Nigeria 2016 outlook a slippery path to recovery

Nigeria Outlook 2016 A Slippery Path to Recovery...Finding the New Equilibrium
Investment Banking| Asset Management |Trustees| Securities Trading

2
Executive Summary
A slippery Path to Recovery
Global growth will continue to seek for balance. With the EM “commodity super cycle”
officially over, and China still trying its best to find a fulcrum, we believe global growth will
remain fragile at best over 2016. We are slightly more upbeat on the advanced econo-
mies as we expect that the US economy will continue to hobble along the recovery path
albeit at a much slower pace than the US Fed anticipates. This, we think, will have pro-
found impact on the rate of normalization. The pace of QE in the Eurozone and Japan is
also likely to quicken. A stronger dollar is likely to further test the resolve of key EM and FM
economies and their fiscal balances, while exerting further downward pressure on com-
modity prices to the detriment of many SSA economies.
Nigeria needs to make hard choices. The road to recovery is long and tortuous for Nige-
ria as the government faces hard policy choices with short term pain. The record expan-
sionary budget for 2016 is hinged on non-oil revenue, with a view to deviating from histori-
cal trend, an attempt we believe will likely be faced with execution challenges. We like
the renewed vigour for governance, strong anti-corruption drive, as well as the seemingly
stronger political will to push through reforms necessary to navigate current macroeco-
nomic challenges. What we are yet to see is a coherent economic blue-print necessary
to guide a fast paced structural shift in the Nigerian economy.
Aligning fiscal and monetary policy may require an exchange rate adjustment
It is difficult to imagine a smooth execution of the highly expansionary 2016 budget given
current macro realities especially the bearish trajectory of oil prices. The exchange rate
assumption in the budget ( i.e the Official interbank rate) stands at USD/NGN 198 with a
budget deficit of N2.2trn. As at the time of writing this report, oil price was trading at
$27.6p/b. This potentially increases the deficit to N2.4trn if the exchange rate remains un-
adjusted. However, a 27.6% adjustment in the currency will keep the proposed deficit
constant. A further scenario play around oil prices and the exchange rate required to
maintain the proposed budget deficit of 2.2trn is summarized below:
Oil Price Scenario ($ p/b) Exchange Rate (USD/
NGN)
Devaluation Target
15 502 153%
20 376 90%
25 301 52%
30 251 27%
35 215 9%
38 198 0%
United Capital Research Estimates

3
Macro variables will test support levels. Our 2016 outlook is underpinned by the bearish
expectation for oil price which is expected to reverberate across key sectors of the econ-
omy. We think real GDP growth will take a fillip from increased and more productive gov-
ernment spending, hence we expect a mild recovery to 4.4% in 2016. The inflationary
path is dependent on the pass-through from an imminent currency adjustment with Offi-
cial exchange rate likely to close the year at NGN/USD 240. However, with the benefits of
a relatively higher base, and delayed transmission effect of a possible devaluation, we
expect inflation rate to average 9.5% for the year. A somewhat renewed harmony be-
tween fiscal and monetary policy will see the policy rate lowered further to 10.0% .
Expect a challenging year for naira assets. We look to see robust system liquidity over H1-
16, one of the most important themes for naira FI assets. While uncertainties around FX
will continue to hold back foreign inflows in the fixed income market within the period, we
expect that the current pricing of risk in the equities market, will continue to push momen-
tum to the FI market, with attendant decline in yields. Government’s expansionary spend-
ing which is likely to gather momentum in H2 will however place a floor on yield with the
possibility of an uptick. Overall, we project that average FI yields will trim between 100-
150bps on average over H1, barring surprises around FX.
We are bearish on equities as we expect the market to ride the roller coaster of oil price
and FPI funds flows in 2016. What’s more, the outlook for company performance in 2016
remains feeble on account of challenging operating environment. We have modeled
quarterly equity market returns on probability weighted oil price scenarios to arrive at a
forecast return of –9.2% for the year .

4
Analysts
Kayode Tinuoye
Head Research, Financials
+234-706-881-6408
kayode.tinuoye@unitedcapitalplcgroup.com
Adelayo Alabi
Consumer
+234-817-686-8065
adelayo.alabi@unitedcapitalplcgroup.com
Kayode Omosebi
Energy and Industrials
+234-818-1621-267
kayode.omosebi@unitedcapitalplcgroup.com
Moremi Obadara
Intern
+234-905-4655-278
moremi.obadara@unitedcapitalplcgroup.com
United Capital Research Distribution
Bloomberg UCNR<GO>
Reuters www.thomsonreuters.com
FactSet www.factset.com
Contacts:
United Capital Plc
Securities Trading: +234-1-280-8919
Securities@unitedcapitalplcgroup.com
Asset Management: +234-1-2807822
assetmanagement@unitedcapitalplcgroup.com
Trusteeship: +234-1-27157491
trustees@unitedcapitalplcgroup.com
Follow us on twitter

5
Contents
Global Economic Outlook 7
Headwinds yet to dissipate 8
US: On a lonely path to tightening 9
Europe: Sailing along the QE theme amid risk trade-off 10
Asia: China leads emerging market slowdown, as spillover hits SSA 11
Global Oil Prices: Contending with a cocktail of supply shocks 13
SSA Update and Outlook 16
Economic resilience under test, is Africa still the next frontier? 17
BRVM: The big outperformer 19
South Africa: Approaching the bottom of the cycle 21
Ghana: Economy at a delicate phase, risk events still on the horizon 23
Angola: Tough times ahead 25
Mauritius: Striving for steadier growth 27
Kenya: Faltering despite strong fundamentals 29
Nigeria 2016 Outlook 31
Post-election Nigeria: Still attractive for business? 32
Real GDP: Global headwinds meet poor visibility in domestic policy 34
Budget 2016: The Budget of “Change” 37
Fiscal Outlook: Near-term vulnerabilities still in sight 40
Inflation: A monster not so frightening after all 42
Trade and External Position: Surplus shrinks, but outlook remains positive 44
Financial Markets Outlook 45
Money markets: A tale of unequal halves 46
FX: How long more can the “visible” hand hold sway? 50
Fixed Income: A story of resilience 53
Equities: A bumpy ride down the hill 56
Sector Review and Outlook 63
Banking Sector: Still battling a flurry of headwinds 63
Consumer: Riding out the hard times – industry still in transitory phase 86
Oil and Gas: Aligning 2016 projections with reality 107
Cement Sector: Attractive long term call 122
Disclaimer and Ratings Criteria 132

6
Abbreviations
APC All Progressives Congress
BoE Bank of England
BoJ Bank of Japan
BVPS Book Value of Equity per Share
CAPEX Capital Expenditure
CBN Central Bank of Nigeria
CID Cote D’Voire
CIT Company Income Tax
CPI Consumer Price Index
CPMI Composite Purchasing Managers Index
CRR Cash Ration Reserve
DM Developed Markets
EBIT Earnings Before Interest and Tax
EBTIA Earnings Before Interest, Taxes, and Amortization
ECB European Central Bank
EM Emerging Markets
EPS Earnings per Share
FM Frontier Markets
FX Foreign Exchange
GDP Gross Domestic Product
m/m Month on Month
Mn Million
MoU Memorandum of Understanding
NBS National Bureau of Statistics
NGN Nigerian Naira
NGSE ASI Nigeria Stock Exchange All Share Index
NIR - Non Interest Revenue
NPL Non-performing Loan
NSE Nigerian Stock Exchange
OMO Open Market Operation
OPEC Organization of the Petroleum Exporting Countries
OPEX Operating Expenses
p/b Per Barrel
P/BV Price to Book Value
P/E Price to Earnings
PAT Profit After Tax
PMI Purchasing Manager Index
q/q Quarter on Quarter
QE Quantitative Easing
ROAA Return on Average Assets
ROAE Return on Average Equity
SOTP Sum of the Parts
SPS Sales per Share
TP – Target Price
Trn Trillion
USD ($) United States Dollar
VAT ` Value Added Tax
Vs Versus
y/y year on year
Ytd Year to Date

7
Section 1
Global Economic Outlook

8
Global Outlook
Headwinds yet to dissipate
While there were still a few surprises, the major drivers of global market perform-
ance in H2-15 were already fully in play from the start of the year, as extended
commodity price declines, monetary policy divergence across key geogra-
phies, and risk trade-off amongst the well-known Eurozone culprits remained the
major themes. Across the Atlantic, the fear of “Brexit” began to slowly replace
“Grexit”, even as the Turkey/Russia rancor threatened to heighten market
volatility. The latter briefly supported oil prices, although in the end the impact
was mostly transient, as global supply overhang eventually dominated. China
threw the biggest market surprise in H2 in our view, with moves by its leaders to
stimulate growth and protect its capital markets as well as investors’ capital,
only further stoking jitters across markets, even as economic numbers continued
to mostly disappoint.
All these happened on a background of widening disparity in monetary policy
positions by major Central banks globally, with the BoE, ECB and BoJ prolonged
easing monetary policies, while the US Fed summoned enough courage to raise
interest rates for the first time in nearly a decade. These together with a down-
trend in commodity prices had market-wide implications, as key EMs and FMs
bore the brunt, with fiscal balances and EM currencies coming under severe
pressure and eliciting even more varied responses from the Central Banks con-
cerned.
In shaping a prognosis for 2016, we have reviewed events that shaped market
performance in the past year. What is clear to our mind is that divergence in
monetary policies globally will continue to be the reigning theme for the first half
of the year. With outlook for commodities still benign, EMs and FMs will likely re-
main at risk, which obviously dictates a selective approach for both strategic
and tactical plays.
The overriding themes that
dominated the global economy in
2015 were declining commodity
prices and monetary policy diver-
gence across markets
EMs and FMs remain at the receiving
end of global market volatility with
fiscal balances and currencies under
pressure
2.8
2.2
1.6
1.0
2.5
1.5 1.3
-1.3
7.5
6.3
1.3
-1.0
-0.6
-4
-2
0
2
4
6
8
Chart 1: Global growth should edge up as US stability improves
Global Real GDP forecasts (y/y, %)
2015E 2016F
Source: IMF, United Capital
Advanced Economies Euro Area Emerging Markets

