| Nigeria Economy |    1435 VIEWS  |
| Nigeria Economy | |
| 1435 VIEWS | |
 |
Thursday, April 30, 2020 05:12
PM / by CardinalStone Research/ Header Image Credit: CardinalStone
A shocking start to the
year
According to the International Monetary Fund (IMF),
Sub-Saharan Africa (SSA) is likely to face a GDP contraction of 1.6% YoY in
2020-the region's worst reading on record-as a result of the current health and
economic crisis. Less diversified SSA oil economies, such as Nigeria, are also
likely to face significant pressures. For Nigeria, the viral spread came at a
time when budgetary space to absorb shocks is limited and external financing
conditions are tighter. COVID-19 threatens to overwhelm domestic healthcare
infrastructure, upend livelihoods, deteriorate social conditions, and cripple
business activities if left unchecked. So far, Nigeria's reaction has been
largely in sync with IMF's suggested response to the viral spread and its
fallouts even though the scale of the measures adopted appear insufficient to
prevent materially negative distortions to domestic macro variables in the
current year.
In this
report, we analyze the implications of recent policy responses and revisit our
macroeconomic expectations for the year. Our revisions are made in cognizance
that projections under current conditions are subject to an unusually large
degree of uncertainty because economic outcomes depend on several fluctuating
factors. These factors include the length and effectiveness of COVID-19
containment measures across the country; the interaction between the outbreak
and the vulnerabilities in local health systems; the longevity of global oil
demand decimation; as well as the resumption of global travel and trade. Our
base case assumption is that the peak of economic and health disruptions will
occur in Q2'20, leaving legroom for improvements in business activities in the
second half of the year as more containment measures are eased and stimulus
injections begin to alleviate economic pressures.
Economic growth is likely to swing negative in Q2'20
Disruptions
caused by social distancing measures and low oil prices are likely to drive oil
and non-oil GDP lower in coming quarters. For oil, we expect substantially
lower domestic output on account of the plunge in global crude consumption1 and
compliance to OPEC+ cut. The non-oil sector is likely to be negatively impacted
by currency adjustment, weaker consumer discretionary income, and demand
deficits due to containment measures. Cascading to sectors, we note that supply
chain disruptions and border closures are likely to adversely impact trade and
manufacturing just as a slowdown in budget implementation is likely to drive
contractions in construction and real estate sectors. We note, however, that
the recently announced expansion of the 'special public works programme' to all
states may provide some support to construction GDP. In contrast to the last
recession episode in Nigeria, wherein agriculture provided the major offset to
the economic crisis, we expect greater resistance from telecommunications and
financial sectors (in addition to agriculture), this time out. The former is
likely to be supported by higher data usage and subscriptions due to social
distancing measures, while the latter could be driven by knock-on effect of
cumulative loan growth since H2'19. All in, we revise our 2020 GDP growth
estimate lower to -0.8% (vs. 2.0% previously; and the -3.4% forecast of the
IMF), consisting of c.12.0% contraction in the oil sector and c.0.2% expansion
in the non-oil sector. We expect the Nigerian economy to grow by 2.4% in Q1'20,
and contract by an average of 1.8% in the other three quarters of 2020. Nigeria
is likely to plunge into a second technical recession in 5 years by Q3'20, in
our view. In addition, tightening global financing conditions (especially for
oil exporters) and strong capital outflows are likely to leave Nigeria's growth
stimulation prospects at the mercy of providers of concessionary budget support
funds in 2020.
Weaknesses in oil earnings, FDIs, and FPIs may eventually necessitate
naira repricing
In our
view, Nigeria is likely to record a current account (CA) deficit of $13.5
billion in 2020 (vs. $17.0 billion in 2019). The recovery in CA could reflect
reductions in services and income deficits that might offset weaknesses in
goods and transfer accounts. Goods account is likely to swing into a deficit in
2020 on collapse of oil export earnings to c.$25.0 billion (versus $48.0
billion in FY'19). However, a corresponding reduction in imports, due to supply
chain disruptions and weaker naira, is likely to lead to a trade deficit of
only $1.5 billion in 2020 (vs surplus of $2.9 billion in 2019). Similarly, we
envisage lower receipts from the current transfers sub account of CA, as we
foresee a contraction in foreign workers' remittances to $19.0 billion in 2020
(versus $23.5 billion in 2019) as the pandemic reduces earnings outcomes from
key contributing zones such as USA, Canada, and UK. However, services and
income deficits are likely to moderate on reduced spending on travels (due to
global travel restrictions) and lower dividend & income repatriation due to
weaker company performances in Nigeria.
