Q4 2020: A Sequence of Current Account Deficits


Monday, June 07, 2021 / 09:35 AM / by FBNQuest Research / Header Image Credit: RB Associates

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Nigeria's current-account deficit deteriorated in Q4 '20 from a downwardly revised -3.6% to -4.7% of GDP. Expectations of a better performance were undone by the resilience of merchandise imports, which increased by USD1.7bn in the quarter. Nigeria is relatively new to regular deficits on the current account: they used to mark a particularly sharp fall in oil export revenue but have become almost structural. This is the tenth in succession. This sequence removes one pillar of the narrative, popular with the ratings agencies and with the FGN for its roadshows, that Nigeria offers a strong external balance sheet. It also brings additional pressures onto reserves and the exchange rate.


The current account has been in deficit since Q3 '18, for which a worsening performance on trade is mainly responsible. The trade and current-account deficits moved broadly in tandem before the virus. The trade deficit has since become the larger of the two: net transfers (essentially remittances) have fallen as we have previously noted but the positive impact of COVID-19 on the deficits on services and income has been greater.


The impact has been positive because international flights were halted for several months, so fx drawings for health, education and business expenses sharply declined. Once they resumed on a limited scale, Nigerians may have been unable to travel to their destinations of choice.  The return of 'normality' will see the two deficits back at pre-COVID levels.


As for the reduced deficit on income, our take is that foreign companies have deferred the repatriation of dividends due to the challenge of accessing fx since March '20.


Non-oil exports again disappointed in Q4. Running above USD2bn per quarter throughout 2019, they have declined to less than USD700m. The closure of Nigeria's land borders, since reversed, played its part.


Other than in Q2 '20, which was broadly the quarter of lockdown in Nigeria, merchandise imports have proved more resilient than expected. The background is the steady rise in the population of +/- 3% per year as well as the modest impact of efforts to boost import substitution. Additionally, it would appear that many businesses kept their operations running by sourcing fx on the parallel market. 


The best hopes for the return of a trade, and perhaps a current-account surplus lie in a strong recovery in crude production and prices. Both trends are now favourable although we do not buy into the theory of the commodities supercycle.


Trends on the balance of payments (BoP; % GDP)

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Source: CBN; FBNQuest Capital Research

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