36 BUSINESS DAY C002D5556 Monday 09 April 2018 ECONOMY ENDURANCE OKAFOR Markets Intelligence Yield curve flattens on Fiscal and monetary policy synchronisation The recent synchronization between the fiscal policy and the monetary side has help bring down the yield curve down in the first quarter of 2018. Moderating inflation rate, a positive economic growth, a loosened monetary policy in terms of the creation of the Investors’ & Exporters’ FX Window and naira devaluation coupled with reduction in domestic borrowing, are the catalysts to the flat yield curve recorded in the quarter. The Debt Management Policy of the Nigerian Federal Government is to attain 60 percent of domestic borrowing, that is, Treasury Bills, FGN Bonds, Savings Bonds & Green Bonds, and then 40percent of foreign debt through euro bond issuance as compared to the current ratio position of about 75:25 percent respectively. Nigeria has a Treasury bill portfolio of N2.7 trillion and paid off N198 billion worth of bills in December 2017, leading to rates dropping by around 300 basis points. The Debt Management Office (DMO) issued in February 2018 US$2.5 billion in Eurobond as part of its on-going debt restructuring strategy aimed at increasing external debts and cutting down on domestic debts, the issued bond is to be used to redeem relatively more expensive domestic debt instead of rolling them over like Meanwhile, the rate at which the prices of goods and services increase in Nigeria (inflation) moderated to 14.33 percent in February from 15.13 percent the previous month, making it the thirteenth straight month of decline, but still remains well above the 6-9 percent preferred band, according to data provided by the National Bureau of Statistics (NBS). The Monetary Policy Committee (MPC) last week Wednesday held its benchmark rate of 14 percent for the ninth successive time since raising it by 200 basis points in July 2016, in a bid to allow inflation rate moderate further. Nigeria’s Purchasing Managers’ Index (PMI) rose strongly in March, expanding from 54.7 percent to 59.4 percent. FSDH sees Nigeria inflation slowing for fourteen successive months to 13.49% MICHEAL ANI FSDH Merchant Bank Limited, has predicted a drop in the rate of inflation (yearon-year) from 14.33 per cent recorded in February to 13.49 per cent in March 2018, according to a recent report released by its research team. This would mark the fourteenth month that prices have cooled. The expected drop in inflation rate is premised on the base effect of higher prices in the Composite Consumer Price Index (CCPI) in March 2017 than the current month. The Monetary Policy committee (MPC), on Wednesday left its repo rate at a record high of 14 per cent since July 2016 in its first meeting this year, after a political standoff between the executive and the senate, prevented a quorum for months. The committee held its gun, in a bid to curtail spiralling inflation which soared to an 11-year high in April 2016, following a big naira devaluation and an upward review in the retail price of petrol. “We expect the rate of inflation to cool 0.84 bps to 13.49 percent in March 2018,” FSDH said, ahead of an official release by the National Bureau of Statistics (NBS) on April 16. before. US$1.25 billion was issued in 12-year tenor Eurobond maturing in 2030 and a second tranche of US$1.25 billion in 20-year tenor Eurobond to mature in 2038. The yields on the 12-year tenor bonds came in at 7.14 percent, 425 basis points premium on 10-year US treasuries while the 20-year tenor bond was priced at 7.68 percent, 455 basis points premium on US treasuries. A flattening yield curve indicates the yield spread between long term and short term is decreasing, that is, a decline in the gap between yields on short-term bonds and yields on long-term bonds. This makes the curve become less steep. Although, the normal shape of the yield curve is generally known to be upward sloping. The monthly Food Price Index (FPI) from the Food and Agriculture Organization (FAO) released shows that the Index was up 1.05 percent to 172.8 points in March from the revised value for February. The increase recorded in the FPI was because The inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This is considered to be a predictor of economic recession. Flat yield curve is often seen during transitions between inverted and normal curves and as such the investor does not gain any excess compensation for the risks associated with holding longer-term securities. It is typically indication that investors and traders are worried about the macroeconomic outlook. One reason the yield curve may flatten is market participants may be expecting inflation to decrease or the Federal Reserve to raise the federal funds rate in the near term. of a strong recovery in dairy and cereal prices. The FAO Dairy Price Index appreciated by 3.26 percent in March as prices of butter, Whole Milk Powder (WMP) and cheese were on the increase. This increase was mainly supported by strong global import demand and lower than expected milk output. The FAO Cereal Price Index was also up by 2.67 percent from February. The sustained increase recorded in the cereal price Index is as a result of the rise in the prices of most of the major cereals. The FAO Meat Index was up by 0.32 percent driven by the increase in the prices for ovine meat, pig meat and poultry meat. On the flip side, the FAO sugar Price Index dropped by 3.4 percent. The drop in the Index is on the heels of favourable supply conditions in the main sugar producing regions, and a weaker Brazilian Real. The FAO Vegetable Oil Price Index was down by 0.77 percent as soy, rape and sunflower oils prices dropped The naira remain stable at the parallel market, but gained The shape of the yield curve is often used by economists and investors to gain insight about what is happening in an economy. When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates. It may also reduce the incentive for banks to lend to the private sector as they often prefer to invest in lower-risk or risk free Government securities. For consumers an inverted yield curve has an impact when their loans have interest-rate schedules that are periodically updated based on short-term interest rates. Many Nigerian consumers experienced this last year when some banks sent out notifications increasing the interest rates on current loans. 0.08 percent at the inter-bank market to close at US$/N305.65 from US$/N305.90 at the end of February. FSDH said that “the appreciation recorded at the inter-bank market between the two months under review moderated the impact of the imported consumer good prices in the domestic market”. The prices of most of the food items in March 2018 recorded moderate appreciation, leading to 1.12 percent increase in Food and Non-Alcoholic Index. The Index increased by 16.31percent from 229.71 points recorded in March 2017. Furthermore, there was increase in the prices of Transport and Housing, Water, Electricity, Gas & Other Fuels divisions between February and March. “We estimate that the increase in the CCPI in March would produce an inflation rate,” FSDH said.
