2022 - M i n d B o g g l i n g

Questions

Ìbéèrè ??? Presented by Bismarck Rewane

CEO, Financial Derivatives Company Ltd.
March 02, 2022
2

As if we didn’t have enough

problems, then comes
Ukraine/Russia
3

“Beware the Ides of March”

- Spurinna

“It seems to me most strange that men should fear,

seeing that death is a necessary end, which will
come when it will come”
- Julius Caesar
 The 5 Questions
4

I s R u s s i a n - U k r a i n e C r i s i s a 3 rd W o r l d W a r ( N u c l e a r o r
Cyber)?
Oil Price Down, Naira Down; Oil Price Up, Naira
Down- Is the Naira Doomed?

Is Nigeria Approaching a Fiscal Cliff or Is It All

Exaggerated Fears?

Nigerian Inflation Set to Decline – Why Are

Consumers Still in Tears?

Investing in a Pre-election Climate – Fixed Income,

Equities, Real Estate or Bitcoin?
5

Is the Russian Invasion of

Ukraine a 3 World War?
r d
 Russia & Ukraine – Global Importance
6
Russia…
 3rd largest oil producer
 17% of global gas
 Wheat & sugar behemoth
 Major producer of nickel, copper &
aluminum
Ukraine…
 Breadbasket of Europe
 Top supplier of rye and barley across
Europe
 9th biggest wheat producer
 5th largest global corn supplier
 Supplies about 50% of global sunoil
 Russian-Ukraine Crisis – 5 Dimensional Impact
7

Stranded Financial
Commodities
Nigerian markets
market in
students roiled by
turmoil
SWIFT

Energy crisis
Global debt
Oil, gas and
and debt
mineral
service soar
shortages
 5,000 Nigerian Students Stranded in Ukraine
8

Top Universities Reputed

 National Technical University “Kharkiv  Medicine

Polytechnic Institute” Bilateral relationships with foreign educational and scientific

 Engineering
institutions
 Taras Shevchenko National University of Kyiv  Aviation

 Ivan Franko National University of Lviv

 Sumy State University

Setbacks

 Major setback for Nigerian students - STEM

 Nigeria – Torn Between the Devil & the Deep Blue Sea
10

Global trade estimated at $5.3trn in 2022

Nigeria’s international trade = $8.15bn

Nigeria's major trading partners (%)

40 38
34.2
35 Pro-Russia Anti-Russia
30

25 • China • US
20 • India • EU
15 13.8
• Brazil • UK
9.4
10 8.1
4.7 • UAE • Others
5

0
China India Indonesia US Spain Belgium
 Energy Crisis – Brent at an 8-year High
11

 Brent crossed the $100pb benchmark – currently $118pb

 WTI trading at a record high of $110pb

 Natural gas price up 67% to $5/mmbtu YTD

 An incursion into Kyiv record global energy prices

 Russia exercised its veto power at the UN security meeting

 Vladimir Putin insists on attacking until Ukraine withdraws its intention of

joining the NATO

 Putin’s offense and premeditated approach sowing volatility

 Commodities Market in Turmoil
12

 The grain markets are also affected by the lingering tensions

 High demand amid subpar supply

 Nigeria – a net importer of food - at the receiving end of the equation

 Domestic price of flour, animal feed, cereals and more to climb again

14.91% YTD 11.21% YTD

Wheat Corn
 Financial Markets Roiled by SWIFT
13

 Russian Rouble tumbling as war on Ukraine persists

 The UK, US and EU have cut off Russian banks from the financial markets in
the west

 The banks are banned from using the Swift international payment system

 In response, the Bank of Russia increased its benchmark interest rate by

1,050bps to 20% from 9.5%

 “Russia is increasingly becoming an economic pariah, increasingly

isolated from the global financial system“ – Will Walker–Arnott
 Financial Markets Roiled by SWIFT
14

Asset Classes Performance (%) in 2022

Pre-Crisis During Crisis
15
10.4 10.95
10
3.8 4.35
5
0
-5
-10 -6.2 -6.53 -6.8
-8.76 -8.23
-15 -13.4
Gold S&P 500 NGX Bitcoin DJIA