Our
projection for a deficit in Nigeria's current account balance suggests FG will
likely prioritize its attempt to raise over $6.9 billion (c. N2.48
trillion at N360/$)
in concessionary funding from the World Bank, AFDB, and IMF. This view is
supported by Nigeria's weak FPI and FDI inflows (2.0% and 0.7% of GDP
respectively, in 2019) and the tighter external financing conditions that have
resulted in the widening of Eurobond spreads. While IMF's recent approval of
Nigeria's $3.4 billion facility under the RFI raises hopes for a realization of
targeted external borrowings, FPIs, in short term government securities, are
likely to largely exit at maturity in H1'20 as was the case in Q1'20 (the
I&E window recorded net outflows of $4.0 billion and $3.6 billion in
February and March respectively, despite average CBN interventions of $2.5
billion over the two months). We expect FPI outflows to be driven by low oil
prices, currency repricing overhang, and expectations of further capital
controls. Similarly, FDIs are likely to be limited to reinvestments of retained
earnings as investors stay on the sidelines amidst uncertainties in domestic
macroenvironment. All in, we believe planned external borrowing of c.$6.9
billion (assuming everything is realized) and other flows (FDI & FPIs
inclusive) would still lag projected current account deficit of $13.5 billion
in 2020E. That said, the fresh $3.4 billion RFI loan as well as debt
suspensions from multilaterals would provide temporary reprieve for reserves in
the short term even though further deterioration of oil earnings, pent up FPI
demand for FX, and renewed import drive (when economies reopen) are likely to
cascade to pressures on reserves and naira repricing eventually.
Nigeria in the aftermath of COVID-19
In the
wake recent external shocks, both monetary and fiscal authorities have resorted
to measures to drive recovery. The intervention measures have been largely
targeted at funding fiscal shortfalls at both the state and federal levels,
improving existing healthcare infrastructure, providing welfare palliatives to
economically vulnerable groups, and easing debt burden on the private sector.
The current size of approved fiscal interventions (COVID-19 intervention fund
plus support to states and NCDC) is N672 billion or 0.4% of GDP, while CBN's N1.1
trillion intervention represents a modest 0.8% of GDP. However, a further N2.4
trillion intervention through commercial bank credit could take the apex bank's
intervention to as high as 2.4% of GDP. Cumulatively, fiscal and monetary
interventions could account for c.2.8 % of GDP. To bankroll these stimulus and
augment budget shortfall, Nigeria has already obtained IMF's approval for a
$3.4 billion (c.N1.2 trillion at N360/$)
financing under the RFI programme. This facility amounts to c.24.0% of
Nigeria's retained revenue in 2019E. This borrowing will likely be complemented
by the €21.0 million grant from the EU and the debt service suspension by the
World Bank. Debt service suspension should lighten external debt service burden
(last year, 24.7% of debt service payments went to multilaterals like the World
Bank and the AFDB) and slightly free up fiscal space. With the recent
conversion of previous external borrowing plan to domestic issuance target of
c.N850
billion (planned 2020 total: N1.7 trillion) and the $3.4 billion IMF fund alone, FG
is effectively provisioning for 47.0% of our projected deficit (given that part
of the IMF borrowing will finance the N500 billion COVID-19 fund). Assuming the expected
loans from World Bank and AFDB are meant solely for budget support, total
deficit cover could rise to 71.0% of our projected deficit, suggesting the
likelihood for more domestic borrowing than guided. Thus, although external
borrowings may be insufficient to negate the likelihood of greater than
budgeted domestic borrowing and higher yields, we believe the rise in yields could
be lower than previously expected given limited investment outlets for domestic
investors.
Policy response should focus on alleviation of private sector burden and
welfare
Faced
with the inevitability of a recession, the response of the fiscal authorities
should be tuned towards facilitating a v-shaped economic recovery. Such a
recovery may be attained if scarce resources are deployed strategically to
quickly arrest the disruption to household consumption (which accounts for
c.76.0% of GDP) and production. To achieve this, intervention spending should
be targeted at preserving operational viability and payroll spending by the
private sector. The importance of conserving spending power is heightened when
considered against the backdrop of projected higher inflation.
Never let a good crisis go to waste
Nigeria
could utilize the unique situation created by the lockdown to embark on
structural and administrative changes that could have positive ramifications
for years to come. The FG appears to have tilted along this line with the
alleged removal of PMS subsidy. However, given the history of retractions
around previous subsidy removal drives, only time will tell whether the
government is steadfast on going all the way this time out. If sustained, we
believe subsidy removal could complement efforts to improve fiscal discipline
in Nigeria. On fiscal discipline, we note that FAAC agreed to distribute only
N661.4 billion (vs. the N780.9 billion available for March 2020) and save
N119.550 billion in the Excess Oil Revenue Account in view of the highly
uncertain revenue profile in the immediate future. The president also approved
the implementation of the report of the presidential committee on reform of
government agencies, which seeks to reduce cost of governance. Elsewhere, the
nationwide lockdown creates legroom for Improved data gathering across states,
which could improve informal sector capturing, future welfare provision,
national security, credit scoring, and tax collection. The lockdown provides a
unique situation, under which households can be counted and business owners
compelled to share their accounting books with relevant authorities if
contingent on relief support. The crisis also presents the opportunity to look
inwards to upgrade capacity and service provision across several essential
areas including health, power, tech infrastructure, welfare, and education.
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