Global oil benchmark, Brent crude, traded sharply lower on Monday, extending its declines following Britain’s vote to exit the European Union on Thursday.
The dip in the oil price comes as investors were worried about global energy demand and shunned assets perceived as risky in the aftermath of the Brexit decision.
Brent, against which Nigeria’s oil is priced, had hit the $50 per barrel mark for the first time in 2016 on May 26 and was as high as $53 per barrel few days after before dropping to $49 on June 13.
It stood at $46.31 as of 8.05pm on Monday, weighed by a rallying dollar and continued market uncertainty over Brexit.
Brent and US crude futures have lost about seven per cent since Thursday’s settlement after the so-called Brexit vote sent global risk assets plummeting on Friday as investors fled to safe havens such as the dollar, United States Treasuries and gold, according to Reuters.
Analysts at Goldman Sachs and other research houses sought to allay fears over the impact of the EU crisis on oil specifically, pointing out that Britain’s demand for fuel was negligible at the global level.
Oil prices rose slightly early on Monday on some of that sentiment, before slipping again. Market intelligence firm, Genscape’s report of a draw of more than 1.3 million barrels at the Cushing, Oklahoma, delivery point for US crude futures provided little support.
The dollar was up almost one per cent, near Friday’s three-month high, making oil and other commodities priced in the greenback less attractive to holders of the euro and other currencies.
“We feel that a market shock such as Brexit can often induce enough chart damage to force a major long liquidation phase,” Jim Ritterbusch of Chicago-based oil market consultancy, Ritterbusch & Associates, was quoted to have said.
Safetrust Mortage Bank Limited has declared an impressive N150.6m profit before tax (PBT) for the financial year ended 2015 representing an increase of 41.8 percent on the figure for the previous financial year on the account audited by Messrs KPMG. The declaration was made by the Chairman of the Board of Directors, Mr. Akin O. Opeodu in an address issued at the Annual General Meeting (AGM) of the Mortgage Bank held at Eko Hotel & Suites, Lagos on the 7th day of June, 2016.
Also declared by Opeodu was gross earnings of N1.8billion and total assets which stood at N9billion the while the shareholders’ funds stood at N2.8billion representing 1.52 percent growth over the previous financial year’s figure of N2.75billion. Following the impressive performance, the shareholders are to be rewarded with a good chunk of the profit, N84,337,500 as dividend at 5k per share.
Regarding the business outlook in the country, Opeodu said that, “we are continuously optimistic on the outlook of the 2016 financial year. Whilst business and customer confidence remain fragile, the level of activity and Government’s commitment to improving the real sector gives a base for the growth of the Nigerian economy”. But he warned that the country needed “to brace up for likely shocks by developing the appropriate resilience to such risks”.
The Chairman also advised that, “to ensure a sustained economic uplift, the 2016 FGN Budget must be fully implemented”, positing that “lower interest rate regime should be put in place to support economic activities, reform our Governance structure, improve on the efficiencies of our labour market and simplify our process for doing business.”
To brace up for better performance in 2016, he stressed that Safetrust had taken steps to diversify the revenue base while leveraging inherent opportunities in the outlook for continuous revenue growth. He maintained that the Mortgage Bank would also continue to strengthen its risk management capabilities to ensure effective mitigation of existing risk factors in their domestic operations.
Safetrust is managed by a 9-man Board of Directors that also has Mr. Yinka Adeola as Managing Director whose voluntary retirement was announced by the Chairman at the AGM while Mr. Akintayo Oloko, an Executive Director of the Bank was appointed by the Board as the new Managing Director.
Investors in the country’s capital market recorded a loss of N278bn on Monday as concerns that the market might plummet due to the decision of Britain to leave the European Union heightened.
Some traders said there was the worry that the Brexit might slow foreign interest in the market.
The Nigerian Stock Exchange market capitalisation on Monday dropped to N10.248tn from N10.526tn, while the All-Share Index also declined to 29,840.23 basis points from 30,649.66 basis points recorded on Friday.
