Global strategy october 2012


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Global strategy october 2012

  1. 1. St ra p la nNigerian EconomicsGlobal Strategy: A new world order…?Focus on Africa, Nigeria … the Next Retail Frontier..? Part OneA complimentary publication of Straplan (Research & Planning) October 2012
  2. 2. St ra p la n It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to fit facts. - Arthur Conan Doyle (Sherlock Holmes)This report has been prepared to serve a broad range of subscribers, basically, individuals and organizations interested in the dynamics of the Nigerianeconomy. The Nigerian Economics series is a complimentary publication of Straplan. It seeks to bring insight into trends in the Nigerian economy, itsmarkets and industries.Our mission in Straplan is to provide direction for our clients’ planning, decision-making, and stakeholder consultation with creative and insightfulinformation. Straplan’s reports target both international and local investors, corporate and public institutions, business students and teachers,foundations, interest groups, policy-makers, quasi-governmental institutions and media companies. For more information. See the Contacts Page.Straplan provides advisory services in research, strategy, trainings, and stakeholder consultation. A complimentary publication of Straplan (Research & Planning) October 2012
  3. 3. Summary St ra p la n Global economy weakens as euro area continues to wobble.. The euro area is still deep in recession, despite the ECB’s intervention measures, and there appears no end in sight, even as the US grapple with its huge debt logjam. This gloomy trend continues to weaken global economic growth, as even growth in emerging market countries, such as China, India and Brazil continue to falter. China and India are expected to offset imbalances in external demand and close up economic ties with sub-Saharan Africa (SSA), further enabling growth in trade and consumption in both regions, albeit the pressures from the wobbling euro area and expected tightening in US demand. Investors show more interests in sub-Saharan Africa … we think it is a clear opportunity to emerge as a retail frontier Perhaps the euro crisis is SSA’s opportunity to emerge as the next frontier of global economic growth, as more investors (local and international) show interests in entering or expanding their operations in sub-Saharan Africa. We see demographics in the SSA and Nigeria (our main interest) as opportunities for a sustainable (30-50 years) retail play. With an estimated $2.2trillion spending potential by 2020, and a rising, strong youth population, the sub- Saharan African market is a potential retail haven. Please check out the appendix for foot prints of some international companies investing in SSA.A complimentary publication of Straplan (Research & Planning) October 2012
  4. 4. Beleaguered Euro Area Impedes Global Growth … St ra p la nAccounting for only 1.1% of euro area total trade in 2011, sub-Saharan World Output %Africa (SSA) has been able to ride relatively smoothly through the global 14effects of the euro area economic crisis. The euro area is still deep in 12recession, despite the ECB’s intervention measures, except for 10Germany which has experienced marginal growth. This trend continues China 8.2to weaken global economic growth, as even growth in emerging market 8 India 6countries, such as China, India and Brazil faltered. Although data on the 6 Sub-Saharan Africa 5.7United States have been mixed lately, a risk to global economic growth 4 World (Aggregate) 3.6is the country’s huge fiscal deficit logjam which signals an ensuing United States 2.1 2tightening that could lead it into recession and further reduce global Euro Area 0.2trade levels. There are no clear answers to solving these crises as yet, 0 2007 2008 2009 2010 2011 2012f 2013flikewise there appears no end in sight. -2As uncertainty spreads in advanced countries and consumption and US Euro Area Chinatrade activities slow down, sub-Saharan Africa maintained strong India Sub-Saharan Worldgrowth, above 5%, making it one of the fastest growing regions in theworld. World Trade Ranking % of (EU) Total Trade16 United States 13.8% 113 China 13.3% 210 Russia 9.5% 3 7 Switzerland 6.6% 4 4 Norway 4.4% 5 1 Turkey 3.7% 6 -2 2008 2009 2010 2011 2012 2013 2014 Japan 3.6% -5 7 8 India 2.5% -8 Brazil 2.3% 9-11 21 10 South Korea 2.1%-14 Nigeria 1.1% World trade Developed countries Developing countries Sources: IMF, Eurostat, EIU A complimentary publication of Straplan (Research & Planning) October 2012