9
US: On a lonely path to tightening
Despite market expectations that an interest rate hike was on the horizon, US
equities started the second half of 2015 on a strong footing, with the S&P 500 ris-
ing 2.1% m/m in July. This was amid generally upbeat macroeconomic data,
which further strengthened the view that the disappointing showing in the first
quarter was due to one-off factors, mainly poor weather and port shutdowns.
Furthermore, data released showed that the US economy accelerated in the
second quarter, as GDP rose at an annualized rate of 2.3% during the three
months to June. At the same time, the figure for first-quarter GDP was revised, this
time from a 0.2% decline to positive growth of 0.6%.
Much in line with market expectations which already put the probability of a
December 2015 rate hike at c.70.0% as early as September, the US FOMC raised
the range of its benchmark interest rate by a quarter of a percentage point to
0.25% - 0.50% from 0.0% - 0.25% at the close of its 2-day policy meeting in Decem-
ber. The Chair of the Fed, Janet Yellen explained that the Committee judged a
modest increase in the federal funds rate was appropriate, even as the econ-
omy continued to pick-up recovery pace. She added that the rate hike was a
tentative beginning to a "gradual" tightening cycle, and that in deciding its next
move, attention would tilt more towards monitoring inflation, which was still some
distance behind its 2.0% target.
Broadly upbeat macroeconomic
data supported US equities at the
start of H2-15
-6.5
-2.5
1.5
5.5
9.5
Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
unemployment Equity returns
Chart 2: Despite strong labour numbers, overall mixed data and global
growth concerns to slow equities
US Monthlyequityreturns and unemployment rates (%)
Source: Bloomberg, United Capital
Inflation still significantly lags US Fed
target rate of 2.0% which suggests
that tightening may come at a
measured approach

10
Europe: Sailing along the QE theme amid risk trade-off amongst member
countries
Across the Atlantic, the start of H2 was dominated by headlines around Greece.
After months of capital controls, murky negotiations amongst stakeholders which
included a missed payment to one of its creditors (the IMF), Greece finally
reached a deal and signed an memorandum of understanding (MOU) with its
creditors. This guaranteed further financial support premised on a third round of
economic adjustment programme. This financial package comprised of up to
€86 billion in financial assistance over three years (2015-2018) with disbursement
linked to progress in delivery of policy conditions, in accordance with the terms
of the MoU.
Outside of Greece, economic data of the Eurozone continued to improve slowly
as most economies in the region benefitted from QE support by the ECB. While
countries such as Germany, Spain and Ireland started H2 on a strong footing,
performance of some other countries notably Belgium and Italy lagged, with
weak growth and increasing unemployment from already elevated levels
combining to constitute a drag on the performance of the wider euro area. We
note that Q3-15 GDP expanded by 0.3%, and represents the tenth consecutive
quarter of growth, driven by a gradual recovery in pent-up domestic demand
and less by net trade.
The Greece bailout put paid to the
likelihood of Grexit
Source: Bloomberg, United Capital Source: Bloomberg United Capital
Beside Greece, economic perform-
ance of the Eurozone continues to
slowly improve
Despite slowly improving fundamentals which was mostly QE driven, the Euro
zone's growth picture was tinted early Q4 by more global-wide concerns. The
initial trigger for instability was China, where the authorities’ management of the
bursting of the country’s stock market bubble and the decision to devalue the
currency in August left investors severely unimpressed. Fears over China’s slow-
down and subsequent falling demand for raw materials, coupled with excess
supply, meant a further step down for commodity prices, which stoked jitters
across markets.
Global wide concerns weighed on
the Eurozone early Q4 with instability
in China leading the charge

11
Moreover, the Eurozone remained well behind its inflation target of 2.0%, as it
continued to battle deflationary pressure which persisted in spite of on-going QE
(inflation came in at -0.1% in September 2015)
It was against this backdrop that investors raised expectations of an increase in
the quantum of QE even as the Draghi led ECB went dovish, stating that they will
continue to monitor growth data and will act if conditions so warranted. The mar-
ket generally interpreted the statement as “more QE for longer”. However, on
the strength of economic numbers that were released early Q4, which saw the
CPMI rise to 54.0 in October, and GDP growth close to 2%, the ECB held off mak-
ing grand changes to the on-going QE at its December meeting. Instead, it
opted to only extend the QE tenure by additional six months together with a 10
basis point cut in deposit rate to - 0.3% much to the disappointment of investors.
Consequently, Eurozone equities ended 2015 on a negative note (-6.2% return in
December), with investors clearly discontent, having set the bar high with regards
to the quantum of easing needed to provide a jolt to the ailing economy.
Asia: China leads emerging market slowdown, as spillover hits SSA
In August 2015, China surprisingly devalued its currency by lowering the rem-
minbi’s reference rate ( the rate at which the Central Bank sets the currency on a
daily basis and from which the currency is allowed to move by +/-2% against the
dollar). The currency was marked down by 1.9% marking the biggest downward
adjustment in 2015. This move by the Chinese authorities was aimed at stimulat-
ing economic growth via exports which had seen a persistent contraction.
The slowdown in the world’s second largest economy (accounting for one-fifth of
the global economy) was reaffirmed towards the end of the year as economic
data worsened on a number of metrics. The closely-watched Caixin China
manufacturing PMI reading for October continued on its downward trajectory,
posting a reading of 48.3, above September’s 47.2, but still in contractionary terri-
tory. Meanwhile, September inflation registered a lower than-expected 1.3% in-
crease year-on-year, down from August’s 1.6% rise, with the numbers continuing
to add to worries that the economy is facing prolonged deflationary pressures.
Global Market Outlook
Volatility still in sight as global growth and risk balancing takes center
stage.
Going into the first half of 2016, we believe global growth will remain fragile at
best, as the important parts continue to move in different directions. With the EM
“commodity super cycle” officially over, and China still trying its utmost best to
find a fulcrum, we believe global trade and manufacturing will remain in the
balance
The Eurozone still lies behind its infla-
tion target range
Eurozone equities ended 2015 on a
negative note reflecting investors’
disappointment with the quantum of
easing by the ECB
The slowdown in China was reaf-
firmed towards the end of the year as
economic data worsened on a num-
ber of metrics.

12
This is further hinged on our projection that outlook for commodity prices, with oil
leading the charge, will remain bearish during the period. While we do not fore-
see China entering into a recession, we think a slowdown in overall demand will
still pose significant downside risk across markets.
Given the scale of the bilateral trade between China and many SSA economies,
a continued weakness of the Yuan in 2016 will continue to pressure the terms of
trade positions of these economies. According to the IMF, a 1% slowdown in
China’s domestic investment is associated with a 0.8% contraction in the export
growth rate of resource-intensive economies in SSA. Continuous adjustments to
the Yuan is likely to be negative for the growth of industrial activities in less diversi-
fied SSA economies.
For the DMs, our outlook is a little more upbeat, as we expect that the US econ-
omy will continue to hobble along a path to recovery albeit at a much slower
pace than the US Fed must have earlier anticipated. We believe this may impact
the pace of rate normalization, although we still expect that the level of tighten-
ing will be strong enough to ensure a divergent global monetary policy theme
remains dominant. Therefore, a stronger dollar is likely to further test the resolve of
key EM and FM economies and their fiscal balances, although one can argue
that many of these may be a little more prepared than a year ago to weather
the storm, or maybe it will be a case of resetting to lower expectations for these
markets.
Despite still strong deflationary pressures, we expect the Eurozone economies will
also contribute to global growth, with further QE likely on the horizon, a policy
direction also likely to be pursued by Japan. In fact, we think monetary easing in
these economies will extend into 2017, which again hints that the pace of tight-
ening in the US may be uneven as the US Fed may elect to cap the uptrend in
the dollar. The emergence of “Brexit” remains a key risk, and together with oil
price related shocks, could be a major source of market volatility in the course of
H1-16.
Overall, while the global markets are not out of the woods yet, we believe 2016
will form an additional base to the recovery theme that is slowly beginning to
gather pace, although headwinds from commodity price shocks and structural
shifts in the largest economies will likely continue to threaten. These, in our view
will continue to drive volatility across markets, with investors likely to continue to
tread cautiously, selectively balancing risk against reward across the major asset
classes.
A prolonged episode of a slow down
in oil demand from China is a key risk
for the global markets in 2016
The US economy will continue on a
path to recovery
Monetary Easing in the Euro zone
could extend to 2017
Caution will be the ruling theme as
volatility continues over H1-16
More periodic adjustments to China’s
currency in 2016 portends terms of
trade deterioration for SSA

13
Global Oil Prices: Contending with a cocktail of supply shocks
Demand-supply imbalances were the major driver of crude oil prices in 2015. In
our 2015 Outlook report, we stated a base case expectation of $55-60p/b for
average oil prices in 2015.
Our view on the trajectory of oil prices was anchored on 4 factors at the time: 1)
Oil had long been trading in backwardation implying prices were almost cer-
tainly range-bound in the medium term; 2) Alternative energy sources had
gained significant traction at the time making excess supply of crude oil unavoid-
able. In fact, US Shale oil production had increased 5-fold in the prior six years; 3)
OPEC had failed to rein in excess production from its members who were faced
with acute fiscal challenges (on our estimates, Saudi’s output alone explains
c.37.0% of the variations in crude oil prices globally); 4) Supply glut aside, de-
mand had slowed considerably and a bleak outlook for emerging market
economies meant prices were likely to struggle for support.
To a considerable extent, the factors stated above, combined with faltering
global demand on account of slower growth from Europe and Asia, drove oil
prices lower to an 8-year low in 2015. As at Dec 31 2015, Brent crude averaged
$55.9p/b for 2015, closing the year at $36.7p/b, 36.0% down from its value at the
end of 2014.
Faltering global demand, as well as
supply glut exerted significant pres-
sure on oil prices in 2015
Brent averaged $55.9 p/b in 2015,
36.0% down from its 2014 close
0
20
40
60
80
100
120
140
160
Jan-03
Sep-03
May-04
Jan-05
Sep-05
May-06
Jan-07
Sep-07
May-08
Jan-09
Sep-09
May-10
Jan-11
Sep-11
May-12
Jan-13
Sep-13
May-14
Jan-15
Sep-15
Chat 6: Crude oil tested successive lows in 2015
Brent crude price vs. WTI($p/b)
Brent WTI

