In 2021, starting this first quarter, Q1’21, all expectations are focused on reversal of the depressing macroeconomic figures which had pushed Nigeria into recession in Q3’20. This is despite the resurgence in the COVID-19 debacle, which was the main cause of the recession.
Both the fiscal authorities led by the Finance Minister, Mrs Zainab Ahmed, and the monetary authorities led by the Governor of Central Bank of Nigeria, CBN, Mr Godwin Emefiele, assured the nation that Nigeria would be out of recession in the Q1’20, and none of them has yet come out to change that position at the backdrop of COVID-19 resurgence.
Economy observers are awaiting the figures for full-year 2020, but certainly, the Q4’20 is going to show a third consecutive negative Gross Domestic Product, GDP. Looking into Q1’21 and the rest of the year, Vanguard Business Magazine perspective, as well as those of some analysts, indicate that although economic activities appear to have improved since the Q3’20, it is yet to be seen whether the improvements were sustainable in short to medium term, especially with regards to significantly improving consumption and gross capital formation, which are necessary catalysts for growth.
It could be seen clearly that while domestic consumption could improve, all things being equal, in Q1’21 going forward, the impact of currency devaluation (thrice last year), inflationary pressures, trade imbalance, depressed oil revenue amongst other downside records as at end 2020 would be weighing down on the manufacturing sector in particular and extending to the entire economy. External sector stability has been infrequent upset throughout last year with the exchange rate and external reserves in a tailspin. Inflationary pressures have been persisting for 34 months consecutively, closing the year at 15.75 per cent in December 2020.
Balance of trade deficit has continued to rise as at year-end. Vanguard Business Magazine notes with concern the continuing sluggish recovery in the Manufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMIs), which slipped below the 50-index point benchmark in December 2020, at 49.6 and 45.7 index points, respectively, compared with 50.2 and 47.6 index points during the previous month. This weak performance, according to the various economy analysts, was attributable to the foreign exchange pressures, increased costs of production, a general increase in prices and decline in economic activities.
A similar trend was also observed in the employment level index component of the manufacturing and non-manufacturing PMIs, which contracted for the ninth consecutive month in December 2020 to 46.3 and 45.1 index points, respectively, compared with 50.2 and 46.7 index points in the previous month. Weak base Although the last GDP report at negative -3.6% year-on-year for Q3’20, was less severe than the -6.1% slump in Q2’20 beating analysts’ expectations of a much greater contraction, things were still in bad shape. For instance, in the all-important energy sector, conditions deteriorated even further, shrinking a massive -13.9% over the same quarter last year (Q2’19: -6.6% YoY).
Aside from oil prices remaining in the unstable rise, crude production dropped to 1.67 million barrels per day (mbpd) as the country complied with OPEC+ cut agreements, marking the lowest level in four years (Q2’20: 1.81 mbpd). Consequently, though the fiscal and monetary authorities present positive sentiment, the outlook remains fragile, clouded by uncertainty regarding the oil price trajectory, rising inflation, elevated unemployment, security challenges and social tensions.
Against the weak macroeconomic fundamentals which the Nigerian economy closed last year, Emefiele, just last week, sounded upbeat in expectations for the current quarter going forward. He summed up the position of the CBN’s Monetary Policy Committee, MPC, thus: “Overall, the medium-term outlook for both the domestic and global economies continued to show improved prospects of recovery, supported by the recent moderate uptick in crude prices and increased optimism over the procurement and distribution of COVID-19 vaccines. “Available data and forecasts for key macroeconomic variables for the Nigerian economy suggest further improvement in output growth in the first quarter of 2021.
This would be supported by the coordinated and sustained interventions of the monetary and fiscal authorities, including the broad-based stimulus and liquidity injections. “Inflationary pressure is also expected to commence moderation as the economy’s negative output gap closes.”
However, we believe that the underlying uncertainties in the oil market, other domestic structural imbalances and threats to socio-economic stability as well as the current uptick in the second wave COVID-19 infection rate may pose some downside risks to this forecast. Our view on Non-oil sector Six sectors (agriculture, trade, telecoms, manufacturing, crude oil and real estate) that account for 76% of Nigeria’s GDP were responsible for 68% of the 2.7% economic contraction in the first nine months of 2020. Other than the 6.5% growth in agriculture and telecoms sectors (36.7% of GDP combined), the economic contraction could have been worse.
At Vanguard we believe the non-oil sector would remain upbeat and the beautiful bride of the economy recovery in the days ahead. We also note the significant weakness recorded in the transportation sector during the year. Hence, we assess that how quickly the economy recovers from recession will depend on how activities improve in these depressed sectors in 2021. It is instructive that drivers of the recovery train in the current recession contrasts with that observed in 2017. Then the recovery was predominantly driven by the oil sector.
Now, economic recovery will need to be propelled by the non-oil sector, particularly the manufacturing and trade sectors, in addition to oil sector rebound. Analysts’ perspectives Looking into the near future, analysts at CardinalStone Finance stated: “In 2021, we expect further naira repricing on subsisting current account weaknesses, sustained declines in FX receipts, and rising inflation. However, the extent of repricing may be a bit more contained due to firmer crude oil prices, likely Eurobond issuances, and projected dollar weakening. “Overall, we expect the currency trade between the N420-N440/$ band at the I&E window by year-end versus our fair value estimate (FVE) of N505/$. Our FVE reflects Nigeria’s external vulnerabilities and expected acceleration in the inflation rate.”