  5. 5. Euro Crisis: ‘No Obvious End in Sight…’ St ra p la nNo obvious end in sight… sovereign debt-weak banks perplexity .. Although the 6 EU Outputeuro crisis is more pronounced in the PIGS (AKA peripheral countries excludingSpain), the entire region faces higher credit risk and uncertainty. The IMF 4estimated in its Global Financial Stability Report that European banks could 2shrink their balance sheets by US$2.6trn over the next 18 months, while therating agency, S&P had reported that the long term refinancing operations 0(LTROs) of the ECB did not result in significant improvement in loan 2008 2009 2010 2011 2012f 2013forigination. About 30% of Greece is below the poverty line. As part of its -2efforts to ameliorate the situation, the EU announced on Thursday that it will -4introduce a new banking supervisor to prevent a systemic collapse, and theECB pledges to do ‘anything’ to stabilize the financial sector. America is on the -6edge of a fiscal precipice …expectedly, the US will eventually slow down on EU-27 Euro area-17 Germanycurrent consumption to offset its huge debt. Investors and trade partners to -8 Ireland Greece(p) Spainseek alternatives.. austerity and other fiscal consolidation measures across France Italy Portugal UK United Statesthe euro zone (household deleveraging is incipient in certain countries)invariably suggest continued slow down in consumption, output and trade. Debt/ GDP % Unemployment US 102.9% Spain 25.10% EU 82.5% UK 82.5% Greece 24.40% Spain 68.5% Ireland 15% Portugal 106.8% Italy 120.1% Portugal 15.90% Ireland 105.0% Italy 10.70% India 68.1% Iceland 99.2% France 10.60% Greece 160.8% Germany Germa… 5.50% 81.5% France 86.3% Euro… 11.40% China 25.8% Nigeria 17.9% United… 8% As publicly published by national sources without independent verification Source: EuroStat A complimentary publication of Straplan (Research & Planning) October 2012
  6. 6. China-led Asia Buoys Continental Shift? St ra p la nChina and India continue to lead world growth … the second largest economy slows down further inQ3 2012 but its officials indicate it is ‘the slow-down on the transition to transformational Chinese FDI in Africaleadership.’ China’s slow down is largely caused by weaker external demand linked to the euro areacrises. Albeit the deceleration, China is expected to lead global growth in 2012. China’s economy 2000 (%)has taken a big-brother position in world economy as the foremost bearer of the United States’ Others, Agricultur 0.8debt, major supplier of relatively cheap labour to global companies, and provider of ‘customised, e, 7 Services,affordable’ retail goods and services to the global market. It is a voracious consumer of natural 18.3resources and key investor in the African mining sector. China is the world’s largest exporter and Mining, 27.6has since the last decade continued to strengthen its trade partnership with Africa. Its position inAfrica is characterized by a strong demand for natural resources and rising supplies of bottom of the Manufactpyramid goods and services. We expect to see stronger ties between China and Africa (and other uring , 46.3emerging markets) as the former offsets the dent to demand for its exports from the euro area.Similarly, waning external demand is partly responsible for India’s flagging economic growth,nonetheless we expect forthcoming structural reforms in the Indian economy towardsinfrastructure investment to lead to readjustments in its trade and consumption in favour of theSSA. India, like China, continues to strengthen its economic ties with Africa. The Bharti-Airtel initialinvestment of US$10.7bn to acquire Zain’s operations across 15 countries in Africa in 2010, signal 2010 (%)India’s confidence in Africa, hence the SSA. Others, India’s GDP Agricultur Chinas GDP 3.4 e, 3.1 12 11 9.7 9.6 9.4 10 9.2 10 8.1 Mining, 7.6 7.4 9 8 29.2 Services, 8 42.3 6 7 4 6 Manufact uring , 22 2 5 0 4 Q111 Q211 Q311 Q411 Q112 Q212 Q312 2007 2008 2009 2010 2011 2012f 2013f Source: Source: National Bureau of Statistics of China Source: IMF WEO October 2012 A complimentary publication of Straplan (Research & Planning) October 2012
  7. 7. Sub-Saharan Africa – From Cynicism to Optimism St ra p la n Entries and further expansion into Africa A Retail frontier … the demographics play Cummins Beyond its natural resources, sub-Saharan Africa’s over 850 million people Contour Global have become a strong attraction to investors and lent to its presence as an 3M emerging frontier for retail investments. BT Group Within the strong, youthful population is a burgeoning middle class with Yum! increasing financial resources. The AFDB estimates the middle class at 34% of Brands the population, and projects the region’s annual spending power by 2020 at $2.2 trillion annually. This segment is characterised by demand for branded Apple and sophisticated products. On the other hand, Africa has a wide informal market, typifying the poor and illiterate which possess a residual but relatively strong spending power for affordable consumer and social goods. Poverty levels are relatively high in Africa but observably they are much more pronounced due to infrastructural constraints which when overcome by large corporate companies yieldArcher DanielsMidland Co. enduring results. Dow Chemical Over 340 million are 14 years and below, indicating a strong, youthful General population and potentially sustainable consumer market over the next 50 Electric years. This category is comparable to about 260 million and 370 million in Nestle China and India, respectively. Accounting for approximately 40% of total population, this segment will sustain Africa’s population boom and strengthen its economy, provided these human resources are well developed Unilever and trained to be intellectually assertive. Applying the basic economic Starwood Hotels question of what and how to produce to this next generation highlights a lot of interesting possibilities and scenarios. ‘Consumerism’ and sophisticated demand increases as SSA becomes more urbanized. About 315 million, approximately 37% of the population now live in urban centres, driving the region’s growth in mobile technology, banking and finance, alternative delivery channels, building materials, consumer and more ….. goods, oil and gas etc., thus positioning the SSA as a potential retail haven. A complimentary publication of Straplan (Research & Planning) October 2012
