2014 review and 2015 outlook

Nigerian Export-Import Bank January 2015

Economic & Trade Trends

Manufacturing , Agriculture, Solid Minerals and Services Sectors

Global Developments

Global growth prospect remained weak in the first three quarters of 2014,

prompting the IMF in its October report to revise downward the global growth

forecast for 2014 to 3.3% from 3.7% in April. This reflected continued uncer-

tainties and downside risks in the advanced and emerging market economies.

In particular, economic activities in the Euro area declined in the third quarter

mainly on account of weak investments and exports, while the Japanese econ-

omy declined following an increase in consumption tax. In Russia and the

Commonwealth of Independent States, weaknesses reflected the impact of

geopolitical tensions on foreign investments, domestic production and confi-

dence levels. In general, weak domestic demand, coupled with the tightening

of global financial conditions in the first quarter of the year may have taken a

toll on some emerging markets, leading to lower growth, particularly in Brazil

and China. Sub-Saharan Africa, however remained strong with growth project-

ed at about 5% in 2014, driven mainly by sustained infrastructure investment,

buoyant services sectors, and strong agricultural production, though the over-

all positive outlook remained tainted by the outbreak of Ebola Virus Disease in

West Africa.

Contact: [email protected]

-2.1%

7.4%

0.8%0.2%

0.8%

6.2%4.6%

7.5%

0.9%

0.0%

-0.2%

6.5%

3.5%

7.3%

0.7% 0.1% 0.0%

6.7%

-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

US china UK Euro area Germany Nigeria

Q3 Growth Rate of Selected Countries

Q1 Q2 Q3

The foregoing triggered a general moderation in global commodity

prices in 2014. Importantly, Oil prices (depicted by Brent Crude) which

opened the year at $107.71 had come under pressure since it peaked at

$116.45 on June 17 owing to ample supply, weak demand and a stronger

dollar. The price of Brent Crude closed the year at $57.9 per barrel, repre-

senting a 50% decline between June and December 31. The supply glut was

exacerbated by increased shale oil production in the US, coupled with the

refusal of OPEC to cut production.

50

60

70

80

90

100

1103

1-D

ec-

13

26

-Ja

n-1

4

21

-Fe

b-1

4

19

-Ma

r-1

4

14

-Ap

r-1

4

10

-Ma

y-1

4

05

-Ju

n-1

4

01

-Ju

l-1

4

27

-Ju

l-1

4

22

-Au

g-1

4

17

-Se

p-1

4

13

-Oc

t-1

4

08

-No

v-1

4

04

-De

c-1

4

30

-De

c-1

4

Brent Coal

Most commodities declined relative to December 31, 2013 prices. Brent Crude Oil experienced a price decline of c-46% while Gold prices re-

mained firm within year start levels. On the contrary, it was a favourable year for Cocoa and Coffee which rose 14% and 49%, respectively y-o-y.

Cocoa maintained a gradual uptrend on strengthening demand for chocolate in the new emerging markets. Chocolate consumption in India,

China and demand has been increasing by 15-20% annually. Coffee had experienced a strong rally year-to-date over continued supply uncer-

tainty, stemming from adverse weather conditions in the major producing areas of Brazil and Indonesia.

Output growth remained strong… The computation of GDP growth in Nigeria followed a rebasing exercise

which changed the reference year from 1990 to 2010 and established

the economy as the largest economy in Africa with 2013 nominal GDP at

N80.01 trillion ($510bn). Available data from the National Bureau of sta-

tistics showed that the Nigerian economy remained resilient in 2014

despite global headwinds, as GDP growth in the first three quarters of

the year hovered between 6.21% and 6.54% as against a 4.41% and 5.4%

band during the same period in 2013. Overall growth for 2014 is howev-

er expected to keep pace with the budget target of 6.75%. During this

period, the non-oil sector remained the main driver of growth, albeit at

a slower rate of between 6.71% and 8.21% as against 7.84% and 8.88%

in the corresponding period of 2013. The slowdown in the non-oil sector

was largely attributable to output decline in the agricultural sector occa-

sioned by the upsurge of insurgency in the North parts of the country

which led to displacement of farming communities and disrupting agri-

cultural activities during the period. Activities in the oil and gas sector

however, saw a fragile recovery during this period as the rate of contrac-

tion in the sector abated. Although output growth in the Oil and Gas

sector rebounded in Q2 at 5.4% from -6.6% in Q1, it contracted again by

3.6% in Q3. This was however an improvement over the previous year

when the contraction in the sector was between 11.40% and 16.42%.

