2014 Review and 2015 Outlook

3
EXECUTIVE SUMMARY
Global economic activity and trade picked up substantially within the
advanced economies towards the second half of 2013 raising hopes of a much
stronger 2014. These hopes were premised largely on waning skepticism over
the two major threats to global economic recovery at the time: the possible
breakup of the Euro-zone and the reverberating effects of the US falling off the
“fiscal cliff”. Although these two headwinds were summarily overcome early in
2014, the revival in global economic conditions remained largely unconvincing
for the rest of the year. In the major high income areas, growth in private
spending was at best tepid, as these economies began to slowly adjust to the
“hangovers” of massive balance sheet adjustments in the previous year.
Beyond the anticipated decline in oil prices, we believe the major challenge
facing the global economy in 2015 will be the task of minimizing the volatility
expected to ensue from broadly dissimilar fiscal and monetary regimes across
the advanced economies. With the Bank of Japan possibly pursuing
Quantitative Easing, the European Central Bank maintaining its aggressive
balance sheet expansion, and the US tightening stance, we see larger scale
volatility compared to 2014.
The market is moving in the direction of a possible US rate hike...
As the US economy continues its recovery, much stronger than before, the Fed is
widely expected to begin raising interest rate in mid 2015. Our analysis of seven
(7) previous US rate tightening cycles shows that rise in rate often creates
volatility and slows the pace of gains in emerging markets. Some of the impacts
of a tightening environment already occurred in 2013. While many emerging
markets now appear to be better off, having raised rates and reduced current
account deficits, some are still exposed to rate hike due to domestic economic
conditions. The last time the US Fed hinted on Quantitative Easing tapering,
global financial markets went into panic mode with emerging markets bearing
the brunt of portfolio reversals, resulting in sharp depreciations in exchange
rates. Although we expect many emerging markets to take measures to reduce
their vulnerabilities to such externalities in 2015, having learnt their lessons the
hard way, we still see a sizeable chunk of capital outflows from very volatile
frontier economies particularly those with relatively lower risk adjusted real
returns.
Are oil prices assuming a new normal?
Given the long backwardation history of oil price trading dynamics, current and
anticipated supply-demand scenarios, there is no reason to expect oil prices to
rebound sharply in the short to medium term. We see oil prices remaining

4
volatile especially in the first half of 2015 as the market digests the actions and
inactions of oil producers. Notably, the outlook for oil prices in the medium to
long term remains bleak against the background of the significant traction that
alternative energy sources as well unconventional oil production has gained in
the last decade.
Nigerian economy and financial markets may be challenged in 2015
The Nigerian economy is set to face one of the most difficult times in history as
global crude oil prices, a key anchor for fiscal strength and macroeconomic
stability, continue on a downward trajectory in 2015. The financial markets are
likely to be more challenging relative to 2014 as we expect 4 major factors to
shape the markets in 2015: 1) Post-election scenarios 2) Aggressive tightening by
the CBN, 3) Variability in foreign portfolio flows, and 4) the downward trajectory
of crude oil prices. These factors are largely expected to dictate movements in
both equity and fixed income markets albeit in different degrees during the
year. This report contains a detailed review of the market in 2014 with
projections for 2015, including expectations across different sectors; inherent
opportunities as well as strategies for navigating the market at a time like this

5
CONTENTS
Executive Summary 3
Abbreviations 7
Global Economic Review and Outlook 11
 Global Economy: Quite a distance to recovery 12
 United States: Turning off the stimulus tap 13
 Other Advanced Economies 14
 Emerging and Frontier Markets 15
 Global Macro Themes for 2015 17
 The BRICS 19
Africa Update and Outlook 21
 South Africa: Slowly turning the corner? 22
 Ghana: Growing but groaning 26
 Kenya: Brighter medium term prospects 29
Oil Price Dynamics and Nigeria’s 2015 Outlook 35
Domestic Macro Trends and Outlook for 2015 43
 Monetary Policy 44
 Real GDP 48
 Inflation Rate 50
 Exchange Rate Dynamics 51
 Fiscal Plan 55
 Politics and 2015 Elections 59
Capital Markets Review and Outlook 61
 Fixed Income Market 62
 Equities Market 67
Sector Reviews and Recommendations 76
 Banking Sector 77
 Insurance Sector 82
 Consumer Goods Sector 91
 Industrial Goods Sector 97
 Oil and Gas Sector 101
List of Figures and Tables 107

8
Analyst(s)
Kayode Tinuoye
Team Lead, Research
Kayode.tinuoye@unitedcapitalgroup.com
Office: +234-1-280 7334 Ext: 18334
Kayode Omosebi
Analyst
kayode.omosebi@unitedcapitalgroup.com
Office: +234-1-2808425 Ext: 19425
Securities Trading
ubasecurities@ubacapitalgroup.com
+234-1-280-8919
Asset Management
assetmanagement@ubacapitalgroup.com
+234-1-2807822
Trusteeship
trustees@ubacapitalgroup.com
+234-1-27157491
Investment Banking
InvestmentBanking@ubacapitalgroup.com
Project Finance
UBAC_PF@ubacapitalgroup.com
Mergers & Acquisitions
UBAC_MA@ubacapitalgroup.com
Capital Markets
CapitalMarkets@ubacapitalgroup.com

10
Section 1
Global Economic Review and Outlook

11
2014: The Year That Was…
Global Economy: Quite a Distance to Recovery
A strong pick-up in global activity and trade within the advanced economies
towards the second half of 2013 raised hopes of a much stronger 2014. These
hopes were premised largely on waning skepticisms over the two major threats
to global economic recovery at the time: the possible breakup of the Euro-zone
and the reverberating effects of the US falling off the “fiscal cliff”.
Although these two headwinds were summarily overcome early in 2014, the
revival in global economic conditions remained largely unconvincing. In the
three major high income areas, US, Euro Zone and Japan, the growth in private
spending was at best tepid, as these economies began to slowly adjust to the
“hangovers” of massive balance sheet adjustments in the previous year. In the
Euro-zone and the US, a significant easing following sustained fiscal
consolidation drove expectations of a recovery in demand and business
confidence.
Emerging economic data as early as April 2014 however suggested that all may
not be rosy for the global economy. In its World Economic Outlook for April,
2014, the IMF noted the improvement in global economic outlook but
maintained that output gaps largely existed especially in the advanced
economies. It was therefore of necessity that the broadly accommodative
monetary policies be sustained, even as fiscal consolidation needed to stay
within the threshold that ensured that downsides risks to global growth were
largely contained.
Monetary Policy Divergence Fuels Market Volatility
One noticeable theme in the global economy for the year was that for the first
time in a long while, the US Fed pursued broadly dissimilar monetary policy to
the ECB, a development which in our view contributed to the appreciation of
the dollar against most currencies in 2014. The search for yield continued in key
emerging markets with the attendant pressures on exchange rates especially for
countries with more open economies and weak external trade positions.
Beyond the anticipated declines in oil prices, we believe the major challenge
facing the global economy in 2015 will be the task of minimizing the volatility
expected to ensue from broadly dissimilar fiscal and monetary policy regimes
across the advanced economies. With the BOJ possibly pursuing QE, and the
ECB maintaining its aggressive balance sheet expansion, we see a larger scale
of volatility compared to 2014. That said the strong growth prospects of the US
economy should provide some comfort.
In the three major high
income areas, US, Euro Zone
and Japan, the growth in
private spending was tepid,
as these economies began
to slowly adjust to the
“hangovers” of massive
balance sheet adjustments in
2013.
The US fed policy decisions
diverged significantly from
the ECB’s, leading to strong
gains in the dollar

12
-4%
-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006 2008 2010 2012 2014f 2016f
Advanced economies seem to have turned the corner but
lingering output gaps leave much ground to gain in 2015
y/y GDP growth in global and advanced economies
Advanced Economies
Emerging Economies
Global Real GDP Growth (2014-2015)
%,q/q
Q1 Q2 Q3 Q4
Advanced Economies 0.7 1.3 2.2 1.8
United States -2.1 4.6 3.5 2
Euro Area 0.9 0.1 0.5 0.8
Japan 6.0 -7.1 2.4 2.6
Emerging Economies 3.3 3.9 4.1 4
Latin America 0.2 -0.8 0.9 1.3
Emerging Europe 1.9 -0.1 -0.3 -3
Russia 0.3 1 -2 -6
Asia/Pacific 5.2 5.2 7 6.9
China 6.1 8.2 7.8 7.5
World 1.6 2.2 2.9 2.6
United States: Turning off the stimulus Tap
Economic fundamentals continue to support interest rate hike
A disappointing Q1’14 saw the US economy contract by 2.1% q/q ( Vs. a growth
of 2.6% q/q in Q4’13) as adverse weather effects and inventory overhang
constituted a drag on the economy. We believe the decline in Q1, which was
the first quarterly drop since 2009, re-enforced the vulnerability of the US
economy, and effectively places a steeper hurdle on the growth path of the
economy in the near term. The economy rebounded in Q2 with a strong 4.6%
q/q but growth slowed to 3.3% in Q3’14 (annualized 3.5%) driven by an
acceleration in private consumption spending.
Motivated by some cheery trends in economic data, the US effectively ended
its QE programme in October 2014 after a gradual cutback in debt purchase,
beginning January 2014. As a result, a huge chunk of emerging market portfolio
inflows was curtailed. Although most economic fundamentals continue to point
to the recovery of the US economy, the FED has chosen to delay interest rate
hike. We believe this is a precautionary stance taken to shield interest rate
sensitive sectors such as housing and the financial markets. While the labor
market improved significantly in Q1-Q4 ‘14, signs of a re-emergence of labor
market pressures resurfaced in Q4’14.
FED’s forward guidance points to the possibility of rates remaining at zero (0%)
through mid 2015. Nonetheless, we expect the FED to begin to raise interest rate
early in Q3 ‘15 as a sustained acceleration in private spending is expected to
spur growth while inflation remains at a comfortable sub-2% range.
Source: IMF, United Capital Research Source: IMF, United Capital Research
We believe the decline in Q1
‘14, which was the first
quarterly drop since 2009, re-
enforced the vulnerability of
the US economy.
FED’s forward guidance
points to the possibility of
rates remaining at zero (0%)
through mid 2015. economy,
and effectively places a
steeper hurdle on the growth
path of the economy in the
near term
Fig. 1