  8. 8. Sub-Saharan Africa – from Cynicism to Optimism St ra p la nPreviously, sub-Saharan Africa was considered an insignificant part of the globaleconomy. Today, there is a new dimension to its outlook due mainly to more SSA Outputdiscoveries in natural resources and its population boom, and more so, it is one 8of the regions with the strongest economic growth at over 5%. As corporategiants seek regions that offer growth opportunities and sustainable consumerdemand, the question is, “Has the euro crises created an opportunity for SSA to 6emerge as the next frontier for global investments and growth opportunities? “Many companies continue to show interests in introducing or expanding their 4operations in SSA, especially for a retail play on its demographics. Typical of aless advanced region, there are enormous challenges facing the averageinvestor, but well-researched strategies, adequately funded and organized 2operations, and ethical business approaches have recorded considerablereturns. Please see appendix for companies investing in SSA.In the mid-term, investors willing to do business in Africa must be ready to 0 2007 2008 2009 2010 2011 2012f 2013finvest in education, skills training and infrastructure. We think SSA’s emergence Source: NBSis possible, and rapidly so, if constituent economies remain assiduous and keepfocus on improving infrastructure, health and education.37% SSA Population and Urban Population Growth Millions % of Population Age 14 and below (2011) 37% 860 50 46 43 44 840 38 36% 40 82036% 30 30 36% 800 30 35% 780 20 19 17 18 2035% 35% 760 13 13 740 10 720 0 Germany Nigeria Japan Angola China USA France Ghana Gambia South Africa India34% 700 UK 2007 2008 2009 2010 2011 SSA Population SSA Urban Population Source: The World Bank A complimentary publication of Straplan (Research & Planning) October 2012
  9. 9. SSA PECR St ra p la nPotential Enablers• Economic growth • Natural Resources•Improving macroeconomic conditions •Population Boom• Growing consumer market •Urbanization• Rising sophisticated demand •Mobile Technology• Young population • Macroeconomic Reforms• Technology innovation • External Demand from China and IndiaChallenges Risks• Access to finance • Weak Human Resources• Infrastructure • Growing urbanization without commensurate expansion and• Corruption improvement in infrastructure•Weak Work Force-underdeveloped human resources • Mono-cultural economies, vulnerability to oil price shocks• Teething problems associated with inchoate democracy, stop- • Deviation from or macro-reforms go policies, etc. • Issues of asset bubble and hot money following surge in• Poverty and illiteracy capital in-flows• Inflation • Political Instability (low) • Illiteracy A complimentary publication of Straplan (Research & Planning) October 2012
  10. 10. Nigeria – Once a Pariah, Now a Bride? St ra p la nA Retail frontier … the demographics play Share of GDP (2011) Real Estate,Nigeria leads the population boom and retail market potential in SSA, accounting for 19% 1.78 Business andof the region’s population in 2011 at over 160 million (compared to 51 million in South Hotel and Other Others, 6.67Africa). Evidently, Nigeria’s robust trade (retail and wholesale) sector accounted for Restaurants, Services, 0.92 Building and 0.52about 19% of its GDP in 2011. Construction, 2.08Typical of the SSA region, Nigeria has a youthful population with over 65 million age 14 Agriculture,and below, representing 40% of its population. Nigeria’s demographic play becomes **Wholesale 40.21 and Retailmore promising as its urban dwellers gradually rise beyond 80 million, supporting the Trade, 19.36gradual emergence of a middle class with significant financial resources and sophisticateddemand. Finance &Conversely, there is high poverty and illiteracy levels (largely due to infrastructure Insurance, Crude Petroleum &deficiencies) followed by a large informal sector (retail market) with residual, but strong 3.45 Natural Gas,spending potential directed towards affordable, customized ‘economy-pack’ products. Telecommunic 14.78 Solid Mineral, ation & Post, Manufacturin 0.36The efficiency of the Nigerian retail market will be reinforced by the rise in mobile 5.71 g, 4.16technology, fuelling its integration with the global economy and helping to alleviate someof the challenges of doing business. The spread of mobile telephony (over 100millionactive mobile lines by Q2’12) has also increased internet penetration with about 45million on-line and 24million (56%) of them via their mobile phones. Million Population Growth (quarterly) 170 9 7.61 7.68 8 7.13 7.3 160 7 6.17 6.28 6.5 6 150 5 140 4 3 130 2 1 120 0 2006 2007 2008 2009 2010 2011 Q111 Q211 Q311 Q411 Q112 Q212 2012f Source: NBS A complimentary publication of Straplan (Research & Planning) October 2012