A total of 40 stocks recorded losses, while 16 made the gainers’ chart.
The market recorded a turnover of N4.027bn from 375.221 million shares traded in 4,229 deals.
United Capital Plc, Zenith Bank Plc, Stanbic IBTC Holdings Plc, Forte Oil Plc and Seplat Petroleum Development Company Limited were the top five losers on the chart.
United Capital’s share dropped by N0.22 (7.94 per cent) to close at N2.32 from N2.52, while that of Zenith Bank lost N1.04 (6.12 per cent) to close at N15.96 from N17.
Stanbic IBTC also closed at N16.15 from N17, losing N0.85 (five per cent), while Forte Oil posted a decline of N10 (five per cent) to close at N190 from N200.
The share price of Seplat Petroleum fell to N331.60 from N348.97, losing N17.37 (4.98 per cent).
Other losers were Dangote Sugar Refinery Plc, Oando Plc, Ikeja Hotels Plc, Guaranty Trust Bank Plc, Diamond Bank Plc, Fidelity Bank Plc, Flour Mills Nigeria Plc, AG Leventis Nigeria Plc, Sterling Bank Plc and Unity Bank Plc, among others.
Analysts said the stocks began the week on a negative footing as sell-offs across board prevailed. Asian markets shrugged off Friday’s global sell-off, while the European markets slid further as investors continued to weigh the impact of Britain’s decision. United States futures pointed to a lower open.
The NSE ASI and NSE 30 lost 2.63 per cent and 2.43 per cent, putting year-to-date returns at +4.19 per cent and +3.24 per cent, respectively.
The value of transactions was above May averages by 70 per cent, while the volume of transactions was below May averages by five per cent.
Fidson Healthcare Plc, Julius Berger Plc and GlaxoSmithkline Consumer Plc led the gainers chart, advancing by 9.91 per cent, five per cent and 4.97 per cent, respectively.
On Monday’s trading result, analysts at Vetiva Capital Management Limited said in the firm’s daily report, “Although we note the impact of broader downbeat global market sentiment, we believe today’s losses were largely fuelled by profit-taking across a handful of large cap stocks following the strength of the gains recorded in recent sessions. We think there’s still some room for profit-taking, and thus see a likelihood for another negative close in the session ahead.”
Lafarge Africa Plc have urged shareholders to leverage the Ashaka Cement’s voluntary tender offer, which provides opportunity for the minorities to participate in a much larger growth platform of Lafarge Africa to boost their portfolio.
Speaking at a shareholders forum in Lagos recently, Chairman, Lafarge Africa Plc, Mobolaji Balogun explained that the offer, which is currently on-going to Friday July 1, 2016, would enable the shareholders to move from being investors in Ashaka Cement with 1metric tones per annum (mtpa) cement production capacity to Lafarge Africa with 12mtpa and an additional 2,5mtpa due for commissioning by the end of 2016.
He added that the consideration offered for the tender is quite favorable to shareholders of Ashaka Cement.
“I encourage you and your members to accept the tender, which in simple terms creates the immediate and direct advantage of moving from investors in Ashaka Cement with 1mtpa cement production capacity to Lafarge Africa with 12mtpa and an additional 2,5mtpa due for commissioning by the end of 2016. “We continued to build on the successful completion of the Lafarge Africa asset consolidation transaction through some strategic initiatives, including increasing our shareholding in Ashaka cement to 82.46 per cent via a mandatory tender offer and acquisition of further stake in Unicem. On the recently concluded N60 billion dual series bond issuance, Balogun told shareholders that the issue comprises of a N26, 386,000,000 three year 14.25 per cent bond due 2019 (“the Series one bond”) and a N33, 614,000,000 five year 14.75 per cent bond due 2021 (“the series II bond”).
According to him, the proceeds of the bond issue will be used to part-refinance the debt of its wholly owned subsidiary, United Cement Company of Nigeria Limited (“Unicem”).