Monday 09 April 2018 Start-Up Digest In BUSINESS DAY 37 association with How FIIRO directors frustrate Nigerian SMEs ODINAKA ANUDU Date was January 27, 2015. Jon Kachikwu, chief executive officer of a small-scale food processing and export firm known as Jon Tudy Interbiz, addressed a letter to the director-general of the Federal Institute of Industrial Research, Oshodi (FIIRO), requesting the fabrication of groundnut frying and chaf removal machines, otherwise known as groundnut roaster and dehuller respectively. The letter was acknowledged on that same date by one Abraham C.O., a staff member of FIIRO. It took FIIRO 17 days to reply this letter on February 13, 2015. The institute, through one of its directors, W.B. Asiru, sent a quotation to Jon Tudy Kachukwu. A document seen by BusinessDay showed the price of groundnut roaster (680kg/ hour) as N680, 000 and that of groundnut dehuller (800kg/ hour) as N650, 000. Kachikwu paid N770, 000 into FIIRO’s account as part payment for both machines on February 18, 2015, a document seen by BusinessDay showed. The entrepreneur later completed the money to N950, 000, which, according to him, was acknowledged by FIIRO. Till April 24 of that year, FI- IRO did not supply the said machines to Kachikwu, prompting the entrepreneur to write to the agency. A letter addressed to the director-general of FIIRO read: “With reference to the above subject matter which was dated February 13, 2015, we wish to remind you sir that the delivery date and installation of the machines have elapsed. “As per your quotation, we were requested to make a 70 percent down payment and 20 percent after four weeks, balance 10 percent after installation and testing. On our part we made the mandatory 70 percent down payment, after four weeks, we contacted the relevant department in order to make additional payment and we were asked to hold on. It is over eight weeks and our machines are yet to be delivered. “This delay has messed up our projection for the year. Our workers are redundant and salaries are not being paid. While we are still waiting for your organisation to sort things out, we would suggest you allow us to make use of your machines in order to cushion the effect of this unfortunate delay.” The institute did not make any machine available to Kachikwu as requested. Jon Kachikwu Due to FIIRO’s inability to produce the two machines paid for, Kachikwu temporarily requested a contract with the government agency whereby it could dry groundnuts on his behalf pending when the machines would be ready. Kachikwu requested that FIIRO dry between five and 10 tonnes of groundnut within the next 30 days. “But they could not deliver on this,” Kachikwu told BusinessDay. In 2016, FIIRO supplied the two said machines to Kachikwu, but they were faulty and could neither roast nor dehull groundnuts. Kachikwu addressed a letter to Dele Oyeku, director of extension and linkages at FIIRO, complaining that the machines fabricated by the agency were not working. This letter was acknowledged by one Omolayo J.O, a staff member of FIIRO, on March 17, 2017. Kachikwu wrote another letter the same day indicating that the two machines had been returned. The same Omolayo J.O acknowledged the return of the faulty machines in the said letter. Due to, once again, FIIRO’s inability to supply functional machines 32 months after, Kachikwu engaged lawyers at Coronet Legal, who demanded the immediate supply of the machines. A letter written by the lawyers to FIIRO revealed that the The transaction was done by me, and everything went well. I am surprised that the DG (Elemo) could say that it was not done through the institute. What happened was that they asked me to hands off at some point, that I am not in charge of that. If the DG said that, I am really surprised Gloria Elemo institute conducted two tests on the two machines returned by Kachikwu but both failed. “Our client has suffered great loss and untold hardship due to the delay as it had secured a loan facility to pay for the machines with running interest and yet got no value or its money owing to the unwarranted delay by your establishment. “We therefore demand an immediate supply of the said machines which must be functional to 100 percent capacity,” the letter, signed by Sophina Ozougwu, a lawyer, read. The lawyers threatened to take legal action against the institute, but all their warnings fell on deaf ears, it was gathered. After pressing for his money from the institute, Gloria Elemo, director-general of the institute, sent contradictory text messages to Kachikwu. The message sent by Elemo read: “Good evening sir. The institute does not have funds with respect to the situation in the country. We are not even able to meet our obligations. It is unfortunate that we cannot meet your demand right now.” The message continued: “More so, you did not channel your fabrication directly through the institute. You worked with a staff on private basis. There was no record of the transaction in the institute.” BusinessDay called the phone number of Gloria Elemo many times but the calls were not picked. Text messages were sent to her phone number but she did not reply. This correspondent visited W.B Asiru, the director at the centre of the whole transaction, whom the director-general said handled the transaction on private basis. Our conversation with Asiru took place at Frontline Guest House, located opposite FIIRO office at Oshodi, Lagos. When asked whether the transaction was done on private basis, Asiru said: “The transaction was done by me, and everything went well. I am surprised that the DG (Elemo) could say that it was not done through the institute. What happened was that they asked me to hands off at some point, that I am not in charge of that. If the DG said that, I am really surprised.” Asiru acknowledged that Kachikwu made the payments needed but the machines were not supplied to him. BusinessDay contacted Dele Oyekun, who took over the transaction from Asiru. “I am aware of the whole thing,” Oyekun said. “At the end of the day, the DG asked me to take charge. At a point, we eventually produced the equipment. During installation, they were little errors. We said the head of engineering should work on them. They have not finished working on them. I know there was a time Continues on page 39