The slight improvement in the sector was attributed to government’s

efforts at addressing the myriad of challenges in the sector, including the

problem of vandalism of oil facilities, incidents of crude oil theft as well

as gas supply shortages to the power plants.

Prices remained relatively stable… In line with the 2014 budget target of single digit inflation at 8.3%, head-

line inflation averaged 8.06% between January and November 2014,

peaking at 8.5% in August after dropping as low as 7.7% in February. This

was due to the tight monetary environment, coupled with favourable

weather conditions.

Export Proceeds increased … Available data by the CBN shows that non-oil export earnings grew pro-gressively to $4.29bn by Q3 2014, up from 1.11bn in Q1 and 2.54bn in Q2. The sustained increase was due largely to growth in agricultural pro-ceeds. In view of this, agricultural exports accounted for 51.66% of total proceeds followed by manufactured products at 26.32%. Proceeds from industrial, minerals and food products accounted for 14.63%, 6.21% and 1.18%, respectively.



Manufacturing , Agriculture, Solid Minerals and Services

Domestic Economy


8.0%

7.7%7.8%

7.9%8.0%

8.2%8.3%

8.5%

8.3%

8.1%

7.9%8.0%

7%

7%

8%

8%

8%

8%

8%

9%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Headline Inflation



Manufacturing , Agriculture, Solid Minerals and Services

Fiscal Measures

On 17th November, the Minister of Finance announced the first set of measures to mitigate the impact of the falling oil prices on fiscal and external balance. These are:

6% downward review in the 2015 budget benchmark oil price to $73pb

Upward revision in the collection target for FIRS

Reduction in international travel and training within the public service

Surcharge on luxury items such as private jets and alcoholic beverages.

Monetary Measures

In response to the developments in the local and global economies, the Monetary Policy Committee (MPC) announced further tightening measures following its meeting on the 24th and 25th November, 2014. The key policy pronouncements were as follows:

Increase in the Monetary Policy Rate (MPR) by 100 basis points from 12% to 13%

Increase in the Cash Reserve Requirements (CRR) on private sector deposits by 500 basis points from 15% to 20% with imme-diate effect

Adjustment in the midpoint of the official window of the foreign exchange market from N155/US$ to N168/US$

An increase in the band around the midpoint of the official window by 200 basis points from +/- 3% to +/-5%.

Retention of Public Sector CRR at its current level of 75%

Retention of the symmetric corridor of +/- 200 basis points around the MPR

Retention of the foreign exchange trading position at 1%.

The MPC decisions also reflected the limited policy options given the declining fiscal buffers occasioned by the depletion of the excess crude account. Although the MPC was cognizant of the need to promote inclusive growth through a low interest rate envi-ronment, it observed that improved liquidity in the banking system has not translated into increased credit to the productive sec-tor, but has led to increased pressure in the foreign exchange market and the Standing Deposit Facility Window of the Central Bank. The Committee further observed that the administrative measures taken by the CBN in the form of excluding certain import items from the retail DAS window has not achieved the desired result. It was therefore necessary to take bold policy and adminis-trative measures to address the underlying problem of excess liquidity, in addition to preserving the country’s External Reserves.

Fourth Quarter Pressure… and the Trends Escalated

The first three quarters of 2014 experienced relative stability and positive

macroeconomic trends which changed in the fourth quarter as the buildup of

domestic economic vulnerabilities exposed Nigeria to the negative effects of

the moderation in the global economy with implications for oil revenues,

interest rates, exchange rate and foreign reserves by the end of the year.