Asset classes weathering an array of headwinds: geopolitical uncertainty,

high inflation, and elevated valuations
Geopolitical uncertainty bolstered investors appetite for safe haven assets
(gold)
NGX remains oblivious to the global crisis
 Debt Service Costs to Climb as Interest Rates Rise
15

 Global monetary policy authorities to embark on monetary policy

tightening spree

 US Fed to increase rates in March

 BoE signalling modest tightening

 Raised its key bank rate by 25bps to 0.5% at its February meeting

 Higher interest rates to push up debt service costs for emerging markets
and developing economies
 Implications for Nigeria
16

Exports Imports
Commodities Share of total Major imports
(%)
Sugar
Oil 74.6
Wheat
Gas 12.8 Rice
Others 12.6 Aluminum

Terms of trade
Export
prices
> Import
prices

 Nigeria will benefit from higher oil prices, but subsidy will be a major problem

 Fiscal gap will be funded through borrowing

 Debt service costs will increase as interest rates rise

18

Oil Price Up, Naira Down –

Is the Naira Doomed?
19
Oil Price , Naira ; Oil Price , Naira – Is the Naira Doomed?

 Answer – No

 Forex markets are volatile by nature

Oil Price Vs Exchange Rate

700
600 578
500
400 388.21
300
220
200 146
125 95.63
100 75.3 116
44 61
0
Obasanjo Yar'Adua Goodluck Buhari 2022
Oil price ($pb) Exchange rate (N/$)

*oil prices increased at the tail end of Buhari’s tenure

 Currency Depreciation is Not Nigeria Specific
20

10 years ago 5 years ago Current % Rate of

Depreciation

Nigerian Naira 161 363 578 +259.0

South African 8.47 12.36 15.36 +81.4
Rand

Ghanaian 1.90 4.52 6.5 +242.1

Cedis

Angolan 95.88 165.1 491.07 +412.2

Kwanza

 Despite economic reforms, currencies have shown extreme volatility

 Dollar is the most traded convertible currency

 70-75% of all trade is done in dollars
 Against Other Oil Producing Countries
21

10 years ago 5 years ago Current % Rate of

Depreciation

Nigerian Naira 161 363 578 +259.0

Saudi Riyal 3.75 3.75 3.75 -

Kuwaiti Dinar 0.28 0.30 0.30 -

 Some oil producers have stronger currencies

 Oil revenues were optimally, efficiently and prudently utilized

22

What Next for the Naira?

 Recent Steps taken by the CBN to Defend the Naira
23

Inventory of Policies Level of success

N5 for every dollar scheme Low

Import restrictions Not sure

Scrapping of BDCs Not sure

N65 per dollar ??

 Rebate – the silver bullet?

Rebate
Parallel market (N/$) = 580
N99/$
Official rate (N/$) 416 + 65 = 481

 Will exporters be willing to give up N99/$ out of patriotism? - NO

 What Should the CBN Do?
24

Increase forex
supply and force
price down Increase price to

significantly its fair value and

boost forex
supply

 Will push the market towards equilibrium

25
Value of Transactions to Maintain Upward Trend in March
Channels Jan’21 (N’bn) Feb’21 (N’bn) Jan’22 (N’bn) Feb’22 (N’bn)

Cheques 248.2 277.45 237.26 259.81

POS 489.24 468.91 573.72 575.06

NIP 18,892.81 18,734.46 26,645.18 27,182.01

NEFT 1,374.06 1,194.08 1,415.74 1,385.89

Total 21,004.31 20,674.90 28,871.90 29,402.77

Total value of transactions up 1.84% to N29.40trn in February 2022

42.24% higher than N20.67trn in February 2021

No seasonality effect among payment channels except cheques and NEFT

We expect the upward trend to continue in March on inventories build-up

25

ahead of the Easter holiday

27

Is Nigeria Approaching a
Fiscal Cliff or Is It All
Exaggerated Fears?
28
Is Nigeria Approaching a Fiscal Cliff? Yes, But Not There Yet

