Monthly Economic News and Views

At

Lagos Business School
(Executive Breakfast Session)

B.J. REWANE
FINANCIAL DERIVATIVES CO. LTD. April 03, 2007

Outline
Policy & Political Update Activity Wrap Up Oil Markets Inflation, Money Market and Interest Rates Forex & External Reserves Outlook for April
Financial Derivatives Company Limited

The Final Days – The last scramble for contracts
Federal govt. releases excess crude oil fund to the states ahead of elections. Total Naira released is N489bn or approx. 10% of money supply A rash of contract awards in the dying months of the administration is raising eyebrows both at Federal and state levels There are rumours of a cabinet dissolution in the offing for April
Financial Derivatives Company Limited

The Final Days – The last scramble for contracts
FGN is putting 30 oil blocs for sale on May 2, 2007 This is almost identical to the final days of the Abdulsalam Abubakar administration in which oil blocs were given away to their cronies Many of those awards were subsequently overturned by the present administration

Financial Derivatives Company Limited

The Final Days – The last scramble for contracts
This time the govt. is supposedly insisting on a 50% down payment Edmund Daukoru the oil minister has visited China trying to drum up interest in the acreage blocs. He has expressed confidence that the blocs will be fully sold before the end of this administration

Financial Derivatives Company Limited

Power Supply – No light at the end of the tunnel
Power generation has collapsed again to below 15% of generation capacity Power Holding Company was forced to close down Egbin power station on March 11 to clear a blockage in a gas supply line It subsequently said it had restored 600MW of supply at Egbin and the PPMC has been directed to arrange regular supply of fuel to fire one turbine which has added 200MW to the grid
Financial Derivatives Company Limited

Power Supply – No light at the end of the tunnel
Arrangements have also been made to increase water flow into Jebba to start a turbine that will generate another 900MW The near collapse of power supply has become a huge political embarrassment to Obasanjo and the PDP

Financial Derivatives Company Limited

Policy Update
It was the first major policy promise made by Obasanjo and the late Charismatic Bola Ige in 1998 Eight years later and a few billion dollars spent, there is no flicker at the end of the tunnel All NITEL lines in the Lagos area went down for 2 days because of power outage and no funding for diesel This is a black eye for the newly listed

Financial Derivatives Company Limited

Nigeria : Electricity Industry & Distribution Company Data

Source : African Energy

Financial Derivatives Company Limited

Policy Update -

Niger Delta still a hot spot

The FGN launched the Niger Delta Development Master Plan estimated to cost N6.3trn over a five year period Exploration and production companies to contribute 6% of the budget In spite of the fanfare of the launch, violence and kidnapping has continued

Financial Derivatives Company Limited

Policy Update -

Niger Delta still a hot spot

In the past year over 100 workers have been kidnapped. Higher security costs and a shrinking number of expats is becoming a problem in the Niger Delta IFC commits the sum of $155m to back the sale and privatization of the Eleme Petrochemical Company to Indorama International Finance, an Indonesian private investor

Financial Derivatives Company Limited

Policy Update June 2005

Niger Delta still a hot spot

Six oil workers including two Germans kidnapped.

11 January 2006 Shell oil pipeline attacked in Brass Creek area. Four foreign workers taken hostage in
Bayelsa. Previously unknown Movement for the Emancipation of the Niger Delta (MEND) claims responsibility

15 January 15 February 18 February 19 April

Separatist militants attack Shell pumping station in Benisede, seven killed including two Shell workers. Helicopter fires on barges used to smuggle oil near separatist base; militants strike back Separatists kidnap nine foreigners working for Shell subcontractor Wilbros. Car bomb in a barracks explodes in Port Harcourt, killing two. MEND claims responsibility

Courtesy of African Energy
Financial Derivatives Company Limited

Policy Update 29 April 10 May 3 August 3 October 10 October 6 November

Niger Delta still a hot spot

Car bomb activated by mobile phone explodes at an oil-tanker stop in Warri. MEND claims responsibility, said to be Nigeria’s first car bomb. US national working for Baker Hughes shot dead in Port Harcourt. Five members of Survicom, a Shell contractor working on a topographical survey in Rivers state are killed Seven foreign workers – four Britons, one Romanian, one Malaysian and an Indonesian – kidnapped from an ExxonMobil compound in Eket. Released soon after Militants seize a Shell oil pumping station in Oporama capturing 60 oil workers. Released shortly after. Gunmen take control of Agip’s Tebidaba flow station in Bayelsa state. After a twoweek siege, 40 Agip hostages are released