He pointed out that the dual-series issuance, the first of its kind and largest bond issuance by a corporate in Nigeria’s debt capital markets, was concluded, following a book build, with the order being oversubscribed.
He added that the transaction was Lafarge Africa’s second bond issuance in the Nigerian capital markets, having previously issued a N11.8 billion three year fixed rate bond in 2011.
Balogun said the bond affirms Lafarge Africa’s reputation as a prime issuer, adding that the proceeds of the issue would allow Lafarge Africa Plc part-refinance the debt of its wholly owned subsidiary, Unicem.
“We are grateful for the overwhelming support we have received from domestic institutional investors, especially the Nigerian pension funds. We also wish to thank the SEC for its support on the completion of the transaction.”
“These proceeds will deliver savings in financing costs to Unicem and Lafarge Africa. Unicem is currently undergoing a 2.5mtpa capacity expansion which will be completed by the end of 2016.”
In a bid to cushion the effects of the current economic crisis on their finances, most construction workers have increased their charges, MAUREEN IHUA-MADUENYI writes
Some artisans have increased their charges on construction sites by as much as 60 per cent in response to the current challenges in the nation’s economy.
According to findings by our correspondent, some builders who have ongoing construction works now have to contend with increased artisans’ charges.
Some of the skilled workers such as carpenters and masons, among others, who used to charge about N3,000 per day on building sites before the current economic hardship, now ask to be paid N5,000, accounting for an increase of about 66.6 per cent.
The unskilled labourers, who were previously being paid between N1,000 and N1,500 per day, now charge a minimum of N2,000.
This, according to investors, means that instead of paying about N90,000 monthly for a skilled worker on long-term projects, they now have to pay close to N150,000 every month, while for an unskilled worker, they have to pay between N50,000 and N60,000 every 30 days.
A former Chairman, Nigerian Society of Engineers, Lagos State Chapter, Mr. Olatunde Jaiyesinmi, said the construction sector was the first to be affected by challenges in the general economy as building material prices were subject to market forces.
Jaiyesinmi, who is also a former Chairman, Nigerian Institute of Building, Lagos Chapter, added that the cost of labour had also been recently affected.
He said, “Labour is now affected too; the artisans and labourers’ wages have gone up by between 25 and 60 per cent based on which of them you want. We have skilled labour and unskilled labour; now, a labourer who is not skilled will take about N2,000 instead of the normal N1,500 or N1000.
“The artisans, on the other hand, who were taking N3,000, now ask for N5,000. And when you hire and take them to a site say in Lekki and they have to come from Ikorodu, Agege or Abule Egba, they keep complaining about the cost of transportation; so, you are forced to meet their demands.”
Professionals in the construction sector said activities across all segments of the industry had in the last few months dropped by up to 70 per cent.
Only a few projects are ongoing, with many stalled, while investors have opted to watch before starting new construction works.
The 2nd Vice President, NIOB, Mr. Kunle Awobodu, said the increment in labour cost had not been made official by the artisans’ associations but was merely individuals’ response to the economic situation in the country.
He noted that since the inception of this government, construction activities had been at the lowest, while several companies in the sector had retrenched more than 50 per cent of their staff and others had closed down completely to venture into other things after selling off their equipment.
“Government is the major client to professionals in construction; so, if the government is not engaging in construction activities, the sector will be down,” Awobodu said.
He said that due to the dearth of artisans in the country and the current economic crisis, investors/developers were being forced to yield to the demands of the available craftsmen in order to get their jobs done.
Awobodu added, “Basically, it is not an agreed increment but a spontaneous reaction to the economy and the general inflationary trend. Transport fares have gone up; fuel prices increased; so, invariably, everything else has also increased, even the price of the foods that artisans eat on site has equally been increased.
“It has forced most of us who have ongoing projects to introduce fluctuations into the business; we have been forced to review the wages of contract staff; everything around the artisan has gone up.
“It is only natural for them to seek increase in their wages. For instance, a carpenter who was charging N3,000 or N4,000 per day now wants to be paid N5,000.”