20 140
119.8
16.5 16.7 120
16.2 106.3
15 100
90.2
12.2 12.8 12.6 80
10 61.5 58.6 62.5 60
40
5 20
-1.9 -1.9 -1.6 -0.9 1.4 0.7 0
0 -20
'2017 '2018 '2019 '2020 '2021 '2022*
External Debt (%GDP) Total Factor Productivity (%) Debt/Export (%)

 Nigeria’s debt ratios rising but still within the acceptable limit

 But total factor productivity is declining

 Increasing the risk of a debt cliff

29
Nigeria’s Precarious Fiscal Position
29

Brent crossed Oil production FAAC Gross external

$100pb 6.06% 17.8% reserves 0.5%

Exchange rate Balance of trade Government debt Excess crude

1.23% (N576/$) 61.5% 7.13% account 98.57%
 Delayed Reform –Fiscal Gap Widening
30

 President Buhari has submitted a N3trn supplementary budget to NASS

 To make additional provision for fuel subsidy (N2.557trn)

 Initial subsidy provision was N500bn

 Compared to an estimated annual subsidy payment of N3trn

 Creating a shortfall of N2.5trn, increasing fiscal deficit to N8.9trn

Subsidy shortfall (N2.5trn)
Estimated annual +
N3trn
subsidy payment Fiscal Deficit (N6.4trn)
Shortfall N2.5trn
=
Provision for subsidy 39.06% Fiscal Deficit to N8.9trn
N500bn
in the 2022 budget
 FG Scouting for Funds
31

 Government trying to raise revenue by

 Introducing taxes

 Sugar tax - A N10/liter excise duty on all carbonated, non-alcoholic

and sweetened beverages

 Digital tax – A 6% tax on turnover for non-resident e-commerce

businesses

 Removing tax shelter on government T/Bills and securities

 Will mostly affect the banks, pension funds & insurance

 Total tax shelter approximated at N200bn

 Implications on Corporates, Investors and Consumers
32

Implications
 Increase effective tax rate on companies’ income

Corporates  Significant reduction of affected companies profit after tax

 Companies affected include banks, insurance firms & PFAs

 A lower PAT implies a reduction in dividend payments

 Will prompt rotation of portfolios from affected companies

Investors
 Lower investment and a fall in the national savings rate

 MPS MPC
Consumers
 Reduced consumption
33
Alternative Funding Options - Borrowing
33

Government
Borrowing

Domestic Foreign
Borrowing Borrowing

Ways &
Commercial Multilateral
Means Investors
loans institutions
Advances
 Alternative Funding Options - Borrowing
34

Domestic Borrowing Foreign Borrowing

Ways and Means advances –  Concessionary debt structure is

how sustainable? more appropriate

Will improve the risk profile

Debt service costs to increase
as interest rates rise Rating improves

Interest rate hike in advanced

economies to increase debt
service burden

Relevance of timing of borrowing

 Oil Price & Oil Revenue Paradox
36

 Rally in oil prices with no matching increase in government revenue

Pipeline
vandalism
and theft

The counter-
trade
Oil
transactions
production
sharing
contract
37

Is the Dangote Refinery Nigeria's

Hail Mary Pass?
Not Completely True!
38
Is Dangote Refinery: Nigeria's Hail Mary Pass?

Long petrol queues resurface

A nightmare no one wishes for

Dangote refinery to the rescue

MC > MR = Negative Profit
Pricing plays a major role
39

When will the Nigerian

consumer smile?
“Unfortunately, not anytime soon”
 Too Early to be Happy?
40

 Fall in food prices is sadly temporary

 Living costs are climbing

 Domestic airfares up by 100% - new price floor set at N50,000

 On higher jet fuel prices, spare part imports and forex scarcity

 A Lagos – Abuja return ticket now selling for over N100,000

 Rent payments up by an average of 20% as landlords discount for inflation

 Electricity costs also high

“Perhaps its still too early to be
happy”
 Inflation Biting Deep into People’s Pockets
41