13
2.3
1.6
2.5
0.1
2.7
1.8
4.5
3.5
-2.1
4.6
3.5
2.5
3.2
-3
-2
-1
0
1
2
3
4
5
Q1'12 Q2
'12
Q3
'12
Q4
'12
Q1
'13
Q2
'13
Q3
'13
Q4
'13
Q1
'14
Q2
'14
Q3
'14
Q4
'14 F
2015F
US GDP growth to steady at 2.5% range in 2015
Fig. 2
Other Advanced Economies
Expect some volatility, but cheaper oil will support growth
We continue to expect growth to strengthen further in advanced economies in
2015 albeit at varying momentum across countries. While the US is likely to
record the strongest rebound due to robust private spending, growth in the Euro
Zone will continue to be weighed down by the legacy of socio-political crisis.
Although the recession in Europe can be placed against the backdrop of
balance sheet deleveraging, the recent crisis within the region continues to
suggest that further large capital outflow is not in any way impossible. This trend,
in our view, will be further exacerbated by the accommodative monetary
policy of the ECB expected to be sustained going into 2015.
While the big economies are expected to bounce back to positive growth
territory in 2015, the peripheral economies will continue to experience high
unemployment rates (more than 20% in some cases), with the attendant risk of
social unrest. The possibilities of flare-ups in political risks concerning the
capitalization of the ECB and the chance of further debt write-down particularly
in Greece could cause the region’s financial markets to be volatile in 2015. In
the midst of all these, the outlook for the Euro is positive. As at October 2014, the
IMF projected average growth rates of 0.8% and 1.3% for the region in 2014 and
2015 respectively. We believe this is achievable as the ECB’s recently unveiled
%)
Source: Bloomberg, United Capital Research
While the big economies are
expected to bounce back to
positive growth territory in
2015, the peripheral
economies will continue to
experience high
unemployment rates

14
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Canada France Germany Italy Japan Spain United
Kingdom
United
States
Euro
Area
Growth expected to be strongest in the US in 2015
Historical and Forecast GDP Growth for Advanced Economies (y/y, % )
2013
2014
2015
set of stimulus packages, which are likely to be stepped up in 2015, will continue
to support both growth and the regional currency.
In line with market expectations, growth should remain stable in Japan in 2015.
After the disruptions in the pattern of growth in Q1’14, occasioned by hike in
consumption tax, we saw a mild recovery in Q3, largely attributable to
improvement in labor market conditions. We think lower oil prices will support
growth just as the BOJ’s decision to extend and expand quantitative easing
should provide strong support for the economy. Elsewhere, growth in Canada,
Norway, and the UK are expected to be solid. The key drivers here will be
improving credit and financial market conditions as well as healthy balance
sheets.
Emerging and Frontier Markets
Attractive Prospects constrained by commodity price pressures
Emerging-market assets were under pressure in 2014 evidenced by the strength
of the US economy, which should sooner rather than later lead to higher interest
rates, and hence significant portfolio reversals. Softness in key commodity
prices, particularly oil, is adding another dimension of risk to commodity-rich
emerging market economies. In spite of the headwinds, occasioned by waning
capital flows, EMs and FMs continue to offer exciting opportunities to investors, in
our opinion. The major attractions for EM and FM’s assets in 2015 will be
continued high rates of economic growth that these regions enjoy and the
likelihood that they could be sustained due to demographic benefits as well as
In spite of the headwinds,
occasioned by waning capital
flows, EMs and FMs continue to
offer exciting opportunities to
investors, in our opinion.
The IMFs’ recently unveiled set
of stimuli which is likely to be
stepped up in 2015 should
propel the Euro Area economy
Source: IMF, United Capital Research
Fig. 3

15
prospects of exploiting vast natural resources. Across EM’s and FM’s, equity
market performance would be negatively impacted by falling oil prices and
weakening growth trends.
Importantly, in light of recent events, challenges still exist for emerging markets.
Socio-political instability in a number of regions as well as the prospects of
tightening season in the US with attendant currency weaknesses in these
economies might restrain FPIs. In fact, as early as Q1’15, we see investors
beginning to adjust to the possibility of higher US treasury yields, in anticipation
of a mid-2015 lift-off of monetary policy. However, it is critical to note that the
expected tightening in the US is on the back of improvement in economic
performance, and should ordinarily bode well for emerging and frontier
markets, via increased exports, production and trade. In addition, while the US
may be approaching a tightening phase, policy in Japan should remain very
accommodative. Recovery in advanced economies poses prospects of higher
export demand and investment flows, though weaker commodity prices will
moderate growth.
Within frontier markets, measures of economic and market reforms in a number
of key markets, among them; Vietnam, Egypt, Pakistan and Nigeria, offer the
prospects of both a stable growth and improving profitability for the corporate
sector. Concerns however exist, notably conflict in Ukraine, Iraq and Northern
Nigeria, as well as the outbreak of the Ebola virus in West Africa. Nonetheless,
we believe that many of these markets possess strong potential for long-term
growth.
60
70
80
90
100
110
120
0.8
0.9
1.0
1.1
1.2
MSCI Frontier Brent Crude
Oil price decline might pressure Frontier equitiesFig. 4
The expected tightening in the
US is on the back of
improvement in economic
performance, should ordinarily
bode well for emerging and
frontier economies.
Within frontier markets,
measures of economic and
market reform in a number of
key markets offer the
prospects of both stable
growth and improving
profitability for corporates

16
Saudi Arabia to open its stock market to foreign investors in H1’15
As the only G-20 member closed to foreign investors, Saudi Arabia’s decision to
open up its stock market has the potential to deepen financial markets in the
region. The Saudi Arabian stock market, known as the Tadawul is the Middle
East largest and most liquid market. The 167 companies currently listed on the
Tadawul have a combined market capitalization of US$531bn. The possible
effect of this is increased exposure by foreign investors to the Gulf co-operation
council region which may mean less exposure to competing frontier/emerging
region markets in 2015 and beyond. Overall, we believe that these changes to
equity market regulations in Saudi Arabia could have major ramifications, given
the size of the market.
Global Macro Themes for 2015
The market is moving in the direction of a possible US rate hike...
As stated earlier, as the US economy continues its recovery, the US fed is widely
expected to begin raising interest rate in mid 2015. Our analysis of seven (7)
previous US rate tightening cycles shows that rise in rate often creates volatility
and slows the pace of gains in the emerging markets. Some of the impacts of a
tightening environment already occurred in 2013. While many EMs now appear
to be better off, having raised rates and reduced current account deficits,
some are still exposed to rate hike due to domestic economic conditions. The
last time the US Fed hinted on QE tapering, global financial markets went into
0.8
1.0
1.2
1.4
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14
MSCI Advanced MSCI Emerging MSCI Frontier
Frontier equities outperformed others in 2014Fig. 5
MSCI Equity Indices for Advanced and Emerging Economies, 2014(%)
Recovery in advanced
economies poses prospects of
higher export demand and
investment flows, though
weaker commodity prices will
moderate growth.
Our analysis of seven (7)
previous US rate tightening
cycles shows that rise in rate
often creates volatility and
slows the pace of gains in the
emerging markets

17
0
0.4
0.8
1.2
1.6
400
800
1200
1600 MSCI Emerging MSCI Frontier ECB Rate
panic mode. The EMs and FMs bore the brunt of portfolio reversals, resulting in
sharp depreciations in exchange rates. Although we expect many EMs to take
measures to reduce their vulnerabilities to such externalities in 2015, having
learnt their lesions the hard way, we still see a sizeable chunk of capital outflows
from very volatile emerging and frontier economies particularly those with
relatively lower risk adjusted real returns.
... but expansionary policies by BOJ and ECB will cushion the effect
In 2014, the ECB began a new asset purchase program. At its October 2 press
conference, ECB President indicated that the new program would consist of
asset-backed securities and covered bonds, and would lead to a sizable
increase in the ECB’s balance sheet. The program is scheduled to last for at
least two years with the potential to add €1trn into the Euro-zone economy.
Given these indications, there is a high probability of QE in the Euro-Zone in 2015
even as the ECB scrambles to deal with low inflation. This therefore provides
cushion to the effect of tightening and interest rate hike in the US, as QE by the
BoJ and ECB will sustain some level of funds flow into EMs and FMs. On another
note, the possible effect of the ECB’s QE could be Euro-zone banks lending
more to EMs and FMs to earn higher yields. However, it is important to note the
expected liquidity from the Euro-zone may not find easy outlets in Europe, in our
view, as bonds in the region are expensive. The German and French 2-yr note
yields dropped below zero in October 2014.
Meanwhile, the pressure for Japan to continue its asset purchase program
remains intense, especially after the sharp contraction in Q2’14 GDP and weak
production data for Q3’14. In our view, the Bank of Japan (BOJ) will be forced
to expand its balance sheet in 2015 at the same pace that it did in 2014. This
would be the equivalent of increasing the balance sheet by another 15% of the
GDP.
Expansionary regime in the Euro-zone will bode well for the EMs and FMs
There is a high probability of
QE in the Euro-Zone in 2015
even as the ECB scrambles to
deal with low inflation
The Bank of Japan (BOJ) will
be forced to expand its
balance sheet in 2015 at the
same pace that it did in 2014
Fig. 6

18
The BRICS
Geo-political and country specific risks pose major challenges
The outlook for oil prices is at the core of expectations around the economic
performances of the BRICs countries in 2015. The downward trend in global oil
prices, coupled with high inflation and currency pressures present challenges to
the Brazilian economy. Also, as global demand falls, prices of Brazil’s export
commodities (mostly iron ore and petroleum) are expected to fall, further
slowing down the economy.
China also faces demographic pressures relating to an aging working-class
population. For Russia, a major producer of oil, the increased production of
shale as an alternative energy source will continue to pressure the economy
with continued weakness in the domestic currency despite the country’s robust
foreign reserves. This is coming at a time when Russia faces sanctions from
Europe and the US, limiting Russian firms’ access to western debt markets.
Russia’s retaliation of imposing high import tariffs on Western goods has further
pushed up domestic prices, leading to higher level of inflation.
We expect the low investors’ confidence in the economy to continue to
pressure Russian stocks, further weakening the Russian Ruble. Given Putin’s
stance, which shows that he is not willing to give in to the sanctions imposed by
the West, we expect to see more sanctions on Russia, leading to higher rate of
inflation, and weakened currency, hence a slow-down in growth in 2015.
India’s successful transition in May 2014 portends better prospects for the
country’s business environment going into 2015. We already saw a 5.7% GDP
growth in Q2 ‘14 (versus 4.6% in Q1’14). We expect to see some level of
increased spending in 2015, which should translate to economic growth in India,
as long as the government continues with policies that support these
investments.
South Africa’s economy continues to face internal challenges as the GDP
contracted by 0.6% to 1% in Q1’14 from 1.6% in Q2’14. Amidst labor strikes, high
interest rate, currency pressures, rising inflation and slowing demand, we expect
further pressure on growth in the nearer term.
The outlook for oil prices is at
the core of expectations
around the economic
performances of the BRICs
countries in 2015

