FINANCIAL DERIVATIVES COMPANY LIMITED Volume 1, Issue 16

June 1, 2011

FDC ECONOMIC MONTHLY

THE ECONOMY

NIGERIA : ECONOMY REMAINS VULNERABLE TO OIL PRICE

SHOCKS INSIDE THIS ISSUE:

The probability of an abrupt reversal of skyrocketing oil prices looks re-

mote, but cannot be totally eliminated. Keeping in mind that the oil price
will not remain high indefinitely, there is a just cause to worry about the Economy Remains Vulnerable to Oil 1
positive but low correlation between the increase in oil revenues and an Price Shocks

accumulation of fiscal savings (in the Excess Crude Account (ECA) and in
the foreign reserves). This predicament has been raised by many analysts Interest Rate Increase to Strengthen the 2
Naira
and multilateral agencies.

More Regulations as CBN Guarantees 4

World oil prices are mainly a function of demand-supply fundamentals. In Haircut for NPL’s above 5%
other words, while the crisis in the MENA region led to price spikes
(supply side), a debt crisis in the Euro zone, US or Japan; the resurgent Economic indicators & Markets 6
Inflation & Interest Rates
commodity prices; and soaring global inflation could depress oil prices Forex Markets
(demand side) by reducing effective demand for oil. Hence, Nigeria, which Oil Markets

depends on oil revenue for 83% of its export earning and 90% of budgetary Stock Market Review and Outlook 7
revenue, will have to undergo painful adjustments in other to cope with the
Corporate Focus : First City Monument 9
harsh reality of an oil revenue reversal. Bank

There are implications for international trade. For example, in the event of a Sector Update 14
Aviation
deepened euro zone crisis, trade flows between Nigeria and the region Power
Real Estate
could be affected. Thus, goods coming from the single currency bloc will be
relatively cheaper while exports will be relatively more expensive. Theoreti- Global Economy: 17
China’s growing presence in Africa
cally, this should worsen Nigeria’s trade balance as import growth is ex- The Wisdom of Elites
pected to outstrip export growth.

If it is any consolation, it has become somewhat popular for conventional

economic theory to run parallel with actual economic realities. For example,
2008 and 2011 share very similar global economic trends (declining com-
modity prices after reaching fresh peaks, weakening markets and currency

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volatility). The difference however lies in the speed of value erosion (which is
slower today than in 2008) and the trigger of the adjustment, which for 2008 Chart 1 : Oil Revenue & Oil Price
was the housing crisis and 2011, a sovereign debt crisis. 3.0 140
2.5 120
100
2.0
80
The domestic economy front, however, is quite different today compared to 1.5
1.0
60
40
2008: average MPR is 2.65 lower, average savings rate is 7.2% lower, inflation is 0.5 20
0.0 0
0.3% higher, and Naira has depreciated by 21.3% against the Euro. Thus it can M J S D M J S D M J S D M J S D M J S D

be concluded that 2008 presented a greater incentive to import goods from 2005 2006 2007 2008 2009

Oil Revenue (N'trn) - LHS Oil Price ($'pb)_ RHS

Europe based on the relative strength and stability of the Naira against the
Source : NBS & Bloomberg
Euro. But the reality was that people, instead of engaging in import and trade
activities, invested in the financial markets because it offered high and attrac-
tive rates (returns) given the level of inflation at the time. It can also be implied
that some of the funds mobilized in the financial system during this period
helped in fuelling the stock market bubble at that time.

However, it will be ludicrous to think that trade trend in 2008 could reemerge
in 2011. This is because there is a greater incentive to engage in trading activi-
ties compared to keeping the money in the bank at existing low interest rates.
This would explain in part, the soaring demand for forex at the WDAS market. Chart 2 : €/$ and €/N Exchange Rates

The President and his economic team have their work cut out. The fault lines in €/$ €/N
1.7 240
€/N
the global economic recovery are protruding and Nigeria seems to be ill pre- 1.6 220

200
pared for any kind of shock. 1.5
180
1.4
160
1.3
140
1.2
Korede Akeju €/$
120

1.1 100
J-05 A-05 M-06 N-06 J-07 F-08 S-08 M-09 D-09 A-10 M-11

Source : ECB, CBN

INTEREST RATE INCREASE TO STRENGTHEN THE NAIRA

The Naira has witnessed increased volatility in recent months both in the offi-
cial and parallel markets. The premium between the official spot rate and the
parallel cash rate narrowed by 3.2% YTD to N4.9 following a 3% and 1% naira
depreciation at the official and parallel markets, respectively.

