April 20, 2020 / 11:27 AM / CSL Research/ Header Image Credit: Insiders
It is no longer news that the disruption brought by COVID-19 has crippled economic activities, raising concerns of an impending recession for a Nigerian economy that is yet to fully recover from the 2016 economic slump. Already, the International Monetary Fund (IMF) has predicted a negative Gross Domestic Product (GDP) of 3.4% for the country. In our opinion, the impact on different sectors will vary depending on the dynamics prevailing in various sectors, duration of the lockdown, effectiveness of containment efforts and stimulus measures put in place by policy makers.
The construction sector is one sector we believe will be badly hit owing to reduced CAPEX spending by the government given weaker earnings particularly oil revenue. We highlight that the Federal Government has reduced the amount budgeted for capital expenditure by 20% in the 2020 budget. Also, we believe most construction projects across the nation may have been suspended in the interim owing to Covid -19 restrictions. Our expectation is that full resumption of construction activities is unlikely to commence until H2-2020.
In 2016 when the economy went into a recession, the construction sector declined by 5.9% compared to the growth of 4.4% recorded in 2015. Subdued activities in the construction industry had a spillover effect on the cement sector, where growth slowed drastically from 22.1% in 2015 to a negative growth of 5.4% in 2016. Although, we acknowledge that the fiscal authorities are considering an external borrowing programme to raise US$6.9bn to finance the 2020 budget and the Central Bank of Nigeria CBN also plans a N1.5tn fund for financing infrastructure projects, these measures in our view may help stem a deeper recession in the construction sector but are unlikely to avert a downturn in 2020.