19
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f
BRAZIL RUSSIA INDIA CHINA SOUTH AFRICA
Amidst decreasing global demand, declining oil price,weak currencies, high imflation and
sanctions on Russia, BRICS economies may continue their gradual decline in 2015
Real GDP Growth for BRICS Economies
Fig. 7

South Africa
20
Section 2
Africa Update and Outlook
South Africa, Ghana, Kenya

South Africa
21
-8
-6
-4
-2
0
2
4
6
Q1 '09 Q3 '09 Q1 '10 Q3 '10 Q1 '11 Q3 '11 Q1 '12 Q3 '12 Q1 '13 Q3 '13 Q1 '14 Q3 '14
In spite of the recent pressure on output, long term outlook points
to a positive trend
q/q Real Growth Trend for SA (%)
South Africa: Slowly turning the corner?
For most part of 2014, labour market unrest and global macroeconomic
headwinds led to a slowdown in the South African economy. The economy
almost slid into a recession in H1’14 as the protracted strike in the mining sector
constrained industrial activities, culminating in a marginal 0.6% growth in GDP for
Q2’14 (Vs. -0.6% in Q1’14 and 3.2% in Q2’ 13). The mining and quarrying sector
witnessed a 9.4% decline in q/q output due to prolonged industrial actions
which stifled platinum production. Agriculture grew by 4.9% while transport,
storage and communication expanded by 4.0%. However, the economy
showed some signs of rebound in Q3 with a GDP growth of 1.4% albeit below
consensus estimate of 1.5%. Q3’ 14 growth was driven largely by acceleration in
the services and agricultural sectors. Growth in the mining sector rebounded to
positive territory though manufacturing output continued to fall.
With a rebased GDP (from 2005 base year to 2010), South Africa’s economy is
now 4.4% bigger than earlier estimated in 2013 with an increase in the share of
services sector and a reduction in the share of manufacturing.
Growth may continue to be challenged in 2015. We nonetheless expect a
modest recovery provided disruptions to industrial activities can be avoided.
Also, the expected alleviation of infrastructural constraints as the new power
generating capacity comes on stream should further support growth. This should
provide some scope for a rebound in export though the weaknesses in the Euro
zone which serves as the destination for most of South African exports will offset
any gains that weakening of the Rand might imply for export. The expected
normalization in monetary policy in the US also portends some downside risks for
the South African economy in 2015.
Source: National Accounts, United Capital Research
The weakness in the Euro
Zone still portends
downside risk for the South
African economy in 2015…
Manufacturing output
continued to fall as effects of
prolonged industrial actions
lingered on the economy’s
growth path…
With the manufacturing sector in negative
territory, a strong rebound in mining is
needed for a sustainable recovery of the
broader economy
Source: National Accounts, United Capital
Research
Fig. 8

South Africa
22
7
9
11
13
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14
Tougher Days Ahead for the Rand
USD/ZAR, 2011-2014
Exchange Rate: Economic Uncertainties Drive Rand Volatility
Intermittent emerging market sell-offs pressured the Rand significantly in 2014.
The currency lost 10.5% y/y Vs. USD as portfolio reversals heightened against the
backdrop of a cut back in US QE. Although the volatility in portfolio capital
flows into high yielding emerging markets was a key drag on the Rand in 2014,
the currency was further weakened by concerns around the strength of the
domestic economy. The exchange rate broke the ZAR11 resistance on two
occasions in 2014: February and October.
The pass-through on the price level was quite notable, as inflation rate also
broke the Reserve Bank’s target range of 3-6%. We see more pressure on the
Rand in 2015 largely on account of anticipated tightening in the US. However,
the modest growth outlook for the South African economy should support the
currency and provide cushion to shocks from portfolio reversals.
Interest Rate: The SARB Dilemma
In spite of the weak growth of the South African economy, SARB was compelled
to shelve accommodative monetary policy measures for the most part of 2014.
In a bid to control spiraling inflation, the SARB raised interest rate twice by a total
of 75bps to 5.75% as at November 2014. We think interest rates are likely to be
further increased in 2015, as we see inflation tracking above the SARB’s target.
Unless oil prices fall throughout 2015, which is very much unlikely, the expected
weakness in the Rand will continue to fuel imported inflation. This should
necessitate tighter policy measures geared towards maintaining a positive real
interest rate especially in light of the expected tightening in the US.
Portfolio reversals from emerging
markets pressured the Rand
significantly in 2015
We see more pressure on the
Rand in 2015 largely due to
expected tightening in the US
If Oil prices continue to decline
for a large part of 2015, the SARB
may delay tightening as inflation
pressure may be somewhat
muted.
Fig. 9

South Africa
23
3
4
5
6
7
Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
I Inflation remains untamed despite successive rate hikes
S.A Inflation Rates Vs. Policy Rate (%)
Inflation Rate Policy Rate
5
7
9
11
13
15
17
19
21
Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14
Widening Valuation Gaps Relative to Emerging Market Peers
JSE Valuations Vs EMs (P/E(x))
JSE P/E
MSCI P/E
Equities Market: Stretched valuation cum macro headwinds
SA equities closed the year positive with a y/y appreciation of 7.6% in the
benchmark JSE All Share Index. Consumer goods stocks, especially food retailers
were the main outperformers while resource stocks closed the year in the
negative. Industrial and Basic materials sectors declined by 17.8% and 16.1%
respectively while financials, Consumer Services and Consumer goods sectors
returned 22.0%, 27.8% and 11.6% respectively.
The bullish run of the JSE in 2014 contrasted sharply with the backdrop of weak
macroeconomic fundamentals. Valuations now look stretched as the JSE
attained record highs especially in Q1 and Q2’14, necessitating a significant sell-
off especially in Q3-Q4 ‘14. Historically, the SA equity market has benefited from
healthy liquidity levels relative to other African bourses. We expect some more
correction in the market going into 2015, particularly if underlying macro
fundamentals do not improve significantly.
Source: SARB, Bloomberg, United Capital Research
Research
We expect further correction is
SA equities in 2015 particularly if
the underlying macroeconomic
fundamentals do not improve
Declining EM funds flows and
attendant currency pressure
were key themes that
dominated the SA fixed income
space in 2014
Fig. 10
Fig. 11

South Africa
24
7.2
7.6
8.0
8.4
8.8
9.2
Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Yields tapered considerably after the bearish run early in the year
SA 10yr bond yields (%)
Fixed Income: Fairly priced, Waiting on Funds Flow
Declining EM fund flows and attendant currency pressures were key factors that
shaped the SA fixed income market in 2014. Early in the year, expectations of
increasing Rand weaknesses led foreign investors to sell off on local currency
debt resulting in negative returns in the SA bond market. However, the
corporate bond segment remained quite strong given lower liquidity feeds. For
the most part of 2014, the market traded mostly sideways in spite of S&P‘s
downgrade of SA’s foreign credit rating to BBB- (one notch above sub-
investment grade). South Africa issued 3 bonds in 2014 raising a total of
US$2.2bn.
Looking ahead, we think progress on fiscal consolidation will bear on SA‘s credit
rating in the foreseeable future. With already huge current account deficit, a
further deterioration in fiscal health could feed through bond yields in 2015.
With an already huge current
account deficit, a further
deterioration in fiscal health
could feed through bond
yields in 2015
Fig. 12

Ghana
25
11.2%
19.1%
14.1%
15.9%
9.4% 9.9%
6.7%
9.5% 9.0%
10.8%
4.4%
6.4% 6.5%
5.3% 5.1% 5.5% 5.1%
0%
5%
10%
15%
20%
25%
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014
Q4e
2015e
Macro Headwinds Threaten GDP Outlook
Ghana y/y Real GDP Growth
Fig. 13
Ghana: Growing but groaning
The slowdown in Ghana’s economic growth, which commenced in Q3 2013,
persisted in 2014. GDP growth in Q3’14 came in at 5.1% (vs. 5.3% in Q2’14, 4.4%
in Q3’ 13 and 10.8% in Q2’13). Macroeconomic instability continues to weigh on
the real economy. The sluggish growth in GDP had earlier led to an official
revision in the country’s growth expectation to 6.9% for 2014 (Vs. 7.3% in 2013).
The country’s significant current account deficit (13.2% of GDP), driven by a
wide trade deficit of US$2.2bn and high government spending continue
portend downside risks to economic growth. However, we expect the current
account deficit to ease to 9.0% in 2015 (BoG target is 8.8%) Q4’ 14 data suggests
trade deficit have narrowed to US$495mn.
In terms of managing the level of fiscal deficits, our expectations remain slightly
bleak in the medium to long term, for 2 major reasons: 1) fiscal revenues appear
to be inert on the back of weak economic growth as well as the constraints
limiting oil production, 2) Large capital outlays needed to propel the oil and gas
sector will continue to put pressure on the current account. In 2015, we expect
growth to be anchored by agriculture largely due to higher price for cocoa, the
rehabilitation farms over the last few years, as well the distribution of fertilizers
and pesticides.
Having ramped up oil production capacity modestly, Ghana is expected to
produce around 120,000 b/d in 2015 but a significant growth in output is not
expected until 2017 when the Jubilee field, expected to double output, begins
operation. However, modest oil revenue despite falling prices is expected to
reduce fiscal deficits appreciably in 2015, giving further support to growth. Most
importantly, striking a sustainable deal with IMF will be critical to Ghana’s
macroeconomic progress and restoration of investor confidence in 2015.
Source: BOG, United Capital Research
We expect the current
account deficit to ease to
9.0% in 2015 (BoG’s target is
8.8%) as recent data suggests
trade deficit have narrowed to
US$495mn
Striking a sustainable deal with
IMF is key to Ghana’s progress
and restoration of investor
confidence in 2015.

