Earnings outlook, equities at risk as Boko Haram claims Lagos presence

Corporate earnings, equity markets and growth prospects face downside risks as Islamist terrorist group, Boko Haram, over the weekend claimed responsibility for a bomb attack in Lagos, says Damina Advisors, a frontier market-focused research firm.

“The presence of Boko Haram terrorist operations in Lagos means the fundamental risks to the Nigerian economic outlook in 2014 have multiplied exponentially,” Damina says in a note released July 14.

“A major bomb attack in Lagos will accelerate capital market flight, weaken the naira, dent economic growth, reduce corporate earnings and slash equity market values,” says the research firm.

Stocks have risen just

4.14 percent this year, after returning 44 percent in dollar terms in 2013.

Nigeria’s real gross domestic product (GDP) growth strengthened to 5.5 percent in 2013, from 4.2 percent in 2012, recent rebased data from the National Bureau of Statistics (NBS) show. The naira is down about 2 percent versus the dollar this year.

The greater Lagos area, which is home to over 20 million Nigerians, more than 11 percent of the country’s total population, serves as the vital spinal axis underpinning Nigeria’s $503 billion economy, the largest in Africa.

Lagos as a distinct economy boasts a GDP of over $100 billion, which is larger than the entire economies of Ghana, Kenya or Uganda, and the economies of US states of Virginia, North Carolina, or Georgia.

The nation’s commercial capital has a GDP per capita of $4,000, 48 percent higher than the national average of $2,700. The average Lagos resident has a higher consumer purchasing power than the average Ukrainian, Indonesian or Filipino, according to Damina Advisors.

“With a rebased national economy that is now nearly 40 percent dominated by the Lagos-centred services sector, the migration of the Islamist terror threat from the poor north-eastern states into the heart of the country’s commercial capital has significantly raised the negative risks to the business sector,” Damina says.

Fund managers have been rotating into government bonds and treasury bills this year and selling riskier assets amid uncertainty over the forthcoming elections and growing security risks.

The Central Bank of Nigeria (CBN) sold N50.40 billion worth of six-month paper at a yield of 10.24 percent last week, while it sold N4.37 trillion in treasury bills in the first quarter of 2014.

A spike in violence by Boko Haram this year had previously had a muted impact on financial markets, as attacks had been largely restricted to the north.

Damina Advisors says, however, that the unbudgeted costs of new security infrastructure for major airlines, telecom companies, banks, gas stations, commercial buildings and other manufacturing industries will erode the profitability of many companies.

The foreign share of transactions on the Nigerian Stock Exchange (NSE), which has dropped in recent months from over 75 percent to 45 percent, is also expected to drop further.

Nigeria’s 2014 GDP growth could fall also towards 4.5 percent from the current bullish IMF estimate of 7 percent, Damina says.

The increasing trade linkages and co-dependencies between the Nigerian economy and those of other key African economies such as Ghana and South Africa means that the deceleration of the Nigerian economy will also negatively catalyse a generalised deceleration of economic activity on the African continent, according to the research firm.

BusinessDay