Current account weaknesses The analysts at CardinalStone also observed that current account weakness is expected to worsen. Nigeria experienced Balance of Payments (BoP) setback in 2020 as plummeting crude oil price drove trade deficit to its worst level on record (N4.3trillion) in 9M’20 amid a drop in capital inflow to pre-2017 levels (c.$’8,610 million).
On this, the analysts at CardinalStone stated: “We expect a rebound in oil prices to improve trade balance in 2021, but note that a potential increase in services (travels and education accounts for 35.0% of services FX outflows) could offset the impact of higher oil sales.”
External pressure on FX Further on the forex challenges, Nigeria secured substantial financing from multilateral institutions last year, including a $3.4 billion facility from the IMF and a $1.5 billion facility from the World Bank for social programs and institution building. At this backdrop, the analysts at CardinalStone said, “In our view, Nigeria is under pressure to improve the flexibility of its currency pricing and unify its exchange rates to get increased funding from these institutions and encourage Foreign Direct Investment inflows.”
Furthermore, they also noted: “The Bilateral Currency Swap Agreement (BCSA) between China and Nigeria, which comes due in April 2021 may lower reserves by $2.5 billion if not rolled over. The Swap did not materially reduce demand for US dollar for Chinese related transactions ($250 million worth of Yuan sold in 2019 v $15.2 billion in total Chinese imports). However, its maturity could stoke speculative reaction in the market and hasten the potential FX adjustment.” GDP bounce back to 2.4% in 2021 – Norrenberger In a rather highly optimistic note the Managing Director of Norrenberger Financial Group, Mr Tony Edeh, forecasts Nigeria’s GDP growth rate at 2.4 per cent in 2021, significantly higher than the pre-COVID numbers. He stated: “While we expect Nigeria to exit recession in 2021, a return to deliberate policy settings is crucial. Overall, we project a slow and gradual growth at 2.43%.”
The Group also listed some global key highlights that will have major bearings on the economy in 2021, including Moderate recovery in the global economy and fiscal Policy Support; Authorities’ focus on actionable monetary policy; Operationalization of the African Continental Free Trade Agreement (ACFTA); Outlook for crude oil; Equities market; The final severing of ties between the European Union and the United Kingdom; Global accommodative monetary policies; Naira volatility posed by external account imbalances; The trend in headline inflation and attendant impact on real return on investments.
It also stated, “While we acknowledge inherent risks underlying our growth forecast due to rising number of COVID-19 cases, we expect improved performance in non-crude oil earnings.” In the area of fiscal policy response the Group stated: “After the pandemic impact of 2020, we expect that critical sectors would continue to leverage on crucial lifelines from government authorities across the globe. In this regard, we expect heightened global fiscal support in the form of foregone revenues, tax reliefs, direct transfers, as well as liquidity support.
Although this comes at a cost for public finance, leading to wider deficits and higher public debts for most emerging economies including Nigeria, it is hoped that the concerns about public debt sustainability may be allayed.” On the monetary policy front, the Group said: “In 2020, the CBN devalued the naira at least three times. Despite this depreciation and constricted fiscal space, it is our expectation that the Apex Bank would prioritize a rebound of the domestic economy in order to maintain an expansionary stance. Depending on how swiftly economic activities rebound, improved private consumption and investments could drive aggregate demand.” The Group also has some expectations from the ACFTA take off, saying, “Following the launch of the operational phase of the ACFTA, we expect positive prospects for local enterprises and manufacturers.
Further, improved external sector performance arising from members intra-Africa trade volumes is expected. This would also ride on the back of reduction in tariff revenues.” On the outlook for oil earnings, the Group stated: “Although the new round of lockdown is expected to last till February in the U.K as infection rates spike, there is broad optimism in the outlook for the crude oil market.
Much of the improvements in demand is expected from reopening of major segments in Asia, India and China. Our outlook on the oil market is a gradual and steady recovery. “We presume upward demand in Asia, a more collaborative stance on global trade resulting from the outcome of the U.S. elections and improved vaccinations.
Our opinion puts Brent at about USD48 to USD54 in 2021.” CBN’s perspectives on recovery The CBN’s MPC weighed in heavily on the moderation in output contraction in the third quarter of 2020 which was associated with the news of the discovery of COVID-19 vaccines and rising oil prices. But it also acknowledged that the outlook for the recovery appears to be dampened by the second wave of the pandemic considering its intensity.
Members of the MPC thus agreed that the Committee’s current priority remains to quicken the pace of the recovery through sustained and targeted spending by the fiscal authority supported by the CBN’s interventions. The MPC, consequently, thought it necessary for the CBN to increase collaboration with the fiscal authority by providing complementary spending to finance productive ventures in a bid to improve aggregate supply and reduce prices.
Also, members of the Committee reiterated the adverse impact of insecurity on food production, stressing that the current uptick in inflationary pressure could not be solely associated to monetary factors, but due mainly to legacy structural factors across the economy, including major supply bottlenecks across the country. The Committee thus called on the Government to redouble efforts at strengthening infrastructural efficiency and address the emerging security challenges in the country.
The Committee commended the CBN’s effort of improving liquidity in the foreign exchange market but noted the need to continue to explore avenues to improve inflow from sources such as the International Money Transfer Operators (IMTO), diaspora remittances and non-o remittances and non-oil export promotion, given the current trajectory of crude oil prices.
These sources, in the view of the Committee, would boost foreign exchange supply and ease the current exchange rate pressure.