However, a mason and the General Secretary of the Lagos State Bricklayers Association, Mr. Akinmoladun Olaniyi, told our correspondent that those who had raised their charges were individual artisans and labourers, who were not affiliated to registered associations.
He said, “As of today, we as an association have not increased the artisans’ fees because we are thinking that the economy may soon stabilise; if we increase it now, we may not bring it down after this time. Individuals have no authority to increase fees; when we increased from N2,000 to N3,000 sometime ago, we carried everyone along; so, those who are doing it now are doing so illegally.
“We know that our fees should be increased but we are watching the economy; but if we want to consider the way the government is neglecting us, we should increase the fees but that will affect everyone.”
According to Olaniyi, a formal increment in construction workers’ wages will raise rents across the country.
“There will be a general increase in house, shops and office rents, but we don’t want to be the cause of this country’s economic woes,” he said.
He said registered bricklayers were at the moment charging N3,000 daily and nobody had authorised them to increase the fee, adding that whoever charged more was doing it alone.
Olaniyi stated that the artisans’ major problem in the country was negligence by the government.
He said, “They don’t recognise artisans, so a lot of them struggle to fend for themselves. We are still hoping that this government will do something good. For now, the government only recognises professional bodies and leave artisans out. The building industry generally has been relegated to the background.
“There is a lingering issue that has caused a lot of problem; builders, for instance, use labourers such as those who are into concreting, neglecting the artisans who are skilled. These are labourers and are largely unskilled; that is one of the reasons why we have building collapse. And this may be the reason why they have raised their wage demand.”
Investors in Glaxosmithkline Consumer Nigeria Plc (GSK) last week witnessed a record 55.6 per cent capital gain following a bullish trend at the stock market.
The shares gained N7.90, rise from N14.22 to close at N14.22 per share in a week that 40 stocks appreciated. Market operators said the renewed demand for GSK could be for speculative reasons.
The company is to divest its drinks bottling business that manufactures Lucozade and Ribena to Suntory Beverages Nigeria Limited. The planned divestment followed the purchase of business by Suntory Beverages Japan from GSK United Kingdom, the parent firm of GSK Nigeria in 2013.
Explaining the divestment, an official of the company had said: “The drinks bottling used to be part of our business but we belong to a group, GSK which has divested from that line of business and we need to maximise our potential. We are facing the direction our parent company is facing. Other subsidiaries have divested the drinks business but Nigeria was allowed to continue. But the divestment will enable us release the assets to Suntory Beverages so that we can concentrate on those things we are good at,” an official of the company said.
The official said the divestment will give the company a lot of potential to grow its business, saying as a forward looking company it has hedged against the impact of the divestment.
In a notification to the NSE, the Company Secretary of GSK Nigeria, Mr. Uche Uwechai had said the principal terms of the offer would set out in a circular to the shareholder.
“If the shareholders and regulators were to approve the sale, the retained business of GSK Nigeria would include its wellness, oral healthcare, nutrition and pharmaceutical/vaccines businesses and the company would remain listed on the NSE,” he said.
The company has also indicated that subject to the completion of the disposal and receipt of the purchase price the company will pay a special dividend of N716 million (60 kobo per share) to the shareholders.
Analysts at FSDH Merchant Bank said going by their estimate, the contribution of drinks business to the total revenue of the company is not less than 35 per cent, adding that the divestment is one of the negative factors that would affect the company’s performance going forward.
But on the positive side, the analysts cited the company’s new route to market, long standing reputation and brand activation to improve market share.
According to their forecast, GSK will grow its revenue at a rate lower than the inflation rate in the medium term. They estimate a turnover of N24.89 billion, N27.38 billion, N30.12 billion, N31.25 billion and N32.41 billion for the periods ending December 2016, 2017, 2018, 2019 and 2020.