Ghana
26
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14
Currency remains under pressure
USD/Ghana Cedi
Exchange Rate: Dollar Inflows should cushion pressure on the Cedi
Developments in the Ghanaian foreign exchange markets indicate a generally
weaker domestic currency in 2014 relative to 2013. For the first ten months of the
year, the cedi cumulatively depreciated by 31.2% against the USD in the
interbank market, compared to 7.4% in the corresponding period of previous
year. However, the currency appreciated sharply against the USD in Q3,
moderating the significant losses recorded earlier in the year. November 2014
MPC meeting showed that the country’s gross foreign reserve rose to US$6.6bn,
implying barely 3 months of import cover.
The successful issuance of a US$ 1bn Eurobond and the signing of a US$ 1.7bn
cocoa finance facility supported the Cedi during the year. We expect the
currency to depreciate further in 2015 driven by domestic macro-economic
concerns which will lead to portfolio reversals, though we see some support
from policy measures by the BoG. Also, the news flow on a potential deal with
the IMF that may be finalized in 2015 should further support the Cedi.
Fixed Income: Yields likely to remain high, reflecting domestic macro-
economic and global concerns
The country’s fixed income market is concentrated at the short end of the yield
curve and limited in terms of depth and volume when compared to Nigeria and
other frontier markets. Although the introduction of foreign participation in less
than 3-year maturities boosted foreign transactions in the market, yields remain
higher than most frontier markets in 2014.
Developments in the
Ghanaian Foreign Exchange
market in 2014 indicate a
weaker domestic currency
relative to 2013
We expect some pressure
on the currency in 2015
driven by domestic macro-
economic concerns which
will lead to substantial
portfolio reversals
The Cedi is expected to
depreciate in 2015, and FX
shortages will complicate a
market exit in the
foreseeable future
Fig. 14

Ghana
27
Looking ahead, yields will continue to remain strongly influenced by monetary
policy stance, BoG liquidity management efforts, and exchange rate
developments. The policy rate would remain high at current levels on the back
of high inflation. The Cedi is expected to depreciate in 2015, and FX shortages
will complicate a market exit in the foreseeable future. In addition, should bond
yields fall to the high or mid-teens, an increasing number of investors could take
profit.
Ghana Equities: Losing Steam
The Ghanaian equities market slowed dramatically in 2014 with the benchmark,
GSE Composite Index, gaining 5.4% for the year (Vs. 78.8% in 2013). The
unprecedented rally in 2013 has pushed valuations high to 17.9x P/E (vs. 15.5x
for comparable Frontier markets). However, we still expect a relatively modest
performance in the equities market in 2015, driven by the gradual recovery in
economic growth as well as the positive outlook for companies in the financial
services sector.
That said, we note that there is a growing concern among foreign investors on
the macroeconomic environment in Ghana, especially the rapid depreciation
of the local currency. This could adversely affect their participation in the
Ghanaian equity market in 2015. Also, the poor depth and liquidity in the market
will be a limiting factor to foreign players as there are just 36 companies listed on
the Ghana Stock Exchange; many of them are subsidiaries of multinationals
where the mother company holds the bulk of the shares. What’s more, the
biggest investor on the stock exchange, Ghana’s Social Security and National
Insurance Trust (SSNIT), the state-owned pension fund has a stake in every listed
10
15
20
25
30
May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14
Fig. 15
GHS fixed Income Instrument still offers attractive yields
Average yields on fixed income instrument in Ghana
Ex
Public Debt as a % of GDP
The rally in the market pushed
valuations high to 17.9x P/E
relative (vs.15.5x for
comparable Frontier markets
We note that there is a growing
concern among foreign
investors on the
macroeconomic environment
in Ghana, especially the rapid
depreciation of the local
currency.

Ghana
28
0
500
1,000
1,500
2,000
2,500
3,000
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Ghana Composite Stock Market Index
company and is inactive. The market may ride on this relative illiquidity to deliver
modest returns in 2015.
Kenya: Brighter medium term prospects
Kenya towed the line of Nigeria, rebasing its GDP in September 2014 by
changing its base calculation year to 2009 from 2001. This sent the East African
nation into the continent’s top 10 economies, becoming the fourth largest
economy in Sub-Saharan Africa after Nigeria, South Africa and Angola. Its GDP
post-rebasing increased to US$55.2bn in 2013 from US$44.1bn – a 25.3% jump
surpassing the government’s prediction of 20.6%; GDP per capita now stands at
US$1,245 from US$999. Agriculture, Manufacturing and the real estate sector
accounted for most of the change in the level of GDP, contributing 19.9%, 11.4%
and 5.9% respectively. The new GDP showed a growth rate of 5.7% in 2013
versus a flat growth of 4.7% under the old series.
We expect annual growth in 2014 to be tepid following the poor raining season
in H1 (GDP expanded by 5.8% in H1’14 GDP Vs. 7.1% in H1’2013). In the medium
term, the rebasing exercise is expected to provide the much needed boost to
the Kenyan economy even as the government attempts to spur economic
growth in light of the challenges facing the tourism industry. Manufacturing,
construction and services will continue to be the main drivers of growth.
Agriculture, which remains the backbone of the economy and the main
employer, is growing at a steadier pace of around 4.1%. We expect increased
Post-rebasing, Kenya’s fiscal
ratio looks better as deficit as
a % of GDP now stands at
6.0% (Vs 7.4% before
rebasing).
Kenyan Bureau of Statistics, United Capital Research
Fig. 16

Kenya
29
6.5
7.5 8.0
11.8
8.0
6.7
5.7
4.1 4.6
3.7 4.0
4.8
6.0 6.2
5.6
3.4
4.4
5.8 5.7 6.0
6.6
0
2
4
6
8
10
12
14
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3e
2014Q4e
2015F
Growth path signals modest recovery
Kenya Real GDP growth ( y/y, %)
Q4'13 Q1'14 Q2'14 Q3'14
Agric. 3.2 5.7 4.5 6.2
Mining (15.8) 4.1 6.9 2.8
Manufacturing 1.3 7.9 8.4 4.5
Construction (2.8) 9.0 18.8 11.0
Services 2.1 2.3 1.8 1.7
pace of growth from the Services sector on the back of modest recovery in
tourism as well as technological-based financial inclusion.
Looking ahead, one of the biggest challenges for the Kenyan economy will be
its large fiscal deficit. Post-rebasing however, Kenya’s fiscal ratio looks better as
its deficit as a % of GDP now stands at 6.0% (Vs 7.4% before rebasing). We
expect the fiscal deficit to narrow to 5.0% levels in 2015, as recent measures
introduced by the government to reduce wage burden begin to gain traction.
However, capital spending still falls below target which might hamper growth,
as capacity constraints and corruption will continue to be major hindrances to
public investment.
Exchange Rate: KES weakens though performs better than peers
Kenyan’s shilling has been less vulnerable to external shocks compared to its
peers; KES dipped by 4.7% in 2014 to KES90.6/US$– a modest performance when
compared with the Naira, Cedi and Rand. Corporate demand has been the
major driver on the exchange rate pressure driven by growth momentum and
improved economic activity, as credit to private sector grew at an annualized
rate of 26.7% as of October 2014. Although we expect the KES to weaken in
2015, we do not see a significant decline and expect the local currency to
hover around KES 90-93 levels.
Furthermore, the country’s reserve recorded considerable accretion reaching a
record high of US$7.3 in September, 2014 representing c.4.7 months of import
cover, driven by Eurobond issuance proceeds. In spite of expected portfolio
reversal in 2015, we think the KES will hold steady relative to peer currencies, as
Sectoral Growth in Real GDP for Kenya
(%)
Although we expect the KES
to weaken in 2015, we do not
see a significant decline and
expect the local currency to
hover around KES 90-93
levels.
Kenyan Bureau of Statistics, United Capital Research Kenyan Bureau of Statistics, United Capital Research
Fig. 17

Kenya
30
84
85
86
87
88
89
90
Sept'13 Nov'13 Jan'14 Mar'14 May'14 Jul'14 Sept'14
The Kenyan Shilling was pressured in 2014 as increased importation
fuelled significant dollar demand
0
5
10
15
20
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Inflation has been well tamed amidst broadly accommodative Policy
Rates
MPR and Headline Inflation in Kenya (y/y, %)
Inflation Policy Rate
foreign participation in Kenya’s domestic fixed income market stands at just
7.0%.
Inflation: Still in check with a benign outlook.
Inflation rate in Kenya stood within the central bank’s target corridor of 5.0% ±
250bps for most part of 2014. After temporarily breaching the upper limit of the
band in July and August, y/y CPI growth fell to 6.43% in the month of October
2014 from 6.6% in September largely due to VAT base effects and lower
electricity and fuel price pressures (in the middle of September 2014, the Energy
Regulatory Commission (ERC) announced a drop in the price of Super Petrol,
kerosene and diesel). We think the central bank will be lose on monetary policy
in H1’15 with inflation in single digits though underlying fundamentals of a huge
current account deficit will spur some weakness in KES, putting mild pressure on
inflation. Core inflation should however remain within the 5%-6% range.
In spite of expected portfolio
reversal in 2015, we think the
KES will hold steady relative to
peer currencies, as foreign
participation in Kenya’s
domestic fixed income
market stands at just 7.0%.
Inflation rate in Kenya stood
within the central bank’s
target corridor of 5.0% ±
250bps for most part of 2014.
The government has indicated
that it would seek to reduce
domestic borrowing in 2015 to
around KES101.7bn from
KES190.0bn; focusing more on
external borrowing following its
successful Eurobond issuance
Fig. 18
Fig. 19

Kenya
31
4
6
8
10
12
14
3M 6M 1YR 2YR 5YR 10YR
A combination of lower expected domestic borrowing and benign
inflation expectations should keep yields lower in 2015
Kenya Sovereign Yield Curve (%)
Fixed Income market: Yields likely to sit lower in 2015
In terms of outstanding issuance, Kenya is the fifth-largest bond market in Africa
with a total size of US$10.3bn as at October 2014. Banks held 52.5% of the total
debt holdings, followed by institutional investors (25.7%) and insurance
companies (10.2%). It has been widely speculated that Kenyan bonds may be
included in the GBI-EM index, given the foreign interest they have generated
and their critical size. We think the inclusion will eventually happen at some
point, but not in the foreseeable future. The liquidity of KES bonds is still too low
at this stage and even the outstanding size would need to increase. Kenya
raised US$2bn Eurobond in 2014, the largest African Eurobond debut so far. The
government has indicated that it would seek to reduce domestic borrowing in
2015 to around KES101.7bn from KES190.0bn; focusing more on external
borrowing following its successful Eurobond issuance. This is likely to expose
Kenya more to foreign exchange risk given the sensitivity of the KES. Overall, we
think the yield environment will be somewhat lower in 2015 as positive
inflationary expectations would necessitate sustained accommodative policy
stance.
Equities: On a bullish run
The Kenyan equities market maintained a bullish run in 2014. The market
returned 4.5%, 5.3%, 8.7% and -0.34% in Q1, Q2, Q3, and Q4 respectively,
culminating in a y/y return of 19.20%. Share price rallies in heavily weighted
stocks such as Safaricom, Kenya Commercial Bank (KCB) and Equity Bank
pushed the benchmark index north. The market also experienced increased
trading activity as investors remained bullish. The strong trading activity was
underscored by a stable currency, a generally stable macro-economic
environment and positive H1 and Q3’14 results released by listed companies.
The government has indicated
that it would seek to reduce
domestic borrowing in 2015 to
around KES101.7bn from
KES190.0bn; focusing more on
external borrowing following its
successful Eurobond issuance
Kenyan Bureau of Statistics, United Capital Research The strong trading activity was
underscored by a stable
currency, a generally stable
macro-economic environment
and positive H1 and Q3’14
results released by listed
companies
Fig. 20

