BBC World Business Report-6:30GMT +1

Catch me on BBC radio -World Business Report at 6:30pm GMT+1 as I discuss Nigeria and the Naira deval.

Click on the link below:

http://www.bbc.co.uk/programmes/p03y4hlt

 

The Nigerian Baht, I mean Naira -Why I am still short.

In my opinion, there are a few clear signs that show when a country is in trouble. The first is a swing from surplus to deficit or a widening current account deficit, another is also a fall in the price of the country’s exports. Both signs were true of Thailand in the mid 90’s, just before the currency peg was broken in 1997.
Thailand’s GDP growth in the first half of the 90s averaged over 8% to 6% in 96. Foreign investors attracted to the stable baht, high interest rates (vs rates in Eurodollar market) and high growth rate flooded into Thailand. But then the music stopped. Led by a sharp reduction in export growth, economic activity started to slow. The weakness in the financial sector, put pressure on the baht to depreciate.
Just like Thailand, Nigeria showed the signs of an economic boom from 2000s. With GDP growth swinging between 6% and 8% from 2006 to 2014. A somewhat stable currency between 2009 and 2013, depreciating by just under 8% through that period.

 

NGNUSD
Fast forward to 2015, following the collapse in oil prices, Nigeria’s current account turned negative for the first time since 2002.

Current account balance

CAB BAL

Although oil and gas accounts for 35% of the country’s GDP, petroleum export revenue represents over 90% of total exports revenue. Now not only is the price of oil trading over 50% below 2014 high, but due to oil pipeline vandalism from militants in the Niger-Delta region, Nigeria has also begun to see a reduction in exported barrels of oil per day.
Oil price.

OIL PX

Barrels per day of Nigeria’s oil exports have not been this low since 2009.
Crude oil export.

CRUDE OIL EX

After over a year of maintaining the Naira’s peg with the US dollar, the Central Bank of Nigeria abandoned this peg. Instead of depleting its FX reserves the bank announced that it will allow the Naira to be market-driven, setting the stage for a devaluation of the currency when the system kicks in on the 20th of June.
My concern is that Nigeria tends to pass through high import costs as its currency falls. A falling currency will easily force inflation higher, as the country is already suffering from its highest inflation rate in 6 years.
NEW CPI

the guardian

The central bank will be forced to raise rates, which will add to the government’s borrowing costs.

MPR

Currently, the Nigeria dollar debt is trading at an average yield of 6.5%. It’s not a historical premium, but the highest in 2016. This gives me the impression that for some reason the market has taken a view that the country’s finances are stable and relatively safe.

The local government bond now trading at negative real yields.

LOCAL GOVVIE

In my opinon, the market is yet to fully adjust to the fact that the numbers in Nigeria have changed; Nigeria is still reliant on a commodity story that has also changed-suffering price and export reductions, it’s currency now floating will naturally devalue and add inflationary pressure on an economy that’s already seeing high numbers due to bad policy. I also see the market adjusting to an increase in government borrowing costs.
At the end for Thailand, policymakers had no easy choices once pressures on the exchange rate emerged, as defending the peg or allowing the currency to depreciate both involved significant costs. Thanks to the power of hindsight, it’s obvious to us that this dilemma could have been avoided by allowing the currency to freely float earlier than they did. It is saddening that the Central bank of Nigeria had not learned this lesson. I think we hold tight and enjoy the ride.

Quick ChartS-Food for thought-FBN 2021 V SEVEN ENERGY 2021

Interesting chart I just came across- First bank’s 2021 USD bond now trading at a higher yield than Seven Energy 2021…

FBN 2021

FBN CAPITAL 2021

 

 

 

 

 

Seven Energy 2021

SEVEN Energy 2021

 

 

 

 

 

For those who do not know, Seven Energy is a Nigerian upstream oil and gas company,  with interests  in the south-east of Nigeria. Seven Energy had a few issues in the past with former director Kola Aluko and some assets-but that’s not what this post is about. I just find it interesting that the country’s largest bank-by assets is trading at or near to an oil and gas company.