The surge in forex demand is making the task of supporting the Naira even
harder for the CBN. In the official WDAS segment an average of $2.8bn per
month has been demanded in the last five months compared to $1.9bn per
month in the corresponding period in 2010.

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In response, the CBN has increased the amount of forex sold in the market by
meeting an average of 120% of total demanded. The introduction of forward
Chart 3 : Nigeria’s Trade With the
forex trading has done little to douse these pressures: but has instead resulted Euro Zone
in a marginal accretion in reserves of 0.9% from $32.3bn at the start of the year.
This is in spite of strong crude oil prices and production. 3,500
3,000
2,500
2,000
On the other hand, real interest rates have remained negative even after the re- 1,500
1,000
cent increases in the MPR by the apex bank to 8%. The Monetary Policy Com- 500

mittee (MPC) has raised the monetary policy rate by a cumulative 125 basis -
2005 2006 2007 2008 2009
Import Export Total Trade
points in the first 4-month of 2011.
Source : National Bureau of Statistics

In its last meeting on May 23, the MPC noted that the key policy challenges re-
main weak growth in private sector credit and very high lending rates in spite
of the low cost of funds. However, as the threat of inflation grows, tightening
measures by the CBN become inevitable.

While the efforts taken so far by CBN have somewhat helped to calm the forex
market, there are still considerable downside risks to naira stability in the near Table 1 : Summary Data
Annual Averages 2008 2011` % Change
term. The use of external reserves to defend naira has its limits. The steady de-
MPR (%) 9.85 7 .2 2.65
cline in oil prices seen in the last weeks heightens tension over possible accre-
Term Deposit Rate(%) 1 1 .7 4.5 7 .2
tion in reserves in the near term. Even if oil prices recover, the low level of in-
Inflation (%) 1 1 .5 1 1 .8 0.3
terest rates will continue to impair CBN’s ability to support the Naira indefi-
WDAS ($ Sold) $1 1 .7 bn $1 0.90
nitely. Euro (€/$) 1 7 3.1 21 0 21 .3

Source : CBN
The outlook for the Naira is mixed. In the short run, we expect the naira to re-
main relatively stable at both official and parallel markets. We expect CBN to
continue to support the currency in the official market. The market is expected
to continue to factor in the high crude oil prices.

Higher crude oil prices will lead to increase in external reserves and help the
CBN to continue to support the Naira. The premium between the parallel and
official rates will remain high. What happens to naira in the long run will de-
pend on two imponderables namely oil prices and production.

Fatai Asimi

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BANKING: MORE REGULATIONS AS CBN GUARANTEES HAIRCUT

FOR NPL’S ABOVE 5%

The central bank gave indications that it is targeting a 5% limit on Non-

performing loans as a percentage of total loan books. The governor gave this
indication and noted that the rescued banks had been brought back to a neutral
position due to the activities of AMCON.

Prior to the bailout of the bad bank, the industry’s total non-performing loans
(NPLs) as a percentage of gross loan/advances of 35%. This is subject to the law
of averages as some banks had as high as 60% NPLs/gross loans on their bal-
ance sheets. It means that NPLs above 5% will be conservatively valued i.e.
banks that want their NPLs above 5% purchased will have to sell at punitive
prices.

This new target means banks will have to pay more attention to risk manage-
ment practices and credit analyses. The previous practice of granting credit will
have to be streamlined to ascertain the credit history of clients and potential
borrowers. To this end the roles of the credit bureau in the new dispensation
Prior to the bailout of the bad bank, the indus-
will also come to the fore. try’s total non-performing loans (NPLs) as a
percentage of gross loan/advances of 35%.

The Nigerian financial market seems to be one of the few where credit is
granted without due or proper recourse to the credit history of an applicant be
it with that institution or others. The logic being that the likelihood of a credit
default is higher if the individual has defaulted on an existing loan or has other
credit obligations outstanding.

Other countries seem to have moved on or are making conscious efforts to

move away from a sub-optimal credit appraisal process to a historical-based
credit appraisal process.

Brazil recently passed a bill for the creation of credit bureaus as a repository of
credit data. This is still subject to the president’s approval though.

Recapitalization Remains Goal

The goal of the apex bank therefore remains to recapitalize the banks. The proc-
ess however is experiencing legal bottlenecks as the court only recently placed
discussions between FCMB and Finbank on hold. There seems to be more tech-
nical issues encumbering the process as talks have broken down between other
target banks and interested parties.

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For now, it appears the main obstacles to the negotiations are some erring
shareholders who have been able to resort to the law to put a hold on further
negotiations. It however does not look like this would pose a long-term risk to
the recapitalization process. The negotiations will be allowed to run after the
legal bottlenecks are removed. The only snag could be that the offer by the ac-
quiring banks could be below the targets’ expectation.