 Headline inflation still high at 15.6%

 6.6% above the CBN’s target ceiling of 9% and growth retarding

 Disposable income bleeding profusely

 If you’ve been earning N200,000 as a monthly income – here’s what

inflation has done to your money

2019 2022

Inflation rate (%) 11.98 15.60

Real income (N) 176,040 168,800

The value of your N200,000 has fallen by 4.1% in the last 3 years, meanwhile costs keep climbing
 Will the Cycle Ever End?
42

 In the meantime, inflationary pressures will persist

 So the loop continues, till the CBN fully resumes its

primary function of price stability Exchange
rate pass
through effect

Insecurity
Logistics
costs and
Higher supply chain
energy disruptions
costs (PMS,
Money diesel &
supply electricity)
saturation
Planting
season
 Consumer Response
43

 Consumers to keep rationing income to prioritize necessities

 No incentive to save

 Stalling behaviour from FG in addressing harsh living conditions could:

 Trigger public unrest

 Increase the rate of emigration

 Worsen crime rate/cybercrime

45

CBN’s Unorthodox Policy

– How Sustainable?
46 Monetary – CBN Targets $200bn Non-oil Revenue in
3 Years
CBN targets $200bn non-oil revenue in the next 3 to 5 years

To boost forex supply and address currency pressures

Y = C + I + G + NX
$465.1bn $303.0bn $147.1bn $41.3bn -$29.9bn

This is equivalent to an annual increase of $70bn (17.5% increase in GDP)

Export earnings currently at $50.5bn

Of which crude oil accounts for 74.6% and gas accounts for 12.8%

Non-oil export earnings is currently 12.6% = $6.4bn

 The MPC’s Next Move?
47

 Next MPC meeting scheduled for March 22/23

 Major considerations would be:

 Inflation: 15.6% (Jan’22)

 Growth: 3.98% (Q4’21)

 Exchange rate pressure (Parallel: N576/$, IEFX: N416/$)

Next move:
Rate hike to 13.5% (probability 45%)
To taper inflation
In tandem with the global trend
 Status quo 11.5% (probability 55%)
 To keep stimulating growth at the expense
of rising inflation
 A huge disincentive to investment inflows
48

Investing in a Pre-election
Climate – Equities, Real
Estate or Bitcoin?
49

Investment in a Pre-election Year…Equites/Real Estate?

10.95% 16.9%

Nigerian Equities Real Estate

17.1% 8.00%
Dollar Investments –
Bitcoin
US Equities
 Global Fund Managers In 2022
50

Global fund managers confronting an array of headwinds: high

inflation, heightened geopolitical uncertainty and elevated valuations

Industry players are mitigating the impact through strategic

diversification, mergers and acquisitions and robust financing

Increasing capital flight from Russian investments to other emerging

markets

Industry players are buying into growth opportunities in private markets

and ESG funds (environmental, social and governance)
 If You Invested N10mn….2021 vs 2022 Returns
51

Investment Securities 2021 Return Investors’ 2022 –YTD Investors’

Return Return Return

US equities (S&P 500) 26.9% N2,690,000 8.00% - N800,000

Nigerian equities 6.07% N607,000 10.95% N 1,095,000

Avg. NTB (364 days) 7% N 700,000 5% N500,000

Real Estate 15% N1,500,000 16.9% N1,690,000

Bitcoin 59.7% N5,970,000 17.1% - N1,710,000

Uncertainty characterized by the geopolitical war coupled with

forthcoming interest rate hikes will dampen the investment climate

Bitcoin – best performing asset class in 2021 but unimpressive in 2022

Investors to remain cautious among risky assets

52
NGX Indices in February
 NGX ASI gained 1.65% in February
February
 All indices in green territory
NGX ASI 1.65%
 Reflecting investors renewed interest for
Nigerian equities market Insurance 2.53%

 Underpinned by impressive corporate Banking 2.76%

earnings
Industrials 2.82%
 Investors rotate their funds as fixed
Consumer Goods 2.32%
income yields slide
Oil & Gas 7.76%
 Rising oil prices spur gains in the oil and
gas industry
 Invest in Equities or Not?
54

 Equities to remain popular amongst investors as yields in the fixed income

space declines and inflation continues its upward trend

 Investors to buy into fundamentally strong stocks with attractive valuations in

a post-election year

 Oil & gas sector to continue its gaining streak, which will be bolstered by
soaring oil prices