14
Iran: the new kid on the block
The Iranian deal came at an inopportune time, when the global oil market was
already oversupplied. A nuclear deal framework was struck with Iran in June 2015
in order to give international nuclear weapons inspectors access to Iranian nu-
clear facilities, and hence freeze nuclear activities for 10 years. In exchange, Iran
is expected to see trade sanctions relief. Iran’s resumption of production after a
lift-off in sanctions is expected to compound the downward pressure on prices.
Although the deal had been anticipated by the market, current prices still do not
reflect the additional supply from Iran, in our view. This is because we believe the
commodity market operates less on expectations relative to the financial mar-
kets, hence we think prices will ultimately adjust when Iranian oil finally hits the
market sometime in 2016. Though estimates vary, Iran’s oil minister Bijan Zan-
ganeh has said that his country will be able to ramp up output by 500,000 barrels
per day on resumption of production. In any case, with the 4th largest crude oil
reserves globally, we expect Iran to ultimately strive to retrieve its market share of
1 million barrels per day lost prior to the sanctions.
Shale Oil Production: Marking time or moving on?
The market witnessed a continued revolution in 2015 as significant progress made
with the unconventional US fracking technology. US oil output has been growing
at its fastest rate on record in the last 5 years. According to EIA, production of
crude oil averaged an estimated 9.3 million b/d in 2015, a 7.0% increase over
2014 and the highest rate since 1972. We note that earlier market expectation of
a gradual decline in shale output as production becomes uneconomic played
out in 2015, albeit with at a lesser scale than envisaged, largely on account of
advancement in oil rig technology. Although US rig count declined by 62.1% in
2015, horizontal rig count, the backbone of the fracking technology, fell by 59.3%
vs. 71.2% for the less efficient vertical rigs within the same period.
Currently prices do not fully reflect
expectations on Iranian production,
in our view
Source: EIA, United Capital
Rigs are falling but the efficiency of
drilling continues

15
In the last couple of years, the US has
made appreciable progress in the
shale oil technology
This suggests that overall rig count decline should not be taken at face value as
vertical rigs continue to fall much faster than horizontal rigs. Hence, we posit
that a rapid increase in the efficiency of drilling remains a downside risk to oil
prices in 2016. In the last couple of years, the US has demonstrated significant
progress in the perfection of cost-effective production of oil and natural gas
from hitherto unrecoverable reserves. Emerging consolidation in the industry is
also driving cost lower. To sum, drilling efficiency and possible further reduction
in full cycle cost of fracking are likely to make shale production withstand lower
oil prices in the medium term.
Source: Baker Hughes, United Capital Source: EIA , United Capital
The OPEC strategy: Cards not too close to the chest, waiting on Saudi
The Saudi-led OPEC strategy of defending market share has substantially driven
global excess supply of c.2.0 million bpd in the last 18 months. This excess, which
naturally goes into storage, likely to be released when storage capacity is ex-
ceeded, could further drive prices down unless production is cut back. While
most of the OPEC members are fiscally constrained to maintain current output
level, non-OPEC members’ stance on production appears to be both economi-
cally and politically motivated. To add, as emerging markets’ currencies come
under more pressure from a strengthening dollar in 2016, production will likely be
sustained at current levels in order to make up for revenue losses. For these rea-
sons, we do not expect a sharp price rebound in the near term, unless OPEC pro-
ducers cut production unexpectedly or geopolitical shocks ensue. Undoubtedly,
Saudi holds the key to a change in OPEC’s strategy. We note that Saudi, the big-
gest player in OPEC, now needs up to $105p/b to balance its annual budget
according to the IMF; hence would need to sacrifice a substantial loss of market
share for a more favourable fiscal condition. While spending cut is not likely to
have significant impact on deficit, a drawdown in reserves is likely to trigger a
downgrade in sovereign ratings which may bode ill for more international bond
issuances in the medium term.
Saudi continues to hold the key to a
change in OPEC’s strategy

16
Section 2
SSA Update and Outlook

17
Slowing global growth has varied
impacts on the economies of SSA
SSA Review and Outlook
Economic resilience under test; is Africa still the next Frontier?
SSA is a remarkably diverse geography, a feature that has helped shape growth
patterns over the past two decades. The 45 countries that make up the region
vary markedly in population sizes, income levels, social political stability, re-
source endowments, and access to international markets. We believe this diver-
sity has yielded appreciable benefits by moderating the impact of external
headwinds on the collective economic strength of the region.
Similar to 2015, we believe the economic fundamentals of the SSA economy as
a group and individually, will continue to come under severe test in 2016 as a
result of adverse global macroeconomic conditions.
Globally, growth has slowed remarkably in the last 18 months, but we have seen
marked differences in the experiences of many middle-income SSA countries.
The close integration of financially active countries to the international markets
is manifesting in a sharp adverse shock to GDP. Resource rich low-income coun-
tries with high export concentration have seen slightly more severe impacts on
domestic growth with Nigeria’s GDP down to multi-year lows.
Our base case scenarios suggest that the global economy will continue to strug-
gle to gather momentum for the most part of 2016, with activity in the Euro Area
and Japan slowing, growth in China continuing to decelerate, Brazil, Russia and
India under continuous pressure, growth in SSA, especially for key commodity
exporters will continue to weaken.
We expect global growth to slow
over 2016 with relentless pressure on
the economies of commodity-
dependent SSA
Source: IMF, Bloomberg, United Capital

18
High concentration in the export
base of most SSA countries continues
to expose them to global headwinds
Looking ahead, we believe the contribution of commodity price fluctuations to
SSA economic growth look set to remain significant, with business cycle peaks
and troughs likely to be closely linked to resource price movements for the fore-
seeable future. A viable antidote to this malaise will be a healthy dose, or more
appropriately, a wave of structural economic reforms which, in our view, are
very remote going by the historically slow progress in economic diversification
across most of our coverage SSA. For instance, revenue from hydrocarbons ex-
ports accounted for 53.9% of fiscal revenue in 2015 for the entire SSA, up from
39.5% in the early 2000s, on our estimates. The fact that most SSA economies still
have highly concentrated export bases is symptomatic of the region’s vulner-
ability to global macro shocks; with the tendency to erode gains from prior
years of economic acceleration.
Our perceived downside risk to many of our coverage SSA economies in 2016 is
the low policy buffers in these countries, a trend that has constrained their re-
sponse to the current macro-economic shocks. We reiterate that there is an
ever-increasing need for African countries to improve domestic resource mobili-
zation and enhance public expenditure efficiency.
As the global economy re-engineers itself, albeit in a step-wise direction, emerg-
ing market capital and funds inflows will be seeing drastic rebalancing and in
some cases, notable cutback with dramatic consequences on economic
growth across our SSA coverage. SSA bonds have sold off in the international
markets as investors perception of macro risk heightens amid weak domestic
response to global headwinds. For us, most far reaching would be a worse-than-
expected slowdown from China which remains strategically important for com-
modity rich but dependent SSA economies.
With a series of elections coming up in 2016, countries like Uganda, Zambia and
Ghana are set to witness dramatic changes in fiscal spending typical of most
SSA economies in an election year. For countries under our coverage, we do
not envisage significant political risks in the run-up to their respective polls. How-
ever, we believe the impact of electoral spend on fiscal policy in Ghana will be
significant, while SA’s Municipal elections will likely be a precursor to a shift in
political leanings as the wider 2019 general election approaches, with the fate
of the ruling ANC set to face a stern political test.
Policy buffers remain low across SSA
A significant slowdown from China
will compound SSA woes in 2016
Political risks remain to the downside

19
CID’s strong growth story drove the
performance of the BRVM in 2015
BRVM
The big outperformer
In 2015, the BRVM equity market outperformed peers in the SSA region on local
and foreign currency bases. Political and macroeconomic stability as well as
strong growth story in Cote d’Ivoire (CID), the largest economy in the region,
largely drove this strong performance.
CID’s impressive growth trend should persist in 2016 as the current economic
boom looks likely to be sustained in the medium term. Most sectors of the econ-
omy, from agriculture to construction, will likely continue to perform strongly. We
like the private investment led growth pattern (60.1% of the total investment) of
the region which makes growth more sustainable. Broadly speaking, the region
is somewhat decoupled from the China and other emerging market slowdown
given its limited commodity export linkages.
The success of CID’s 2015 elections points to entrenched political stability. The
successful conduct of the election which saw the re-emergence of Alassane
Ouattara in the presidential elections, with over 80.0% of the votes cast has
raised hopes for the peaceful conduct of the Legislative elections in 2016, as
well as longer term consolidation. Despite political upheavals within the CFA
franc zone, particularly in Mali and Burkina Faso, the Ivoirian economy has been
less impacted due to limited trade ties with these economies.
CID, with favourable ratings outlook, provides strong prospects for the BRVM re-
gion in 2016. CID was the only SSA sovereign to have been upgraded in 2015.
The sovereign’s rating was upgraded from B1 to Ba3 by Moody’s, with Fitch likely
to upgrade its current B rating (positive outlook) to B+ in 2016 on account of
consolidating political stability and relatively resilient macroeconomic perform-
ance.
The region is less susceptible to eco-
nomic slowdown in China and other
emerging markets

20
CID’s negligible net energy export
makes it less susceptible to oil price
declines
External performance is likely to be driven largely by the price of Cocoa, which
has been relatively favourable in spite of the downturn in global commodity
prices. CID net energy export is negligible, implying less susceptibility to oil price
declines. With the Currency (XOF) pegged against the Euro, and little political
willingness for a de-pegging, there is little exchange rate risk. Rather, a possible
weakening of the Euro due to dollar strengthening provides potential trade
competitiveness advantage though this could also mean higher debt service
and marginally higher fiscal deficit.
We expect CID’s strong growth story to support the BRVM equity market in 2016.
Market Liquidity has remained robust though the bond market is relatively less
active, with total value of trades just 18.0% of total value of trades on the Bourse
as of December 2015.