The central bank governor has been talking tough in recent days about recapi-
talization deadlines for rescued banks and the outcome of failing to recapitalize
by 30 September 2011. This seems unlikely though given the various stake-
holder interests and the fallout of such actions. Having said his piece, it’s now
left for the negotiating parties to sort out grey areas of negotiations with the
bargaining chip stacked in favour of potential acquirers

The race is therefore on and the time is ticking. The expectation is that the res-
cued banks will take on a more favorable look to offers made by interested par-
ties. They will also have to find ways of soothing disgruntled nerves both
within the management team and shareholders. Simply put, negotiations must
proceed in earnest.

Adedayo Ayeni

INDICATORS AND MARKETS

Inflation
Headline inflation rose by 11.3% in April, according to recent data from the Ni-
gerian Bureau of Statistics. This is lower than the 12.8% recorded in March.
Food inflation also declined to 10.7% from 12.2% in March, while core inflation
increased to 12.9% from 12.8% in March. Chart 4 : Inflation & Interest Rates
20

Inflation expectation remains high. This is due to elevated risks factors such as 15
11.3 Inflation

the new minimum wage, possible removal of petroleum subsidies and further
10.8 Call
10 9.52 Tbill

liquidity injection from AMCON activities.

8 MPR
5

0
J F M A M J J A S O N D J F M A M
Interbank Rates 2010 2011

The cyclicality of money market rates, in response to large public sector inflows Source : MMA
and outflows, continued in May. Overnight and OBB rates closed the month at

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10.8% and 9.9% respectively. This is 0.21% and 0.5% lower than month end val-
ues in the previous month. Yields on 7 day, 30 day, and 60 day facilities reached Chart 5 : Exchange Rate (N/$)

11.3%, 12.4% and 12.9% respectively. Fund inflows for the period were mainly 190

from FAAC (Federal Account Allocation Committee) of N455.6bn. Short-term 180

170
interest rates are expected to remain around current levels next month. The 2% 160

increase in the Cash Reserve Requirement (CRR) to 4% could squeeze liquidity 150

further, but marginally. 140

J-09 M-09 M-09 J-09 S-09 N-09 J-10 M-10 M-10 J-10 S-10 N-10 J-11 M-11

Parallel(N/$ ) Official(N/$ )

Exchange rate
Source : CBN, FDC
The Naira closed at N153.59 to the Dollar at the official market. Representing a
depreciation of 0.5% compared to the previous month. On a YTD basis, the
Naira depreciated by 3% and 1% in the official and parallel markets, respec-
tively. The spread between the official and parallel rates narrowed by 3.2% to Chart 6 : External Reserves

N4.9. CBN may continue its defence of the currency due to increased forex
earnings (as a result of strong oil prices and production). However, near term
projection however remain mixed and dependent on oil market trends.

External Reserves grows marginal by 0.9% YTD

Nigeria’s external reserves stood at $32.6 bn as at May 26, representing a 0.9%
accretion YTD. The marginal accretion in reserves comes on the back of strong
oil production of 2.2mbpd and high prices (May average of $112). The cost of Source : CBN

defending the Naira is very high when real interest rates are negative and infla-
tion expectations are high.

Oil Markets
Brent crude averaged $115 barrel, 2 cents above the previous month. However,
there was however increased volatility in the market as investors worry about
fiscal sustainability in the Euro zone, Japan and US. The currencies of these
economies also faced great levels of volatility during the period.

The sustained peace in the Niger delta has ensured a rebound in oil production.
Average production for the year currently stands at 2.2mbpd, 10% higher than
the corresponding period in 2010.
Chart 7 : ASI vs Market Capitalization

STOCK MARKET
MAY 2011 REVIEW
The ASI rose by 315 basis points to 25,829.75 points while market cap rose by
322 basis points to 8,258.72bn. The indicators rose amidst reduced activity levels
when compared to April. Source : FDC/NSE

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The difference in the movement of the ASI and market cap is due to the listing Table 2 : Market Indicators
of about 828m ordinary shares of 50kobo each in the name of STACO Insurance
Plc being Right Issue subscription and listing of an additional 2.33bn ordinary
shares of 50k each of Great Nigeria Insurance Plc on the Official List of the NSE.

Market drivers
Improved liquidity in the markets, conclusive presidential elections that have
been adjudged as free and fair by international observers all shaped the direc-
tion of the market during the review period.

