Nigeria Outlook 2021: A Shot at Recovery

Executive Summary

Global Economy: A shot at recovery

2020 was an unprecedented year, no thanks to the coronavirus outbreak, as the global economy was suspended in Q2 and most of Q3-2020 to safeguard human health. Oil prices plummeted to levels never seen before, airlines were grounded, hotels shut down, and all forms of congregational economic activity halted. This triggered a global recession across advanced and low-income countries, as GDP growth numbers printed negative amid demand and supply shocks. As such, the IMF estimates global GDP to contract by -4.4% in 2020.

Surprisingly, stock markets in many advanced and emerging economies surged amid massive monetary and fiscal stimulus. In Q3-2020, the global economy began to reopen as countries looked to recover from the sharp blow dealt by the pandemic.

However, the cost of reopening was evident in Q4-2020, as the second wave of infections began in many advanced markets, particularly in the United States and Europe. This forced some countries to halt economic reopening and, in some cases, reintroduce lockdowns. As of the end of the year, the global Covid-19 caseload count was above 83 million, including 1.83 million deaths and more than 47 million recoveries.

In 2021, we expect the global economy to take ‘a shot at recovery’, largely due to the announcement and approval of effective Covid-19 vaccines. The risks of re-emerging infections remain high, however, and much will depend on the speed, scale, and long- term effectiveness of vaccination. Away from the virus, the outcome of the recent US presidential election which will see Joe Biden replace President Trump from January 2021 greatly reduces political risk. Also, a Joe Biden presidency is positive for global trade and efforts against climate change.

Overall, global growth is projected by the IMF to rebound by 5.2% in 2021, buoyed by recoveries in emerging markets (+6.0%) and advanced economies (+3.9%). Recovery will be aided by bold economic stimulus packages and a massive accommodative policy stance by central banks. Similarly, oil prices are expected to continue northwards but may be stuck within the $45-$55/b range if demand fails to keep up with supply.

Sub-Saharan Africa: Much depends on the pandemic

In 2020, the SSA region slumped into its first recession in three decades. Although SSA countries were the least infected by the virus, the global economic shutdown left a huge imprint on economic activities across the region due to a slump in key commodities prices. Thus, recovery is projected to be slower than peers. Tourism dependent economies (Mauritius: -32.9%, Seychelles: -17.0%) were the hardest hit, with sharp GDP contractions in Q2-2020, followed by oil-exporting countries such as Nigeria and Angola. Also, South Africa, a more diversified economy, recorded a -17.1% contraction in Q2-2020.

In 2021, growth in the region will be driven by a few factors. Firstly, the capacity of SSA economies to keep the spread of the coronavirus pandemic at bay amid potential vaccination bottlenecks and financial distress will be a significant factor, as the region must avoid another round of unaffordable lockdowns. Secondly, the implementation of the AfCFTA trade agreement, now scheduled to begin from Jan-2021 rather than Jul- 2020, and the commitment of major economies such as Nigeria and South Africa to the success of the pact is key.

Finally, fiscal policy operations, supported by access to more concessional financing, relief, and private financing amid bold policy reforms, will help bolster recovery.

Overall, slower than required recovery in key markets, notably South Africa, Nigeria and Angola, will drag SSA growth in 2021. The IMF expects regional growth to rebound to 3.1% in 2021 but insists that many SSA countries will not return to 2019 output levels until 2022–24.

Nigeria: Tough times, tough takes!

Covid-19 took its toll on the Nigerian economy in 2020, after the FGN imposed widespread nationwide lockdowns in Q2-2020 to contain the virus. The oil market collapse wiped out export earnings and 50.0% of government revenue, even as domestic economic activities were ground to a halt in the country’s largest commercial hubs.

The CBN devalued the Naira on its official and I&E windows in the face of the pandemic, launched a series of intervention programs, slashed the monetary policy rate and kept the system inundated with liquidity. Similarly, amid pressure on both oil and non-oil revenue, the FGN was forced to take bold actions. The pump price of petrol was somewhat deregulated, electricity tariffs were hiked, and the closure of the land borders was reviewed.