Perhaps a reflection of things to come?

We need to talk about Zambia -The short case for Zambia 2027

I’ve always thought that it never makes sense to get bullish unless you can see that the drivers of the bear market are breaking down. Hence the recent rally in Zambia USD paper has caught my attention. Especially the 2027USD bond.

This year we’ve seen the bond rally over 20% from trading at low 60’s to 80.

Zam27 px

 

A rally across the curve has caused a downward shift.

Yield cuve Jan to Apr

 

It looks like what the market is forgetting about Zambia is copper. After reaching peak copper production in 2013, thanks to tax increases and power cuts, Zambia has struggled to hit production targets, so much so that it is seeing a flat line in copper production.

Copper Production

 

The chart shows the spread in yield between USD bonds issued by Zambia (average of 2022,2024 and 2027) and the US treasuries and the copper price. What’s important to me is that copper is trading around a 6 year low and it trades together with Zambia USD spreads.

Zambia spread v copper

 

The trading pattern of the curve has also been interesting to me. As you can see below, the rally ended in April, especially for the 2022 and 2024 paper, but not for the 2027. There seems to be lag, a bearish hump has now formed across the curve.

Zambia curve apr to now

 

Tightening in the spread between the 2022 and 2027 this year.

27_22spread

 

27_22

 

The 2027 paper is now more expensive and trading higher than the 2024. Relatively the most expensive it’s been since issued in August last year.

 

27_24

 

In February this year, the country announced that the IMF were on the ground, the market reaction was very positive. But the fundamental facts still hold in my view-the bearish drivers Zambia struggled with have not changed, lower copper prices and slowing copper production, however for some reason the market is yet to price this in the 2027 paper. In my view the bond is now looking very attractive to short.

The Current State of Fidelity Bank PLC-Cheap is Cheap for a reason

 

Generally, a sharp fall in bond prices, the result of a sudden increase in the credit spread on the bond, is a strong indicator to me that the issuer is perceived to have become higher risk by the bond markets. As is the case with the Nigerian Fidelity Bank PLC.
A quick look at the Fidelity Bank 2018 bond price performance, we see a decline from 2015 and a continuing decent into Q2 2016.
Bid Price chart.

bid px

(source: Reuters)
Yield Chart

Yield

Even more interesting to me is comparing Fidelity Bank 2018 to its peers- Access Bank 2017, Diamond Bank 2019, Zenith Bank 2019 and Guaranty Trust Bank 2018; it’s sold off a lot more than they have, in fact, from mid-February 2016 as most bonds began to pick up, Fidelity bank 2018 continued its sell off.
Fidbank 18 v Average (Access 17, Diamond 19, Zenith 19 and GTB 18)

fibank v average
Spread between Fidbank 18 and Average (Access 17, Diamond 19, Zenith 19 and GTB 18)

fidbank_average spread
As oil rallied a little this year, the markets felt slightly more comfortable with buying African bonds with oil exposure, we saw some movement in the Nigeria Eurodollar bond (as well as Angola 2019). The market also picked up other near term corporate Nigerian bonds, but despite this, Fidelity Bank sold off sharply. I compared Fidelity Bank 2018 with Nigeria’s 2018 Eurobond below.