Source : FDC
Although the market enjoyed positive liquidity the level of activities in terms
of volume and value fell short of the previous month occasioned by corporate
actions. Investors also continued to cautiously take position ahead of the com-
mencement of the inauguration of the president into a full term in anticipation
of the continuation of already proposed reform agenda.
Table 3 : Gainers & Losers

Recently, the MPC at its May meeting agreed to raise MPR by 50 basis points to
8.00% in a bid to defend the Naira from speculative attack as well as manage
inflation associated with currency devaluation in an import-dependent econ-
omy like ours.

Post-election violence notwithstanding, the general consensus was that the

elections were free and fair, reinforcing confidence of international investors.
On the home front local investors interests are less correlated to the political
environment.

The advance/decline line slid to 0.5:1 in May from 0.72:1 in April. It is also
noteworthy that the number of gainers increased from 45 to 51 companies, but
Source : FDC
the decliners in May nearly doubled those in April.

The Banking sector remained the most active in terms of transaction value. At
the time of the report, available data shows that transaction declined by 22.28%. Table 4 : Most active sector by turnover

The other sectors on the table also showed decline with the exception of Brew-
eries and Foreign Listings which recorded transaction growth of 10.78% and
2,611% respectively.

Corporate Announcements Source : FDC

Nearly two-thirds of forty nine corporate announcements released in the re-

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view period showed an improvement. The same trend is observable in year-to- Table 5 : Corporate Announcement
date banking sector corporate announcements except in the case of UBA
(FY2010) and Stanbic IBTC (Q1 2011). The following stocks were marked down
for dividend payments and bonus issues during the reporting period.

Outlook & Implication

The new MPR regime comes into effect on 8th June 2011. Already, the interbank
rates are beginning to adjust upwards. We expect the bond markets to correct.
This could also have negative impact on the banking sector. Overall a stable Source : FDC

currency is expected to encourage investor participation in the equities market.

Bamidele Ige

CORPORATE FOCUS

FIRST CITY MONUMENT BANK (NSE)

Summary
The playing field in the banking industry is about to change significantly fol-
lowing the recent news that FCMB plans to recapitalize and acquire Finbank,
one of the ten rescued banks. With this proposed acquisition, FCMB with a his-
tory of acquisitions, including that of Cooperative Development Bank, Nigeria-
America Bank Limited and Midas Bank Limited is clearly saying “I want to Price: N7.41 (as of 25 May 2011)

play in the big leagues.” The Bank began as a merchant bank in 1982 and then 12-mth Target Price: N8.87
adopted a universal bank structure in 2001 in order to access the highly lucra- S&P Credit Rating: B+ Beta: 1.1
tive retail segment. Today, FCMB operates in the Retail, Corporate, Institutional
52-Wk Range: N5.19 - N8.70
and Investment banking segments.
PETTM: 12.4

Industry Analysis
EPS: 49k
Following the hotly debated intervention by the CBN, Nigerian banks have No. of Shares: 16,271,192,202
experienced a return to profitability as indicated by recently released FY 2010
and Q1’11 results. This has been due largely to recent activities by AMCON in
purchasing a portion of banks’ non-performing loans (NPL).

The low interest rate environment resulted in low asset yields in 2010, which in
turn put pressure on net interest margins. However, in 2011, the rising interest
rate environment will pose a threat to loan demand and in turn, loan growth.

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Loan growth was sluggish in the first quarter of the year with average loan
growth of around 4%.

High dividend payout ratios in the industry remain worrisome for institutional
Table 6
investors. Banking sectors in other nations have reduced their dividend payout
Average Average
ratios in the wake of the recent global financial crisis, in order to strengthen Payout Dividend
Ratio Yield
their capital base. On the contrary, Nigerian banks have done the opposite, with
Nigeria 75% 4.54%
dividend payout ratios of up to 75% of PAT.
USA* 30% 2.33%

Canada 40% 4.12%

The new wave of consolidations is in the offing and typical of consolidated Europe 36% 2.88%
playing fields. The level of rivalry is set to intensify, particularly in the SME and
* fell to 12% following recent financial
retail segments. Average profitability of the surviving players should increase
crisis
significantly. The industry is also expected to benefit from forecasted GDP
growth rate of 7.5% with a corresponding 15% growth rate.

Company Analysis

Strategy
We sat down with the Bank’s management team to discuss the recently re-
leased FY 2010 and first quarter results for 2011. In our discussions, the team
stressed that FCMB was not focused on becoming the largest bank but rather,
on maximizing shareholder value by becoming among the five most valuable
banks in terms of market capitalization.

As other banks increase their focus on mass retail, FCMB has set a clear strat-
egy of maintaining its investment banking leadership and carving out a niche of
the retail segment i.e. mid-high income earners (≥ N1.2 million) and civil ser-
vants.