Notwithstanding the strong growth and moderation in prices, the develop-

ments in the global arena presented major risks to domestic macroeconomic

stability by the end of the year. The most significant global development that

affected Nigeria in the last quarter was the steep decline in the oil price

which lost 50%. This, coupled with the tapering of the stimulus package in

the United States and investor speculations, triggered demand pressures in

the domestic foreign exchange market with implications for Naira stability

and external balance. In view of the foregoing, the fiscal and monetary au-

thorities responded with a combination of measures to address the potential

threat to macroeconomic stability arising from the oil price decline.


The Domestic Economy



And interest rates spiraled …

Between January and October, the money market was stable and interest rates remained within range (11.39% -13.07%). However, following the decisions reached at the monetary policy committee, the average Nigerian Interbank Offered Rate (NIBOR) spiraled from 12.93% on 25th November to 14.16% by 31st December, after peaking at 29.62% on 17th December. Naira depreciates …

Earlier to the November MPC decisions, the CBN had kept the official exchange rate within a narrow band of N155.70/$ - N158.41/$ while the interbank market hovered between N158.84/$ and N174/$ as the CBN regularly intervened to ward off the pressures in the forex market. How-ever, following the MPC decision which led to adjustment of the official mid-point to N168/$, the exchange rate at the interbank market shot up to end the year at N186.10/$. … and foreign reserves moderated

External Reserves which opened the year at $43.51bn dropped to $36.76bn in June after which it peaked at $39.61bn in September before closing the year at $34.47%. Following the MPC meeting in November, the reserves dropped 7.4% from $37.18bn to $34.47bn.

2015 Outlook

The outlook for the Nigerian economy in 2015 remains overcast with uncertainty, in view of both global developments and domestic head-winds. Global economic recovery has been forecast to remain low in 2015 at 3.6% by the IMF, a slight improvement over the 3.2% overall forecast for 2014. The upside growth potential for 2015 is expected to come mainly from the US as the Euro-zone and emerging market economies – Nigeria’s key trade partners, show signs of weakening growth and fragility. In the global arena, the pressure points for the Nigerian external sec-tor in 2015 revolve around the sustained downward movement of the oil price. Another downside risk to economic stability may be the im-pending normalization of interest rates in the US by the end of first quarter which may lead to another round of capital flow reversal from the Nigerian economy. These, coupled with slowing activities in the country’s top trading partners such as Germany, Italy, China, India and Japan, will most likely impact export demand with attendant im-pact on export revenues.

Conclusively, oil prices are expected to remain low in the near term as the glut in the oil market persists and global demand remains weak. On the domestic scene, we expect investors to remain cautious as political risk heightens in the run up to the 2015 national elections. The February elections is expected to be a major driver of issues in 2015. This may take the form of higher spending and hostilities during the electioneering process or dispute resolutions and judicial interventions post-elections. These may slow down business activities, impact policy-making or affect the macro variables such as inflation and exchange rates.

Budget 2015… A Transition Budget As oil prices push lower, the successful implementation of the federal budget raises concern to stakeholders, given that oil contributes about 70% of budget revenue and over 90% of export reve-nue. Thus, the federal government has tagged the 2015 budget “A Transition Budget” to indicate the shift from an ‘oil economy’ with 75% oil revenue towards a non-oil driven economy with 53% of oil revenue in 2015. The National Assembly has however not passed the budget (as at the time this document was published) given the uncertainty surrounding the proposed benchmark oil price at $65/barrel, especially when oil prices have fallen below $50 and yet to bottom out. The proposed budget 2015 projects a modest aggregate expenditure of N4, 357.96billion, 6.14% lower than N4, 642.91billion approved in 2014. Unfortunately, at N633.53billion or 17.6% of total expenditure, the proposed capital expenditure will be 59% lower than the amount approved in 2015. On the other hand, recurrent expenditure is set to increase by 9.3% vis-a-vis the amount approved in 2014 to N2, 616.01billion or 72.6% of total expenditure in 2015. We however expect another downward review of the budget given the continued decline in oil prices. In making the transition to a non-oil revenue driven budget, the FG intends to embark on an aggressive non-oil revenue drive by raising the revenue side through taxes like the introduction of surcharge on luxury goods, and cutting expenditure by, for example, freezing the purchase of new equipment and other administrative capital. The govern-ment would also cut spending by focusing only on growth stimulating sectors like power, agriculture, security, transport, health and education. The government also proposes to review tax waivers and exemptions such as pioneer status exemptions hitherto granted some oil companies, amongst others.