“We estimate earnings before interest and tax (EBIT) of N0.56 billion, N2.16 billion, N2.58 billion, N2.83 billion, and N3.28 billion, and earnings before interest, tax depreciation and amortization (EBITDA) of N1.92 billion, N3.72 billion, N4.40 billion, N4.97 billion, and N5.80 billion, for the same periods,” they said.
The analysts projected PBT and PAT of N0.60 billion, N2.20 billion, N2.62 billion,N2.88 billion, N3.32 billion and N0.50 billion, N1.52 billion, N1.81 billion, N1.99 billion, and N2.29 billion in 2016, 2017, 2018, 2019 and 2020 respectively.
The Nigerian Stock Exchange (NSE) has facilitated the investment of N11.094 trillion in the nation’s capital market in the last 10 years, according to data obtained by THISDAY at the weekend. The data showed that the investments were made in equities and bonds.
It was also revealed that 2007, 2008, 2013 and 2014 accounted for the highest investments.
The years 2007 and 2008 were boom years for the Nigerian stock market before the bubble burst in 2009. Investors traded securities worth N2.379 trillion in 2007 and N2.086 trillion in 2008.
Following the global financial meltdown, which also impacted the Nigerian market, the value of trading fell to N686 billion in 2009. It improved to N797 billion in 2010 before declining to N634 billion in 2011.
The value of trading rose to N658 billion in 2012, while it jumped to N1.044 trillion in 2013 and N1.388 trillion in 2014.
However, it fell to N953 billion last year. Explaining the poor performance of the market in 2015, the Chief Executive Officer of the NSE, Mr. Oscar Onyema, said it was affected by factors such as political risk, currency volatility and uncertainty in global crude oil prices.
According to him, 2015 began with the continued depreciation of the naira against the dollar and uncertainty around the direction of economic policies, which fueled an already prevalent bearish sentiment in the Nigerian capital market.
“Like many emerging markets’ governments, the Federal Government of Nigeria is largely dependent on oil exports as its leading revenue source. Thus FGN revenue suffered extensively from sustained low commodities prices in the global market, as well as political and economic policy uncertainty leading up to and following the general elections held in April 2015. Sustained uncertainty in the country led to postponed decision making by business leaders in anticipation of clearer direction on economic policies, thus slowing economic activity,” he said.
In his address to members at the annual general meeting of the NSE last week, Onyema said the exchange illustrated its resilience during 2015 in generating an operating surplus before tax of N1.86 billion amidst prolonged economic uncertainty, diminishing commodity prices and volatile securities markets.
“This was driven by a business model that focused on budgetary prudence, complemented by heightened focus on strategy execution,” he said.
The NSE CEO said going forward, the goal is to reinforce the exchange’s business to take advantage of fluctuations in the market cycles.
“To this end, we will be intensifying our efforts to demutualise, and to develop the necessary infrastructure and framework to launch derivative products in our market. We believe demutualisation will strengthen the exchange’s operational agility and aptitude and that derivatives will empower investors to create stronger portfolio of uncorrelated products,” he said.
Industry analysts have predicted that there will be cautious trading in the nation’s stock market this week.
This is coming after global bourses plummeted at last week’s close as the United Kingdom voted to leave the European Union. The move had triggered a negative sentiment among investors.
Notably, the Financial Times Stock Exchange Index and Shanghai Stock Exchange Composite Index declined 130 basis points and 278 basis points respective at week close.
While trading largely in the green for most part of the week, the Nigerian Stock Exchange receded into negative territory at week close.
Notwithstanding, the NSE All-Share Index appreciated by 4.79 per cent for the week, putting year to date return at 7.01 per cent.
“Noting the emergence of risk-off sentiment across global markets following the Brexit decision, we expect cautious trading across market as investors seek safe havens,” analysts at Vetiva Capital Management Limited said in the firm’s weekly report.
On June 23, Britain voted to leave the EU in a 52 per cent to 48 per cent vote in favour of exit. The exit is expected to happen over the next two years. The decision has set in motion an unprecedented and unpredictable process that threatens a period of uncertainty for Britain, Europe and the global economy.