The Bank’s retail strategy is at first suspect until you consider the winning suc-
cess of its subsidiary, Credit Direct Limited (CDL). The operational structure of
CDL is fundamentally different from that of banks. CDL is a monoproduct,
monoclient entity created with the strategic objective of offering soft loans to
retail clients. At present, the company’s clients are comprised of civil servants
who are guaranteed 24 hour loan approvals. CDL has been able to maintain low
operational costs and drive higher margins.

The management listed the following as the Bank’s differentiating factor:

Transaction banking- cash management and trade services

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Operational excellence and customer intimacy

Fundamental Analysis
Competitive advantage in the banking sector derives from sustained low costs
and efficient strategy execution. The Bank may have a funding cost disadvan-
tage. Its NIM of 5.3% is strong but could be improved.

This disadvantage is due in part to its history as an investment bank which, by

its very nature relies on purchased funds rather than free current account bal-
ances. The Bank’s low cost deposits (current and savings) in 2010 amounted to
43% of its total deposit compared to an average of 70% for its competitors.

In the rising interest rate environment of 2011 in which the MPC recently in-
creased the MPR from 7.5% p.a to 8%p.a, the issue of funding costs becomes Table 7 : Result Sheet
even more critical for FCMB. The management acknowledged the funding cost N aira b illio n 12 M 2 0 0 7 12 M 2 0 0 8 12 M
2009
8M 2009 12 M
2 0 10
Q1 2 0 11

Gro s s 2 4 .7 50 .1 71.1 3 3 .4 57.8 16 .6

challenge and is working strenuously to address it. In the meantime, the return Earning s

PB T 7.4 18 .4 4 0 .72 7.6 3 .4

on risk assets is lucrative enough to compensate for the funding cost disadvan- PA T 5.8 13 .7 3 .5 0 .6 7 7.3 2 .7

tage. TA 2 6 2 .8 4 6 5.2 514 .4 4 6 0 .1 53 0 .1 59 5.4

TL 8 4 .1 18 8 .9 2 73 .2 2 3 9 .9 3 3 0 .4 4 57.9

TD 18 7 2 51.2 3 2 1.2 266 3 3 4 .8 3 4 2 .1

The high interest rate also has the potential to impact loan demand/growth TS HF 3 1.1 13 3 .6 12 9 .1 12 9 .5 13 4 .8 13 7.4

especially among the Bank’s prime segment of borrowers. Loan growth rate of EPS 63k 13 5K 2 5K 5K 49K 16 k

over 36% achieved by the Bank in 2010 seems unlikely in 2011’s interest rate Source : FCMB Annual Reports
climate.

FCMB has responded to the pressures on net interest margins by boosting its
non interest income from areas such as corporate finance fees, commissions,
and trading income. FCMB was able to offset an 18% decline in net interest in-
come with a 59% growth in non-interest income in 2010. This trend in non-
interest income growth is expected to continue in 2011.

FCMB bottom-line has also been bolstered by significant declines in loan loss
provisions from (N3.96) billion in 2009 to N439 million in 2010. This was due to
the Bank’s much healthier NPL ratio of 6% and loan recovery of N1.6 billion.

Merger & Acquisition

FCMB recently announced that it had signed an MoU to recapitalize and merge
with Finbank. Is this merger based on a portfolio decision or a strategic deci-
sion? i.e. Does FCMB intend to acquire Finbank, nurse it back to health and
then sell it off for huge profits or does it intend to merge the operations of both

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banks? The management has stated emphatically that this was foremost a stra-
tegic decision in which Finbank operations would be merged with that of
FCMB within a 6-12 month period after acquisition. The reasons given for the
decision include:

To grow commercial banking and strengthen retail segment Chart 8 : FCMB vs NSE

Improve national presence especially in the North and East using Finbank’s
stronger branch network
Increase non-interest income using Finbank’s highly developed e-payment
platform
Improve liquidity (Finbank’s current LDR at 25%)

Risk Source : NSE, FDC

FCMB was among the 12 banks that passed the CBN stress test in 2009. The
Bank has relatively low volatility and has come through the 2010 financial year
with a healthier balance sheet and lower NPL ratio. However, the higher inter-
est rate environment will have more of an impact on the interest earnings of
FCMB since its deposits are skewed towards wholesale deposits. In addition,
the proposed merger with Finbank will no doubt stress the Bank’s management
and capital resources and may do more harm that good if the process is im-
properly managed.