  11. 11. Nigeria – Once a Pariah, Now a Bride? St ra p la nGreat potential… but lacks a grand national development plan/strategy to guide its political economy in driving a focused transformationprocess. If the economic system is the gun that solves the problem, the political system is the hand that pulls the trigger-Anonymous.’The current administration has just presented the medium term expenditure framework (MTEF) 2012-2015 to its parliament, signalingits administration’s commitment to fiscal prudence and restructuring, while keeping focus on strengthening the fragile infrastructurebase, especially the supply of electricity power. Since Nigeria’s democracy is still inchoate, macroeconomic reforms have progressedalbeit slowly due to the absence of an overarching framework that clearly spells out the priorities of the nation and effectivelycoordinates the affairs of its institutions. Therefore, significant structural improvement and socio-economic transformation, especiallyin infrastructure development, appears far-fetched in the near term until the country has developed and instituted a nationaldevelopment programme-in part, a derivative of the much touted constitutional review, which is the pillar that would support anddefine the political economy.Scale is an important consideration for investing in Nigeria in order to overcome challenges of access to finance and infrastructure.Investors interested in doing business in Nigeria should be ready to invest in education, skills training and infrastructure. Nigeria’slabour force is weak on two accounts, the human resource is under-developed and then is constituted by a mere 40% of the population,compared to Africa’s average of 55% and China’s 70%. These deficiencies however signal potential improvement in local spendingpower when eventually the work-force becomes more efficient.The outlook on the economy is generally positive owing to rising commodity prices and on-going attempts at reforms. Nigeria’sresilience to the euro area crises has been buoyed by its economic ties with China and India which is continually being strengthened. Leading Suppliers % of Total Imports Leading Markets % of Total Exports China 17.5 US 26.2 US 9.1 India 10.9 Netherlands 4.9 Brazil 7 India 4.7 Spain 6.4 Source: EIU A complimentary publication of Straplan (Research & Planning) October 2012
  12. 12. Nigeria- PECR St ra p la nWe believe that a realistic overarching national development plan, transcending and connecting all levels of government and economicstructures would keep Nigeria above a double-digit growth. Infrastructure deficiency tends to deepen poverty levels, widen the income gap,sustain corruption, increase cost of living and doing business, and push lower the standard of living, but a strong infrastructure base will reduceinflation drastically and free disposable income, as noted with slight improvement in electricity power. Potential Enablers •Economic growth • Natural Resources • Stable financial sector •Population Boom •Improving macroeconomic conditions •Urbanization • Growing consumer market •Mobile Technology • Rising sophisticated demand • Macroeconomic Reforms • Young population • External Demand from China and India • Mobile Technology Growth Challenges Risks •Access to finance • Oil price shocks • Infrastructure • Labour unions • Corruption • Political risk (still manageable) •Weak Work Force-underdeveloped human resources • Management of surging inflows and possible asset bubble • Teething problems associated with inchoate democracy, stop- • Under-developed human resource go policies, etc. • Growing urbanization without commensurate expansion and • Poverty and illiteracy improvement in infrastructure • Inflation • Price adjustments on successful delivery of sustainable infrastructure, especially power and transportation A complimentary publication of Straplan (Research & Planning) October 2012
  13. 13. Appendix: Companies Investing in Africa… Culled from St ra p la n• 3M Technology conglomerate 3M announced a big expansion to its African business in June and set up subsidiaries in Nigeria and Kenya. The new operations will set about distributing the company’s existing products in the region. Eventually, they hope to develop new products, specifically designed for the African context. Management believes Sub-Saharan Africa could develop into a $500 million market for the company over the long-term.• BT Group UK-based telecom, BT Group, plans to nearly double its African operations by 2015. The company already serves 600 African commercial customers and is hiring 100 additional staff at its regional head office in Johannesburg. Other investment includes the construction of data centers and the purchase of internet bandwidth on a Cape Town to Johannesburg.