21
The South African economy appears
not yet strong enough weather cur-
rent headwinds
South Africa
Approaching the bottom of the cycle
The South African economy faced a number of headwinds in 2015, chief
among which were a tightening of the global market conditions, Southern Afri-
can drought, persistent local energy constraints, as well as commodity price
weaknesses. In our view, the economy does not yet appear strong enough to
weather these headwinds which are set to persist in 2016.
2016 elections may throw up surprises. Public support for the ruling African Na-
tional Congress is waning on the back of poor macroeconomic performance. A
bid to retain the loyalty of a sizeable portion of the urban populace has been
attributed to the recent increase in public sector wages. Due to ongoing eco-
nomic woes, the election may see the incumbent ANC lose hold of the largely
economic Guanteng which accounts for over 30.0% of the entire SA’s GDP.
Growth is expected to slow in 2016. We expect growth to slow to around 1.5% in
2016, driven largely by an expected sluggish growth in private consumption as
wage and employment conditions deteriorate. Further, tepid export demand
from a lethargic global economy, as well as low domestic business confidence,
is expected to further dampen growth. Spending may become more populist as
the election approaches, limiting growth enhancing options for the current gov-
ernment.
Currency weakness is set to persist as stronger dollar, less-than-expected dovish
Fed, as well as weak commodity prices are possible risk factors that may weigh
on the domestic currency. The Rand lost 33.7% in 2015 as the currency came
under relentless pressure. With SA credit status likely to deteriorate in 2016, the
Rand will remain under water for the most part of the year.
Growth is expected to slow in 2016

22
Source: Stat SA, United Capital
We expect a 25bps increase in the
benchmark rate in 2016
Inflation outlook is less benign than the trends seen in the last quarter of 2015
given expected pass through from ongoing Rand weakness. Given that fiscal
consolidation has been delayed as Gross Debt to GDP is likely to peak at 49.4%
in FY-19, higher than 47.5% assumed in the Feb-15 budget, a tighter fiscal deficit
will likely not be enough to suppress inflationary pressure in the medium term.
We expect measured monetary tightening. In the last MPC meeting, the SARB
appeared concerned about a build up in inflationary expectations; so we think
the series of the tightening seen in 2015 would have more of a frontloading ef-
fect. Moreover, a continued weak growth backdrop, though seen to be partly
structurally driven, will limit tightening in 2016. We therefore expect the repo rate
to move up not more than 25bps in 2016.
Table 1
South Africa Key Macro Indicators
2015 2016 2017
Real GDP(y/y, %) 1.5 1.6 1.8
Policy Rate(%) 6.25 6.5 7
Inflation rate(%) 5.4 5.7 5.8
External Reserves (USDbn) 40.6 38.7 41
Fiscal Deficit (% of GDP) 4.075 3.693 3.445
Current Account Balance -4.5 -4.56 4.47
Currency (ZAR/USD) 15.6 17.5 15.3
e: Bloomberg

23
Ghana’s successful deal with the IMF
has created a lifeline for sustainable
recovery
Ghana
Economy at a delicate phase, risk events still on the horizon
While a downtrend in commodity prices, spiraling government debt, challenges
around electricity, and strong inflationary waves all combined to dampen eco-
nomic expansion in 2015, measures that have been taken to instill some stability
appear to be having a moderating effect, especially towards the end of the
year. As at the end of H1-15, Ghana’s total public debt rose to 94.5bn cedis
($23.7bn), a staggering c.71.0% of its GDP. However, its debt restructuring strat-
egy which focuses on issuance of longer term securities as well as a three-year
aid deal with the IMF worth $918.0mn has created a base for a gradual recov-
ery. In our view, H1-16 will give a much clearer picture of just how rocky or other-
wise, its path to recovery will be.
FX pressure continues to mount on lower commodity prices. Much in line with
most emerging and frontier markets, headwinds from exogenous events, such
as the strengthening of the US dollar contributed to the drag on Ghana’s eco-
nomic growth in 2015. In particular, the depreciation of the Cedi, which lost
18.3% over the year drove up prices of imports, eventually raising prices and
stoking inflation with the country now running a high twin deficit (current and
fiscal accounts). Benign outlook for commodities as well as expectations of fur-
ther rate hikes by the US Fed means currency pressures will likely linger in 2016.
Hence, harmonization of monetary and fiscal policies by the Government and
the Apex bank to stimulate domestic demand and increase local production
will be key to insulating the cedi a little more from market-wide shocks.
The Cedi lost 18.3% in 2015
0
5
10
15
2009 2010 2011 2012 2013 2014 2015e 2016f 2017f
Chart 14: Economy is finding some stability but political risk and
fiscal imbalances remains
Ghana Real GDPvs SSA (%,y/y)
SSA Ghana

24
While the country’s economy is be-
ginning to show signs of recovering ,
inflationary pressure remains strong
Inflation still defying the odds, but plausible expected inflows likely to halt the
Apex bank’s hawkish stance. While the country’s economy is beginning to show
hints of stability, the pressure of inflation still remained strong and unabated for
much of 2015. The Bank of Ghana has taken rather aggressive steps to stem the
tide, but results have been mixed for the most part. Despite a combined 500bps
hike in the base rate over 2015, the last of which was a 100bps upward revision
at the end of its November 2015 policy meeting (MPR is 26.0% at the end of
2015), inflation remains well above the apex bank’s target band of 8.0% +/-
2.0%. Clearly, the BOG will be looking to curb inflationary pressures over 2016,
which raises the possibility of further measured monetary policy tightening if the
upcoming November general polls is factored-in.
Sweeping changes needed in the power sector: The economy has been
plagued with power supply challenges over the past 3 years, running at 1,200
megawatts, which is c.50.0% of its total installed capacity. The issues have been
further compounded by debt ($10.0mn) owed to Nigeria for supplying gas to its
power plants. It was against this background that the Minister for power re-
signed at the end of 2015, after being unable to solve the power challenges
within the stipulated deadlines. In our view, progress around challenges pre-
sented by “dumsur” which seemed to have worsened in the past year, will be
pivotal for economic growth in 2016, and we expect to see more clarity with
regards to the privatization or otherwise of its power industry.
Despite slowly improving fundamentals, economy to remain in the balance: We
see scope for higher political risk in 2016 with its attendant impact on FX, domes-
tic prices and inflation, as the country builds up to the general elections set to
hold in November. This will likely keep the apex bank on its toes, and as such
further monetary policy tightening could be on the cards. On the other hand,
we expect oil production and some oil export incomes to come on stream in
the course of the year, which should provide additional FX denominated reve-
nue for the government, despite global supply glut concerns.
With struggles in the power sector still
evident, we expect further clarity with
regards to privatization of its power
industry in 2016
Source: National Statistics Office , United Capital
Table 2

25
Source: IMF, United capital research
There are several risk scenarios for the
Angolan economy in 2016
Angola
Tough times Ahead
With crude accounting for c.50.0% of GDP, two thirds of fiscal revenues and
c.90.0% of exports, Angola’s economy was pressured in 2015 due to crude oil
price collapse, in line with the global trend for economies heavily reliant on
commodities. Consequently, the government slashed its 2015 budget by
$17.0billion (a 25.0% reduction), with public spending also reduced by 53.0%,
further extending an era of contractionary fiscal policy. Except the pace of fis-
cal revenue diversification gathers momentum, the conditions for a hard land-
ing appears to be aligning for Angola going into 2016, as headwinds from pres-
sure on the kwanza, high unemployment (c.26.0%), political complexities and
rising debts, present tricky risk scenarios.
Tough FX policy calls awaits the Central bank, with currency pressure set to lin-
ger. Dwindling fiscal revenues and foreign reserves drove a devaluation of the
kwanza by 6.0% and 4.0% in June and September 2015 respectively, even as the
Central Bank regularly intervened in the FX market to halt the depreciating
kwanza. Furthermore, the apex bank reduced the delivery of banknotes in for-
eign currency, limited withdrawals from foreign currency accounts and encour-
aged the use of other foreign currencies such as the euro or the renminbi as an
alternative to the U.S. Dollar. Against this backdrop, Bank of America, the big-
gest supplier of dollars to Angola, decided to stop supplying Angolan commer-
cial banks with USD in Q4-15 and other banks such as Standard Chartered soon
followed suit.
Despite its efforts, the kwanza still depreciated by 31.5% over 2015. With crude
oil prices testing new lows, we believe the apex bank still has tough days ahead
in 2016, and may be forced to take more drastic measures.
The kwanza was devalued by 10.0%
in 2015
0
2
4
6
8
2009 2010 2011 2012 2013 2014 2015e 2016f 2017f
Chart 15: Pressure from currency and falling crude is setting Angola
up for a possible hard landing
Angola Real GDP vs. SSA
SSA Angola

26
Ties with China strong but may prove inhibitive. China is, by far, Angola’s largest
trading and economic partner, holding c.41.0% of Angola debts and also im-
porting about 50.0% of Angola’s oil output. With growth slowing in the world’s
second largest economy, it will likely import crude oil from Angola at a lower
rate in 2016, which will likely further hurt Angola’s economy. Furthermore, debts
owed to China (estimated at c.$20bn) carries restrictive provisions and cove-
nants, For instance, contracts from the Export-Import Bank of China require that
70.0% of projects be awarded to Chinese companies and 50.0% of procurement
materials imported from China. Such dynamics in our view, could combine to
further constitute a pull-back on growth over 2016.
Economic growth prospects to hinge on pace of revenue diversification. 2016
will likely see the government tighten further as it seeks to have a grip on the
faltering economy. In our view, economic growth prospect will be well tied to
the pace of enactment of policies that will drive fiscal revenue diversification,
barring distractions from political propaganda as the country begins prepara-
tions for the 2017 presidential polls.
We expect further monetary tighten-
ing in 2016
Strong ties with struggling China con-
tinues to bode ill for the Angolan
economy
Angola Key Macro Indicator
2015 2016 2017
Real GDP 3.8 3.6 4.1
Policy Rate 11 12 11.5
External Reserve 24.3 22.3 22.6
Fiscal deficit 4.2 4.7 4.1
Current Account Balance -7.8 -5.5 -4.9
Currency 30.8 14.3 11.1
Pressure from currency and falling crude is setting Angola up for
a possible Hard landing in 2016
Economy finding some stability but political risk and fiscal
imbalances still remain
Table 3

27
Source: IMF, National Office of Statistics United Capital
Mauritius growth trend has been rela-
tively stable despite global macro-
economic volatilities
Mauritius
Striving for steadier growth
Mauritius remains one of the most competitive countries in SSA having under-
gone successful transitions in recent times. Unlike most SSAs, commodity price
slump has been less telling on fiscal revenue and external reserves, save for a
slowdown in its traditional trade markets, Europe.
Real GDP expanded by 3.5% in 2015 slightly above a 5-year average of 3.4%.
While growth has trailed government expectations for 3 years in roll now, the
trend has remained fairly stable despite global macroeconomic volatilities.
Mauritius’ sub-capacity growth performance can be attributed to a slowdown
in the Euro area, which remains its biggest trade partner. Dec-15 GDP numbers
show a deceleration in export revenue growth (from 10.9% in 2014 to 5.6% in
2015). The 2016 budget targets a growth rate of 5.3%. We think growth will be
slower at around 3.6% as the external environment as well as falling commodity
prices continue to portend downside risk.
Shifting focus from traditional European markets could boost growth. The au-
thorities are taking steps to achieve a more diversified export revenue base
which should further reduce external vulnerability. Continued focus on Asia for
tourism should also help support growth, with strong increases in tourist arrivals
from both India and China helping to temper tepid growth in arrivals from
Europe. The manufacturing sector is slowly gathering pace with a modest
growth rate 3.8% in 2015 (vs 2.6% in 2014), higher than the growth rate of the
overall economy.
External pressure is set to persist in 2016. Official statistics for 2015 shows that net
export improved slightly to RM(41.4bn) (from -44.6bn in 2014), driven partly by
falling energy import bill despite increase in import of manufactured goods such
as machinery, as well as slower growth in export revenue. Given weak export
performance and high imports, the current account deficit is likely to remain
high in 2016. (10.3% of 2014 GDP). The ensuing pressure on the currency will likely
see the USD/MUR depreciate further to 38.5 over 2016.
The manufacturing sector is slowly
gathering momentum
The current account deficit is likely to
grow wider in 2016