Valuation
FCMB currently trades at a PE of 12.47 and 0.9x its book value, slightly cheaper
than the industry average of 12.83 and 1.0x respectively. We believe that the
stock is trading slightly above its computed fair value of N7.48, at the current
price of N7.41. We are therefore neutral in the short-term. Our 12 month target
price of N8.87 is based on a combination of price multiples and residual income
valuation methods. We have also taken into consideration the Bank’s funda-
mentals, the stock’s trading pattern and the sector’s operating environment.

Efemena Esalomi

Disclaimer & Disclosure

This report is for information purposes and should therefore not form the sole basis for investment decision. Information contained in this report has been
sourced from several reliable sources and no representation is made that it is correct, complete or timely.
Mr. Bismarck J. Rewane, MD of Financial Derivatives company, is a non-executive director of FCMB. It is imperative that we emphasize that Mr Rewane
did not contribute, in any form, to this write up. The opinions expressed are the analyst’s.
The analyst also has a FCMB current account, opened and maintained in the normal course of business.

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SECTOR UPDATE

AVIATION SECTOR: ALLIANCE IS A COMPETITIVE STRATEGY

After a challenging 2009 and 2010 during which most network, regional and
domestic airlines traffic and capacity declined, the cynical may still have cause
to fear this year may yet be another challenging one for the air transport indus-
try.

Profit margins looks set to shrink for most operators and opportunities for
growth are constrained by a number of factors including high fuel prices, frag-
ile economic recovery and excess capacity. Nonetheless, year 2011 may not pre-
sent a gloomy picture for the aviation sector as some would want to believe.

Oil prices, which reached a peak of $127pb in March, have eased to $98pb as of
writing, while global recovery seems set to remain broadly on track despite re-
newed sovereign debt concerns in the Euro Area.

However, there is a much more fundamental problem that had faced the do-
mestic air transport industry (besides poor aviation infrastructure). And that is
how to extricate itself from domestic debt burden which is adversely impacting
operations.

Very recently the Asset Management Corporation of Nigeria (AMCON) is be-

lieved to have granted Arik Air N4.5bn lifeline to support its operation and en-
hance its capacity for debt repayment. The capital injection probably follows the
acquisition of most of the airlines’ debts by AMCON from two Deposit Money
Banks in December 2010.

That said, the question that readily comes to mind is whether government bail-
out is what domestic players really need to remain competitive. In a sense, this
is welcome. But while Arik’s lifeline is expected to help save jobs that would
otherwise be lost if the airline was to go under, the company and other domes-
tic players may have to reassess their business model in an industry where cut-
throat competition has become the name of the game.

To this end, a key strategy would be to team up with stronger foreign carriers
through code-shares and joint ventures. This would make good economic sense

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since these local carriers possess insufficient financial capacity and aircraft fleet
to fully exploit local and international business opportunities.

Lawrence Oseafiana

POWER SECTOR: TARIFF SET TO RISE BY JULY

The Nigerian Electrical Regulatory Commission (NERC) is conducting a Major

review of the Multi Year Tariff Order (MYTO) which will take effect in July this
year. The review was originally scheduled for 2013 but has been fast tracked
due to its importance to the current power sector reform.

The commission introduced the Multi Year Tariff Order (MYTO) in 2008 as a
framework intended to determine a pricing structure that is transparent and
produces fair outcomes.

The primary objective of this major review is to develop a new industry pricing
structure. The new pricing structure will allow for a reasonable rate of return
for investments in the sector. It will give incentives to improve efficiency and
quality, send efficient cost signals to customer and ultimately phase out or re-
duces cross subsidies.

Based on the revised framework, end users are expected to pay significantly
more for electricity. However, it is expected that the overall cost of electricity
(assuming supply improves significantly) will be lower than the extra cost in-
curred from the use of alternative energy.

REAL ESTATE: BABY STEPS TO A MILLION MILE JOURNEY

The Federal Housing Authority (FHA) has indicated that it plans to build
106,000 houses in the next four years (that is approximately 26,500 units annu-
ally). The FHA has only managed to build only 37, 000 houses since it was es-
tablished 37 years ago (that is equivalent to a rate of just 1000 per year).

The new housing project, if achieved, will contribute to the reduction of the cri-
sis level housing deficit, currently estimated at 16 million units. To achieve its

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objective, the FHA must tackle problems such as inadequate capital, an under-
developed mortgage industry, land ownership and administrative bottlenecks
etc. These issues and many more, are fundamental to solving the housing crisis.
As part of the means to at least address some of the funding issues, the Federal
Mortgage Bank of Nigeria (FMBN) is considering raising its second Mortgage-
Backed Bond from the capital Market in July 2011. The amount to be raised will
bring the cumulative beneficiaries under the MBB programme to 16,108 home
buyers. In 2007, the FMBN successfully floated its first tranche of the N100
Mortgage-Backed Bond worth N26 billion.