 FX availability to improve cost margins of sensitive sectors

 Stock market sensitive to economic and political vulnerabilities

 Increased cost of borrowing will further reduce profitability

 Banking stocks to gather weak sentiment driven by the elimination of tax

shelter

 Reduced profitability likely to hurt dividend pay-outs

55

Corporate Earnings
 Zenith Bank- FY’2021 Earnings
56

 Zenith bank resilient despite a wobbly year

 Gross earnings up 10% to N765.6bn

 Underpinned by a 7% growth in net interest income to N320.8bn

 Attributable to loan growth

 Non-interest income increased by 23% to N309bn

 Bottom line grew by 6% to N244.6bn

 Supported by the reduction in interest expense and growth in

non-interest income
 Zenith Bank- FY’2021 Earnings
57

 Total assets up 11% to N9.45trn

 Total customer deposit up 21% to N6.42trn (increased

customer base)

 Investors set to enjoy mouth-watering final dividends

 Dividend up 3.7% to N2.8 (N2.7 in Dec 2020)

 NPL ratio declined by 2% to 4.19% (4.29% in Dec 2020)

 Liquidity (71.6%) and capital adequacy (21%) ratios remain

above regulatory thresholds

58
Elimination of Tax Shelter-Impact on Earnings and Dividend

Banking sector pays an average

2022*
(based on effective tax rate of 12% relative to
Zenith Bank 2020 2021
new tax a nominal tax rate of 30%
policy)

PBT (N’bn) 255.9 280.4 280.4 But effective tax rate expected to
surge due to tax shelter removal on
Tax Paid 25.3 35.8 84.12
(N’bn) FGN securities
Effective Tax 10% 12.8% 30%
Rate Dividend payment and share price
PAT (N’bn) 230.6 244.6 196.28 will be negatively impacted as
DPS(N) 3 3.1 2.6 profitability shrinks
Dividend 12.1% 0.2% to 2.7% to Investors will likely reposition and
Yield 12.3% 9.6%
hunt after attractive sectors
 Real Estate Update
59

 Annual GDP growth positive at 2.26%

 On increased investor confidence despite low consumer purchasing

power

 When inflation climbs, investments in housing and landed properties rise

 In a bid to hedge against inflation and garner reasonable yields

 But housing deficit still high at 22 million as affordable housing stays scarce

 Likely CBN intervention in housing sector to boost growth

 Demand for yield by investors amid short supply of real estate to drive
sector activities in the near term
 In the End…
60

 Investors should diversify their portfolio – depending on your risk appetite

 Real estate, equities and fixed income securities are more stable
options

 Compared to cryptocurrencies, due to high volatility in the global

markets
62

Aviation Update
 Aviation - Global Update
63

The aviation industry was already on the mend in Q4’2021

Most carriers were already projecting to reach the pre-pandemic load factors
by 2023

Singapore Airlines, the gold standard of aviation, reported a sharp

improvement in its earnings, load factor and yield in December 2021

Net profit stood at $62.8mn, its first positive earning since the pandemic

The Star Alliance, Lufthansa, Brussels and Swiss, all reported superior
performance in Q4’2021

Lufthansa recorded an EBIT of $19mn, for the first time since the pandemic
 Aviation - Global Update
64

Heathrow - the world’s 3rd busiest international airport - showing a slight

resurgence with passenger traffic reaching 2.6mn in January
This is 300% higher than January 2021

After 2 years of lower passenger traffic, with decline peaking at over 300%
to 19.39mn in 2021, Heathrow expects to return to profitability in 2022

The UK has stopped all COVID-19 restrictions for visiting passengers

The US is also following suit in dismantling COVID-19 restrictions for

vaccinated and boosted passengers
 Aviation - Global Update
65

Easing restrictions are expected to support the recovery momentum

of the global aviation industry

In Q3’21, the industry-wide operating loss was 2.6% of revenues

compared to 13.6% over the April-June period.

