Nigeria faces mixed bag of domestic, global macro trends in 2021 – KPMG

By Phillip Isakpa & Charles Abuede

• Uncertain FX environment
• Constrained productivity
• Cautious private sector investment
• Socio-political threats
• Inflation to pressure consumers

The Nigerian economy faces a cocktail of domestic and global macro trends and developments that will combine to shape its economic outlook and outcomes in 2021, global advisory and audit firm, KPMG, has said in a report it has just released.

The report comes amidst uncertainties surrounding the economy in the wake of its relapse into recession for a second time in five years and is buffeted by a world that is under the throes of a pandemic that has left over a million people dead, disrupted supply chains, seen many countries on lockdown for more than two spells and a Nigeria that has gone broke as a result of dwindling earnings from exports and domestic taxes.

The KPMG report notes that while several macro trends across the world would shape Nigeria’s economy next year, these are hinged on key indicators showing heightened external, domestic financing and policy vulnerability indices, which represent key drivers in a struggling economy such as Nigeria’s.

It therefore warned that a highly anticipated modest economic recovery domestically in 2021 is being threatened by a second wave of Covid-19 pandemic risk, which has already gripped major countries in Europe and the United States, further signposting the vulnerability under which Nigeria is placed, especially as a highly import dependent country and exporter of primary commodities for which it adds no real value.

The pandemic, which has devastated the world in the number of lives it has taken and its disruption to the ebbs and flows of global economies, has impacted Nigeria severely as the country depends largely on export of crude oil for 90 percent of its foreign exchange earnings. A lack of economic activities globally has meant that demand for crude oil has been tepid and price has also been bearish causing Nigeria’s earnings to dwindle, amid several needs requiring financing in the domestic economy.

The price of crude oil currently hovers round $39 and $45 a barrel and expectations of it reaching $50 and higher are at best optimistic.

KPMG states in the report that the nation’s economy will be shaped by global dynamics, specifically tied to the pandemic. But key pressure points from the global economy will be the dependence of recovery on fiscal and monetary interventions, as well as covid-19 trajectory.

It said some of the pressure points will include the emergence of a new democrat president in the US, expected to have some implications for the global economy. As well would be the consideration of OPEC to deepen oil production cuts amidst the rising cases of the virus and fresh economic lockdown in Europe. The cost of borrowing which still remain high as financial conditions remain high and the expectations of the world trade organisation (WTO) for a significant downturn in global trade to be around 13 per cent and 32 per cent with recovery expected at 8 per cent in 2021.

Expectations of modest outlook on oil prices, which would keep oil revenue low for Nigeria and thus affect capital flow.

The report also highlights fiscal sustainability in which it refers to Nigeria’s fiscal policy being threatened by a wide margin of a budget deficit of about N5.2 trillion in which the key drivers to the 2021 FY budget stands implicative to its implementation as well as to the economy. From the budget, oil price at $40 appears realistic considering the EIA average forecast of $46 in 2021. However, a second wave of the pandemic may threaten oil price below the projected amount.

Nigeria also faces an uncertain foreign exchange environment as the country is faced with foreign exchange management quagmire as the foreign exchange environment will remain under pressure exacerbated by lower FX earnings in 2021. What this means for the year ahead is that Nigeria, in a bid to manage the pressure resulting from subdued FX earnings, the apex bank set off the exchange rate unification policy, altering the official exchange rate by 19.4 per cent from N306 per dollar in January 2020 to N381. The report notes that despite the two separate rounds of adjustment in the official exchange rate, major pressure points still exist with multiple exchange rates and illiquidity in the FX space.

The economy also faces a stringent policy environment, the report noted. It stated that in 2021, Nigeria’s policy stance will appear very stringent. This is because, the nature, speed, volume and magnitude of change is volatile, for example, rising inflation and low aggregate demand; there is uncertainty and lack of predictability in issues and events, it noted. “This makes it difficult to see future outcomes or make decisions; a complex and intricately interwoven forces that defy the traditional cause and effect analysis,” KPMG stated.

There is also threat arising from constrained productivity, the report pointed out. Nigeria’s infrastructure and spending deficit hugely stands at $300 billion while it has improved in the ease of doing business ranking. However, the power sector is yet to be unlocked though, regulation may stifle performance. Thus, results in the dearth and poor quality of available infrastructure facilities in the country.

The report also noted what it called consumer pressure points, stating that it is overwhelming evidence that the inflationary pressure reflects the prevalence of structural rigidities and supply shocks, adding that while monetary policy cannot be the only sheriff in town, fiscal input is needed to fix structural bottlenecks exerting downward pressure on output growth and upward pressure on domestic prices. As a result, consumer spending is expected to remain under pressure well into 2021.

It gave a ray of hope when it noted that despite a challenging environment, the consumer outlook for the next 12 months is positive at 23.7 points. This is attributed to anticipated improvements in the economic conditions, increase in family income and financial conditions in the next quarter and the next 12 months. However, consumer confidence will be dependent on income and savings levels and economic conditions.

Other trends that will shape the Nigerian economy, according to the report are accelerated credit penetration, especially noting that Nigeria has been credit-starved despite increased supply to the private sector which averages above N19 trillion as at November 2020 while the private sector loans by banks stand at $47.1 billion as of 2019 which is about 11 per cent of the private sector loans by bank to GDP; cautious private sector investment activities as the confidence in the private sector continues to be dampened while foreign direct investment (FDI) is expected to be weak in 2021 with no relief from subdued capital flows; emerging digital economy, is another trend that will shape the economy, KPMG observed, adding that the increased investment resulting in capital to drive growth; entry of new players into the fintech segment; disruption in venture capitals, among others, it noted that Nigeria boasts of an emerging digital economy driven by these factors delineated.

The report also highlight socio-political threats, noting that these threats spinning from poverty, insecurity, education, migration out of Nigeria, healthcare from which Nigeria ranks 4th for worst healthcare delivery, rising rate of unemployment due to job losses amidst the pandemic, corruption which Nigeria ranks 146 out of 180 countries and political discontent will serve for the social wheel of pressure in 2021 as well as the socio-political landscape in Nigeria.

Possible recovery pathways in 2021

A potential upset to economic recovery, according to the report, that a high level of impact from domestic financial crisis with a low probability of occurrence, oil production and price shock, which are moderately likely to happen, as well as political and policy uncertainty shocks, with high occurrence probability, are some key takeaways from these forecasts on macro trend.

However, it advises that Nigeria should create the headroom for shocks, hedge and diversify her natural and financial resources, develop strategic ability to scale and achieve a minimum scale for survival in all sectors, invest in the upsides as well as the need to develop regulatory compliance resolutions for all industries and stress-test all assumptions with a wide margin in order to maintain balance within the prognosis.

Fundamentally, the fragile state of Nigeria’s economy in 2020 may have been a pointer for what is to be expected on a macro level. The chains of event, which have eroded the economy have been from a boom era to a current state of recession.