28
Fiscal deficit is likely to widen on expansionary budget. The authorities an-
nounced a highly expansionary 2016 budget with 15.8% increase in total expen-
diture and focus on mega infrastructure projects. While these projects are likely
to support growth and boost the slowing construction sector, we think the huge
outlay could further widen the budget deficit given the bleak outlook for reve-
nue even as revenue is only forecasted to increase by a meagre 5.0%.
Inflationary pressure should remain subdued in the near term. As a result of be-
nign inflation, monetary policy has been broadly accommodative in the last 4
quarters. Low inflation motivated the Bank of Mauritius (BoM) to lower the repo
rate to 4.40% from 4.65% in November 2015. Given the bearish outlook for oil
prices, which forms the bulk of import bill, inflation is expected to remain con-
tained in 2016. However, the authorities’ ambitious target of 5.3% growth rate in
the 2016 budget may lead to a further cut in the benchmark rate.
Monetary policy is likely to be more
accommodative to foster stronger
growth
Huge budget outlay is set to widen
the fiscal deficit
Table 4
Source: IMF, National Office of Statistics , United Capital

29
The impact of oil price slump has
been minimal on the Kenya econ-
omy
Kenya
Faltering despite strong fundamentals
The attractive potential of the Kenyan economy continues to come under seri-
ous scrutiny as global headwinds and domestic challenges weigh on growth
prospects. A well diversified economic base has minimized the impact of oil
price slump but security-related risks remain significant with the threat of further
Al Shabab attacks. Near term, success in Kenya’s oil exploration activities will
bode well for the economy. In fact, oil exploration has been resilient to crude oil
price decline. Recent deal-flow in the East African region, with the acquisition of
five East African oil blocks by a new investor, hints at investor interest in East Afri-
can oil.
External vulnerabilities threaten growth outlook. In the last 3 years, Kenya has
intensified efforts at developing public infrastructure projects expected to pro-
vide a catalyst to growth. But the impacts are likely to be farther out in our view,
given emerging weaknesses in its regional trade partners. Owing to its diversified
economic base, the decline in oil price has been less hurtful to Kenya relative to
the rest of SSA. However, we see significant downside risks to growth on the
back of the expected lagged impact of tighter monetary policy in H2-15 as
well as exchange rate shocks.
Headline inflation is expected to test the upper band of KCB target in 2016. Infla-
tionary pressures are likely to persist in 2016. Higher food prices may stoke head-
line inflation as adverse weather conditions in Q4-15 puts pressure on prices over
H1-16. Increased political spending in H2-16 will further pressure the CPI. The po-
tential for prolonged shilling weakness over 2016 also remains a downside risk to
inflation though lower international diesel prices should temper rising fuel price
charge.
Infrastructure build-up will take time
to reflect in meaningful growth num-
bers

30
Benchmark rate may be lowered in 2016. We have pencilled in a reduction in
the central bank rate as we think the tightening cycle may have peaked. The
positive angle to such a move will be the attendant reduction in money market
rates which will be supportive of the government’s borrowing efforts in 2016.
Budget outlook is still hazy. The likely conclusion of ongoing syndicated loan
with commercial lenders is expected to temper domestic borrowing, with lesser
crowding out effect on private sector credit. Despite efforts at fiscal consolida-
tion via more rational spending, Kenya’s domestic borrowing activities will re-
main substantial especially given the increasingly lower tax revenue. Like most
of SSA, Kenya’s public finances will remain susceptible to emerging exchange
rate weaknesses, given the rise in external borrowing in recent years.
Borrowing activities will remain sub-
stantial in 2016
Table 5
Kenya Key Macro Indicators
2015 2016 2017
Real GDP (y/y, %) 5.5 5.6 5.8
Policy Rate (%) 11.5 11.0 10.4
Inflation rate(%) 6.5 6.4 6.6
Fiscal Deficit(% of GDP) -8.1 -8.8 -8.5
Current Account Balance (% of GDP) -9.1 -9.5 -9.7
Currency (USD/KES) 105 112.0 116
ce: Bloomberg
Source: IMF, National Office of Statistics , United Capital

31
Section 3
Nigeria 2016 Outlook

32
Domestic Policies and Politics
Post-election Nigeria: Still attractive for business?
The uncertainty that pervaded the air prior to the 2015 elections proved to be
significant for the Nigerian economy and financial markets, with massive portfo-
lio outflows ensuing from late 2014. Following the successful conduct of the 2015
elections and widespread recognition by the international community, consen-
sus expectations hinted at Nigeria’s ability to consolidate on her political stability
as well as strong demographic story to attract sizeable and sustainable foreign
investment flows. Post-election however, macro headwinds, FX rigidities and
minimal clarity in domestic policy direction have delayed resumption in portfolio
and FDI inflows. The key question on our mind now is whether we can expect a
reversal in this trend going into 2016.
We opine that the historic change in political party control of the machinery of
governance is largely attributable to the rather slow take-off of policy in the Bu-
hari-led administration. However, we like the renewed vigour for governance,
strong anti-corruption drive, as well as the seemingly stronger political will to
push through reforms necessary to navigate current macroeconomic chal-
lenges. What we are yet to see is a coherent economic blue-print to guide a
fast paced structural shift in the Nigerian economy. We think the government
needs to optimize the opportunity presented by current quagmire to evolve
long term policy redirection, such as fuel subsidy and taxation reforms, that is
well institutionalised and possibly designed to outlive the current government.
We recognise that public support for the new government appears to be un-
dergoing a litmus test, with the possibility of dissipating if reforms are not quick
enough to address lingering challenges.
We expect the political environment to be largely stable in 2016. The recent
progress in the tackling incessant security challenges remains business-positive.
Although the focus on retrieving looted funds is desirable and likely to boost
confidence in the government’s anti-corruption campaign, we believe a
greater share of governance effort needs to be devoted to creating more sus-
tainable funding sources to address current and future strain on the fiscal bal-
ance sheet.
We look forward to a more coherent
economic blue print to guide the me-
dium term to long term direction of
the economy
Nigerian economic fundamentals
have made little progress post-
elections
We expect the political environment
to be largely stable in 2016

33
One downside risk we see on the political terrain in 2016 is the vulnerability of the
APC to splinter group given the seeming lack of ideological underpinning even
as one might argue that what bound the coalition pre-election was the com-
mon pursuit of power.
The recently constituted cabinet can arguably be described as comprising a
healthy dose of reformists, but remains too overweight on political affiliation, in
our view. However, if significant progress can be made in key infrastructure
within the next couple of years, the ruling party can expect to hold on to power
for much longer than earlier anticipated.
Nigeria remains extremely attractive for direct investment but an age-long reli-
ance on oil means that the economy would require painful adjustments which
could impede portfolio investment in the medium term, a task we observe the
government is favourably disposed to. Hence, we expect moderated portfolio
flows in the next 2 to 3 years with attendant impact on asset price valuations.
The currency has come under severe pressure in recent times and the much-
needed adjustment has only been delayed by sheer political doggedness. That
said, physical investment will continue to ride on Nigeria’s strong demographic
credentials despite lingering structural rigidities.
A key downside risk remains the
vulnerability of the ruling APC to
splinter group
We expect moderated portfolio
inflows in the next 2 to 3 years

34
Source: NBS, United Capital
Real GDP
Global headwinds meet poor visibility in domestic policy
Nigeria’s trend real GDP retreated to multi-year lows in 2015 as global head-
winds continued to expose the structural imbalance in the economy. From an
average growth rate of 5.8% post-rebasing and overall 6.2% in 2014, real GDP
dropped to 4.0% in Q1-15, 2.4% in Q2-15, and 2.8% in Q3-15. The slowdown cut
across major sectors with manufacturing and energy sectors taking the biggest
hit.
We had anticipated growth to slow in 2015 largely on account of impending
fiscal and monetary tightening, which were the expected pro-cyclical re-
sponses to weakness in the global economy. However, delayed clarity on do-
mestic policy contributed to a bigger-than-expected slowdown. Beside the lack
of palpable policy direction, there were three main channels through which the
lower oil receipts impacted real economic activities in 2015: lower government
spending (specifically capital expenditure), constrained disposable income for
private sector expenditure, and the resultant exchange rate effects. Of the
three, the exchange rate channel had the greatest impact on the manufactur-
ing sector, given that Nigerian businesses rely heavily on imported intermediate
inputs.
Global headwinds continue to ex-
pose the structural imbalance in the
Nigerian economy
In line with our expectations, GDP
slowed to below 5.0% in 2015

35
Key sectors in cyclical trough as macro shocks exercabate
A closer look at the quarter-on-quarter GDP prints reveals mixed patterns. In our
view, Q1-15 GDP took a breather from the offsetting impact of Naira devalua-
tion on the trade balance, as well as heightened political spending, despite the
uncertainty that trailed the elections. However, as FX scarcity lingered, spurred
CBN’s tight administrative controls on the exchange rate, manufacturing activi-
ties slowed ,thus extending the negative run of manufacturing GDP through Q2-
15 and Q3-15. The impact was most telling on the Food and Beverage sub-
sector which sustained its negative y/y reading (-0.8%, -5.9% and -8.9% for Q1-
15, Q2-15 and Q3-15 respectively), while the Textile and Apparel sub-sector
maintained a flattish growth trend.
Oil GDP also came under pressure as oil price declines led to government’s fail-
ure to fund commitments to production sharing contracts, hence necessitating
frequent shut downs which negatively impacted oil output. What’s more, leak-
ages in the oil sector continued almost unabated with crude oil thefts and van-
dalism taking their toll on Oil GDP. Perhaps the most important clog to growth in
2015 was the prolonged uncertainty in the policy environment post-election,
especially the delayed cabinet appointments, which took the market by sur-
prise, hence slowing down economic activities and playing a significant role in
the sluggish trend in GDP up to Q3-15.
The decline in manufacturing GDP
was most visible on Food and Bever-
age sub-sector
Oil output also came under pressure
as oil price declines drained fiscal
cash flows needed to fund produc-
tion contracts