“Amidst renewed global uncertainty, we also expect the post-Brexit risk-off sentiment to dampen the current positive sentiment in the Nigerian market in the coming days as market participants continue to assess the overall impact of the decision,” the analysts maintained.
In other developments, Fitch ratings downgraded Nigeria’s long-term foreign currency Issuer Default Rating to “B+” from “BB-“ and Long-term local currency to “BB-“ from “BB’ while maintaining a stable outlook.
The agency cited worsening vulnerability in Nigeria’s fiscal and external positions, slow monetary and fiscal adjustments to low global oil prices, lower oil production from renewed insurgency in the Niger Delta region, and magnifying pressures on export revenues, among others.
The Vetiva analysts continued, “In the near term, we expect this to trigger an uptick in the yield across the curve as investors price in the increased risk. We highlight that this might hurt the Federal Government’s plan to secure external debt in a bid to finance the expanding budget deficit as foreign borrowings become more expensive for the country.”
On what will shape markets in the coming week, the analysts said, “While we highlight that the result of the Brexit referendum dampened the positive market sentiment, we are of the opinion that the market was due for modest profit-taking, given recent rallies. That said, we anticipate a mixed trading session in the coming sessions as the investors further digest the impact of the Brexit decision.”
The capital adequacy ratios of a number of Nigerian banks will come under increasing pressure should the weakness in the naira and crisis in the nation’s oil sector persist, Fitch Ratings has said.
CAR, which is a measure of a bank’s capital, is used to protect depositors and promote the stability and efficiency of financial systems around the world, according to Investopedia.
“Nigerian banks are sufficiently well capitalised to absorb the impact of the 40 per cent effective devaluation of the naira against the United States dollar seen as of Wednesday, the third day of trading under the nation’s new market-driven exchange-rate policy regime,” Fitch said in a statement on Thursday.
According to the global credit rating agency, the currency devaluation affects banks’ capital ratios largely because total risk-weighted assets are inflated when foreign currency assets are translated back into naira, while capital is denominated in local currency.
“We assign ratings to 10 Nigerian banks and our assessment is that, with a 40 per cent effective devaluation, the majority will not face an immediate breach of regulatory capital adequacy ratios.
“However, if the naira continues to weaken, buffers between minimum and reported CARs may decline to a level which heightens ratings sensitivity.”
Fitch-rated banks report CARs ranging from 14 per cent to 21 per cent, according to the statement.
It said the devaluation would impact ratios in different ways across rated banks, depending on the level of their foreign currency risk-weighted assets and the size of their net open FC positions.
The agency noted that the oil sector was responsible for an inflow of impairments into some rated banks.
It said, “We believe that the oil sector’s fundamental problems pose a threat to asset quality across the banking sector because of disruptions to production and because oil prices remain low.
“Around 25 per cent of Nigerian banks’ lending is to the oil sector. If problems in the sector persist, impaired loan ratios could accelerate, further pressurising CARs.”
The standalone viability ratings of the Nigerian banks were all in the ‘b’ range, indicating highly speculative fundamental credit quality, Fitch said.
According to the agency, on the average, 45 per cent of net lending in the Nigerian banking sector is extended in FC (almost entirely the US dollars). Balance sheets tend to be reasonably well-hedged, although CARs are primarily affected by the revaluation of their FC risk-weighted assets into naira.
It said the immediate impact of effective devaluation on CARs reported by Fitch-rated banks would be a two per cent average reduction.
“Any erosion of capital ratios may be short-lived because banks are profitable despite the unfavourable operating environment. Rated banks reported a 14 per cent average return on equity in the first half of 2016, we think dividend payouts will probably be conservative in 2016 and internal capital generation is expected to remain healthy.
“Banks’ ability to continue to generate solid performance indicators largely depends on developments in asset quality and loan impairment trends. Impaired loans represented an average of 5.5 per cent gross loans across our portfolio of rated banks at end-1Q16, which is reasonable considering the tough operating environment.