Kenya
32
Given the relatively higher level of domestic participation (60% of transaction
volumes), we expect headwinds from the global financial space to have a
limited effect on the Kenyan equities market in 2015. We are positive on the
outlook of the market in 2015 expected to be buoyed by strong earnings
performance. We expect the revolution in the country’s mobile payments
industry to bode well for the banks who should continue to drive the market.
The Nairobi Stock Exchange Limited after a successful IPO (which was
oversubscribed in excess of 600%) launched a new bond trading system. The
new system will enable online trading of treasury and corporate bonds, foreign
currency bonds and improve the speed of settlement. We expect this to further
deepen the market and boost the NSE’s revenue in 2015.
80
100
120
140
160
180
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
Nairobi Stock Exchange on a steady bullish ride since 2013
Movement in NSE All Share Index
Given the relatively higher
level of domestic participation
(60% of transaction volumes),
we expect headwinds from the
global financial space to have
a limited effect on the Kenyan
equities market in 2015.
Fig. 21

33
6
8
10
12
14
16
Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
SA Kenya Ghana Nigeria
Fig. 26
0.5
1.0
1.5
2.0
2.5
Kenya Ghana SA Nigeria
-24.1%
-0.1%
-25.3%
-2.7%
-5.4%
-5.2%
-34.6%
-12.1%
-40% -30% -20% -10% 0%
RAND
KES
CEDI
NAIRA
2014 2013
0
4
8
12
16
20
Kenya Ghana
SA Nigeria
Fig. 23
21.0%
13.0%
5.8%
8.5%
0%
5%
10%
15%
20%
25%
GHANA NIGERIA SOUTH AFRICA KENYA
Fig. 25
8.6%
6.9%
5.6%
1.9%
0%
2%
4%
6%
8%
10%
KENYA GHANA NIGERIA SOUTH AFRICA
10 –Year Bond Yields Equity Market Indices (Rebased to 100)
Local Currency Returns: 2013, 2014 Inflation Rates: 2013-2014
Monetary Policy Rates5-year Average Real GDP Growth
Fig. 22
Fig. 24
Fig. 27
Key Macro Variables for Select African Markets

34
Section 3
Oil Price Dynamics and Nigeria 2015 Outlook

35
80
82
84
86
88
90
92
94
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
Quarterly Trends in Global Oil Demand and Supply
Demand Supply
95
100
105
110
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
Non OPEC output has outpaced OPEC
production since 2013
OPEC and Non-OPEC share of oil production ( rebased
to 2010)
OPEC NON OPEC
Fig. 29
The Tragedy of Oil Price Slump
Tumbling oil prices was the dominant theme across the globe in the second half
of 2014. Stemming from huge supply-demand disequilibrium, Brent crude
tanked 54.2% in 2014 after reaching a year peak of $113.41d/p in June on the
heels of ISIS offensive in Iraq. Broadly, the imbalances in global oil demand and
supply in the year could be attributed to two factors: 1) the energy sufficiency
strides of the US demonstrated in the significant ramp-up of capacity in shale oil
production 2) the stickiness of Saudi Arabia’s crude oil supply in the face of
sizeable excess capacity. Perhaps, it could be argued that the moderating
force of shale oil production in a year that saw little progress in the crisis within
the oil rich Middle East, political upheavals and production stoppages in Iran
and Libya, was necessary to fill an important gap in a market with very strong
attributes of an oligopoly.
Supply glut aside, demand moderated considerably in 2014
According to the IEA, global oil demand has weakened since mid-2014. This
compounded the impact of a much stronger dollar compared to the trends
seen in 2013, as well as unconventional supply especially from the US. Beside the
usual seasonal factors behind demand patterns, the sluggish growth of the
global economy in 2014 also led to a slowdown in energy demand. While
demand appeared to have bottomed out during the year, having touched a 5-
year annual low, the slower-than expected recovery in Europe did little to push
deliveries especially in H2’ 2014. We posit that a mild recovery in global
economic growth in 2015 should give comfort to oil demand especially from the
OECD though the seemingly weakening of the non-OECD demand led by
marked declines in gasoline and diesel demand in both China and India is
expected to trim global oil demand. Looking farther ahead however, we think
oil demand is gradually approaching a plateau and could well be seen as a
major pressure source for hydrocarbon prices in the next decade.
Stemming from significant
supply-demand disequilibrium,
Brent crude tanked 48.3% in
2014
We posit that a mild recovery
in global economic growth in
2015 should give comfort to oil
demand especially from the
OECD
Source: EIA, United Capital Research Source: OPEC, United Capital Research
Fig. 28

36
Oil Supply War: US Vs Saudi Arabia; and the winner is...
Conspiracy theories and the quest to hold firmly to market share were at the
heart of postulations around the downward trajectory of oil prices in 2014. Saudi
Arabia, the biggest producer in OPEC, with 32.0% and c.90.1% of the Cartel’s
production volumes and excess capacity respectively, held firmly to its volumes
despite pressure from other members to cut output in order to support price.
Saudi’s motivation to defend market share in the face of declining prices did
not come as a surprise given the country’s relatively strong fiscal position as well
as its disproportionate market share in OPEC. With c. $740.4bn in excess reserves,
we estimate that Saudi still has significant cushion to accommodate oil prices as
low as $30p/b.
In its last meeting in 2014, OPEC chose to stay action as members looked to
Saudi to cut output with Gulf members having reached a consensus prior to the
meeting. The Cartel’s second option which was to convince members to stick to
production quota was also not pushed through. We note that OPEC members
have historically overshot their quota largely due to fiscal pressures arising from
deficit budgets, slow growth and high cost of alternative energy sources as well
as the need to defend fragile market shares. We think it will be more
challenging for OPEC to rein in excess production from members in 2015, as a
handful of fringe producers with huge dependence on oil had already
experienced currency devaluation, placing further pressure on their fiscal
buffers. What’s more, Saudi’s quest to hold on to market share is seen as both
politically and economically motivated, with an overweight on the former. This
could well be sustained as long as crisis in the Middle East, and Russia cum Iran
tensions persist.
Complicating the supply side dynamics was the remarkable growth witnessed in
US Shale oil production. Having increased output volumes by 1 million barrels in
2014, the US now holds largest share of global crude oil production. In fact,
“tight” oil production from shale has grown 6-fold in 5 years. The Fed has made
note of the fact that drilling activity in Shale production districts is expected to
increase steadily for the next two years, even with much lower oil prices. We
believe that the rapid growth of shale production will continue to create excess
oil. Imports from West Africa have already been edged out and we expect
further reduction from other markets in 2015.
From the foregoing, we are inclined to think that the market will have to
patiently wait for the convergence of oil prices with the production cost of most
of US shale wells. In our view, this is the only point at which oil prices can find a
support in 2015.
With c. $740.4bn in excess
reserves, we estimate that
Saudi still has significant
cushion to accommodate oil
prices as low as $30p/b.
We think it will be more
challenging for OPEC to rein in
excess production from
members in 2015.
Saudi’s quest to hold on to
market share is seen to be
both politically and
economically motivated, with
an overweight on the former

37
0
2
4
6
8
10
2000 2002 2004 2006 2008 2010 2012 2014 2016
US non-conventional oil production has increased
5-folds in the last 6 years and could yield the same
volume as crude oil as early as 2017
US Oil Production Volumes (mn b/pd)
Total Oil Production Tight Oil Crude Oil
Fig. 30
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-100
-50
0
50
100
1Q
2001
2Q
2002
3Q
2003
4Q
2004
1Q
2006
2Q
2007
3Q
2008
4Q
2009
1Q
2011
2Q
2012
3Q
2013
Saudi's output variations account for 37% of the
changes in crude oil prices
WTI and Saudi's production
Saudi Production Change WTI Price Change
Fig. 31
Are oil prices assuming a new normal?
Given the long backwardation history of oil price trading dynamics as well as
current market trends, there is no reason to expect oil prices to gain some
respite in the short to medium term. We see oil prices remaining volatile
especially in the first half of 2015 as market digests the actions and inactions of
oil producers. Our bull case scenario would be a $35-$40p/b in H1 and an
average of $55-$60p/b for 2015.
Notably, the outlook for oil prices in the medium to long term remains bleak
against the background of the significant traction that alternative energy
sources as well unconventional oil production has gained in the last decade.
Beside the US, several other countries, notably Canada, Argentina Australia e.t.c
are also on the path of shifting reliance to shale and other unconventional
resources for the majority of their oil and gas production. Argentina, with
declining production from conventional gas fields, is investing heavily in its tight
and shale gas resources; Australia with large shale gas and methane resources
looks to steadily transit away from gas production even as significant leasing
and exploration for shale gas and oil are underway in Algeria, China, Poland,
Columbia and Mexico.
Although the economic viability of producing these shale gas and shale oil rests
significantly on favourable oil prices, we think scale advantages of rapid
production build-up will improve cost effectiveness, combining with the
efficiency of the extraction of technology to render demand fairly inelastic. The
possibility that we could see some fiscal interventions in the form of price
subsidies by the US, the largest producers of shale is also a huge concern. On
Source: EIA, United Capital Research Source: EIA, United Capital Research
We see oil prices remaining
volatile especially in the first
half of 2015 as market digests
the actions and inactions of oil
producers

38
the geo-political scene however, no respite is in site as far as conflicts in the oil
producing region is concerned, with 2015 looking even more likely to be as
volatile as 2014 given recent development in the region. That said, the risk of
oversupply looks more likely to outweigh the downsides from geopolitical
tensions, in our view.
Oil Gas
Technically
Recoverable (Billion
Barrels)
Technically
Recoverable
(Tcf)Country Country
Russia 75 U.S 1161
U.S. 48 China 1115
China 32 Argentina 802
Argentina 27 Algeria 707
Libya 26 Canada 573
Australia 18 Mexico 545
Venezuela 13 Australia 437
Mexico 13
South
Africa 390
Pakistan 9 Russia 285
Canada 9 Brazil 245
Others 65 Others 1535
The fall in oil prices is already taking a heavy toll on a number of countries
globally. Most oil producing Sub-Saharan and emerging economies with
external trade imbalances remain unfavorably exposed to a continuous slide in
crude oil prices. While countries who are net energy importers will continue to
benefit, via a reduction in their current account deficits (if any), net energy
exporting countries are particularly vulnerable to the extent that their balance
of payments positions can sustain them. Also, cheaper oil may impact positively
on inflation, with an indirect positive effect on economic growth in these
countries.
Relative to the size of its economy, Nigeria is the second biggest net energy
exporter in Africa after Angola. Based on spending plans for 2015, the
breakeven oil price for Nigeria is well above $100 p/b and among the highest
Top Ten Countries in Shale/Tight Oil and Gas Resources
Source: EIA
So what does cheaper oil mean for Nigeria’s macro stability?
We see oil prices remaining
volatile especially in the first
half of 2015 as market digests
the actions and inactions of oil
producers
The fiscal and monetary strain
on Nigeria remains severe,
more so with its crawling peg
exchange rate system.