36
Persistently slowing non-oil GDP: cause for worry?
The mild recovery in overall GDP for Q3-15 (from 2.4% in Q2-15 to 2.8% in Q3-15)
was not reflected in non-oil GDP growth which slowed from 3.5% in Q2-15 to
3.1% in Q3-15. We highlight that the non-oil sector has assumed a downward
trend since 2013, a development we think warrants closer policy attention, if the
newly inspired non-oil revenue drive of the government is to gain considerable
traction in the medium term. A closer look at the sector reveals that growth at-
tributed to Real Estate (22.3% of non-oil GDP) as well as Information and Tele-
coms (28.9%) are at the lowest levels in the last 15 quarters with growth in Public
Administration GDP falling into negative territory for the first 3 quarters of 2015. In
our view, it appears the second round effects of oil price shocks on the real sec-
tor is set to be extended, with prolonged bearish state of the global oil market
likely to create further pressure.
Non-oil GDP has assumed a
downward trend since 2013
Growth Outlook for 2016
Hinged on hydrocarbon prices and fiscal policy direction
Our Q3-15 real GDP forecast of 3.0% came ahead NBS reported figure of 2.8%,
largely on account of bigger-than-expected slowdown in manufacturing and
construction. We have therefore revised our GDP forecast for Q4-15 to 2.9%,
implying an overall GDP growth of 3.1% for 2015. Looking further ahead, we ex-
pect real GDP to stage a mild recovery in 2016, with 4.4% growth expectation
for the year, driven by anticipated increase in government spending with larger
fiscal multiplier, higher CAPEX outlay, clearer policy direction, and moderately
accommodative monetary policy stance. We have pencilled in a sub-5.0% GDP
growth for 2016 mainly on the back of the bearish outlook for crude oil prices
which is likely to cap the growth rate of the oil sector GDP with secondary ef-
fects on the non-oil sector. Also, if ongoing FX controls persist beyond H1-16,
manufacturing GDP will likely continue to be restrained. However, the impact of
weak oil prices on the non-oil sector should be tempered by improvement in
food production especially given expected traction in curbing unrest in the
food producing North Eastern region.
We forecast 4.4% real GDP growth
for 2016

37
Source: Ministry of Budget and Economic Planning
The 2016 Budget estimates a deficit
of 2.2trn (2.2% of GDP)
Budget 2016: The budget of “Change”
In Dec-15, the FG announced the much anticipated 2016 budget dubbed the
“budget of change” with a total outlay of N6.1trn (c.US$30.5bn). The budget reit-
erates the government’s focus on Capital expenditure (CAPEX) and social wel-
fare, committing about N1.0trn (US$5bn) and N1.8trn (US$9bn) to social spending
and CAPEX respectively. The budget specified revenue of N3.86trn which is ex-
pected to be derived from oil revenue (N820bn), Non-oil revenue (N1.45trn) and
Independent revenue (N1.51trn); implying a deficit of N2.2trn (2.2% of GDP. Capi-
tal expenditure is proposed to increase to N1.8trn from N557bn in 2015 with 30%
of Capital expenditure focused solely on Power, Works and Housing (N433.4bn)
and Transportation (N202bn). Non-oil revenue comprised of Company Income
Tax (CIT), VAT, Customs and Excise duties and Federation Account levies; while
independent revenues will be via enforcement of the Fiscal Responsibility Act
2007 and public expenditure reforms in all Ministries, Departments and Agencies.
2016 Budget
Highlights 2015 2016
GDP Growth rate 5.50% 4.37%
Exchange rate (N/US$) 190.0 197.0
Crude Oil Price p/b $53.0 $38.0
Daily Production (mbp/d) 2.28 2.20
Government Revenue (N'bn) 3,452.0 3,856.0
Expenditure (N'bn)
Recurrent Exp (non-debt) 2,593.2 2,348.6
Debt service (excl N113bn - Loan retirement) 953.6 1,361.9
Capital Exp 557.0 1,760.0
Special Intervention program - 300.0
Statutory transfers 375.6 351.4
Subsidy reinvestment program 20.8 -
Aggregate expenditure 4,493.4 6,078.0
Fiscal deficit 1,041.0 2,222.0
Fiscal deficit (% of GDP) 1.09% 2.16%
Deficit doubles on higher debt service, drop in Oil revenue and increase
in CAPEX.
The 2016 budget represents an increase of 21.6% from 2015 outlay. Conse-
quently, the FG now expects a larger 2016 budget deficit of N2.2trn (vs. N2.1trn in
2015). Deficit will be financed by a combination of domestic borrowing of
N984bn, foreign borrowing of N900bn totaling N1.84trn, and misappropriated
funds recovery of N380bn.
The 2016 Budget represents an in-
crease of 21.6% over 2015 levels
Table 6

38
The 2016 Budget estimates a deficit
of 2.2tr (2.1% of GDP)
The higher expenditure was majorly driven by the N1.36trn budgeted for debt
service and a 223% increase in CAPEX to N1.8trn in 2016 with major ministries tak-
ing the largest chunk. On the revenue side, oil price benchmark was revised
lower to US$38p/b (vs. US$48p/b and US$53p/b in 2015 supplementary and initial
budget respectively) which matches average Brent oil prices over the last three
months, though recent downtrend in Brent crude to below $30p/b suggests some
headwinds may still be on the horizon. Oil production estimate has been cut by
80,000bp/d to 2.2mbp/d. FG’s share of oil revenue projections contracts from
N1.64trn in 2015 to N820bn in 2016 while projections from non-oil revenue sources
rise by 20.0% from N1.21trn in 2015 to N1.45trn. Independent revenue also rises by
208% from N489bn in 2015 to N1.51trn.
Beyond the numbers, aiming to make an impact: Prudence is key
While it appears obvious that the government is looking beyond oil, recent
downtrend in Brent crude to below $30p/b presents execution challenges. Fur-
thermore, the government’s insistence on keeping the exchange rate at N198/
US$ is quite unrealistic, deferring conclusive action with a short-term solution as
current realities do not hold this value for the Naira, hence running on an ostensi-
bly phony value for the currency; the parallel market currently trades around
N265-N280/US$ while FX reserve currently stands at US$29.2bn. However, we are
comfortable with production benchmark of 2.2mb/d which seems to be realistic
as oil production in 2015 averaged of 2.4mb/d constrained by continuous though
moderated pipeline vandalism.
Do we see swift impacts?
The significant drop in oil revenue by c.50.0% on the back of the bearish trend in
oil price has pushed deficit to a new high. The budget aims to raise non-oil tax
revenues and increase capital spending. Aligning fiscal, monetary and industry
policies is quite encouraging from the side of spurring economic growth, though
question remains on the impact of such an alignment on macroeconomic indi-
cators and the financial market.
The focus on infrastructure is expected to bode well for the economy though the
impacts will not be felt in the near-term. The CAPEX outlay of N1.8trn is expected
to be channeled towards infrastructural development with N635bn allocated to
Power, Works and housing, and transport. While we expect to see greater fiscal
discipline by the government, there is an urgent need to expand the tax base
and improve the effectiveness of revenue collecting agencies in order to shore
up non-oil revenue. The adoption of zero based budgeting approach will ensure
that resources are aligned with government’s priorities and allocated efficiently.

39
FX concerns will continue to hurt
the real sector and offset gains
from the lower interest rate environ-
ment
The Efficiency Unit set up by the government, together with effective implemen-
tation of GIFMIS and IPPIS, are expected to drive a reduction of overheads by at
least 7.0%, personnel costs by 8.0% and other service wide votes by 19.0% Subsi-
dies are expected to come in the form of lower tax rates for smaller businesses as
well as subsidized funding for priority sectors such as agriculture and solid miner-
als.
For the real sector, we think capital control in the FX market will continue to hurt
sub-sectors that are reliant on imported raw materials, a trend that continues to
offset gains from the lower interest rate environment. That said, the welfarist na-
ture of the budget will likely improve consumer wallets in the medium term,
thereby boding well for the consumer staples. The construction and industrial
sector is expected to record significant growth hinged on government’s focus on
infrastructure and expected private initiatives in that space.
Expansionary fiscal policy: Any detach?
We look at the 2014-2016 Medium Term Economic Framework (MTEF) of the gov-
ernment which projects an increase of N17trn in nominal GDP between 2012-
2016 while noting the drop in nominal FG revenue and expenditure. Thus, this in-
dicates detach of fiscal policy from economic reality. From the MTEF, nominal
GDP is projected to grow by 40.7% from N40.5trn in 2012 to N57trn in 2016 while
nominal total revenue and nominal total expenditure is projected to decline by
2.9% in the same period to N3.9trn and N4.8trn respectively. While we appreciate
the reversal of the tight fiscal policy which would undermine the government’s
aim to grow and diversify the economy and reduce unemployment rate signifi-
cantly, we think the fiscal authorities will need to do more to ensure that growth
in nominal revenue and expenditure keep up with the pace of nominal GDP
growth.
Fiscal policy needs to align with
economic realities
Source: CBN, United Capital