“Loan loss cover is adequate for most banks, but we expect impaired loan ratios to rise in the wake of the naira devaluation. This is because some Nigerian corporates are not adequately hedged by the FC income streams and may find it more difficult to service their FC loans. Most major Nigerian corporates are well hedged.”
It said the success of the FX move in attracting portfolio inflows and foreign direct investment had yet to be tested, adding, “If successful, and the FC supply rises, we expect the FC liquidity for banks to ease which will allow them to meet the FC demand, and meet their internal and external FC obligations.
According to the report, new impaired loans emerging in 2015 and early 2016 are often linked to the trading and manufacturing sectors where the scarcity of the FC liquidity forced a reliance on the parallel currency market where the FC rates were far higher.
It said the new FX regime could bring some relief if the supply of the FC improved substantially.
Fitch Ratings has downgraded Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ as well as the country’s long-term local currency IDR to ‘BB-’ from ‘BB’.
But the global rating agency, in a statement yesterday, assigned a stable outlook to the country. The issuers rating on Nigeria’s senior unsecured foreign-currency bonds was also downgraded to ‘B+’ from ‘BB-’.
Nigeria’s Country Ceiling was also revised downwards to ‘B+’ from ‘BB-’ and its Short-Term Foreign-Currency IDR affirmed at ‘B’.
The agency, with dual head offices in New York and London, pointed out that the downgrade of Nigeria’s IDRs, among others, was because its fiscal and external vulnerability had worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices.
It hinged its decision to the renewed insurgency in the Niger Delta in the first half of 2016, which has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency.
Fitch also forecast that Nigeria’s general government fiscal deficit was expected to grow to 4.2 per cent in 2016, after averaging 1.5 per cent between 2011-2015, before beginning to narrow in 2017.
“The government has adopted a fiscal adjustment strategy centred on raising non-oil revenue and has made some progress in raising tax revenue by improving revenue collection and improving the control over revenue raised by government departments and state-owned enterprises.
“Despite expected increases in non-oil revenue, the agency expects overall general government revenue to drop to just 5.5 per cent of Gross Domestic Product (GDP), from an average of 12 per cent in 2011-2015.
“On the expenditure side, Nigeria has also cut fuel subsidies and adopted a number of public financial management reforms that have contained the growth of current expenditure, including the move to a Treasury Single Account and the implementation of information systems that have reduced the number of ghost workers.
“Nigeria’s low level of general government debt, forecast to be 14 per cent of GDP in 2016, is well below the ‘B’ median of 53 per cent and a rating strength. However, the fall in general government revenue represents a risk to the country’s debt profile.
“Fitch estimates general government debt/revenue will rise to 259 per cent in 2016 from 181 per cent in 2015, higher than the 223 per cent median for ‘B’ rated peers.
“At end-2015, only 19 per cent of central government debt was denominated in foreign currency. Nevertheless, depreciation of the naira will increase the debt and debt service burden.
“A weak policy response to falling external revenues has led to an increase in external vulnerabilities, slower GDP growth and a widening of the current account deficit,” it added.
The Central Bank of Nigeria (CBN) recently commenced trading on the inter-bank foreign exchange market under a revised set of guidelines paving the path for a floating exchange rate.
Commenting on this, Fitch held the view that the new regime would not be fully flexible, as it would still involve a parallel market as importers of 41 items are excluded from the inter-bank market.
This would continue to hinder growth, capital inflows and investment, in Fitch’s view.
It added: “The delayed change in exchange rate policy casts some uncertainty over the authorities’ commitment to a more flexible system. The CBN’s previous exchange rate policy of managing demand for hard currency and restricting access to dollar auctions at the official FX rate resulted in a significant shortage in dollar liquidity.
“Fitch expects that some continued intervention in the FX market will reduce international reserves, which were below $27 billion before the new market began trading compared with $34 billion at end-2014.
“Fitch expects reserves to fall to 3.4 months cover of current external payments by end-2016. Fitch forecasts GDP growth to fall to 1.5 per cent in 2016, down from 2.7 per cent in the previous year, after GDP contracted by 0.4 per cent year-on-year in first quarter of 2016, stemming partly from low hard currency liquidity.