39
184.0
130.7 130.5
122.7 117.5
106.0 100.6 98.0
79.7 77.3
60.0
54.0
0
20
40
60
80
100
120
140
160
180
200
Libya
Iran
Algeria
Nigeria
Venezuela
Saudi
Iraq
Angola
Ecuador
UAE
Qatar
Kuwait
OPEC Countries still require oil prices in excess of $100p/b to balance
their budgets
Break even Oil Prices Average
within the OPEC, after Algeria and Iran. This implies that the fiscal strain on
Nigeria remains severe, more so with its crawling peg exchange rate system.
As shown in figure 33 below, Nigeria falls within the quadrant of vulnerable
countries that could be severely impacted by a continuous decline in oil prices.
In fact, the country’s current account surplus, estimated at 4% of GDP could be
completely wiped out if oil prices continue to fall.
In order to correctly gauge the vulnerabilities of different countries to current oil
price shocks, we have separated the “winners” (net oil importers) from the
“losers” (net oil exporters). Oil importers are expected to save on their energy
costs while oil exporters will lose revenue. However, the final impact will depend
on the relative sizes of their economies (measured by GDP) as well as the share
of export receipts in the general government revenues of these countries. We
have assumed that fiscal buffers (i.e. external reserves) would be held constant
as most countries would lean towards a more flexible exchange rate regime in
view of current market dynamics.
We found that relative to other OPEC countries (all of whom are net exporters),
Nigeria’s vulnerability is quite low when the size of its GDP is considered. We
attribute this to the relatively strong growth in non-oil GDP witnessed over the
last decade especially the growing contribution of the services sector. However,
when placed against the backdrop of total government revenue, Nigeria’s
vulnerability rises significantly. This didn’t come as a surprise to us given the
Source: IMF, National Finance Ministries
Relative to other OPEC
countries (all of whom are net
exporters), Nigeria’s
vulnerability is quite low when
the size of its GDP is
considered
When placed against the
backdrop of total government
revenue, Nigeria’s vulnerability
rises significantly
Fig. 32

40
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-60% -40% -20% 0% 20% 40% 60%
Net Energy Exports/GDP
Highly Vulnerable
Net Energy Exports/GDP
Highly Vulnerable
skeweness of government revenue to oil receipts. Perhaps, what is more
instructive to note is that among the Non-OPEC members, US remains one of the
least exposed largely due to the strengths and diversities of her economy, while
Saudi Arabia is modestly vulnerable, a development we can link to the recent
pressure on its fiscal expenditure. Russia on the order hand could leverage on its
massive external reserves position despite its low current account surplus (2013
est. 1.6% of GDP). The import of all these is that US and Russia are less likely to
succumb to pressure to support prices in 2015 while we might see some “ground
shifting” from Saudi Arabia when the going gets tougher sometime in the
second half of 2015, by our estimate.
Not Vulnerable
Nigeria
OPEC Members
Neutral
Vulnerable
From a balance of payments perspective, most OPEC members, including Saudi Arabia are
vulnerable to continuous declines in oil prices
CurrentAccount/GDP
Source: WTO, IMF, United Capital Research
Kuwait
Saudi
Fig. 33

41
Austerity Measures: How far can they go?
In 2014, the Nigerian government introduced some austerity measures to
cushion the effect of declining oil prices on the economy. These include cut in
subsidy provisions for petrol and kerosene from N971.1bn and N250.0bn to
N458.6bn and N156.0bn respectively, introduction of surcharges on luxury goods
and a freeze on foreign travel by civil servants and government officials. We
think these measures are insufficient in light of the expected fiscal strain that a
persistent decline in oil prices portend for the Nigerian economy. We expect the
Naira to continue to be under pressure. This suggests that monetary policy
would be tighter than ever in 2015.

Domestic Macro Trends and Outlook for 2015
42
Section 4

43
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012 2013
Monetary Policy Rates Broadly Accommodative
Select Policy Rates : Annual Averages, %
FED
ECB
Canada
SA
Brazil
India
Monetary Policy
Across the globe, central banks’ monetary policies were broadly and overly
aggressive in 2014. In a debt-ridden post crisis world, central banks continued to
expand the size of their balance sheets while adjusting short term interest rates
to zero or near zero in some cases. The multi-step unwinding of the US monetary
policy was effectively concluded with interest rates closing at zero levels at the
end of the year. As we stated earlier, the divergence in monetary policies
between the ECB and the Fed engendered a significant bout of volatility of in
asset prices and yields especially in the advanced economies with spillovers to
most emerging markets.
Nigeria: Caught in the web of emerging market portfolio reversals
In the past year, the Nigerian financial markets saw fair share of portfolio
reversals largely due to moderating impact of funds flow to emerging markets.
The US tapering of quantitative easing that effectively began in Q1, 2014
impacted liquidity in the Nigerian fixed income space, distorting valuations
across naira denominated assets. While we note that the expansionary policy
stance of the Euro-Area somewhat moderated the negative impact of these
tapering, we believe Nigeria’s ability to maintain a positive real rate
environment in 2014 remained key to retaining a healthy dose of FPIs in the
economy. Also, we think the clarity of timing and length of these monetary
adjustments especially from the Fed was critical to ensuring that market
expectations were closely linked to valuations at each point in time, helping to
minimize volatility in domestic market rates.
The multi-step unwinding of the
US monetary policy was
effectively concluded with
interest rates closing at zero
levels at the end of the year
The US tapering of quantitative
easing that effectively began
in Q1, 2014 impacted liquidity
in the Nigerian fixed income
space, distorting valuations
across naira denominated
assets
Fig. 34

44
13
0
2
4
6
8
10
12
14
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
CBN kept the benchmark unchanged for the most part of 2014,
resorting to administrative changes for monetary policy adjustments
Nigeria Monetary Policy Rate (MPR, %)
Domestic Monetary Conditions
Interest Rates and Money Supply: Eye on liquidity
The Nigerian monetary authority maintained a fairly tight interest rate policy in
2014 as the benchmark rate, MPR, was kept at 12% for most part of the year. The
need to keep inflation in check given the anticipated elevated spend in the
run-up to the 2015 elections was prominent in the policy discussions at the
various MPC meetings held during the year. Also, elevated system liquidity led to
a record increase in the Cash Reserve Ratio (CRR) for public sector funds from
50% to 75% at the January 2014 MPC meeting followed by an increase in the
private sector CRR from 12% to 15% in its March meeting.
The combined impacts of these aggressive policies signaled the CBN’s intention
to rein in excess liquidity in the system and curb speculative and non-core
banking activities of Nigerian banks. The suspension of the former CBN
Governor, Lamido Sanusi Lamido however “surprised” the market, leading to
considerable volatility in money market rates.
There were however two noticeable trends in the movement of monetary
aggregates (narrow and broad money) in 2014: 1) a sharp reversal in the
downward growth trend of money supply and credit growth compared to the
trend in 2013; 2) Increasing 12-month rolling correlation between money supply
and credit growth (see figure 36). We see this trend as evidencing the
effectiveness of monetary expansion in stimulating credit growth. That said, we
note the transmission could have been a lot stronger with lesser pressure on
banks’ balance sheets and a relatively more de-risked lending environment.
The combined impacts of
these aggressive policies
signaled the CBN’s intention to
rein in excess liquidity in the
system and curb speculative
and non-core banking
activities of Nigerian banks
Source: CBN, United Capital Research
A much stronger transmission
mechanism could have been
achieved with lesser pressure
on banks’ balance sheet and
a more de-risked lending
environment
Fig. 35

45
0.0
0.2
0.4
0.6
0.8
1.0
1.2
-10%
-5%
0%
5%
10%
15%
20%
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14
Broad Money Supply and Credit Growth show intandem movements,
resuming an upward trend in 2014
Money Supply Growth
Credit Growth
12-month rolling correlation
4.0
6.0
8.0
10.0
12.0
14.0
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
OMO Auctions tapered significantly in 2014 relative to 2013
CBN OMO Activities , 2013 Vs. 2014
Offer Subscription Rate
The various administrative measures employed by the CBN in 2014 meant that
there were lower volumes of OMO auctions relative to 2013. However, a more
elevated system liquidity reflected in a substantial gap between offerings and
subscription levels in H2’14 in spite of relatively flat rates at the auctions
especially towards H2. (See figure 37).
A much stronger transmission
mechanism could have been
achieved with lesser pressure
on banks’ balance sheet and
a more de-risked lending
environment
Fig. 36
Fig. 37

46
Outlook for Monetary Policy in 2015
Tighter still but waiting on crude oil prices
The Nigerian benchmark interest rate (MPR) closed the year at 13% with a
symmetric corridor of +-200ps as the MPC voted for a hawkish rate environment
in its last meeting of the year following persistent downward pressure on crude
oil prices. To a large extent, the trajectory of crude oil prices will shape the
monetary policy environment in 2015.
We expect a tighter interest rate regime in 2015 for 3 major reasons: 1) There are
greater downsides to inflation in the medium term given the recent devaluation
of the Naira and Nigeria’s precarious balance of payments position 2) Oil prices
are likely to fall through H1 2015 with attendant pressures on the domestic
currency; 3) A reversal to a tighter interest rate environment especially in US by
H2’ 15 will further compound the pressure on the Naira, raising the possibility of
further tightening.
It is also worth noting that the proposed fiscal spending cuts in the 2015 budget
could moderate structurally induced inflation, effectively shifting the monetary
policy anchor to exchange rate even as the recent devaluation feeds through
domestic price level as early as Q1 ‘15. We are inclined to believe that the CBN
will be even more aggressive if oil price do not find a floor early enough in 2015
and we look to see more administrative measures, increased OMO auctions as
well as more direct liquidity controls in H1 relative to 2014 levels.
The Nigerian benchmark
interest rate (MPR) closed the
year at 13% with a symmetric
corridor of +-200ps as the MPC
voted for a hawkish rate
environment in its last meeting
of the year