Courtesy of African Energy
Financial Derivatives Company Limited

Policy Update 22 November 18 December 21 December

Niger Delta still a hot spot

British oil worker David Hunt killed when troops try to free seven foreigners abducted from a vessel belonging to a Eni subsidiary Two bombs explode in Port Harcourt – one near the company of Italy’s Agip and one in the Shell residential compound. No casualties. MEND claims responsibility Gunmen storm the Total-operated Obagi field facility in Rivers state, three guards killed. Another group takes over an Eni facility. The companies shut down production at both facilities, some 80,000 b/d Car bomb explodes outside government office in Port Harcourt in the first targeting of a government installation by a militant group

23 December

16 January 2007 Two oil workers – one Nigerian and a Dutch national – are killed when gunmen

attack a boat operated by Hyundai transporting workers from Bonny Island to Port Harcourt

Courtesy of African Energy
Financial Derivatives Company Limited

Policy Update 7 February 23 February 6 March

Niger Delta still a hot spot

A 59 year oil French engineer working for Total is kidnapped in Port Harcourt Lebanese worker killed and another injured, along with the driver, when a car is attacked near Port Harcourt airport. Two Italians kidnapped by speedboat. Government says it has deployed more gunboats to the Delta. Oil output in Delta reportedly down by over 600,000 b/d, with Shell losing 187,000 b/d to a spill on its trunk line. 26 Filipinos kidnapped in Bayelsa became subject of CNN documentary

28 March 2 April

3 contractors kidnapped in Port Harcourt area 2 Lebanese kidnapped and four policemen killed

Courtesy of African Energy
Financial Derivatives Company Limited

Policy Update – Fitch retains rating
The project is structured to allow for 10% of NNPC’s residual interest to be owned by the community. Standard Bank, UBA and Fidelity are the local lenders of $90m of facilities Fitch cites the positive comparison between Nigeria and its peer group in the BB rated category One of its major striking ratios was that External Reserves were 163% of Broad Money with 11.1% months of import cover
Financial Derivatives Company Limited

Policy Update – Fitch retains rating
Fitch reaffirms Nigerian BB- rating in spite of significant and increasing political challenges Analysts were pleasantly surprised at the rating but considered its timing curious Coming after the mending of fences with the CNN after the Philipino hostage saga. It was welcome by the Nigerian govt. Fitch outlined the improving financial ratios, reform progress and strong growth in the non-oil sector

Financial Derivatives Company Limited

Policy Update – Fitch retains rating
It cites the massive increase in public investment to bolster the country’s inadequate infrastructure Nigerias growth prospects are good and its diversification away from hydrocarbon dependence is looking distinct The report expresses concerns about the coming elections and the risks of stability and the democratic structures

Financial Derivatives Company Limited

Policy Update – Fitch retains rating
It takes comfort in the promise and likelihood that all candidates will embrace reform Fitch claims that relative to its peers, Nigeria is a compelling case for a positive rating and a reaffirmation of the current IDR (Issuer Default Rating)

Financial Derivatives Company Limited

Policy Update – Fitch retains rating
Nigerias financial ratios much better than the BB category median Peer Comparator Table 2009
Indicators (%) Nigeria BB Median Real growth GDP 5 year average 6.3 5.2 Per capita income 843 2652 Investment GDP 5 year average 23.7 21.1 Inflation 5 year average 13.7 6.7 Budget balance GDP 12.7 -2.8 Government debt GDP 16 42.2 Current account balance GDP 20 -0.8 Net External Debt : GDP -35.2 14.9 Reserves : GDP 35.5 15.5
Source: Fitch
Financial Derivatives Company Limited

Policy Update – Fitch retains rating
Key Indicators and Projections by Fitch 2007 Real GDP Growth (%) 6.0 Gross Domestic Savings as % of GDP 35.9 Gross Domestic Investment as % of GDP 27.0 Growth in Broad Money (%) 25.0 Exchange Rate 126.5 REER % change appreciation 3.0 External Debt Gross ($bn) 6.9 External Reserves ($bn) 55.9 Months cover imports 11.6 External Reserves as % of M2 163.0 External Debt Service as % of Exports 2.3 Current Account Balance ($bn) 10.2 Fiscal (Deficit)/Surplus as % of GDP 5.0
Financial Derivatives Company Limited

2008 6.5 33.9 28.3 17.0 125.5 2.0 7.7 66.7 12.5 168.0 1.5 6.7 5.5

Policy Update – Goldman is cautiously optimistic
Goldman Sachs, the highly reputed Investment Bank, has initiated coverage on Nigeria on March 29 with a title “Nigeria Medium Term Outlook clouded by near term election risk” It says that foreign reserve build up has been strong Paris Club write-off and high oil prices reduce external risks

