Unlike Tunisia, where power and corruption were
tightly centralised in the ruling family, the tentacles of Egypt’s regime stretch
from the army to the internal security forces and the ruling National Democ-
ratic party. Every element of the regime, including a military with significant
business interests, has too much at stake to relinquish power easily.
The Egyptian regime’s struggle for survival is also being fought for the sake
of Mr. Mubarak’s autocratic peers in the Arab world. If Egypt’s transition
turns to chaos or produces the very same regime under a different face, per-
haps the wind of change blowing out of Tunisia will dissipate.
The question of “who’s next” has been troubling Arab rulers and their west-
ern supporters since Mr. Ben Ali fled to Saudi Arabia three weeks ago. Some
of the small, rich oil states of the Gulf can probably buy their way out of tur-
moil. But Marwan Muasher, the former Jordanian foreign minister now at the
Carnegie Endowment for International Peace in Washington, warns that no
regime should feel complacent: “No one is immune and everyone is vulner-
able.”
Social change in the Middle East, particularly the growing number of edu-
cated youth who struggle to find jobs and are determined to live in dignity, is
not unique to Tunisia and Egypt. Across the region, leaders are finding out
that economic liberalisation in political systems that lack accountability can-
not protect against popular upheaval.
Gallup research published this week reveals that in both Tunisia and Egypt
the percentage of people who felt they were “thriving” has been on a decline
even as gross domestic product has increased. Only 20 per cent of Egyptians
surveyed said their well-being had improved since 2009. But while the Mid-
dle East is likely to see more popular protests, the circumstances of every
country will influence the progress, and the outcome.
Faysal Itani of Exclusive Analysis, a risk consultancy, argues that if the pro-
tests that have wracked Yemen in recent weeks persist, the risk of a fragmen-
Page 24 FDC Bi-monthly Economic & Business Update
tation in a country besieged by three different insurgencies could be greater
than the prospect of democratization. In Syria, meanwhile, a police state ruled
by a minority sect, the reaction to pro-democracy demonstrations could be
swift and violent. The more homogeneous the society, says Mr Itani, the
greater the chance of a democratic transition.
Mr. Khashoggi, the Saudi analyst, says that it is in Arab countries that have
erected facades of democracy that citizens are most likely to rise up against
their rulers. “In republics with presidents claiming to be democratic, but
where elections deliver 99 per cent support, the citizen feels cheated every
single day,” he says. While some could be shaken by uprisings, he adds, oth-
ers have the chance to absorb the lessons of Tunisia and Egypt and embark on
a more credible process of political reform that would guarantee peaceful
transitions.
A sudden recognition that Arabs might be able to chart their own future will
be forcing a rethink of the way the world views the Middle East. The up-
heaval in the oil-rich and strategically important region has dealt a spectacu-
lar shock to western powers – particularly the US, the outsider with the great-
est influence in the region.
Tunisia was not central to US foreign policy. In Egypt, however, a longtime
ally at peace with Israel and sharing US interests in containing Iran, Washing-
ton has been trapped between the fear of losing Mr. Mubarak and positioning
itself on the right side of those who might lead a future government. In a dra-
matic swing, the administration of President Barack Obama went in 10 days
from assertions that the Mubarak regime was stable to what were in effect
calls for the president’s departure.
As the administration redraws its analysis of Middle Eastern stability, it must
be asking itself the big question: what if Saudi Arabia, the world’s largest oil
exporter but also a land where a young population has not felt the benefits of
oil wealth, were shaken by similar upheavals? As one Saudi activist says: “If
the revolution in Egypt works, it can export the values of justice and liberal
democracy.”
Democracy promotion has not featured high on the Obama administration’s
list of priorities, partly because the freedom agenda of its predecessor back-
fired. The 2003 invasion of Iraq, under the mistaken assumption that Baghdad
would be the beacon of democracy that transformed the Middle East, soon
provoked a regression on democratic freedom. Forced to support an increas-
ingly unpopular US, Arab regimes became more rather than less repressive.
Page 25 FDC Bi-monthly Economic & Business Update
Washington has leverage to exert in Egypt, particularly with the powerful
military, which it trains and finances. But analysts say the US also has to rec-
ognise that its influence is limited. “Let’s have no illusion about the effect of
what we say on the outcome in Egypt – or throughout the Arab world,” She-
bli Telhami, an expert on Arab public opinion from the University of Mary-
land, wrote this week. “Events in Egypt are largely out of our control.”
This is certainly the view in Cairo, where protesters and analysts say the up-
rising is not about the US, not about Israel and not about Egyptian foreign
policy. “They (the US) are afraid for Israel? There are 80m people here, 80m
human beings,” says Imad Gad, an Egyptian political analyst. “This is about
them.”
Al-Jazeera embraces the tweeters of Tahrir Square
In the Tunisian and Egyptian uprisings, al-Jazeera has been both a media out-
let and a story in itself, writes Abeer Allam.
Seen by governments in the region as having contributed to the downfall of
Tunisia’s Zein al-Abidine Ben Ali, the popular pan-Arab news channel has
been confronted with every possible trick by authorities desperate to block
the Qatari-owned network from helping to rid the Arab world of another
ruler.
Accusing it of incitement, the Egyptian government closed al-Jazeera’s Cairo
office. On Friday, al-Jazeera said the office had been burnt down by “gangs of
thugs”. Signals on Nilesat were cut and frequencies on other satellites dis-
rupted to prevent images from reaching other Middle Eastern audiences.
Al-Jazeera’s Qatar studio
But al-Jazeera has fought back, using Twitter and online accounts to update
viewers with alternative frequencies. Thanks to help from other channels in
the region, it managed to continue broadcasting what appeared to be live im-
ages from Tahrir Square, the focal point of the pro-democracy protests.
“Clearly there are powers that do not want our important images pushing for
democracy and reform to be seen by the public,’’ the broadcaster said this
week.
When al-Jazeera’s licence was revoked in Cairo, Wadah Khanfar, the net-
work’s director-general, was combative. “This news should not be met with
disappointment but instead be used as fuel for further impetus, galvanising
Page 27 FDC Bi-monthly Economic & Business Update
our courageous network to continue to best tell the story of the changing face
of Egyptian politics.”
Al-Jazeera, launched a decade ago by Qatar’s Sheikh Hamad bin Khalifa al-
Thani, has turned itself into a broader forum, urging the Egyptian public to
send in content for airing. “Bloggers, citizen journalists and anyone with a
camera who has content to send” would be welcome, it said. “We’ve already
made great use of social networking.”
To the chagrin of the Egyptian authorities, it also offered airtime to Sheik Yu-
suf al-Qaradawi, an Islamist leader who has his own programme on al-
Jazeera. He urged Egyptians to revolt on Tahrir Square and declared he was
praying for disease and death to befall the oppressor.
Culled from Financial Times
Editorial Committee
Tayo Fagbule
Labi williams
Jemine Rewane
Kemi Ajayi
Bimbo Salami
Important Notice
This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer,
recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strat-
egy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such fu-
ture movements will not exceed those shown in any illustration. All rates and figures appearing are for illustrative purposes.
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