fidbank_ngeria spreead

fidbank_ngeria
It’s fair to say 2016 so far has been a challenging year for the bank. In the first quarter of 2016, Fidelity Bank suffered from the same malaise as most of the banks in Nigeria this year- deterioration in asset quality and loan loss provisioning. A fall in loan loss provisioning of 28% y/y and a 16% y/y spike in OPEX resulted in PBT declining by 15% y/y. A negative result -N3.5bn in other comprehensive income also, increased decline in PAT (-99% Y/Y).
In line with the sectors pattern of shrinking NIR on lower FX incomes, Fidelity Bank PLC reported a contraction in non-interest revenues (-35% y/y),  strong declines in net foreign exchange gains of -96% y/y.
In April, the bank announced that it had placed a $113m loan to energy firm Oando PLC on a watchlist, the loan accounts for 15.2% of its energy loan book. The bank refused to classify this loan as non-performing, if the loan is classified as non-performing, this will boost the banks NPL ratio from 4.4% to 8.1%.
Adding to this, at the end of April, the EFCC (The Economic and Financial Crimes Commission-a Nigerian law enforcement agency formed in 2003 to investigate financial crimes) announced that they took the bank’s CEO in for questioning as part of an investigation into financial transactions made in the closing months of Goodluck Jonathan’s administration. On the 3rd of May the bank appointed an Acting Chief Executive despite a plethora of qualifications and experience- the bond price fell by over 2% following this announcement.

fidbank 1m px

A week later, the former CEO was released by the EFCC with no charges, reassigned as CEO and the acting CEO was then demoted to deputy Managing Director.
On the 11th of May, the S&P Global Ratings affirmed its ‘B/B’ long- and short-term counterparty credit. The outlook, negative.
Given the outlook of the Nigerian Banking environment- restrictions on FX trading driving steep drops in NIR, banks’ exposure to the O & G sector, also bearing in mind that despite the rise in the banking sector’s non-performing loans, most Nigerian banks (ex First Bank PLC) reported low NPLs to the O&G sector, which suggests to me that there will likely be more pain through the rest of the year. I think Fidelity Bank is cheap for a reason and could possibly get cheaper.
Until next time…

The Case for Short South African Equities

In a high credit environment, we normally have low interest rates, low lending rates and requirements, which leads to an increase in the amount of lending or credit growth, increasing business and consumer confidence causing the population to spend more, therefore increasing  asset valuations and prices, causing inflation. This is generally followed by a contraction period; depicted by an increase in rates, high lending restrictions, slow credit growth, reduction in spending, consumer confidence and a reduction in inflation. Sometimes, it is difficult to ascertain which trigger comes first. But I believe South Africa is heading towards a contraction period , which will soon translate in a reduction in asset prices.

In November 2014, the South African Reserve Bank (SARB) left rates unchanged at 5.75%. I believe, as of the beginning of 2014, when rates were increased from 5% to 5.75% a few months ago to support the weakening currency, South Africa went into a high interest rate environment. At current levels of 5.75% rates are the highest they have been in four years.

SA Rates

Following in line with the SARB, the benchmark rate at which banks lend out to the public are also the highest they have been in 4 years. Which means, expensive credit and tighter lending restrictions.

Lending rates

So, in a high interest rate and lending rate environment we can see that consumers and businesses alike are not spending. As can be derived from the Consumer Confidence and Business Confidence indices.

CCI

BC

What disturbs me however is that despite the reduction in inflation, business and consumer confidence is still quite low and going lower-consumers do not feel wealthy.

The SARB have an inflation band target of 4%-6%. Reduction in inflation started in August, from 6.4% to 5.8% in November 2014, which fits in the target band.

SA INF RATE

An environment of high interest rates, high lending rates (increased lending restrictions), low consumer and business confidence, coming from a high inflation to a lower inflation environment – shows me that South Africa has entered a low credit cycle.

From the chart below you are starting to see a slowing down in the amount of credit extended by the SARB to domestic borrowers, including the government and commercial banks.

SA CRED GROWTH

In my view, the SARB are in a pickle as they need inflation below the 6% target, and hence cannot make the credit environment more interesting by reducing interest rates;  remember however that  they need to support the weakening currency somehow. Hence, they cannot reduce rates to support credit growth and increase spending. Right now, I see only two choices, they can either, leave rates as it is or increase rates to provide more support to the currency. Rates left as is, will cause the credit environment to continue to slowdown  probably at the same pace, and an increase in rates will most likely cause an acceleration to the deterioration of the credit environment-contraction.