Financial Derivatives Company Limited

Political Update – The finish line is still blurred
Appeal court ruling on general principles of law on INEC’s power and High Court Ruling on Atiku specific affirming his eligibility is roiling the political space The probability of an extension of the electoral timetable to accommodate a presidential election postponement is getting higher Alternatively an AC/ANPP and coalition of the unhappy parties is also seeming more likely
Financial Derivatives Company Limited

Political Update – The finish line is still blurred
The election has now become a referendum on Obasanjo to the delight of the opposition Yar’Adua remains marginal favourite in a three way race because of incumbency and resource endowment In a two way race and an alliance of the AC/ANPP, Buhari looks very good

Financial Derivatives Company Limited

Financial Derivatives Company Limited

Activity Wrap Up – Pre-election spending gravity
Speculative build up ahead of the elections has led to some bunching of deals and transactions All indicators point to a stronger than expected March both in volumes and value Early April seems to be a continuation but could be hit by Muslim, Easter and election conference of events Value of cheques cleared through the Lagos clearing house which usually represents approx. 60% of National transaction flows was up 1.7% to N675bn
Financial Derivatives Company Limited

Activity Wrap Up
Forex demand at the auction was up 1.2% to $1.07bn in March There was also significant activity in the interbank market and the BDC corridor Ships berthing at Apapa and Tincan Island are up 2.5% to 65. This is 32.8% above corresponding level in 2006 Apapa and Tincan is attracting more shipping and cargo traffic because of its faster clearing and turnaround time
Financial Derivatives Company Limited

Activity Wrap Up
Hotel occupancy in the key markets is up in Abuja and Lagos and declining marginally in PHC With 3 carriers operating 10 frequencies into PHC (NAF) base, day return visits are back again Feb. March % change
PH Lagos Abuja 70% 70% 60% 65% 73% 65% (5) 3 5

Financial Derivatives Company Limited

Activity Wrap Up
Airline load factors were uncharacteristically strong in all directions over 50% of international ticket sales are now ex-Nigeria i.e. in foreign currency and diaspora This indicates that international travel is not a drain on the capital account

Financial Derivatives Company Limited

Activity Wrap Up
Load Factors
International - Europe March
Outbound Inbound 85% 90% 90% 80% 75%

April
80% 70% 75% 65% 65%

USA
Outbound Inbound

Domestic
* April figures represent booking levels

Financial Derivatives Company Limited

Activity Wrap Up
Higher frequency of travels before elections VNA opened up Lagos – PH (NAF BASE) with very strong market presence Cameroon airlines has closed shop and is being taken over by a private concern VNA and North American airlines have entered into a cooperation agreement with NAA selling VNA destinations into PH and Abuja. A code share is planned shortly
Financial Derivatives Company Limited

Activity Wrap Up
Royal Air Maroc has commenced flights from Casablanca to Brazzaville via Douala 3 times a week Commencement date of open skies agreement between E.U. and the U.S. pushed forward to march 08 to allow for opening of Terminal 5 at Heathrow After the speculation of a bid by Lufthansa German Airlines to takeover Iberia, another interesting bid is now on the table
Financial Derivatives Company Limited

Activity Wrap Up
Texas Pacific Group a private equity firm has approached Iberia with a $4.5bn bid, the first attempt at a cross-border takeover since the new open skies agreement between the U.S. and Europe Multilinks the PTO with a very loyal and strong subscriber base in the Lagos area has sold 75% of its equity to Telkom of South Africa for $280m. Multilinks have a unified license and is very well positioned to compete
Financial Derivatives Company Limited

Activity wrap up
Telkom also bought Internet Service provider Africa Online for $20.25m. The purchase gives Telkom a base outside South Africa where its fixed line revenue is stagnating. Africa Online operates in a number of Regional markets including Ghana, Kenya, Namibia, etc MTN had earlier acquired VGC Communications for $60m, which already has a unified license

Financial Derivatives Company Limited

Activity wrap up
Competitive pressures are beginning to manifest in all segments of the Telecom Industry UBS Investment bank has raised its estimates for MTN longer term penetration assumptions. Its five year (Dec. 2011) assumption of average penetration across MTN’s sub-Saharan Africa region is now 39% and includes Nigeria at 47% UBS estimates total subscribers in Nigeria to reach 75m by Dec 2011. Current market estimates are 27m
Financial Derivatives Company Limited