• France Telecom The telecommunications giant has made a huge push into Africa with its “Orange” mobile and broadband brand. During the first half of 2012, revenue from Africa and the Middle East grew 5.8%, propelled by a stabilized Ivory Coast (+34%) and an impressive performance from Niger (+20%). FTE also devoted considerable resources to building its mobile customer base in Niger (+28%), Cameroon (+25%), and Senegal (+18.5%). Mobile broadband usage increased 83% in the region.• Koninklijke Philips Electronics Dutch electronics maker, Philips, said its second quarter Africa sales increased nearly 30%. Much of the growth stems from the company’s distribution of high-efficiency lighting in South Africa. It’s in the midst of a program that will see 200,000 50W halogen bulbs at South African banks, shopping malls, and other commercial establishments replaced with Philips’ 7-10W LED lamps.• Moneygram Remittances from the US to Africa have surged of late as the pain of recession begins to ease. There’s also been a big upswing in transfers within Africa and between Africa and China. To take advantage of this opportunity, fund transfer company, Moneygram, is building out its branch network as quickly as it can. In July, it announced that it could now process transfers to South Sudan. It also added nearly 500 additional locations in Ghana and over 500 locations in Nigeria. A complimentary publication of Straplan (Research & Planning) October 2012
  14. 14. Appendix: Companies Investing in Africa… Culled from St ra p la n• Starwood Hotels Hotel operators are beginning to reap the benefits of their African investments. Starwood Hotels’ Middle East and Africa revenue per available room (REVPAR) bounced back after last year’s tough Arab Spring, increasing 11% in constant dollars. The chain’s Nigerian properties performed particularly well, with revenue up 43%. Starwood operates 84 hotels across Africa and the Middle East.• Visa The global payments company that’s everywhere you want to be is finally realizing that some people want to be in Africa. It opened its Sub-Saharan regional headquarters in Nairobi in June. Visa sees significant potential in East Africa’s mobile payments market and in processing inter-bank ATM transfers. A wider Visa network would also be a boon to the international tourism industry. It aims to generate $14 million worth of revenue from Kenya alone by 2015.• Western Union The money transfer service reported “strong” results in Africa in spite of foreign currency headwinds. Its Middle East and Africa segment grew revenue by 3% during the second quarter. It now accounts for 15% of total sales and total transactions in the region grew 9% — more quickly than anywhere else in the world.• Yum! Brands We’ve highlighted Yum! in Africa before, but on its second quarter conference call, the purveyor of pizza (Pizza Hut), tacos (Taco Bell), and fried chicken (KFC) reiterated its plans to be in 20 different African countries by the end of the year. It sees “tremendous growth potential” on the continent, especially in Nigeria with its rapid population growth. The company’s expansion will be driven primarily by the KFC chain, which has proven extremely popular in South Africa. It bought 70 restaurants in South Africa last year, building its base in the country which it will use as a springboard into the rest of the continent and more ….. A complimentary publication of Straplan (Research & Planning) October 2012
  15. 15. Disclaimer St ra p la nDisclaimerWhilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the information, estimatesand opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Straplan or any of itsemployees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of theinformation contained in this report as it is based on secondary information. All information and opinions set forth in this document constitute theanalyst(s) position as at the date of the report and may not necessarily be so after the report date as they are subject to change without notice.This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed withoutthe written consent of Straplan Research. The report is available primarily electronically. A complimentary publication of Straplan (Research & Planning) October 2012
  16. 16. What We Do St ra p la n Nigerian Markets Research & Analysis / Strategic Planning / Strategic Training CoordinationYou can engage our Research Assistants for independent analysis on the following: Information & Analysis, Preparation of Dissemination of Data Gathering Modelling & Research Reports Information (Database) Valuation •Policy updates •Ratios • Weekly Reports • Electronic • Economy •Forecasting • Annual Reports • Internet • Financial Markets • Valuations • Quarterly Reports • Telephone • Sectors/Industries • Models • Monthly Reports • Publications • Companies’ Performance •Industry Drivers • Industry-Specific • Media • Demand and Supply Reports DynamicsA complimentary publication of Straplan (Research & Planning) October 2012
  17. 17. Contact Details St ra p la nAll comments, suggestions and enquiries should kindly be sent to:Ajibola AlfredStraplan Research10B, Apapa Lane, Tel: +234 803 860 8755 email:;Dolphin Estate, Ikoyi, or orLagos. +234 808 311 3785 A complimentary publication of Straplan (Research & Planning) October 2012