04 December 2016, Lagos — Last week’s upwards price trend in the oil market has shifted stock market sentiment to positive. Nigerian Stock Exchange, NSE, indicators which opened the week bearishly trended northwards by mid-week and sustained uptrend till Friday, driving the All Shares Index, ASI, up by 1.6 per cent week-on-week, the highest in several weeks.This also bucked six consecutive weeks of losses.
The mid-week rebound in the market coincided with developments in the oil market where OPEC members reached an agreement to cut production by 1.2 million barrels per day, mb/d. The announcement already triggered a rally in oil prices to US$54.1/b.
The uptrend in the ASI also ensured a positive opening for the market into the month of December. In addition, performance was driven by renewed interest in Oil & Gas and Banking stocks with the share prices of Mobil Nigeria Plc appreciating 55.1 percent.
Consequently, the year-to-date, YTD, loss to investors eased to 10.1 per cent from 11.6 per cent at the beginning of the week while market capitalisation shows investors have gained N134.3 billion during the week. But this development may be short term as a similar development in the trade sector as reported by the National Bureau of Statistics, NBS, came without positive fundamentals.
The NBS had released its third quarter, 2016 (Q3:16) Foreign Trade Statistics on mid last week showing a quarter-on-quarter, QoQ, improvement in trade deficit which narrowed to the lowest in 2016.
Analysts attributed the positive figures to impact of weaker exchange rate in the period which inflated exports data (reported in Naira) while currency controls by the Central Bank of Nigeria, CBN, stifled growth in imports, with both artificial developments creating a seeming improvement in trade deficit by 78.5 per cent QoQ to N104.1 billion from N484.2 billion in Q2:16, while Merchandise trade (sum of exports and imports) rose 16.3 percent QoQ and 17.9 percent year-on-year, YoY, to N4.7 trillion.
Analysts at Afrinvest West Africa, a Lagos-based investment house, stated: ‘‘The Naira reporting currency made the trade numbers flattering due to large exchange rate movements within the period with the weaker exchange rate offsetting the lower volume of oil exports. ‘‘The relatively weaker exchange rate did not fully constrain imports as CBN tightened currency controls while consumption and investment expenditure in the economy were inhibited as shown from recent GDP numbers.
Consequently, imports grew only 6.2 per cent QoQ to N2.4 trillion. However, another improvement in the trade deficit in the 4th quarter is expected not only due to the above reasons but also due to rebound in crude oil production and rally in oil prices.
Elsewhere on other economic fronts, adverse development continued. Foreign exchange market remained tensed up with Naira resuming a downward slide in value at the parallel market exchanging 482/ USD1.00 as against N470/ USD previous week) while artificial stability holds in the official interbank market (at N305/ USD, same level for over three months now) but with scarcity of the USDollar worsening. CBN had directed security agents to clamp down on parallel market operators for three weeks now to rein in on rates, a development which helped force down rates to almost N440/ USD three weeks ago, but has now returned to steady depreciation. Banks’ foreign-exchange dealers told Sunday Vanguard that they expect the liquidity constraints in the market to continue to drive the overall performance of the forex market in the coming weeks into 2017.
Companies report poor results
Of the 22 companies that have released financial results on the floor of the Nigerian Stock Exchange (NSE), only four grew profit while the remaining faltered. Dangote Cement, UACN Property Nigeria Plc, Portland Paints Plc, Cap Nigeria Plc, Berger Paints Nigeria Plc , and Sky shelter Funds Nigeria Plc recorded a -15.48 percent, -93.27 percent, -41.89 percent, 11.96 percent, -83.41 percent and -12.41 percent fall in net income respectively in the period under review.
Julius Berger, the largest construction company by market value, alongside Lafarge Africa Plc, Austin Laz Electronics Product, Avon Crown Cap Plc, Meyer Nigeria Plc, and Premier Paints Plc, recorded losses of N3.32 billion, N37.40 billion, N33.67 million, N85.64 million N71.72 million, and N15.67 million respectively.
The real growth rate of construction activity stood at -6.13 percent YoY in the third quarter of 2016, a decline of 6.02 percent points from the rate recorded a year previous, while the real estate contracted by 7.37 percent in real terms, according to NBS. Dangote Cement, Julius Berger, Lafarge Africa, Berger Paints, Beta Glass, Sokoto Cement, Paints and Coatings, and UACN Property have returned -7.08 percent, -16.67 percent, -51.48 percent, -37.70 percent, -41.07 percent, -52.09 percent, -29.81 percent and -59.61 percent compared to -11.55 percent year to date on the NSE-ASI the same period.
For the cement makers, a shortage of gas caused by militant attacks on pipeline facilities made them resort to a more expensive alternative source of energy, Low Pour Fuel oil. This sudden switch spiked input costs.
