Friday, October 4, 2013

4th October, 2013 in the Nigerian Economy

Being that I am an investment banker that loves her job, I decided to bring to my readers the Nigerian economic review from my own perspective. Please note that it's my own view and any use of the information there of for an informed decision is done at ones risk.

Nigerian FMCG companies have contended with some challenges such as security issues and depressed discretionary spending over the past 18 months. In relative terms, the discretionary goods manufacturers have experienced more pronounced declines in sales volume, while the food producers have fared better. I expect these factors to remain in Q4-13 with a spending recovery emerging in 2014 and improving through 2015 on the back of the presidential elections. I believe the FMCG sector will be characterised by increased M&A activity, high inflation, cost efficiency and investment in product branding. First, M&A activity will accelerate as more multinationals look to Nigeria as an investment destination, potentially more so than in other African countries given the demographic advantages in Nigeria. Secondly, I expect a generally high inflation environment to persist, leaving FMCG companies to contend with input cost inflation, even though we saw a slight easing of food inflation to 10.5% in 2013 vs. 11.3% in 2012. Companies will continue to find it difficult to pass on the cost increases entirely, and will face margin pressures. Third, I believe improved cost management will be a major consideration for companies to enhance margins and returns, given difficult market conditions. Marketing and distribution cost management and operational efficiencies will likely be the focus for management. Fourth, I expect companies to continually invest in branding and packaging of products to ensure improved market acceptance. Finally, I expect companies to deepen their distribution networks, to enhance market penetration. But beyond the short term challenges, I expect robust growth for this sector as they have delivered a solid performance this year with the NSE index rising to 21% YTD.

Headline inflation declined 50bps (YoY) and 29bps (MoM) to 8.2% (a five year low) and 0.25% respectively in August as YoY Core inflation climbed for the second consecutive month, rising 60bps to 7.2%. The MoM reading was also 10bps higher than the July reading at 1.3%, reflecting the impact of an upsurge in prices of services during the period, in addition to adverse base effects on the YoY core reading. The August performance strengthens my expectation for a sharp downturn in inflation trajectory for the rest of 2013 after the effect of a flood induced spike of 2012 melts away.

 The CBN left all its policy parameters unchanged at its last MPC ignoring liquidity pressures that emerged over September which saw interbank rates spike briefly to 41%. This surge was driven by a N102 billion debit on banks for AMCON amid an ensuing delay in FAAC allocations and the increased spate of currency market interventions over the period even as sharply higher OMO issuance in September – at N323billion vs. N91billion in August helped reduce the tight liquidity conditions. The inversion of the NIBOR curve during the spike period had suggested that these effects were temporary.

Many emerging market currencies posted gains in September, in contrast  the naira shed 0.7% MoM to N160.95/$ amidst a 21% MoM rise in WDAS sales to $2.6billion. However, moderation in the naira’s losses rested on a turn in fortunes after a “shocking” decision by the US Fed to hold back on curtailing its LSAP at its 18th September FOMC, having lost 1.6% MTD on that date. It also contrasts with much sharper gains in the emerging market currencies that performed worse prior to the Fed decision.

Brent Crude prices declined 4% MoM in September to $108.37/b as threats of a US strike on Syria receded and conciliatory gestures from Iran’s new regime heightened speculation about sanctions on its exports being lifted. The substantial recovery in Libyan production has helped reduce supply side risks, shifting focus back on demand, all of which promise a bearish near term outlook for energy prices. 

The equities market closed today on a positive note, as NSE ASI appreciated by +0.01% to close at 36,831.03 bp, compared with the appreciation of +0.88% recorded the previos day. Currently, the YTD returns currently stands at +31.17%.

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