47
0
4,000
8,000
12,000
16,000
US
China
Japan
Germany
France
UK
Brazil
Russia
Italy
India
Canada
Australia
Spain
Korea
Mexico
Indonesia
Netherlands
Turkey
SaudiArabia
Switzerland
Argentina
Sweden
Nigeria
Poland
Norway
Belgium
China
Austria
UAE
Thailand
Colombia
Iran
SouthAfrica
Denmark
Malaysia
Singapore
Israel
Chile
HongKong
Philippines
Egypt
Nigeria(Old)
Finland
Greece
Pakistan
Ireland
Kazakhstan
Iraq
Venezuela
Portugal
Post-rebasing, Nigeria's GDP jumped 19 places to 23rd highest in the world
Top 50 Economies Globally: nominal GDP (US$ million)
Real GDP
Structurally clearer, fundamentally weakening
The rebasing of the GDP dominated discussion around Nigeria’s economy early
in 2014. With support from the IMF, World Bank and AfDB, Nigeria’s GDP was
rebased in April 2014 as the base year for the computation of GDP was
changed from 1990 to 2010. This effectively increased the size of the economy
by 89.2% to N80.2trn ($US 509.9billion) in nominal terms. A further breakdown of
the numbers showed that the services sector is not only the biggest contributor
to the GDP (with, 35.8% Vs. 20.0% in the old series), it also contributed the most
to the jump in the base year GDP numbers. We attribute this to the various
reforms that have been instituted in the Telecomms, Real Estate, Finance and
Insurance sectors over the last decade. We note that the marked difference in
the sectoral contributions to GDP post the rebasing exercise underscores the
diversification of the Nigerian economy, giving a clearer picture on the structure
of the economy, distribution and performance necessary for more effective
policy decision making.
Notably, the rebased GDP numbers have thrown up the headroom for
significant fiscal adjustments within the next couple of years. More than ever
before, it is now imperative to grow the financial sector and widen the tax net.
Although the exercise triggered “improvements” in fiscal ratios such as total
debt to GDP and fiscal deficit to GDP, it also revealed weakness and leakages
in Nigeria’s tax collection system while also highlighting the need to deepen the
financial system as indicators such as market capitalization to GDP, Credit to
GDP, M2 to GDP are now extremely poor by emerging market standards.
Source: IMF, United Capital Research
A breakdown of the numbers
showed that the services
sector is not only the biggest
contributor to the GDP (with,
35.8% versus 20.0% in the old
series), it also contributed the
most to the jump in the base
year GDP numbers
Fig. 38

48
4.5%
5.4% 5.2%
6.8%
6.2%
6.5%
6.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3
2014 Real GDP Growth Tracks Higher than 2013
levels
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3
Volatile growth trends from Manufacturing even as
Oil and Gas slips back into negative territory
Nigeria GDP Sectoral Growth Trends
Agriculture Manufacturing Oil and Gas Services
Fig. 40
Real GDP: Now anchored on buoyant services sector
On rebased GDP numbers, the Nigerian economy recorded quarterly growth
rates much higher than 2013 trend. Real GDP grew by 6.23% in Q3 ’14 (Vs. 5.4%
for Q3 ’13). The non-oil sector continued on its strong growth trajectory buoyed
largely by the services sector growing from 6.8% in Q2 to 7.6% in Q3 ’14 though
slowed y/y relative to Q3’ 13 (10.5%). This was largely on account of a tepid
growth from the Real Estate sector which expanded by 5.9% as at Q3, ’14
relative to Q3 ’13 (13.3%). Finance and Insurance (7.9% of the services GDP) also
slowed with a growth rate of 8.6% relative to Q3 ’13 (9.43%). The Oil and Gas
sector slipped back into negative growth territory that has been characteristic
on the sector in for the past 3 years on of account declining production due to
continued crude oil theft.
Outlook
Growth is likely to slow to below 5.0% in 2015
Tighter fiscal and monetary policies are the key downside risks we see to real
GDP growth in 2015. We do not expect a drastic reversal in government
revenue mix in the short to medium term, largely due to current heavy reliance
on oil. What’s more, government’s recurrent expenditure has historically
remained sticky, making a scale back in capital spend more likely in a bid to
prevent a ballooning of fiscal deficit. With additional currency weakness on the
horizon, the need to maintain a tight monetary policy stance will keep interest
rates high, thereby shaving 75-100bps off real GDP by our estimates. We expect
the services sector to continue to drive growth as we look to see appreciable
progress in reforms to key sectors namely agriculture and power.
Source: NBS, United Capital Research
The Oil and Gas sector slipped
back into negative growth
territory that has been
characteristic on the sector in
for the past 3 years on account
declining production due to
continued crude oil theft.
Tighter fiscal and monetary
policies are the key downside
risks to GDP growth in 2015
Fig. 39
Source: NBS, CBN, United Capital Research

49
0
2
4
6
8
10
12
13,000
13,500
14,000
14,500
15,000
15,500
16,000
16,500
17,000
Core Inflation held steady despite modest increase in
Money Supply
Money Supply(Nbn) Vs. Core Inflation
Money Supply (M2) Core Inflation
Fig. 42
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
Headline Inflation stood firmly within CBN's
target range in 2014
Inflation Rate
Single digit out of the radar
In line with our expectation, headline inflation remained firmly in single digits in
2014, averaging 8.1% (Vs. 8.5% in 2013). The broad declines in global commodity
prices and relatively favourable harvest seasons helped ease pressure non-core
inflation in the year as food inflation averaged 9.5% y/y (Vs. 9.7% in 2013).
Although the conflict prone areas of the North East continued to experience
significant disruptions to farming activities, favourable main harvests was
witnessed across much of the rest of the country leading to increased inventory,
and declining staple food prices. Notably, the aggressive tightening stance of
the CBN moderated the impact of election related spend even as exchange
rate stability in the first half of the year provided cushion to domestic prices
The downside risks to inflation in 2015 include the escalations in insurgency in the
northern part of the country especially in a post election scenario given the
recent spread in the geographical reach of the Boko Haram insurgents. The
current and expected pressure on the Naira given the declines in oil prices is
another risk factor that is yet to fully crystallize, in our view. We expect to see the
full impact of the recent devaluation of the Naira from Q1‘15, even as a
possible further adjustment of the currency in the near term portends greater
downside risks to inflation in 2015. We forecast and average inflation rate of
10.5% in 2015 as we expect core inflation to average 9.5%, and food inflation
11.5%
Target Range
In line with our expectation,
headline inflation remained
firmly in single digit in 2014,
averaging 8.1% (Vs. 8.5% in
2013).
Fig. 41

50
Exchange Rate Dynamics
Battling for the “Soul” of the Naira
The Naira came under severe pressure in 2014, as the N/USD weakened by
12.6% (Vs. -2.6% in 2013) with -11.5% of the depreciation recorded in Q4’ 14
when the Naira was devalued in the Official market. Early in the year, much of
the bearish trends in the Naira were driven by reduced foreign portfolio inflows
(FPIs) as the Fed decided to cut back its bond buying programme effective Q1
2014. This was evident in a huge spike in official forex demand–supply gap
which had shot up to a 2-year high as early as January leading to 1.6%
depreciation in the currency, the highest monthly change pre-devaluation.
Domestic macroeconomic uncertainties heightened by the suspension of the
former CBN governor in February 2014 raised concerns about the fate of the
Naira. This led to sharp outflows in FPI (m-o-m, -43.3% in February). Consequently,
the Naira depreciated by 1.4% in February. However, a rebound in FPI inflows in
April especially in the equity segment lent some respite to the Naira, with an
appreciation of 2.7%, the highest monthly gain in 2014. The last quarter saw a
market-induced devaluation which coincided with tamer foreign inflows and
significant net outflows from debt and equity securities as uncertainties around
the 2015 elections heightened.
Hawkish Stance Moderates Naira Volatility
The aggressive tightening policy of the CBN as well as the various control
measures employed by the Apex bank to ease supply bottlenecks across the
various segments of the market provided minimal support for the currency in the
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
-80.0%
-40.0%
0.0%
40.0%
80.0%
120.0%
160.0%
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
FPI Changes tracks closely in line with Naira Returns
Changes in FPIs Vs. Naira Returns
FPI Changes Naira Returns
Source:, CBN, United Capital Research
Much of the bearish trends in
the Naira were driven by
reduced foreign portfolio
inflows (FPIs) as the Fed
decided to cut back its bond
buying programme effective
Q1 2014
The aggressive tightening
policy of the CBN as well as
the various control measures
employed by the Apex bank
to ease supply bottlenecks
across the various segments of
the market provided some
support for the currency
Fig. 43

51
140
145
150
155
160
165
170
175
180
185
Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14
Administrative measures failed to substantially
close arbitrage gaps
NGN/USD Rates in 2014
Official Interbank BDC
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
In spite of CBN's strong defense of the Naira,
demand outweighed supply by 30% in 2014
Total FX Demand Versu Total FX supply ( $US, millions)
Demand Supply
Fig. 45
face of slow accretion to external reserves, especially in Q2. Notably, the
revision in the minimum capital base for the operation of the BDC to N35mn,
from N10mn as well as the prohibition of the ownership of multiple BDCs, helped
restrict forex dealers from round tripping the Naira, with the intent to close the
arbitrage gaps in the market. However, the decision of the CBN to
simultaneously reduce weekly sales to BDCs to $US15,000 from $US15,000
created some pressure in that segment of the market, thus widening the gap
between the parallel and official rates. CBN’s late intervention in the interbank
market also supported the Naira to a large extent in 2014 even as the removal
open positions for banks in Q4 ’14 created additional support to the currency.
The Imperative of Devaluation
The CBN’s resolve to continue to defend the Naira was tested in the face of the
sharp declines external reserves as oil prices began to tank in beginning H2’14.
The reserves, which reached a 2 year low in October 2014, with an import cover
of 7.3 months based on latest available data.
One of the strongest cases for a drastic exchange rate adjustment was the
precarious state of the country’s external trade position. By Q2 ’14, current
account surprise had weakened to 1.1% of GDP (Vs. 3.6% in 2013), largely on
account of higher import bills from crude oil trade as well as increased
repatriation of profits and dividends in light of macro-economic uncertainties.
Compounding the situation was heightened speculative demand for the dollar
induced by high system liquidity. A key demand management policy
Source: FMDQ, CBN, United Capital Research
One of the strongest cases for
a drastic exchange rate
adjustment was the precarious
state of the country’s external
trade position
Aggressive tightening cum
administrative measures failed
to close arbitrage gaps in H1’
14
Fig. 44

