Inflation pressure to persist in January

Expectations that inflation pressure will start to weaken in January are beginning to look unrealistic. The expectations have been hinged on the base effect of having had very high inflations in 2016, which means that inflation in 2017 when compared to 2016 will not look that bad. However sharp rises in energy costs and drop in power supply means that inflationary pressures are persisting in January.

In the last one month, the cost of cooking gas has risen from an average of N2, 900 and N3, 100 to between N4, 500 and N5, 000 per 12.50 kg cylinder. A litre of Kerosene also now sells for an average of N500 while diesel sell for an average of N270 per litre.
The Pump price of petrol has remained fixed at N145 per litre but marketers are putting pressure on the government to allow a price increase. Outside Lagos, some marketers are already selling about the official N145 per litre cap.

Meanwhile, power generation has dropped to between 2000MW and 3000MW, which means that businesses are increasingly dependent on their private generators to sustain their operations.

Inflation closed at 18.55 percent in December 2016 and economists expected it to start moderating in January. But even if there is moderation, it will be illusionary, as many Nigerians will still feel the pinch of higher prices on their pockets.

Can Nigeria really afford to borrow more?
Come March Nigeria will be approaching the international markets to issue a US$1 billion Eurobond. A few months after that issue, which will be fully subscribed, the country is planning to also issue a US$300 million Diaspora Bond.

Already, Nigeria is also in negotiation with the World Bank for a US$2 billion facility after taking a US$1 billion facility from the African Development Bank (AfDB). There is also an estimated US$10.9 billion in export credits, most of them from China, which the federal government has negotiated. This is likely to be part of the government’s planned US$30 billion three-year external borrowing plan, which the national assembly is yet to approve.

In its latest credit rating, which downgraded Nigeria’s B+ sovereign rating for foreign and local currency, long-term obligations from stable to negative Fitch expressed concern about Nigeria’s increasing debts especially plans to increase the foreign component.
With Nigeria’s current debt burden estimated at just about 17 percent GDP, it is easy to argue that the country is under borrowed since Nigeria’s ratio is one of the lowest globally. The US has a debt to GDP ratio in excess of 100 percent while the average in the Euro area is more than 90 percent.

But Nigeria’s debt to GDP ratio is deceptive especially because Nigeria’s economy is highly dependent on oil revenues rather than taxation. So the flexibility to increase taxes to repay debts is limited. The country also boasts of one of the lowest tax to GDP ratios in the world. This means that though Nigeria has much headroom to borrow, her capacity to repay is limited.

For Nigeria, the most important indicator is not debt to GDP ratio but debt service to revenue ratio which currently stands at 33 percent. Basically, the country is already spending N33 of every N100 earned in revenue to service debts. It leaves little room for the government to manoeuvre especially when it is constrained in raising tax rates.

Strong upsides for Skye, Access and Zenith Bank
Analysts at FBNQuest are looking very optimistic on three banks in their coverage universe in their market outlook for the week beginning 30 January. Skye Bank has the most positive outlook with a 80 percent upside potential. FBNQuest analysts expect that SkyeBank, which has received a lot of beating from investors, will regain some investor confidence this year and see its share price rise from current 50 kobo per share to 90 kobo per share by December.

Access Bank’s share price is also expected to move from its current price of N6.7 per share to N9 by December, a gain of 33.3 percent. Zenith Bank is also expected to move from its current price of N16 per share to close the year at N20.7, which will give investors an average return of 29.4 percent.

The only other bank stock with an expected positive return in the FBNQuest banking coverage universe is that of UBA which is projected to deliver an average gain of 13 percent this year with the share price moving up from a current price of N5.10 to N5.80.

It is interesting to note that all the banks in the FBNQuest banking coverage have average price the book ratio of 0.5, an indication that they are priced below their networth, a situation which sometimes described as being worth more dead than alive. In advanced markets, this could be a signal for hostile takeovers, but not in Nigeria yet.

Interestingly, GTBank with a price to book value of 1.4 and Stanbic IBTC with a price to book value of 1.2 are the only two banks covered by FBNQuest with premium pricing to their networth but both banks are however considered overpriced at current prices by FBNQuest, which is a reflection of the very low investor confidence in the market currently.