Macroeconomic positions decline
On a larger macroeconomic space, indicators presented worsening conditions as the NBS report on the gross domestic product, GDP, released the previuos week showed the country’s economy was still sinking deeper into recession, with a third consecutive negative growth rate in third quarter 2016 (Q3’16).
Many economy analysts indicated that NBS report was a negative surprise which led to the adverse indices across markets. The situation appeared reinforced by the CBN’s MPC position which, rather than inspire hope slid into blame game pointing accusing fingers at the Federal Government’s macroeconomic measures for failures of its monetary policy measures so far.
The apex bank’s quarterly policy review meeting had between Monday and Tuesday previous week, weighed the events that have shaped the global and domestic landscape since its previous meeting in September concluding that its policy tools are limited in influencing output and unemployment. Consequently, the Committee voted overwhelmingly to do nothing by way of policy change as it relates to key monetary measures including interest rates (it’s Monetary Policy Rates), liquidity ratios and Cash Reserve Requirements. The apex bank was also silent on the most controversial and worrisome of its instruments, the foreign exchange market policy.
Unfortunately, the meeting was the last in this current financial year and the next one would not come until February next year. Analysts at another investment house, Greenwich Trust Limited sympathised with the CBN monetary policy difficulties and hence indecision.
They agreed with the apex bank that in the circumstance the government should take responsibility for failures so far. But they decried the apex bank’s silence on the most controversial issue of foreign exchange market.
They stated: “The decision of the MPC matches our call and the key takeaway is that the CBN has called on fiscal authorities to increase the investment in capital projects that will bridge the infrastructural deficit and spur a recovery in economic activity. ‘‘Monetary policy has reached its limits leaving the fiscal authorities as the principal drivers of economic recovery.
“The MPC Communique read by the CBN Governor conspicuously excluded any policy action in the Forex market and we believe that investor sentiment will remain clouded until the gap between the official and parallel Forex markets narrows to an acceptable level and appropriate policies are put in place to enhance the transparency and credibility of the Official Inter-Bank Forex market.
“We await the Economic Roadmap which is said to be in the works and an inflow of funding, especially via concessionary loans and the Eurobond Issuance.
“At Greenwich Research, we believe that the formulation and effective communication of an economic plan, a credible and transparent Forex market as well as investment in key capital projects, will fuel renewed investor confidence and reverse the contraction in economic activity.” But analysts at another Lagos-based investment house, CardinalSt
one Partners Limited disagreed with the apex bank’s position, and would rather blame it for the downturn in the economy. They stated: ‘‘Although the decision to hold rates was largely influenced by the fragile state of the economy – with Q3 GDP figure signalling a further contraction in economic output, we do not think that the Committee’s (MPC) decision will provide any necessary support for growth.
“The key obstacle remains FX scarcity and the Central Bank of Nigeria (CBN) needs to urgently revisit its FX policies and make for better clarity and transparency in the pricing of the exchange rate. This is necessary to attract much need foreign capital.”
2017 prospects and other concerns
Looking into 2017 analysts at Renaissance Capital, a leading global investment house stated: ‘‘Our 2017 growth forecast of 0.5 percent is partly premised on a pick-up in public investment in 2017, on the back of foreign loans that have started to come through (e.g. $600 million in early November from the African Development Bank). ‘‘Forex restrictions and militant attacks on Niger Delta oil facilities are the biggest risks to our growth outlook.”
For the world’s leading economy and credit rating agency, Moody’s Nigeria’s economy can expand by 2.5 percent next year, rebounding from a recession entered in the second quarter, as long as it can keep oil output at 2.2 million barrels per day. Aurelien Mali, Moody’s senior analytical adviser for Africa, that he expected the GDP contraction recorded in Q3’16, and said the fourth quarter could be close to flat. Mail said increases in oil output will help Africa’s top oil exporter generate more dollars.
“With the resumption of oil production and the dollars that should come, we expect that Nigeria would be able to accelerate the implementation of the budget,” Mali said. “With an acceleration, we expect that (growth) could reach 2.5 percent next year,” he said. However, a world’s leading oil producer, Shoreline Natural Resources, said Nigeria will need at least $14 billion a year in new investment to maintain production at 2.2 million b/d, a level at which the national budget is based on. Both the 2017 budget and oil companies’ budget for the next two years are nowhere near this figure. For analysts at CardinalStone, the 2.2mbpd production depends on tempered militancy activity in Niger Delta.
They stated: ‘‘Oil production at 2.2mb/d is largely dependent on the success of ongoing talks with the Niger Delta community. Even then, the assumption is largely optimistic as oil production has consistently underperformed budget estimates in the last 3 years.”
*Emeka Anaeto – Vanguard