40
Quick fiscal policy rebalancing
mainly through tax reforms is ur-
gently needed to minimise the im-
pact of lower oil revenue
Fiscal Outlook
Near-term Vulnerabilities still in sight, but a broader tax base may pro-
vide some respite
With a bleak outlook for government revenue, and the ability to manage shocks
being restricted by low fiscal savings and reserves, we expect to see a continued
strain on the fiscal balance sheet in the near term. This implies that fiscal policy
rebalancing, through tax reform and reprioritization of spending, is urgently
needed in order to boost longer-run growth. According to the IMF Boss, “the new
reality of low oil prices and low oil revenues means that the fiscal challenge fac-
ing government is no longer about how to divide the proceeds of Nigeria’s oil
wealth, but what needs to be done so that Nigeria can deliver to its people the
public services they deserve - be it in education, health or infrastructure.” This
means that hard decisions will need to be taken on revenue, expenditure, debt,
and investment going forward.
In addition to broadening the tax base, the government will need to reduce
leakages by improving compliance and enhancing collection efficiency. At the
same time, public finances can be bolstered further to meet the huge expendi-
ture needs. For example, the current VAT rate is among the lowest in the world
and well below the rates among other ECOWAS members, so some increase
should be considered. We expect to see efforts in streamlining the cost of gov-
ernment and improve efficiency of public service delivery across the federal and
sub-national governments. Transfers and tax expenditures should also be ad-
dressed.
Price modulation: An easy way to end subsidy regime
Rather than phasing out subsidy through the traditional method, the government
has introduced the price modulation approach which is an adjustment in the
pricing template on ex-cost plus freight (C+F) of petrol. From the calculations, the
adjustment led to a N5.50/liter in after C+F line items on the new Petroleum Prod-
ucts Pricing Regulatory Authority (PPPRA) template, insinuating a retail price of
N86.50/liter. The government noted the price modulation will be reviewed quar-
terly to reflect prevailing global crude oil prices with a possibility of capping it at
N97.0/liter. Thus, while we expect oil price to trade lower in 2016, we think the
government will pay little or no subsidy for most part of the year, an easy way out
to phase out subsidy completely.
We expect the government to pay
little or no subsidy in 2016 as oil
price stays relatively low

41
Monetary Policy: How far down the expansionary lane?
Going into 2016, decisions by the monetary authorities will be largely driven by
global oil price trajectory and the need for monetary-fiscal policy harmoniza-
tion. The tepid picture for growth coupled with the fiscal objective of the gov-
ernment will incline the MPC to expand monetary policy further in 2016 in order
to stimulate the economy. We therefore expect the MPR to drop further to
10.0% in H2-16 and the CRR revised to 15.0% in the same period. Furthermore,
the significant easing now raises the probability of currency adjustment going
into 2016 given the attendant pressure on system liquidity. Against the back-
ground of Nigeria’s now significantly lower real return and real interest rate, set
to be even lowered by a possible spike in inflation via the exchange rate chan-
nel, we expect continued muted FPI inflows into naira assets. Further, depending
on the pace of interest rate normalization in the US, the pressure on the domes-
tic currency is expected to linger over 2016.
We expect monetary and fiscal pol-
icy to be broadly expansionary in
2016

42
Inflation
A monster not so frightening after all
Nigeria’s Headline inflation averaged 8.9% for 2015 within CBN target band of 6-
9% with core and food inflation rates averaging 8.2% and 9.8% respectively. Ex-
change rate pass-through and the impacts of likely post-election violence were
the key drivers within sight at the beginning of the year, when we expected in-
flation to touch double digits. While a surprise political stability post-election as
well as progress in addressing security issues in the north turned out positive for
inflation, currency restriction and adjustments proved significant in stoking infla-
tionary pressures within the year.
If we disaggregate the inflation numbers into the two halves of the year, it ap-
pears that both the lagged impact of the 8.0% devaluation of the naira in the
prior year (November 2014), and more importantly, FX restriction on the 41 items
in June 2015 had significant impacts, especially on Food inflation, in the second
half of the year. In H2-15, headline, food and core inflation averaged 9.3%,
10.2% and 8.8% respectively (vs. 8.6%, 9.5% and 7.6% for H1-15). The impact was
most observable on processed food sub-component with higher prices irking
double digit food inflation. Post harvest-seasonal effect was also key in pressur-
ing food prices alongside distribution bottlenecks that persisted over 2015. Still
on the supply side, higher transportation cost on the back of fuel scarcity, as
well as pockets of insurgent attacks restricted distribution of food and exacer-
bated price pressures in the northern region.
Contrary to consensus, inflation
stayed within single digit in 2015
Cost-push factors heightened by
naira devaluation pressured headline
inflation

43
Inflation Outlook for 2016
Benign but anchored on FX trajectory
Our inflation model suggests that baring a devaluation of the Naira in 2016,
headline inflation should average 8.0-8.5% through the year. The progressive
month-on-month decline in headline inflation in 2015 underpins our expectation
of benign inflationary trends going into 2016. Although we recognize the expan-
sionary spending built into the 2016 budget as functionally correlated with infla-
tion, our expectation of more “productive” fiscal spend going forward, relative
to historical trends, should limit pass-through to prices as output gaps gradually
contract.
The impact of unconventional accommodative monetary policy stance of the
CBN is less likely to stoke inflationary pressures going into 2016, as structural fac-
tors remain most causative in Nigeria’s inflationary trends.
If we see a currency adjustment early in 2016, we would expect higher inflation-
ary pass through albeit tempered by a possible simultaneous relaxation of cur-
rent FX controls. Ordinarily, depending on the scale of currency adjustment, we
would expect up to 150-200bps shock on our inflation expectations with up to 6
months lag before a transmission to headline inflation. This implies a bear case
inflation expectation of 9.5% average for 2016.
The impact of currency devaluation
will be tempered by a possible re-
laxation of FX controls
More productive fiscal spending
should limit expenditure pass-though
to inflation

44
Trade and External Position
Trade surplus shrinks, but outlook remains positive
Nigeria recorded a cumulative trade surplus of N2.5trn for 9M-15, a sharp y/y
decline of -68.4%, driven largely by a 42.8% drop in export revenue and a mild
4.2% contraction in imports within the period. In dollar terms, the trade deficit
stood at -US$5.4bn for 9M 2015, equivalent to c.-1.0% of GDP, in contrast to the
substantial month-on-month surpluses recorded in the first nine months of 2014.
This steep deterioration in the balance of trade position is not surprising, given
that export revenue has witnessed a double whammy from continued decline
in oil prices and lower uptake for Nigerian crude by erstwhile trade partners. We
note that the sharp decline in trade balance commenced in Q4-14 when Brent
prices declined 41.2% q/q to close at $57.3p/b, culminating in a devaluation of
the naira.
Mirroring trends in the trade balances, Nigeria’s balance of payment situation
saw unabated strain for the most part of 2015 as both the current account and
capital account remained pressured. The current account deficit opened the
year at -5.1% of GDP in Q1-15, as the external reserves slipped to an all-time low
of US$29.4bn.
Going into 2016, Nigeria’s trade surplus is expected to gain some respite on
probable resumption of crude oil sales to the US as well as growing export con-
tribution from India. The US has historically accounted for 8-10% of Nigeria’s total
crude oil sales. Based on Q3-15 foreign trade statistics released by the NBS, the
US resurfaced in the league of top ten export destinations for Nigeria as crude
oil export resumed for the first time since 2013, albeit at less than 2.0% of total
value of crude sold. India’s share of total export value also increased from 15.3%
in Q3-15 to 17.5% in 2015.
2016 trade surplus should see respite
from a possible resumption of crude
oil sales to the US
Export revenue was weakened by
the twin impact of oil price decline
and lower demand for Nigerian oil

45
Section 4
Financial Markets Outlook

46
Money markets
A tale of unequal halves
Over Q3-15, a 6.8% contraction in currency outside banks neutered a 4.8% ex-
pansion in demand deposit. Hence narrow money (M1) only increased by a
marginal 2.7%. Broad money (M2) however decreased by 2.9% at the end of
the period, its first decline in seven consecutive quarters, on the back of a 5.8%
contraction in Quasi money. While credit to private sector was flattish, Net do-
mestic credit was up by 1.8%, driven by a 17.5% expansion in Credit to govern-
ment. Base money also contracted by 3.9%, reflective of the twin impact of de-
clines in both currency in circulation and Bank reserves, as both trimmed c.4.0%.
Monetary aggregate trend in Q3-15 came as no surprise, and fully captured the
impact of the ruling policies at the time. While OMO issuances were lower by
10.9% and 53.2% respectively over the quantum of issues seen in Q1 and Q2,
four key factors combined to mop system liquidity towards the end of the year:
1) A spillover from the harmonization of bank’s CRR in H1-15, which in the end
appeared to have more of a tightening impact on market liquidity, 2) Moves by
the banks to comply with the Treasury Singles Account (TSA) implementation
deadline by the Federal government (which mopped around c.N700bn), 3) The
CBN’s requirement for banks to frontload FX purchases, and 4) the announce-
ment of removal of Nigerian bonds from the JP Morgan EM Bonds Index.
Monetary aggregates contracted
sharply in Q3-15, reflecting CBN ‘s
extremely tight monetary policies

47
Average opening balance at the end of August was N133.1bn, which was
37.7% and 35.3% lower than average opening balances over Q1 and Q2 re-
spectively. The tighter liquidity conditions increased competition for funds as
evidenced by 160bps rise in deposit rates since the start of the year. The inter-
bank market was also affected by a tighter liquidity, with Q3 average rates for
3M and 6M NIBOR at 17.1% and 18.1%, 120bps and 110bps higher than what
was on offer at the end of the second quarter. Nevertheless, the greatest volatil-
ity was seen in OBB and ON rates, as both breached the 100% mark late august,
higher than the spikes seen in February. Reflecting limited credit activity as evi-
denced in the stable numbers in credit to the private sector, which have re-
mained flattish at c.N18tr from December 2014, Prime and maximum lending
rates were relatively stable over the period.
Some respite however came at the end of the quarter, as the Central bank, at
the close of its two-day policy meeting moved to ease market liquidity by re-
ducing the Cash Reserve Requirements (CRR) for the banks by 6ppts to 25%.
These moderated rates across board, and ensured that average opening bal-
ance for Q3 increased by N29.8bn to N162.9bn.
Q4: Liquidity boost as the Apex bank changes the tune…
Q4-15 saw the apex bank significantly ease its monetary stance further, in what
marked a monumental shift from its prior tightening approach as it aligned its
policy framework to the objectives of the new government which wanted to
bring down borrowing costs, and increase aggregate demand and spending.
The Central bank shaved 200bps off the monetary policy rate (MPR), dropped
the CRR for banks by 5ppts to 20% and announced an asymmetric corridor of
+200bps/ -700bps around the MPR. Furthermore, the apex bank scaled back
significantly its OMO issuances starting from August, with only three December
auctions in Q4. Total OMO issuance in Q4 was N500.1bn, significantly lower than
what was issued in the three preceding quarters.
These took Q4 average opening balance to N564.3bn, and drove a further
downtrend in rates. The 3M and 6M NIBOR shed 370bps and 300bps from third
quarter end to 13.3% and 15.1% respectively at the end of Q4, while both OBB
and O/N ended the year at1.3% and 1.7% in that order.
Tight liquidity conditions reflected in
160bps increase in deposit rates over
H1-15
A change in CBN’s monetary policy
stance occurred in Q4-15 when the
CBN cut back its OMO issuances
drastically