“Second quarter 2016 is likely to experience a further contraction, as the resurgence of violence in the Niger Delta has brought oil production levels down to around 1.5 million barrels per day (mbpd) in May, from approximately 2.1 mbpd in January.
“Nigeria’s ‘B+’ IDRs also reflect the following key rating drivers: In the medium to long term, the move to a more flexible exchange rate mechanism, if implemented effectively, is likely to be supportive of economic growth and economic rebalancing in the face of the drop in oil revenues.
“The accompanying depreciation of the naira will also increase foreign currency denominated fiscal revenue in naira terms. However, the positive effects of naira devaluation will take some time to fully materialise and, in the meantime, Nigeria will be vulnerable to a number of downside risks.
“Fitch expects the current account deficit to widen to 3.3 per cent of GDP in 2016, from 2.6 per cent in 2015 and compared with the median of ‘BB’ rated peers at two per cent.
“Increased external borrowing will reduce Nigeria’s position as a small net external creditor, although this will remain stronger than the ‘B’ range median.
“The authorities’ move to liberalise fuel prices has allowed more supply to come to market, but together with FX restrictions it has led to a rise in inflation to 15.6 per cent in May.
“Inflationary pressures from the depreciation of the naira will be partly balanced by improved foreign currency access which should reduce supply constraints. Fitch forecasts inflation to end the year at lower than 12 per cent.
“Our base case for Nigerian banks is that regulatory total capital ratios will not decline significantly due to the effective devaluation.
“Any impact will be offset by still strong profitability and high levels of internal capital generation. The new FX regime crucially also provides access to US dollars for the banks to meet demand and their internal and external obligations.
“Political risks include the insurgency by Boko Haram and ethnic and sectarian tensions in the Niger Delta and Biafra regions.”
Commenting on the rating by Fitch, Managing Director/Chief Economist, Africa, Standard Chartered Bank, Razia Khan, in a note to THISDAY yesterday described the rating action as a catch-up with the ratings already assigned to Nigeria by the other rating agencies, saying any market impact was likely to be blunted.
According to her, of much more relevance was Nigeria’s recent move to currency flexibility, adding that although the new FX regime was still being tested, over time – if sustained – it was expected to be positive for Nigeria’s credit rating.
“A more flexible FX regime should relieve the pressure on growth, with the real economy no longer needing to bear the full burden of adjustment to the oil price shock.
“Although this is not immediately evident at the outset, currency flexibility should also mean that Nigeria’s FX reserves are eventually better protected, and that access to external financing is enhanced.
“Both are important factors that will allow Nigeria to adjust more favourably to weaker oil prices.
“Meaningfully, the adjustment in the FX rate should provide an immediate boost to fiscal revenue. Both oil revenue and customs receipts should see an immediate uplift, helping to offset partially the impact of more subdued oil output.
“In our view, the key threat to Nigeria’s creditworthiness at the moment would be a reversal of any of the key reforms – especially the transparency effort and the adoption of currency flexibility.
“The risk of a prolonged shortfall in oil production related to Niger Delta militancy is also significant, although over time sustained structural reforms might lessen its overall impact,” she added.
Meanwhile, the FMDQ yesterday announced a revision of the NIFEX methodology and publication standard. The decision would become effective today.
The FMDQ in a notice on its website announced “the revision of the NIFEX methodology and publication in line with the principles for the financial benchmarks of the International Organisation of Securities Commission (IOSCO), effective June 24, 2016”.
During currency trading, the naira gained N1.13 or 0.4 per cent to close at N281.67 to a dollar yesterday, stronger than the N282.80 on Wednesday.
Also, as a result of the move by the central bank to strengthen liquidity in the market, the overnight tenor of the Nigeria Interbank Offered Rate (NIBOR) dropped to 34.42 per cent yesterday, from 68.50 per cent on Wednesday.