Despite the concerted efforts, the economy slipped into another recession as GDP contracted in Q2 and Q3-2020. Inflation galloped to a 33-month high of 14.89% y/y in Nov-2020, amid sharp food price increases and the currency market crisis. Also, the CBN imposed administrative measures to curb the depletion of the external reserves, which slid to $35.4bn (down $3.2bn YTD) in Dec-2020. As such, the parallel market rate crossed N500/$ in Q4-2020 while foreign capital inflows hit rock bottom.

In 2021, we expect GDP growth to rebound by 1.7% to 2.0%, buoyed by increased economic activity and some improvements in the oil market. Although the reopening of the borders in Q4-2020 should ease pressures on food prices, other structural factors such as FX market illiquidity, potential increases in petrol price, etc. may keep general prices elevated. As a result, we expect the headline inflation rate to peak at around 16.0% before pulling back, if no further policy adjustment is made.

Again, the high base effect of the headline inflation spike in Q3 and Q4 2020 should moderate further increases in price levels. In response to rising inflation and in a bid to attract FPI inflows to the market, we imagine that the CBN would begin to tighten its monetary policy stance at some point in Q2-Q3 2021. Finally, on the exchange rate, we expect a potential convergence of

rates when the CBN begins full intervention at the I&E window. As such, we anticipate that the parallel market will appreciate from N470/$ towards the NAFEX rate which has now been adjusted to N410/$.

Naira Assets: Vibing to Emefiele’s orchestra

Nigerian financial markets continued dancing to the tune of monetary policy actions in 2020. The CBN through its heterodox policy actions, following restrictions on OMO bills in late 2019, arguably remained the conductor of the orchestra, setting the tempo for capital flows.

Matured bills issued in 2019 flooded the financial markets, overloading the system with liquidity in 2020. With sustained net OMO inflows, a dearth of investment outlets, and rate cuts by the CBN, the stop rate across all tenors for Treasury bills at the primary auction crashed from high single-digit in Jan-2020 to less than 1.0% (91-Day: 0.01%, 182-Day: 0.09% and 364-Day: 0.15%) in Dec-2020.

Accordingly, the equity market surged 50.0% in 2020 – its best performance in over a decade and well above its global peers – as local investors shifted from risk-free to riskier assets. Similarly, Nigerian sovereign bonds outperformed EM peers with the S&P/FMDQ Sovereign Bond Index returning a record 42.3% as at 23rd Dec-2020 compared to 3.2% on the JPM EM Government Bond Index.

Driven by buoyant system liquidity and an extremely low yield environment, corporate and non-sovereign issues increased significantly in 2020. Data from FMDQ indicated that over N1.0trn was issued in the form of Commercial Papers or CPs (N610.0bn), Corporate Bonds or CBs (N152.0bn), Sub-National Bonds (N100.0bn) and Sukuk (N150.0bn) in 2020. Notably, CP issues were led by blue chips like Dangote Cement (N100.0bn), MTNN (N100.0bn), and Nigerian Breweries (N91.2bn).

In 2021, sentiment for stocks depends on the direction of monetary policy, particularly in relation to the yield environment. A sharp reversal of rates is likely to trigger a sell-off in the equities market considering that the current average market price-to-earnings (P/E) valuation multiple (15.2x) is considerably higher than the 5-year historical average (11.9x).

While we predict that the rate reversal, which appeared to have been triggered in Dec- 2020, will become more apparent from Q2-2020, the yield environment may not reverse to double digits until late 2021 or later. Accordingly, our prognosis for the Nigerian stock market in 2021 is that domestic interest, fueled by dividend expectations, is likely to sustain the market rally in Q1-2021. However, in the absence of foreign demand, we see a short- term bear market from Q2 to Q3-2021.