Macroeconomic trends in 2015… As the country moves towards the 2015 national elections, the economic outlook is

mixed and will be defined by a number of issues.

Interest Rates

The money market is expected to be volatile while interest rates may remain elevated as

the CBN continues to take measures to curb excess liquidity within the banking sector.

The series of measures taken lately by the CBN, such as raising MPR to 13% and the di-

rective to MDAs to close their revenue accounts with Nigerian Banks should keep inter-

est rates higher in the near term.



FGN Budget

Assumptions

2014 2015

Crude Oil Benchmark Price (US$/Bl)

77.5 65

Crude Oil Pro-duction (mbpd)

2.3883 2.2782

Average Ex-change Rate

160.00 165

GDP Growth (%)

6.75 5.5

Targets (Revenue &

Expenditure Projections)

2014 2015

Total FGN Retained Reve-

nue (N’ billion)

3,731.00 3,602.96

Oil 2,114.53 1,918.33

Non-Oil 1616.47 1,684.63

Aggregate Expenditure 4,642.91 4,357.96

FGN Capital Expenditur–

including SURE-P (N’ bn)

1,552.99 633.53

FGN Recurrent Expendi-

ture (N’bn)

2,468.83 2,616.01

Debt Service Payments 712.00 948.00

Statutory Transfers- N’bn 399.69 412.00

Deficit (N’billion) (911.91) (756.00)

Deficit/GDP (%) -1.04% -0.79%

1 Luxury Tax Surcharge in 2015 Rate (%) N’billion

I New Private Jet Import Surcharge 10.0 3.70

Ii Luxury Yatch Import Surcharge 39.0 1.60

Iii Luxury Car Import Surcharge 5.0 2.60

iv Luxury Surcharge on Champagnes, Wines & Spirits

3.0 2.30

v FCT Mansion Tax (Value of N300m+) 1.0 0.36

vi Review of tax waivers and exemptions to oil companies

36

2 Expenditure Savings N’billion

I Cut in international travels & trainings 14.02

Ii Cuts in other overhead measures 4.00

Iii Cut in procurement of administrative capital and new equipment

35.54

Iv Curtailed procurement and upgrade of buildings 44.00

v Rationalization of expired committees and commis-sions

6.49

Naira Exchange Rate

With lower oil revenues and declining reserves, the management of the Naira exchange rate at current levels by the CBN may become difficult to uphold, especially given the import dependent structure of the economy. Hence, should oil prices continue to fall we expect the exchange rate to depreciate further.

Inflation

Inflation threats remain potent in the short to medium term, particularly with increased spending in the run-up to elections, coupled with

expected food supply shocks arising from increased insurgency in the major agricultural belts of the country. The expected increase in

interest rates and Naira exchange rate depreciation are all factors that would impact inflation from the cost-push angle. Inflation may

therefore approach double digits in the short to medium term.

Exports

While a depreciation of the currency usually means an increase in the value of export proceeds, the downside is the exposure against ex-

porting companies that would require foreign inputs for production. This may either slow-down the production process or increase pro-

duction costs. In addition, continued moderation in general commodity prices in view of the slowing demand in major economies may

reduce the export proceeds.

Disclaimer Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the information, estimates and opinions also contained herein are objective, reasonable and fair, no responsi-bility or liability is accepted either by NEXIM or any of its employees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the information contained in this report as it is based on secondary information. All information and opinions set forth in this document con-stitute the analyst(s) position as at the date of the report and may not necessarily be so after the report date as they are subject to change without notice. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of NEXIM BANK. The report is available primarily electronically.

January 2015