48
Gradual shift away from FPIs, but FX risk poses a potent challenge
While it is easy to understand the intentions of the Central bank, the timing as
well as quantum of monetary easing seen over H2 was a little surprising, given
that historically the apex bank has used the backdrop of its tight monetary
stance to keep interest rate sufficiently high enough to ensure inflow of FPIs. This
was important in our view, as it indirectly served as an auxiliary source of dollar
supply, thus providing the support needed to shore up the foreign reserves and
cushion FX volatilities.
With JP Morgan citing concerns around FX liquidity as the reason for removing
Nigeria from its bond index and crude oil prices testing new lows, one would
have thought the CBN would bite the bullet and at the very least maintain
status quo. Instead, the apex bank aligned with the presidency and took a con-
trarian view which hinted at two key beliefs; First, that the domestic Institutional
investors – mainly the PFAs and the Banks, have enough capacity to off-take
plausible sell-offs from the departing FPIs, which should ensure some stability
across markets. Second, it trusted that the administrative controls around FX
which effectively pushed the bulk of dollar demand to the parallel market, was
adequate to support the value of the currency at least in the near term, thus
negating the need the further tighten monetary policy or devalue the currency.
Amid much higher level of system liquidity which obviously caused a downtrend
in the money and FI markets, it is from the second point highlighted above,
which centers on administrative measures around FX, that new pressure points
are beginning to emerge as captured by an ever widening gap between the
official and the parallel market, in our view.
The CBN seems to be reversing its “FPI
-centric” monetary policy stance of
high interest
CBN’s new FX policy has created a
wide gap between the parallel and
Official FX markets

49
Source: CBN, FMDQ, United Capital
Robust system liquidity to place a downward pressure on market rates
Looking ahead, higher OMO maturities in H1-16 of N1.8trillion, compared to H2-
15’s 1.6trillion as well as net T-bills repayment of N56.8bn in Q1-16 is indicative of
more monetary easing, although the new issuances of the 10yr (FGN JAN 2026)
and 20yr (March 2036) bonds of between N80bn – N120bn in the same period
will likely temper the impact. While we anticipate intermittent uptick in interbank
rates as banks comply with TSA debits and frontloading of FX transactions, our
analysis of net maturities and issuances together with expectations that the on-
going controls around FX will remain at least over Q1 points to rates generally
trending marginally lower from current levels for the most part of H1-16, as the
base of liquidity widens a little further.
We deem it fit to mention that a key risk to our analysis will be the earlier than
expected devaluation of the domestic currency which, if judged sufficient by
the foreign money managers, could trigger the inflow of funds into naira assets.
In this scenario, we envisage the domestic Institutionals will seek to front run the
offshore players, which will likely see money market rates trend higher.
Despite the announcement by the Central bank that the extra liquidity from the
most recent reduction in CRR will be targeted at specific strategic sectors in a
bid to support job creation and spur growth, we think prime lending rates will
hover around current levels (16.8% at the end of 2015) in H1-16. This is due to a
myriad of headwinds facing the banks at this time, especially around FX and
plummeting oil prices which will likely continue to drive a risk-off attitude in the
near term. Key movements around the prime lending rates and credit to private
sector will likely be tied to pace of reforms in the real sector as well as more clar-
ity around FX and domestic macro policies.
Overall, we think liquidity will remain robust over H1-16, leading to lower rates
across the money market, barring surprises around the devaluation of the do-
mestic currency.
We expect an increase in market
liquidity in H1-16
A downside risk to our prognosis for
lower rates in H1-16 remains an earlier
-than-expected currency adjustment

50
Source: Bloomberg , United Capital
FX Outlook
How long more can the “visible” hand hold sway?
Of the key SSA currencies, the naira was one of the most resilient; depreciating
by only 8.0% despite two rounds of depreciation in Q4-14 and Q1-15.
While the apex bank has historically maintained a tight monetary policy regime
in a bid to preserve the domestic currency and prevent speculative FX play, it
has recently switched to more administrative controls around the FX market. In
our view, a mix of plummeting oil prices and dwindling reserves appears to be
forcing the CBN’s hands, even as the demand for the greenback heightened
on the anticipation of US Fed rate tightening and eventually removal from the
JB Morgan as well as Barclays’ bond indices. Some of these controls presently in
play include; exclusion of certain items from the official window, ban of FX de-
posits and transfers, as well as limits on the value of foreign transactions that can
be undertaking using naira denominated cards.
…as administrative controls continue to make and mar
On-going admin measures have been a two edged sword in our view. While the
naira has appeared more stable with bulk of the dollar demand effectively
shifted to the parallel market, these FX controls have also stifled the domestic
economy on the other hand, as players across the diverse sectors of the econ-
omy are being forced to the more expensive parallel market to source FX. More
worryingly is the frequency of policy adjustments around FX, which has also
been telling in our opinion, and appears to suggest that pressure from a paucity
of FX is biting more than meets the eye, with foreign reserves at current levels
only adequate to cover c.4 months of imports, amid persistently bearish outlook
for oil prices.
The Central bank has shifted from a
tight monetary policy regime to the
use of administrative controls to sup-
port the domestic currency
Naira was one of the most resilient
currencies in SSA over 2015

51
Source: Bloomberg, CBN, United Capital
The latest of these admin controls, which is the ban the sale of FX to BDCs,
throws up even more questions, and has the look of a perfect catalyst to further
widen the gap between the official and parallel markets, especially seeing that
the apex bank has not provided substantial clarity as to how bulk of the de-
mand that has been pushed to the parallel market via its prior admin measures
will be met.
What is certain at this juncture is that the CBN remains reluctant to officially de-
value the currency; a stance that appears to have some political tint even from
the neutral’s perspective. That said, a worsening balance of payment position,
pressure on the key sectors with major players unable to source for FX, much
smaller inflow of FPIs as well as sustained downtrend in oil prices, all hint that the
can is only being kicked down the road and the domestic currency would have
to shift forward one way or the other.
Plausible devaluation: dancing way behind the beat?
Even with a possible devaluation on the horizon, another germane question in
our view, is what quantum of devaluation from this point would be adequate to
ease current FX pressures and tempt the foreign money managers to return?;
bearing in mind that even without currency considerations (on the assumption
of constant currency), the current monetary easing stance by the Apex bank
has already made naira assets less attractive. Thus one would imagine that at
current levels, the quantum of devaluation would have to be considered suffi-
cient to compensate, a situation that perhaps, could have been avoided if the
apex bank had elected to bite the bullet earlier.
The recent ban of FX sales to BDC
continues to widen the gap between
the parallel and official markets
An optimal level of currency adjust-
ment is needed to reverse FPI out-
flows

52
Looking at where the naira is trading at the parallel market as well as its forward
price, we anticipate a 20-25% devaluation is conceivable from where the offi-
cial rate is at this time. Based on Mr. Emiefele’s recent statements that the apex
bank is already exploring options around FX policies which in our view suggest a
shift in the Central bank’s body language, we think there will be some clarity
before the end of H1-16. Like we earlier highlighted, impact on the markets will
mostly depend on investors’ perception on the adequacy or otherwise, of the
quantum of naira shift. Should the naira mirror the trajectory of the Angolan
kwanza, then a simultaneous forward shift in the parallel market, which mostly
implies investors’ dissatisfaction at the extent of devaluation, will likely see FX
pressures linger.
Aligning fiscal and monetary policy may require an exchange rate ad-
justment
It is difficult to imagine a smooth execution of the highly expansionary 2016
budget given current macro realities especially the bearish trajectory of oil
prices. The exchange rate assumption in the budget ( i.e the Official interbank
rate) stands at USD/NGN 198 with a budget deficit of N2.2trn.
As at the time of writing this report, oil price was trading at $27.6p/b. This poten-
tially increases the deficit at N2.4trn if the exchange rate remains unadjusted.
However, a 27.6% adjustment in the currency will keep the proposed deficit
constant. A further scenario play around oil prices and the exchange rate re-
quired to maintain the proposed budget deficit of 2.2trn is summarized below:
We expect some clarity in FX policy
direction before H1-16
Table 6
Oil Price Scenario ($ p/b) Exchange Rate
(USD/NGN)
Devaluation Target
15 502 153%
20 376 90%
25 301 52%
30 251 27%
35 215 9%
38 198 0%
Source: United Capital Research estimate
2.16
2.20
2.26
2.31
2.37
2.42
2.48
2.55
2.59
2.63
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
$40.0 $38.0 $35.0 $33.0 $30.0 $28.0 $25.0 $22.0 $20.0 $18.0
Budget deficit to widen significantly if oil prices continue to dip
Expected Budget deficit (N'trn) at different oil price levels
Source: United Capital Research estimate

53
Fixed Income
A story of resilience
Domestic institutional uptake offsets FPI apathy
In 2015, yields in the fixed income market traded mostly within a tight range for
the first three quarters, showing some resilience amid events that threatened to
increase yield volatility. However, FI yields assumed a steep downtrend towards
the end of the year, aided by much higher system liquidity and a shift in the
Central bank’s governance objectives.
With pressure mounting on the naira and crude prices trending lower, H1-15 saw
the apex bank maintain a liquidity tightening stance accompanied by an ag-
gressive OMO issuance, as it sought to curb speculative play around the USD/
NGN, remaining true to the strategy it has pursued over the last half decade.
These, together with election related concerns drove average Bonds and T-bills
yields up by 71bps and 122bps to 16.1% and 15.7% respectively, at the end of
Q1. However, Q2 saw a return of bullish sentiments as investors basked in the
euphoria of the successful change in government and a seemingly upbeat out-
look for the domestic economy. This drove a downtrend in yields across the FI
markets, with investors showing preference for the shorter end of the maturity
spectrum for the most part, perhaps connoting a cautious stance reflective of
an understanding that there were possible risk events on the horizon that could
crystallize and pressure yields to the upside.
Over 2015, naira FI assets showed
resilience despite events that threat-
ened to heighten yield volatility
FI play was more to the short end of
the maturity spectrum as investors
remained cautious mindful of possible
risk scenarios

Nigeria 2016 outlook a slippery path to recovery

Nigeria 2016 outlook a slippery path to recovery

Recommended

Recommended

More Related Content

What's hot

What's hot (15)

Viewers also liked

Viewers also liked (12)

Similar to Nigeria 2016 outlook a slippery path to recovery

Similar to Nigeria 2016 outlook a slippery path to recovery (20)

Recently uploaded

Recently uploaded (20)

Nigeria 2016 outlook a slippery path to recovery