Korede Akeju

GLOBAL POLICY PERSPECTIVE

CHINA’S GROWING PRESENCE IN AFRICA
By Mark Mobius

There are some key forces both pushing and pulling China into Africa. First,
China now has the world’s largest amount of foreign reserves, reaching $3 tril-
lion, more than twice that of Japan and far larger than most other countries. Up
to now a large portion of these reserves have gone into U.S. government debt
but increasingly China is finding the necessity to diversify those reserves be-
cause of the growing precarious situation with the U.S. Dollar and concerns
about U.S. government debt.

At the same time, China’s burgeoning economy is demanding more and more
natural mineral resources whether it is oil, copper, nickel, gold, etc. Looking
further into the future, the demands of China’s more sophisticated diets means
that imports of food will be increasing as well. In both areas, minerals and food,
Africa has great promise. It is well known that Africa is rich in a wide variety of
minerals from oil to copper. Africa’s vast amount of land could fit the entire
land mass of not only China but also India, the United States, Mexico, France,
Italy and a number of other countries. Besides land, and more importantly, Af-
rica has huge resources of water essential for bountiful harvests.

China’s attraction to Africa is clear. Africa is also attracted to China — China is

a developing country demonstrating a successful growth model and this is an

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opportunity for African leaders to learn from them. China has the money to
import Africa’s resources and the money to help build Africa’s urgent need for
infrastructure: roads, railroads, ports, electric power systems, etc.

In 2000, the Forum on China-Africa Cooperation (FOCAC) was established to

enhance economic and trade cooperation. Trade has expanded rapidly, moving
from $12 million in 1950 to over $120,000 million now. China is now Africa’s
largest trading partner and, surprisingly, China has a trade deficit with Africa,
importing more than it exports to Africa. Visit any shopping center in any coun-
try in Africa and it is clear that China is flooding Africa with consumer goods
and also machinery, automobiles and electronic items.

Africa’s exports to China are about 80% raw materials like oil but increasingly it
is also manufactured and agricultural such as Egyptian oranges, South African
wines, Ghana’s cocoa beans, Ugandan coffee, Tunisian olive oil and more. In
order to promote that trade, China has bilateral trade agreements with 45 Afri-
can countries, a number of which now have zero tariff preference with China.

In addition to trade, investment from China into Africa between 2003 and 2009
grew from $490 million to $9,300 billion in 49 African countries in mining,
manufacturing, construction, tourism, forestry and fisheries. Part of the China’s
efforts is to sign a bilateral agreement, now with 33 African countries, for pro-
tection of Chinese investments. A China-Africa Development

Fund has already been created to invest in African equities. That fund has al-
ready reached $1 billion by investing in over 30 projects in agricultural machin-
ery manufacturing such as electric power and mining. Plans call for the fund to
expand to $5 billion.

China is also promoting economic and trade zones in Zambia, Mauritius, Nige-
ria, Egypt and Ethiopia where companies can establish manufacturing and trad-
ing operations with appropriate infrastructure and certain government conces-
sions. So far over $600 million has been invested in such zones employing over
6,000 jobs.

As early as the 1970s China was helping to build infrastructure projects in Af-
rica such as the 1,860 kilometer Tanzania-Zambia railway, the 58,000 square
meter Cairo International Conference Center and over 500 other projects such as
highway in Somalia, a harbor in Mauritania, a canal in Tunisia, a National Sta-
dium in Tanzania and many others.

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Preferential loans amounting to over $10 billion to finance projects for airports,
housing and hydropower plants have been made.

The Chinese government has always supported African countries in their effort
to reduce their debts, which have helped relieve their burden of debts to China.
From 2000 to 2009, China canceled 312 debts of 35 African countries, totaling
18.96 billion yuan. That demonstrates China’s determination to help Africa de-
velop, and to help Africa reduce the debt it owes to other countries.

With that kind of flow of money, banks have followed. The China Development
Bank, Export-Import Bank of China, Industrial and Commercial Bank of China,
Bank of China and China Construction Bank are all now active on the continent.
China has also supported the African Development Bank and the West African
Development Bank by injecting funds, cancelling debts and establishing funds
for specific projects.

Tourism is growing as well, with over 300,000 Chinese tourists visiting Africa
each year. African airlines have direct flights to China and a number of Chinese
airlines have direct flights to Africa.

All of this trade and investment is not without problems. Like other countries
around the world, there have been scandals, corruption and disputes such as a
Chinese infrastructure project in Algeria mired in a bribery scandal or arbitrary
seizure of property in Zimbabwe, among other issues.

