‘Nigerian economic outlook still slippery’

By Taofik Salako Deputy, Group Business Editor

The nation’s economic outlook remained difficult and similar to walking on a slippery slope despite recent macroeconomic gains and the slowdown in COVID-19 cases.

In its latest economic review released at the weekend, Nigeria’s only publicly quoted investment banking group, United Capital stated that several downside risks could stymied the nascent economic recovery, although many macroeconomic indices seem set for improvement.

According to the second-half 2021 outlook report entitled: “Walking a Slippery Slope”, rising insecurity bedeviling the country poses a major downside risk, alongside concerns about currency valuation, foreign exchange management and policy congruence.

“We express concerns that failure to stem the recent tide of instability could lead to a country-wide breakdown, disruption of economic activities, destruction of oil installations and weakened investor sentiments. Thus, government’s action or inaction regarding the security situation would be a critical factor to watch,” United Capital stated.

The investment banking group outlined that looking ahead, a myriad of factors will shape the trajectory of the Nigerian economy in second half 2021.

First, developments around COVID-19 infections and vaccination rates will determine if economic growth garners pace.

Also, the success of the Federal Government’s external debt issuance plans will be critical for the government’s ability to finance its budgetary obligations and for improved dollar flows, stronger foreign exchange reserves and consequently, the exchange rate.

The subsidy programme, which is expected to last till October 2021, is also key to watch as the rising cost of subsidies estimated at over N100 billion monthly continue to weigh on government’s finances.

Furthermore, the Monetary Policy Committee (MPC) will be meeting three times before the end of half-year 2021 and the committee’s decision on the monetary policy rate at these meetings would be a key factor to watch in the second half of the year.

United Capital, meanwhile, raised its yearly GDP forecast for full year 2021 to 3.1 per cent from its prior forecast of 2.1 per cent, with rapid economic growth of 7.4 per cent and 4.4 per cent in second quarter2021 and third quarter 2021.

“The upward adjustment to our GDP forecast reflects the faster than expected recovery in economic activities, as well as the low base impact of 2020. Despite continued inflationary pressures, we expect the high base effect of half-year 2020 to create an inflection point for consumer prices, causing the headline rate to continue trending downward. Lastly, we expect to see sustained stability in the foreign exchange market as oil prices are expected to remain strong while the upcoming Eurobond issuance is expected to support external reserves,” United Capital stated.

The report noted that true to expectations, though  surging faster than initially projected, the yield environment reversed higher in the fixed-income market in the first half 2021, setting the tone for financial market performance.

Stop rates at primary market auctions in first half 2021 had risen sharply through the auctions due to investors’ demand for higher rates and  government’s huge fiscal deficit financing needs amidst tight liquidity in the financial system before moderating following strong investor demand for bills amidst limited offering by the apex bank.

At the bond markets, the narrative was similar as average yield across the yield curve climbed 617 basis points year-to-date to 11.3 per cent as at June 2021, from 5.1 per cent at the end of 2020. Consequently, Nigerian sovereign bonds underperformed peers in emerging markets, as the S & P/FMDQ Nigeria Sovereign Bond index has lost 21.1 per cent year-to-date compared to a year-to-date loss of 2.9 percent on the JP Morgan EM Government Bond index.

The report pointed out that following evaluation of the several factors expected to shape the financial markets in second half 2021, it is expected to see periods of oscillation in the yield environment, albeit with an overall downward bias.

“Our expectation is built on three key factors; improved system liquidity via instrument maturities, deployment of financial repressive tactics by sovereign debt managers and status quo stance on monetary policy. That said, despite our expectation of a moderation in fixed income yields, we do not see a rate crash similar to that of 2020. As a result, we expect demand for fixed income instruments to remain upbeat particularly among domestic investors, limiting prospects for improved flows to risk assets like equities.

“For equities, our prognosis for the Nigerian stock market in 2021 is a lukewarm, sideways movement in the equities market with a bearish bias. We do not expect to see any major negative drag on the equities market in second half 2021. However, we do not see a positive catalyst in the near term.