52
0
20
40
60
80
100
120
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Falling Oil Prices exerting significant pressure on the naira
Average Monthly External Reserves and Brent Crude Price
External Reserves Brent
introduced by the CBN was the restriction of certain import items from being
funded at the rDAS window, a move that was intended to effectively cut
demand by more than half at the official window. Despite these restrictive
measures, demand for the greenback continued unabated as total dollar
demand was 1.3x total supply in Q3, reaching a high of 1.6x in September.
Having breached the existing target band to forex sales at the Official window
due to unabated demand, the Committee members in its last meeting for the
year, resorted to a drastic downward adjustment to the midpoint of the Official
window of the foreign exchange market from N155/US$ to N158/US$ and
widened the band around the midpoint of the exchange rate from +/-3 to +/-5
per cent.
Outlook for the Naira in 2015:
Is further devaluation on the Cards?
The key question on the minds of investors and market participants is whether
another round of devaluation might be witnessed in 2015 if the pressure on oil
prices does not abate. We estimate that from the onset of the decline in oil
prices, a 1% drop in Brent crude prices has led to 0.24% decline in gross external
reserves. Using an average monthly imports value of US$4.9bn (the mean
imports value per annum), we estimate that oil prices would need to fall to
Source: FMDQ, CBN, United Capital Research
The key question on the minds
of investors and market
participants is whether another
round of devaluation might be
witnessed in 2015 if the
pressure on oil prices does not
abate
We estimate that oil prices
would need to fall to between
$20-$25p/bd for import cover
to touch 4-4.5 months levels
compared to the
internationally accepted
standard of 3 months
Fig. 46

53
between $20-$25p/bd for import cover to touch 4-4.5 months levels compared
to the internationally accepted standard of 3 months. This brings to the fore the
robustness of Nigeria’s external reserves in containing pressure on the domestic
currency.
While the strength of the external reserves remains appreciable, the same
cannot be said about Nigeria’s trade position. Given Nigeria’s high oil import bill
placed against the backdrop of a fast depreciating Naira, the current meager
current account surplus will be wiped out in no distant time. Our view is re-
enforced by the expected increase in portfolio reversals especially as yields in
key emerging markets move in the direction of market expectation of Fed
tightening by H1’ 2015. What’s more, funds flow from Sovereign Wealth Funds
from key OPEC countries will taper as oil prices continue to recede, leading to
tighter liquidity as resultant higher rate environment in key advanced
economies becomes more attractive to yield hungry investors.
We believe that oil prices are not likely to touch levels seen at the height of the
global financial crisis (2007-2008), given the current strong performance posted
by the advanced economies compared to the era of global financial crisis.
Based on the foregoing, any further adjustment in the exchange rate in 2015
(which is likely to be lower than the 8% devaluation in 2014) will not entirely be
due to consideration of the depletion in external reserves but rather on the
shaky state of Nigeria’s trade position.
We believe that oil prices are
not likely to touch levels seen
at the height of the global
financial crisis (2007-2008),
given the current strong
performance posted by the
advanced economies
compared to the era of global
financial crisis

54
412
634
943
2,616 4,605
0
1,000
2,000
3,000
4,000
5,000
Statutory
Transfer
Capital
Expenditure
Debt Service Recurrent
Expenditure
Total
Expenditure*
Capex accounts for 9% of entire budget Outlay
Breakdown of expenditure plans for 2015 (N'bn)
Fiscal Plan 2015: Budgeting in the midst of Uncertainty
The 2015 budget is predicated on a spending plan of N4.4trn (Vs. N4.7trn in
2014), with an estimated revenue of N3.6trn (Vs N3.7trn in 2014), implying a
budget deficit of N756bn, equivalent to 0.8% 2015E GDP. The benchmark crude
oil price was set at US$65p/b, after multiple revisions on the back of the
continued downward trend in global oil prices as well as bearish outlook for the
commodity in the short to medium term. We reiterate that alternative approach
could have been a scenario based budgeting that allows the fiscal authority to
assume different benchmark prices given the uncertainty around crude oil
prices. We think some level of flexibility should have been built into the budget
to prevent recourse to the legislative arm in the event that the volatility in oil
prices heightens in 2015. Importantly, we do not think the benchmark of
$65p/bd is the bear case scenario for oil prices in 2015.
We think that the oil production benchmark is overly optimistic given the
leakages that have characterized oil production in recent times. Data from
OPEC shows that average crude oil production in 2014) stood at 1.93m bpd,
23.7% lower than the budgeted volumes in the 2014 budget. However, having
widened the band around the official exchange rate, the exchange rate
assumption of $165p/b clearly lies within the range of possible values for the
N/USD at the Official market in 2015. However, the possibility of further
devaluation before the end of the year constitutes a downside to this
assumption
2015 2014 Change
Total Federally Collectible
Revenue (N'trn) 6.90 7.50 -8.00%
Estimated Revenue 3.60 3.73 -3.49%
Total Expenditure 4.40 4.70 -6.48%
Oil Production (mbpd) 2.28 2.39 -4.60%
Benchmark Oil Price (p/b) 65.00 77.50 -16.13%
GDP growth rate 5.50% 6.75% -18.52%
Exchange Rate(N/USD) 165 160 -3.03%
Non oil Revenue(N'bn) 1.68 2.51 -33.20%
Fiscal Deficit (N'bn) 755 970 -22.16%
Fiscal Deficit (% of GDP) 0.79% 1.90% -58.42%
Domestic Borrowing (N'bn) 570.0 571.2 -0.21%
Source: Federal Ministry of Finance, United Capital Research
We think some level of
flexibility should have been
built into the budget to prevent
recourse to the legislative arm
in the event that the volatility in
oil prices heightens in 2015
Fig. 47

55
1,000
1,500
2,000
2,500
3,000
Budgeted Production volumes have historically been below target
due to persistent leakages
Nigeria Crude Oil Actual Volumes Vs. Budget
Actual Daily Oil Production (mbpd) Budgeted Production
Non-Oil Revenue: A realistic transition?
The 2015 budget is predicated on an historic shift to the non-oil sector as a
significant revenue source. This was largely anticipated given the expected
strain on petro-dollar inflows in 2015. Notably, the non-oil revenue to total
revenue is budgeted to increase to 46.7% in 2015 (Vs. 33.0% in the 2014 budget
estimates).
We note that the recent rebasing of the GDP has not only given a clearer
picture to the structure of the economy, it currently gives the fiscal authority
enough elbow room to transit from an oil dependent revenue base to a more
diversified structure, taking into consideration the increasing growth profile, post
rebasing, of previously under-estimated services sector . Historically, the strong
growth in the non-oil sector has not translated into significant non-oil revenue
accretion for the government, even if we back out the large informal sector not
integrated into the mainstream economy.
While we welcome the renewed focus on non-oil revenue streams, we estimate
that the expected revenue from these sources despite the various luxury
charges introduced will be insufficient to cover the shortfall oil revenue if we
hold the benchmark oil price constant for the entire fiscal year. More so, non-oil
revenue has been constrained by the government’s fiscal policy that has
recently tilted more in favour of import substitution, with the attendant declines
in non-oil receipts. On another note, the challenges across the non-oil revenue
Source: OPEC (Monthly Oil Market Reports), Federal Ministry of Finance, United Capital Research
The 2015 budget is predicated
on an historic shift to the non-
oil sector as a significant
revenue source
We estimate that the expected
revenue from these sources
despite the various luxury
charges introduced will be
insufficient to cover the shortfall
oil revenue
Fig. 48

56
28.7%
38.6% 40.2%
32.6% 35.2% 30.2% 32.6%
46.70%
71.3%
61.4% 59.8%
67.4% 64.8% 69.8% 67.4%
53.3%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014* 2015e
Non Oil Revenue Targeted at 46.7% of total revenue
Non -Oil Vs. Oil Revenue Split
Non Oil Oil Revenue
generating sectors have been further exacerbated by the recurring incidences
of smuggling across the borders.
Plugging the Deficits: How Plausible is a reduction in domestic borrowing?
The proposed budget is based on a deficit of N755.0bn (0.79% of GDP (Vs. 1.9%
in 2014 o) with domestic borrowing plan of N570.0bn expected to finance 75.5%
of total deficit. While the recourse to domestic borrowing as a means of
financing budget deficits can easily be regarded as the norm in Nigeria’s
budgeting cycles, we were surprised to see a reduced borrowing plan relative
to 2014 levels. Given that we expect government revenue to come in lower
than estimated in 2015, we anticipate a higher level of domestic borrowing
compared to 2014. We think the required traction in non-oil revenue growth
may be delayed beyond 2015 as the economy adjusts to a new fiscal regime,
making a reduction in borrowing unlikely. Also, we expect borrowing to be at a
much higher cost, given the uncertainties around Nigeria’s fiscal revenue
stream. The government’s recent efforts at diversifying borrowing sources to
offshore funding may also be challenged given the expected increase in
sovereign risk premiums on oil producing countries with relatively weak or
precarious balance of payments position such as Nigeria’s. These expectations
are partly reflected in the 32.4% increase in estimated debt service expense
despite a 0.21% decline in expected domestic borrowing.
Source: CBN, United Capital Research * Budgeted estimates; e= expected
The government’s recent efforts
at diversifying borrowing
sources to offshore funding may
also be challenged given the
expected increase in sovereign
risk
Fig. 49

57
419.9
358.5
334.0
257.5
156.5
84.1 71.8 59.0 52.0 47.5 39.5 39.1 30.9 27.2 26.6 23.3 20.1 18.8 15.6 13.9
9.6%
8.2%
7.7%
5.9%
3.6%
1.9% 1.6% 1.4% 1.2% 1.1% 0.9% 0.9% 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4% 0.3%
0%
2%
4%
6%
8%
10%
12%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
Education
Defence
Police
Health
Interior
NSA
YouthDev
Pet.Res
SGF
ForeignAff
Works
Agric
Power
Science&Tech
Presidency
Information
Justice
Tourism
Environ
Waterres.
Top Priority sectors in the 2015 budget
Total allocation ( Capital +Recurrent, N'bn )
% allocation of total spending
31.2%
35.1%
22.1% 21.7% 20.8%
32.50%
23.70%
9.00%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2008 2009 2010 2011 2012 2013* 2014* 2015e
Capital Spending set to an historic low
Ratio of Capital to Total Expenditure
Capex Spending: The Fiscal lamb
The ratio of capital expenditure to total expenditure in the budget stands at an
all-time low, bringing to the fore the stickiness of recurrent expenditure. While
planned recurrent expenditure remained largely unchanged compared to prior
year, capex ratio declined to 9.0% of total expenditure (i.e Capex plus
Recurrent expenditure), and 13.8% of the entire spending plan. The ratio
becomes much lower if capex is adjusted for expenditure on SURE-P.
In our view, this high cost of governance is not sustainable. The lingering
infrastructure gaps in the economy calls for urgent steps to rationalize
government agencies, and drastically cut unproductive expenditure. Given this
drastic cut in capex, a resort to greater Public Private Partnerships (PPP)
arrangements as well increased privatization of government enterprises may be
the most feasible means of augmenting these significant capex shortfalls in
2015, if the projected medium term real GDP growth rate is to be achieved.
Source: CBN, United Capital Research * Budgeted estimates; e= expected
The lingering infrastructure gaps
in the economy calls for urgent
steps to rationalize government
agencies, and drastically cut
unproductive expenditure
Fig. 50
Fig. 51

2014 Review and 2015 Outlook

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