Oil Markets – Oil prices bounce back
Oil prices surged to a six month high in April. Bonny has reached $69.34pb and New York light sweet crude traded at $66.54pb before retreating sharply Rumours that a U.S. citizen has been reported missing in Iran pushed prices up over $1.70pb The standoff between Britain and Iran over the fate of 15 British sailors held for trespassing Iranian waters had roiled the markets sending prices far beyond equilibrium
Financial Derivatives Company Limited

Oil Markets – Oil prices bounce back
The fear that Iran could disrupt world oil flows by blocking the strait of Hormuz through which 17 million barrels of crude oil pass through a day

Financial Derivatives Company Limited

dollars per barrel

80 78 76 74 72 70 68 66 64 62 60 58 56 54 52 50

Oil Markets

Crude Oil - New York Mercantile Exchange

Financial Derivatives Company Limited

March 23 = $62.28

4/ 10 4/ /06 24 /0 5/ 6 8 5/ /06 22 /0 6/ 6 5 6/ /06 19 /0 7/ 6 3 7/ /06 17 7/ /06 31 8/ /06 14 8/ /06 28 9/ /06 11 9/ /06 25 10 06 / 10 9/0 /2 6 3 11 /06 / 11 6/0 /2 6 0 12 /06 / 12 4/0 /1 6 8/ 0 1/ 6 1 1/ /07 15 1/ /07 29 2/ /07 12 2/ /07 26 3/ /07 12 3/ /07 26 /0 7

Oil Markets – OPEC maintains quota
OPEC maintained its production quota at its meeting on march 15 claiming that its happy with $60pb Royal Dutch shell has restored significant portions of its lost production in the Nembe creek In Nigeria, the rig count has been declining in view of the restiveness in the Delta Production is however beginning to climb reaching 2.25mbp in February
Financial Derivatives Company Limited

Oil Production (2006/07)

2.45 2.40 2.35 2.30 2.25 2.20 2.15 2.10 2.05 2.00 Jul Feb O ct May Nov Aug Dec Sep Feb Jan Jun Mar Apr Jan

m bpd

Source: OPEC

Financial Derivatives Company Limited

Oil Markets
Canada based Addax petroleum has entered into a farm out agreement with Star Crest Nigeria Energy It has signed a production sharing contract in respect of deepwater OPL 291. The block is situated near Agbami Oil field being developed by Chevron

Financial Derivatives Company Limited

Oil Markets – April will be good for oil
Outlook for April
We expect Bonny light to trade above $60pb through April, even if there is a diffusion of tension in the gulf of Arabia The Niger Delta could witness some extra activity over the election period in Nigeria, cutting off some production

Financial Derivatives Company Limited

Financial Derivatives Company Limited

Money Supply & Interest Rates – Excess
liquidity is depressing rates

The release of the monthly statutory allocation together with the excess crude payment made up an aggregate of N488bn in March, an equivalent of approx. 10% of money supply The excess liquidity created depressed short term rates below the CBN rate of 7% p.a and an unprecedented oversubscription of govt. securities by 277% Bond yields have fallen sharply forcing an inversion of the yield curve for maturities over 12 months
Financial Derivatives Company Limited

Money Supply & Interest Rates
The stop rate on 90 day T/Bills is now down to 6.30%, meaning that 90 day yields is lower than overnight rates Broad money supply growth in 2006 was 27% and is targeted at 17% in 2007 At current growth rates of M2, inflationary pressures will be ignited in Q2 and Q3 CBN remains determined to leave rates and policy unchanged through Q1 and Q2 as promised There has been a general decline in lending rates by approx. 150 basis points since January
Financial Derivatives Company Limited

Money Supply & Interest Rates
Yield Curve as at Mar 26th, 2007
14.00 12.00 10.00 8.00

%
6.00 4.00 2.00 OBB 7 Days 30 Days 60 Days 90 Days 180 Days 365 3-Year 5-Year 7-Year Days

Financial Derivatives Company Limited

Inflation – Prices begin to climb
The monetary policy committee in its communiqué on Feb. 7, confirmed that food inflation was 3.9%, whilst headline inflation was down to 8.5% It confirmed that core inflation which is price changes after discounting seasonal factors was up at 17% This is the first time that core inflation has been segregated
Financial Derivatives Company Limited

Inflation
Energy costs is driving up the producer price index. Upper class incomes are spending approx N10,000 per day on diesel FDC urban retail consumer price index increased by 0.66% to 10.81% in Feb. and is expected to increase in March Inflationary pressure would have been more if not for Naira appreciation against the dollar of 9% since 2005 and effective fiscal surplus in 2006
Financial Derivatives Company Limited