The chart below shows the relationship in movement of the Johannesburg All share equity index and South African Credit growth.

JSE V CRED GROWTH

SA Credit Growth (RHS)

Credit growth has a high correlation with asset prices of around 71%. This means that credit growth and asset prices move in the same direction. As I have deduced that credit growth has started to contract, we can then state that asset prices will go in the same direction.  From the summer of 2014, as growth started to slow, equity prices began to fall off their all time high levels.

Therefore, I think as the credit environment continues into this cycle of contraction, we will continue to see lower prices in equities, and there isn’t much the central bank can do to prevent it.

Kenya’s Eurobond Debut?

A plan that began and was announced in 2007, after a 6 year build up, will we finally see Kenya’s debut Eurobond in the coming quarter?

Picking up from the previous government, new government of Uhuru Kenyatta confirmed its plan for a Eurobond issue in June this year, at the time of its FY2013/14 budget statement. According to the economic secretary in the Ministry of Finance-Geoffrey Mwau, planned to raise at least US$1bn by the end of September, but also hinted that the amount could be much larger (equivalent to US$2bn). The FT reported in September that Kenya was planning a US$1.5bn issue.  They noted that the government was now looking at issuance in November, but this could slip to December-January.

Following the recent tragic events at the Westgate shopping centre, the government released a statement saying that it would not be deterred from its Eurobond plans, pronouncing a target to sell US$1.5bn by December. The government plans to use part of the proceeds to help repay a US$600mn loan due in May 2014.

 

Fundamentals

Kenya has a GDP of US$46bn, and is the largest economy in east Africa serving as the regions business hub. Agriculture and Tourism remain important, accounting for 20% and 10% of GDP respectively.  Tea (21% of goods exports), horticulture (12%) and manufactured goods (11%).  After the discovery of oil in Kenya last year, the country also has the potential of becoming the first significant oil exporter in east Africa with shipments aimed for c.2016.

SSA Africa Economic Data

SSA Africa Economic Data

 

 

 

 

 

Credit Worthy?

The country has twin deficits and significantly rising public debt. The current account deficit was 10% GDP in 2012.The government’s FY2013/2014 budget deficit target is 7.9% of GDP. Budget deficits have averaged 5.8% of GDP per annum since FY2008/2009 with a GDP growth rate of 5.9% And Public debt has been growing at 51.7% of GDP in May 2013, up from 42.8% in June 2008. The country’s central bank reserves could provide some support from external shocks, especially in the context of a free-floating exchange rate. Reserves are reported at US$5.9bn.

The new Kenyan Bond could yield between around 7.5-8% assuming  10 year maturity.  With 23 issues now in the SSA ex South Africa it is now easier to compare sovereign bonds. In the  table below, Ghana’s new 2023 bond (B/B+/B1), with a moderately lower rating than Kenya, has a yield of 8.1%. Even with a larger size, Kenya may come in below Ghana’s. The yield on other B+ issuers are 7.1% for Zambia 2022 and 7.6% for Senegal 2021, but these are shorter bonds. It can be estimated that an average of three 10-year B+ yield is 7.8% for Zambia and Senegal- if you adjust for a 10 year tenor. Kenya issue with a strong investment appetite, bigger and more liquid, can come in below or closer to Zambia at 7.8%.

 

SSA ex SA Bond data

SSA ex SA Bond data

 

 

 

 

 

 

Conclusion

In this “taper worry” economy, the large size of the issue has left some investors like me apprehensive. But, I doubt general desire will be qualm. Recently, this “Great bond rush” for new African issues has remained strong and I assume the Kenyan government are aiming to exploit this notion. Kenya, being the best known SSA country NOT to have issued a Eurobond will now be the largest debut bond in SSA. The IMF has even weighed in, lending support to Kenya and saying that Kenya had the room to borrow as much as US$2bn.

 

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