Road to economic recovery mixed for Nigeria in 2021

By Charles Abuede

• Amidst ailing economic performance
• Inflation could climb to 16%‭ ‬in January‭ ‬
• Growth in non-oil sectors to improve from Q1’21‭, ‬electricity tariff hike

Projecting into what 2021 holds for Nigeria, analysts have suggested to Business A.M. that in the face of an ailing economy and ailing economic performance, the country faces a mixed road to recovery for the economy.

Using 2020 on diagnostic year basis, they pointed to an economy buffeted by stumpy oil price and the spill over effects of COVID-19, which dragged economic performance into an abyss, noting that we can only look forward to a slight return to growth that will be driven by the non-oil sector in 2021.

They said the glimmer of hope about a possible slight return to growth, equally faces foreign exchange illiquidity, continued partial lockdown challenges to many sectors.

“Consumer prices have been significantly pressured by the closure of land borders since August 2019 and compounded by naira devaluation, removal of energy subsidies and the disruption of agriculture value chain due to the pandemic,” was how one analyst put it.

Taking a review of the year 2020, it had its good, its bad, and its ugly turns, from which most businesses got crippled, job losses rose to new highs, imposed national lockdown arising from the COVID-19 global pandemic, rising inflation, which currently sits above 14 per cent; the deepest constrictions of GDP for about a decade, in Q3 2020, rising external debt levels, as well as on-going convergence of the exchange rates by the Central Bank of Nigeria (CBN) paints a picture of the task ahead for government this new year.

Despite all the gloom and doom that 2020 threw at Nigeria and the present realities that hovers over the economy, however, markets and economic analysts are also projecting the possibility of positive outcomes from sectors of the Nigerian economy in 2021.

State of the economy in 2021

According to projections by analysts at Financial Derivative Company, a research and financial advisory firm based in Lagos, seen by Business A.M., the leading economic indicators for Nigeria point to a gradual recovery in the course of the year.

In their view: “Positive growth will likely be witnessed during the third quarter of 2021 and to be driven by land border reopening, AfCFTA and the pickup in economic activities. Negative growth to linger through the first and second quarters of 2021, but the rate of contraction will be slow. Across sectors of the economy, uneven recovery is expected; there will be an improvement in growth from the first quarter that will be majorly driven by construction, ICT and financial institutions.”

Similarly, analysts at FSDH Capital Research assert that in the 2021 fiscal year, with no further disruption, Nigeria could return to positive growth in 2021. However, several sectors such as trade and real estate will continue to perform below par.  Also, trade deficit will continue in the early part of 2021. However, the planned full opening of the land borders, as well as increase in production will narrow the deficit. Unemployment and poverty are expected to surge, given the weak link between GDP improvement and social indicators. Public debts will continue to increase in 2021. Government revenues will also increase as economic activities improve. However, actual deficits will widen due to a higher expenditure profile, they wrote.

Fiscal and monetary policy indicators in 2021

In 2020, CBN’s MPC was dovish in its quests to stimulate growth, which took precedence over inflation and as such, the policy committee will consider several factors to influence their decisions in a bid to close the existing gap between the MPR and market interest rates. Consequently, the monetary authority will likely slash the benchmark rate in 2021, considering the need to drive economic recovery.

Similarly, with the federal government confronted with a wider fiscal deficit (around N5.19 trillion) amid lower revenues, it will attempt to spend its way out of the recession, significantly boosting domestic revenue mobilization, which is, however, hinged on the gradual increase in value-added tax (VAT) rates to the ECOWAS average of 15 per cent by 2025; and some changes in a low-interest-rate environment will likely increase debt servicing costs.

The observation of the FSDH analysts is that: “With the need to drive economic recovery amidst MPC’s concerns about the misalignment of interest rates in the fixed income market, there could be support for a rate cut in 2021. However, the introduction of the new CBN Special bill as an alternative investment vehicle will absorb a proportion of the liquidity in the system and stabilize the interest rate environment, at least in the short run.”

Abiodun Keripe, managing director of Afrinvest Research, said the CBN is expected to further adjust its monetary policies for the most part of 2021 to dovish as it continues to pursue economic growth, and stated that the naira will continue being under pressure due to the dire straits of the current account balance as international travel and trade resume.

“Consequently, the headline inflation rate soared to a 34-month high of 14.9 per cent in November 2020. While the recent re-opening of the land borders would ease pressure on consumer prices in 2021, further currency devaluation amid limited foreign exchange supply and higher demand would, however, remain a drag to domestic consumer prices, Keripe stressed.

In terms of foreign exchange, the trajectory remains unclear and is largely dependent on the CBN’s strategy for managing demand. “However, we believe the naira will continue to be under pressure given the dire straits of the current account balance as international travel and trade resumes.

Sectors to watch in 2021

According to projections by FDC analysts, the fast-moving consumer goods (FMCGs) sector will witness smaller brands gaining market shares from the larger players due to lower prices as lower purchasing power will continue to weigh on revenue.

Also, with the move by Tier-1 banks to restructure into HoldCos to improve revenue sources, the competition will intensify especially in the retail banking space and the macroeconomic weaknesses will likely reflect in the fiscal year results of most banks while a possible merger and acquisition within and across tiers will be seen.

In the insurance space, the increasing poverty rate and decline in purchasing power will make the idea of insurance unthinkable to many Nigerians, thus, the industry attractiveness will deteriorate.

In 2021, as banks plan to encroach on industry space through the HoldCos, there will be a need for players to offer specific products desirable to various income and demographic levels, they advised.

Looking into the aviation sector, they maintained that due to weak consumer confidence, the industry will recover but remain in a loss position ($38 billion) in 2021. This will be an improvement from the year 2020’s estimated loss of $118 billion. Similarly, the covid-19 vaccine is expected to boost global travel, they said, with significant gains at the end of 2021 as cargo activities recover to pre-pandemic levels in 2021.

General economic forecast from 2020 trends

With the year starting off on a difficult and challenging note, analysts forecast that tough policy decisions will be made in the first quarter to ensure that economic recovery continues, but they maintained that positive growth will be in the first and second quarters of 2021, as the policy choices will include further liberalization of the forex market and flexible exchange rates. Also, inflation, which could climb to 16 per cent in January, will decelerate towards 11 per cent in the third quarter, the optimistic analysts suggested.

Furthermore, the naira will oscillate between N450 and N470 to the dollar at the parallel market, while at the Importers’ & Exporters’ window, rates will trend around N440 and N450 to the dollar.

Stocks in some sectors, principally telcos, insurance and construction, will maintain their rally, though, the rally will fizzle at the spike of interest rate. Banking stocks will differentiate between those with low cost-to-income ratios and the others and T/bill interest rates will begin climbing in Q1 and could increase towards 5 per cent to 6 per cent by Q2 and Q3.

In driving through the path to sustainable all-round economic recovery, connecting the dots will require government interventions to address structural issues for maximum impact. Economic analysts postulate that the Nigerian government needs to create emergency support for ailing industries affected by the pandemic, restore consumer spending to pre-covid-19 levels, improve and retain local investments, as FDI and FPI are important for driving recovery, that Nigeria should leverage AfCFTA to boost production, new investment and export and ensure more fiscal space and accommodative monetary policies.