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When Nigeria’s all-share index touched
20,373 in mid-March, prices on the Nigerian
Stock Exchange were down a daunting 69 percent
from the 66,370 record high in March 2008.
Significantly, equities peaked a good four
months ahead of the oil price which reached
its high of $147 a barrel in July, implying
that there is much more to the NSE’s
dramatic decline than just the price of the
country’s main export – oil, which
along with gas accounts for over 98 per cent
of foreign currency earnings.
Market cap on the NSE slumped from over N12
trillion a year ago to N4.9 trillion dominated
by banks which accounted for four of the top
five equity capitalizations. First Bank heads
the table, valued at N428 billion, followed
by Nigerian Breweries at N275 billion. The
other three banks in the top five were Zenith
Bank (N251 billion), United Bank for Africa
(N211 billion) and Cuban Nigeria (N202 billion).
Indeed, it is a remarkable commentary on
the state of the Nigerian market that of
the top 20 capitalizations, no fewer than
15 are banks. Oil (African Petroleum) accounts
for just one, while industrials –
beer (Nigerian Breweries and Guinness),
and foods (Nestle and Dangote Sugar) make
up the balance.
Given the
way in which banking stocks have collapsed
in many, if not most, markets, this is quite
astonishing, suggesting that all is not
well with the Nigerian economy. If oil and
gas account for 98 per cent of exports and
15 banks stocks for more than a third of
NSE market cap, what does this mean for
the rest of the economy? Where are manufacturing
and non-financial services?
It is not just the oil price
that explains the NSE’s downturn.
At times over the past year, civil unrest
in the Niger Delta has cut daily oil production
to around 1.6 million barrels a day (mbd)
from a capacity rate of some 2.2mbd –
a 27 per cent reduction.
Then there is currency
weakness. In the official market, the
Naira, which admittedly has long been
overvalued, has lost more than a quarter
of its value, against a weak dollar
to N146.6 to the US unit, while the
street rate has tumbled to around N175.
Inflation is a serious problem too,
more than doubling from 6.5 per cent
at the end of 2007 to 15.1 percent last
December, before slowing fractionally
to 14 per cent in January.
Furthermore, GDP growth
is set to slow substantially this year,
despite the Government’s pump-priming
efforts with increased spending resulting
in a budget deficit of three percent
of GDP. GDP grew an estimated 6.5 percent
last year according to the Central Bank
of Nigeria (CBN),
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but this is unlikely to
exceed three per cent in 2009.
The authorities are in a quandary. Inflation
is high, real interest rates are negative
(the CBN lending rate is 9.75 per cent against
inflation of 14 per cent), interest rates
are rising, output falling and the currency
under serious pressure. In theory, the CBN
should be raising rates to stabilize prices
and the Naira, while easing monetary policy
to boost growth.
In 2008, Harare prices were
massive multiples of the JSE price, but
in mid-March the Harare price was only 60
percent of the Johannesburg price. This
reflects the scarcity of dollars in Zimbabwe,
as a result of which not only is there very
little trading, but prices are in retreat.
Until there are substantial inflows of foreign
aid, Zimbabwe’s economy will remain
in the doldrums
Four explanations stand out – the global
stock market malaise, the excessive market exuberance
of 2006/7 when stock market prices surged 18-fold,
the new prominence of the financial and banking
sector and the drastic economic slowdown on
the island, expected to push GDP growth to around
one percent - the lowest growth rate for a quarter
of a century. Between 2005 and 2007/8 banking
was one of the fastest-growing sectors of the
economy, accounting for 6.5 per cent of GDP
in 2007, only marginally smaller than the country’s
chief exporter, textiles (6.8 per cent). Because
16 of the 19 banks on the island are international,
as distinct from purely local operators, the
industry is exposed to global financial sector
contagion. With the weaker Rupee likely to maintain
upward pressure on prices, inflation, which
reached 10 per cent in 2008 is unlikely to fall
much below seven per cent this year forcing
the authorities to keep interest rates higher
than they would like at a time when the economy
is slowing drastically.
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None of this is good for equities which
are unlikely to mount a sustainable recovery
until 2010.After peaking in 2007 at 8420,
the Botswana Stock Exchange has done better
than most, falling some 23 per cent in local
currency (Pula) terms. However, when adjusted
for the depreciation of the Pula, equities
are down more than 40 per cent from peak levels.
The diamond-dependent economy, rated as one
of the continent’s most successful,
has been hit hard by the collapse of demand,
especially in the US for precious stones.
Consequently, GDP growth is projected to
fall to its lowest level in decades (one per
cent) while the budget deficit in a country
with a track record of years of budget surpluses
balloons to ten percent of GDP. Inflation
remains high at 11.7 per cent leaving very
little scope for monetary easing and interest
rate reductions.
Ghana is another African economy
whose credit rating has just been downgraded
– this time by Standard and Poors, who
cut the country’s rating to negative
because of its deteriorating economic outlook.
The S&P decision followed hard on the
heels of a similar downgrading by Fitch earlier
in March. Both agencies pointed fingers not
just at the global recession and weak commodity
prices, but loose fiscal policies ahead of
the recent elections which have left the country
with a budget deficit of 9.5 per cent of GDP.
S&P warns that government debt, already
52 per cent of GDP, could reach 60 per cent
in the next year while growth slumps to 3
per cent from 7.2 per cent in 2008 following
three successive years of 6 per cent growth.
The Ghana Stock Exchange is feeling the pressure
with equities which peaked last October down
more than 10 per cent at 9662.
While this retreat is more modest than those
for most other African bourses, because the
decline started later Ghana’s market
is probably only in the early stages of the
bear market. When the fast-worsening economic
fundamentals are taken into account the GSE
index seems set to fall below 9000 over the
next few months.
In sum, investors in African markets, in
common with those all around the world, will
have to sit out a difficult, volatile period,
during which prices are more likely to trend
downwards than upwards.To be sure, there will
be no shortage of African market analysts
pronouncing that the bottom has been reached
and prices can only rise, but the IMF’s
grim report in mid-March is a better guide
to future market movements than analysts with
shares to sell. |
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