Specific Price Movement - February 2007
80

60

40

20

%

11
0

Cement

G arri

Maiz e

Ric e

Yam Flour

Candle

Eggs

Roofing Sht

Bournv ita

-20

-40

FDC Market Survey

-60

Financial Derivatives Company Limited

Keros ene

Paints

Sand

Inflation
Outlook
Look out for higher price levels in March and April With diesel at N82 per litre and higher wage pressure, price levels is bound to spike

Financial Derivatives Company Limited

Financial Derivatives Company Limited

Forex Management
With slippage in External Reserves to $41bn, CBN has maintained Naira parity with the U.S.$ The apex bank increased total forex sold at WDAS by 1.2% to N1.06bn in March This resulted in the mopping up of over N130bn of liquidity The official exchange rate appreciated by 0.16% to N126.79 from N127 The Fed. Reserve left rates unchanged thus allowing for some slippage against other currencies
Financial Derivatives Company Limited

Forex Management
Exchange Rate 2006/07
155 150 145 140 N/$ 135 130 125 120 115 Jan Source:CBN Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Official Interbank Parallel

Financial Derivatives Company Limited

Forex Management
Outlook
With interest rate differential in favour of the U.S. dollar, we can expect some speculative short term buying of dollars The parallel market will remain stable if there is a smooth election

Financial Derivatives Company Limited

Stock Market – The rally continues
Market gained approx 3% in the last 3 weeks with an all share index of 43,456.14 and a market capitalisation of N6.15 trillion The results of O and O with a turnover N209bn and profit N2.79bn up from N1.51bn was welcomed by the market. A dividend of N4.00 and a dividend yield of 5.6% Benue Cement reported a fascinating 50% PAT of N3bn on a turnover of N6bn to the delight of the market
Financial Derivatives Company Limited

Stock Market
The market is still grossly overvalued and is trading at 37 times earnings In spite of its price UBA and Oceanic bank issues are still very hot and sizzling Nigerian banks continue to tap the Eurobond market in London but are facing investor apathy

Financial Derivatives Company Limited

Stock Market
FBN subordinated Bond (senior debt) raised only $175 at a coupon of 9.75 and an Issue price of 99.035 lead arranger is Merrill Lynch which has supported the bond at 99.28 The problem for Nigerian banks is the GT Bank bond which lost 60 cents on the first day of Issue. Standard Bank failed to support it. The bond is trading at 2.75cents below its initial price There is currently limited appetite for Nigerian bank paper
Financial Derivatives Company Limited

Financial Derivatives Company Limited

Corporate Results
Company
Sterling NIB UBA IBTC FCMB Diamond Guinness CAP Oando Dangote BCC

Period Ended
3 Mths Dec ‘06 FY Dec 06

Earnings (Nbn)
4.5 16.5 22.1 16.6 17.7 28.5 29.37 1.98 209.2 83.7 6.03

%
221.4 65 27 170.5 69 79.25 7.6 30.26 14.5 50.54

PAT (Nbn)
0.63 7.7 4.5 4.8 3.6 4.6 4.73 0.31 2.79 16.65 3.10

%
216.5 148 139 86.96 97 82.5 20.7 55.2 84.8 38.4

EPS
15 276 168 50 48 73 537 149 316 125

P/E
27.85

3 Mths Dec 06 9 Mths Dec 06 9 Mths Jan 06 9 Mths Dec ‘06 6 Mths Dec ‘06 FY FY FY FY Dec. ‘06 Dec ‘06 Dec '06 Dec .'06

22.67 22.71 17.36 14.59 22.01 27.01 16.35 47.5

Bank Breweries F, B & T Pet. Marketing

Average Growth in Earnings 105% 7.6% 60.5% 14.5%

Financial Derivatives Company Limited

Average P/E 21.6 23.63 20.1 16.35

Outlook for April
Political volatility along with judicial pronouncements A greater scramble for spoils as we approach the finish line The rush to the Eurobond market by Nigerian banks will ease off The first few Naira corporate bonds will be issued in April/May

Financial Derivatives Company Limited

Outlook for April
Inflationary pressure resulting from the accommodative stance of the CBN on monetary policy will being to manifest Profit taking by some margin traders to cover transaction and carrying costs may trigger selling stocks Dividend disappointment based on normal results will lead to portfolio rotation

Financial Derivatives Company Limited

Thanks for your attention