There is no denying, though, that capital markets in Africa are developing rap-
idly. We have been investing in South Africa for many years and its stock mar-
ket is one of the world’s most sophisticated. In our frontier market funds we
have been active in countries like Kenya, Ghana, Mauritius and others. Nigerian
companies now constitute the largest portion of those forfeiter funds which
now have assets of over $1 billion and growing. We expect to expand even fur-
ther in Africa and invest in many more countries. The future is certainly in Af-
rica for investors from China seeking high growth and new opportunities.

Culled from Reuters, May 2011

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THE UNWISDOM OF ELITES

By Paul Krugman

The past three years have been a disaster for most Western economies. The
United States has mass long-term unemployment for the first time since the
1930s. Meanwhile, Europe’s single currency is coming apart at the seams. How
did it all go so wrong?

Well, what I’ve been hearing with growing frequency from members of the pol-
icy elite — self-appointed wise men, officials, and pundits in good standing —
is the claim that it’s mostly the public’s fault. The idea is that we got into this
mess because voters wanted something for nothing, and weak-minded politi-
cians catered to the electorate’s foolishness. So this seems like a good time to
point out that this blame-the-public view isn’t just self-serving, it’s dead wrong.
The fact is that what we’re experiencing right now is a top-down disaster. The
policies that got us into this mess weren’t responses to public demand. They
were, with few exceptions, policies championed by small groups of influential
people — in many cases, the same people now lecturing the rest of us on the
need to get serious. And by trying to shift the blame to the general populace,
elites are ducking some much-needed reflection on their own catastrophic mis-
takes. Let me focus mainly on what happened in the United States, then say a
few words about Europe.

These days Americans get constant lectures about the need to reduce the
budget deficit. That focus in itself represents distorted priorities, since our im-
mediate concern should be job creation. But suppose we restrict ourselves to
talking about the deficit, and ask: What happened to the budget surplus the
federal government had in 2000?

The answer is, three main things. First, there were the Bush tax cuts, which
added roughly $2 trillion to the national debt over the last decade. Second,
there were the wars in Iraq and Afghanistan, which added an additional $1.1
trillion or so. And third was the Great Recession, which led both to a collapse in
revenue and to a sharp rise in spending on unemployment insurance and other
safety-net programs.

So who was responsible for these budget busters? It wasn’t the man in the
street. President George W. Bush cut taxes in the service of his party’s ideology,

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not in response to a groundswell of popular demand — and the bulk of the cuts
went to a small, affluent minority.

Similarly, Mr. Bush chose to invade Iraq because that was something he and his
advisers wanted to do, not because Americans were clamoring for war against a
regime that had nothing to do with 9/11. In fact, it took a highly deceptive sales
campaign to get Americans to support the invasion, and even so, voters were
never as solidly behind the war as America’s political and pundit elite.

Finally, the Great Recession was brought on by a runaway financial sector, em-
powered by reckless deregulation. And who was responsible for that deregula-
tion? Powerful people in Washington with close ties to the financial industry,
that’s who. Let me give a particular shout-out to Alan Greenspan, who played a
crucial role both in financial deregulation and in the passage of the Bush tax
cuts — and who is now, of course, among those hectoring us about the deficit.
So it was the bad judgment of the elite, not the greediness of the common man
that caused America’s deficit. And much the same is true of the European crisis.
Needless to say, that’s not what you hear from European policy makers. The
official story in Europe these days is that governments of troubled nations ca-
tered too much to the masses, promising too much to voters while collecting too
little in taxes. And that is, to be fair, a reasonably accurate story for Greece. But
it’s not at all what happened in Ireland and Spain, both of which had low debt
and budget surpluses on the eve of the crisis.

The real story of Europe’s crisis is that leaders created a single currency, the
euro, without creating the institutions that were needed to cope with booms
and busts within the euro zone. And the drive for a single European currency
was the ultimate top-down project, an elite vision imposed on highly reluctant
voters.

Does any of this matter? Why should we be concerned about the effort to shift
the blame for bad policies onto the general public?

One answer is simple accountability. People who advocated budget-busting

policies during the Bush years shouldn’t be allowed to pass themselves off as
deficit hawks; people who praised Ireland as a role model shouldn’t be giving
lectures on responsible government. But the larger answer, I’d argue, is that by
making up stories about our current predicament that absolve the people who

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put us here there, we cut off any chance to learn from the crisis. We need to
place the blame where it belongs, to chasten our policy elites. Otherwise, they’ll
do even more damage in the years ahead.

Culled from The New York Times, May 2011

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 strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such
future movements will not exceed those shown in any illustration. All rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with
respect to any matter contained herein.

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