‘’On a balance of factors, we expect developments in the yield environment to outweigh other possible market triggers. Thus, despite positivity from oil price uptrend, economic recovery, and calm on the COVID front, we expect relatively attractive fixed income instrument to capture investors’ focus in second half 2021,” United Capital stated.

In its January 2021 report entitled: “A Shot at Recovery”, United Capital had predicted that the economy would recover by between 1.7 percent to two percent from the previous year’s recession in 2021, boosted by full economic reopening, increased economic activity, and modest improvements in the oil market.

The report had also expected structural factors such as illiquidity in the foreign exchange market and probable increases in energy prices to keep the overall price level elevated. Interestingly, economic activities began to rebound as of fourth quarter 2020.

Over the last six months, Nigeria has continued to make solid progress in its fight against COVID-19 outbreak. As at first half 2021, Nigeria received 3.9 million of the 16 million doses of the Oxford/AstraZeneca COVID-19 vaccine pledged by the COVAX facility. In addition, Nigeria also received 100,000 doses from the government of India, bringing total vaccine doses received to four million doses according to the National Primary Health Care Development Agency (NPHCDA).

So far, according to NPHCDA, as of June 29, Nigeria has administered 3.4 million doses in two rounds of vaccination, of which 2.2million people have received the first dose while 1.2 million have received a second dose (0.6 per cent of total population).

sThat said, Nigeria continues to record Covid-19 cases daily with total cases recorded printing at 168,867 cases as at July 13, 2021. Nevertheless, unlike events in countries such as India, Nigeria appears to have flattened the curve of the pandemic.  This has not only emboldened the authorities to push forward with the reopening of the economy but as also hastened the road to recovery as first quarter 2021 GDP came in at 0.5 percent.

The report however noted that the Sub-Saharan Africa (SSA) region, forecast to be the world’s slowest-growing region in 2021, performed in line with expectations in first half 2021 as SSA economies embarked on the path of recovery from the previous year’s pandemic-induced slump.

In its January 2021 outlook report, United Capital had stated that it expected a decent but varied recovery for the region in 2021, underpinned by improvement in exports, commodity prices and travel as key growth drivers in line with a recovery in global demand from the synchronized, devastating impact of the COVID-19 pandemic. It had also noted that the virus and related economic restrictions would remain a significant threat to full economic recovery due to the region’s limited access to vaccines.

According to the report, the slow-paced rollout of vaccines on the continent however remains a downside factor that could potentially derail/prolong the region’s recovery.

“SSA has lagged other regions in terms of vaccinations, although inoculations in some countries, including Angola, Ghana, Kenya, Nigeria, and South Africa, have picked up in the last quarter. Nonetheless, the region is significantly under-vaccinated, with an IMF estimated average of less than 1 vaccinated adult in every 100, compared to about 30 in advanced economies. This is largely a result of heavy reliance on sluggish external donations for the supply of vaccines, a consequence of limited fiscal power across SSA economies, which was further weakened by the pandemic. Besides procurement challenges, the poor and inadequate level of infrastructural development means that African countries also face storage and logistical bottlenecks as well as inefficient supply chains, leaving the region susceptible to new waves of infections and variants of the virus. Notably, the number of daily new Covid-19 cases in SSA spiked in June-2021, led by South Africa and Namibia, foreshadowing a third wave of the pandemic.

“Clearly, SSA is on the road to recovery from the pandemic; the problem now lies in clawing back from the economic damage – particularly to individuals and households. The African Development Bank (AfDB) estimates that the pandemic drove c.30.0m Africans into extreme poverty in 2020, with c.39.0m more likely to fall into extreme poverty in 2021. Reversing this will be significantly harder for countries with high fiscal deficits like Ghana with 16.0 percent of GDP, Zambia with 13.9 percent of GDP; Kenya with 8.4 percent of GDP and Nigeria with 5.8 percent of GDP, where debt must be brought back to more sustainable levels.

“Nonetheless, our outlook for an economic rebound in the region in 2021 remains intact, although the increased risk of a third wave of COVID-19 infections as well as the region’s challenges with vaccination, insecurity, political instability, climate-related shocks, and credit access pose significant downside risks that threaten to elongate the recovery,” United Capital stated.