Sectoral indices reflected the dampened investor confidence during the week as all sectors shed points WtD save for the Insurance sector which rose by 1.12%; MANSARD led its peers in the sector with a 6.25% WtD gain. Following the addition of UNITYBANK to NSE's market making list, the stock recorded a price appreciation of 13.29% in two days of market making and returned 9.43% WtD. We expect to see the index close higher than the 26,400.94pts in the coming week given the gradual resurgence of the advancers
Ahead of MPC: we see the MPR retained at 12%
As the Monetary policy committee of the CBN holds its last meeting for 2012 on 19th – 20th November, 2012, we present an analysis of the indicators they will be considering and the likely monetary policy position of the committee. We see the MPR retained at 12% on a balance of growth and price-stability objectives. Also in line with 2013 budget proposition, official exchange rate might be adjusted to N160/USD.
Growth objective lends Credence to MPR retention
CBN's objective in 2012 has been more in favour of price stability than growth. Average growth rate of the economy has been above 6.23% while other factors attribute to this, the impact of high interest environment is a major factor. The MPR was at 12% since 2011 and the trend in growth rate seems to have patterned a decline. This scenario supports a plausible lower MPR to spur growth which might imply overriding price stability.
The impact of flooding that took place in Q3 and into Q4 will be a source of concern to the MPC considering the devastating impact of these on agricultural output. This in our view will require either retaining the MPR at 12% or increased. Security challenge is another factor that limits economic growth.
As the MPC meet, we consider growth stimulation a priority in their consideration though price stability will also be pivotal to their decision.
Exchange Rate – any need for devaluation?
Given the over 2% YtD appreciation and the relative stability in naira over the past 6 months, Naira has been referred to as the 2nd most performing currency in 2012. The exchange rate benefitted from increased dollar inflows into the capital market, especially in Q2 and Q3, to take advantage of the high yield environment.
While we expect increased inflows of foreign funds in 2013 both into the real and financial sectors which will straighten the naira further, we raise an eyebrow on the N160/USD official rate as contained in the 2013 budget proposition. This is a possible indication of 3.23% depreciation in the value of the naira. The MPC
Inflation: Consolidating a declining trend
Inflation rate averaged 12.32% all through Q1-Q3:2012, up from 11.09% in the same period last year and is currently at 11.3% in September 2011 (0.4% lower than August 2012). In September, core index shrank by 1.6% YoY largely due to base effect and exchange rate stability during this period, while food index increased by 0.3% YoY due to flooding in some agric producing areas. Narrow money and broad money grew in September by 2.34% and 1.97% respectively. Given that the economy has grown at above 6% over the same period, sustained growth rate in money supply will not necessarily be inflationary.
However, owing to the lingering aftermath of the flood experienced in Q3 which saw prices of most root crops on the high (and likely to remain so), petroleum price increase resulting from the sudden scarcity of petrol as well as speculations on further decisions in this regard, prices of commodities might soar. In addition to this, the periodic increase in spending that characterizes the last quarter of the year and the speculative activity of consumers will lead to increase in prices of commodities. On a balance of factors, we stake that inflation will average 11.50% (+0.1) in the last quarter of the year, which does not justify a downward review of the MPR.
Global Economy: Slowing growth
International Energy Agency (IEA) in her recent report revised downward its forecast for crude oil consumption in Q4:2012 and 2013 to 90.1mb/d and 90.4mb/d respectively, given weakness in Europe's economy and disruption to US fuel delivery for the period under review. Although the OPEC crude basket has traded on average above $100 per barrel, the current price is a decline from its peak at $111.35 in October 2012. We expect the price to stay above $100, on average, throughout the year.
After the just concluded US election, the most debatable issue on ground is the impact the potential fiscal cliff would have had not only on the US economy, but also on global economy including Nigeria if the policy is implemented. The major threat to the Nigerian economy is both from the crude oil price and financial market. Given that the fiscal cliff does not only ensure that US government increases revenue through increase tax but also through increased oil export, the imposition will have a strong effect on the global price of crude oil with direct impact on Nigeria revenue.
The three most recognised rating agencies hold the view that should US lawmakers unable to reach deals that will guarantee increased revenue and decreased spending in the medium to long term, rating downgrade looms; an experience that almost threw the world economy back to recession in 2011.
Japan's economy recorded 0.9% QoQ decline in Q3:2012 GDP growth. The fall in GDP translated into an annualized rate of decline of 3.5%. Although the country intends to implement another round of quantitative easing, analysts are of the view that Q4:2012 growth is likely to trail Q3:2012 which could result in a double dip recession.
Considering the possible effects of the above factors and the current fragility of the global economy, we believe that MPC may likely leave rate unchanged rather than reducing it.
High debt servicing cost; still a cause for concern
Just like the previous year's budget, debt servicing in the 2013 budget is 12% of the budget while capital allocation to productive sectors that will ensure the country's sustainable economic development have lower allocation. This is more so worrying, given that capital allocation to health and education is paltry at 1.13%.
Based on the 2013 budget proposal, a total of NGN544bn is allocated for domestic debt servicing which is 11% of the total budget while the remaining 1% is for foreign debt servicing. The high domestic debt servicing figure is not surprising as the average coupon on all FGN bond is 10.9% while instruments issued in 2012 carry average coupon rates of 15.8%. This is in addition to the high yield that applied on all old series that were re-issued in 2012. To achieve a reduction in the cost of borrowing and invariably debt servicing, a downward review of the MPR will be required.
Given our stable outlook on inflation (11.5% Q4 average) and the need to maintain a GDP growth in excess of 6% as well as our dim outlook on global economy, we believe the MPC will retain MPR at 12% while the official exchange rate might be adjusted in line with 2013 budget to N160/USD. We opine that the NOP (1%) and Reserve Requirement(12%) have been effective in reducing speculative demand on the naira and will thus be maintained.
Market movers and shakers
We highlight below key outperformers for the week.