There continues to be renewed optimism about recovery

However, rebound not likely to be broad-based across all

markets

Meanwhile, several airlines have halted flights to Ukraine amid the

Russian invasion
 Domestic Travel Update
66

Positive 19.70% growth in 2021 compared to -36.98% contraction in

2020

On high demand mainly driven by sustained insecurity –

kidnappings

Domestic airfares to increased by 100% amid forex scarcity and rising

cost of aviation fuel

New United Nigeria Airlines and Air Peace partnership to advance

capacity of airlines
 Domestic VS International airfares
67

Domestic airfares rising at a faster pace than international airfares

The price of a flight from Lagos to Abuja has increased more than a Lagos
to London flight
LOS to ABJ LOS to LHR

81% 2.6%

 The IATA rate of exchange has been

stable at N444/$, indicating steady Feb'21
forex supply by the CBN to the airlines 411,562 422,158 Feb'22
VS

105500
58261
68
Domestic Travel Update
Nigerian passengers flying to the UK without a valid Schengen visa not
eligible to travel with European airlines
In the interim, this is likely to spur an uptick in demand for British Airways flights
to the UK

It will also create additional market for key regional players like Kenya and
Ethiopian airways

Emirates airlines has resumed flights to and from Nigeria

7 out of Abuja and 14 out of Lagos

The resumption of Emirates Airlines flights in Nigeria means a disruption to

Qatar Airways’ “monopoly”
68
69
Domestic Travel Update
Air Peace is helping bring passengers back from Ukraine

Meanwhile, domestic tickets remain high as airlines continue to record full

board
This is driven mainly by insecurity

69
71

The Race Begins!!!

 Political Update- 350 Days to Go!
72

President has signed the

Electoral Act

Feb 25th 2023 is the Presidential

Election Day

What are your predictions?

The process is just as important as the outcome

 A 3-Way Horse Race
73

vs vs

Capacity, Competence, Charisma: the 3 Cs

The 3 Ws: Battle of Wits, Wants & Wallets

 The Political Race Begins- An All Comers Game
74

The race begins February 25, 2022 Timeline:

THE CONTESTANTS

Front Conventions Campaigns

Dreamers
Runners
Primaries Elections

Dark Horse

Political Sure
Mercenaries Bankers
 Players to Watch- many are called but few are chosen
75

Muhammed Atiku Bala Aminu Bola Kayode

Yemi
Hayatu-deen Abubakar Mohammed Tambuwal Tinubu Fayemi
Osinbajo

Nyesom
Wike Rotimi Godswill
Bukola Saraki Amaechi Akpabio
 Political Levers of Control
76

Security Judges
Social Mainstream Retired
Agencies Media and
media Generals
Judiciary

International Crime
Influencers Corporate
Financial Syndicates Incumbent
and Nigeria Community Administrations
Celebrities
77

What Next??
Expectation, Anticipation & Breath-Holding
 Data Release Calendar
78

 OPEC meeting – March 2

 US Fed meeting – March 15/16

 February inflation – March 15

 MPC meeting – March 22/23

 What Next?
79

 GDP growth to remain mildly positive as base effect wanes

 Official headline inflation will fall in February (15.4%) before picking up

more rapidly to 15.6% in March

 Food and energy prices will remain high, further eroding consumer
disposable income

 Fuel scarcity could linger as Russia-Ukraine tensions delay PMS imports

 Exchange rate pressures to persist at both parallel and IEFX markets

 Rising oil prices to mildly support external reserves accretion

 And boost the CBN’s forex intervention efforts

 What Next?
80

Non-oil exports’ contribution to forex revenue will be flat

N65/$ rebate will be mostly ignored

Force majeures and oil bunkering will increase at the expense of the FGN

Stock market performance could be bullish as yields on fixed income

instruments remain low

Domestic investors will keep their eyes on corporate earnings

International investors will be more focused on the electoral risks

 What Next?
81

CBN will maintain status quo but will commence mopping up liquidity

After the convention this month, the APC will splinter

The PDP will be embroiled in a zoning squabble

This is the long awaited dance- Azikiwe

82
 Bismarck J. Rewane, MD/CEO
Financial Derivatives Company Ltd.
Lagos, Nigeria
01-6320213

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