In line with our expectations, trade flows remained downbeat as 9M'20 trade flows plummeted by 10.9% to N23.2 trillion. Although trade flows were lower by 8.9% y/y in Q3'20, the reopening of advanced economies and easing of restrictions on business activities improved trade by 34.2% q/q. Irrespective, the trade gap widened to -N2.4 trillion (Q3'20), which exceeds its 9M'16 deficit outturn (-N961.4 billion). This record quarterly deficit was largely due to low exports and a surge in import demand.
Pent-up import demand and OPEC+ compliance raises deficit levels
Interestingly, the country's imports for Q3'20 strengthened by 38.0% y/y, beating pre-COVID import levels due to upbeat demand for machineries, mineral products and chemical & allied products, jointly responsible for over half of Q3 imports. On the flip side, exports tanked by 43.4% y/y due to lower oil prices and OPEC+ production cuts. Specifically, crude exports remained 35.3% lower y/y due to relatively lower oil production (Q3'20:1.6mb/d, Q3'19: 2.0mb/d) and oil prices (Q3'20: $42, Q3'19: $61). However, the relaxation of restrictions in advanced economies in Q3'20 supported a 56.0% q/q recovery in crude exports. Eventually, crude oil made up 81.0% of total exports, compared to roughly 70% in Q2'20 and Q3'19. On the other hand, non-crude exports fell to a multi-year low of N568.2 billion, contributing barely 19.0% to total exports. The simultaneous impact of the divergence in imports and exports on the trade gap for Q3'20 alone dwarfed initial expectations for the country's full year trade balance.
India regains its spot as top export destination
Following a gradual recovery in demand, India sped past Spain to regain its top spot as Nigeria's major trading partner. We attribute this to recovery in India's economic activities in Aug'20, following four months of contraction in production levels. Constituting 16.7% of Nigeria's exports, India topped the exports' chart closely followed by Spain (10.9%), Netherlands (7.6%) and South Africa (6.8%). In terms of imports, China remained Nigeria's top trade partner, responsible for 30.5% of total imports during Q3'20. Without recourse to pre-COVID trade relations, pandemic-related needs made China a strong player in global trade despite ongoing tensions with the US. While the pandemic extended the kick-off date for the Africa Continental Free Trade Area agreement, trade relations with Africa remains low (constituting 16.4% of imports and 3.3% of exports) due to continued closure of land borders amid higher external demand from European countries (constituting 34.0% of imports and 40.0% of exports).
Trade gap to widen for the fifth consecutive time
Trade is on course to experience its worst full year outturn since at least 2016, given subdued crude exports and teeming import demand. With the recovery in domestic manufacturing activities (as revealed by Nov'20 PMI readings), we will continually see an ascent in imports. While import demand continues to wax stronger, the country's exports are expected to remain under pre-pandemic levels, given continued OPEC+ production cuts. However, we expect quarterly improvement in crude exports due to rising demand and higher oil prices. With respect to trade relations, we expect European and Asian countries to remain Nigeria's top trade partners. In summary, Nigeria is set to record its fifth consecutive quarterly trade deficit in Q4'20 as well as a fifth consecutive year of negative trade output growth in 2020. Although Nigeria recently ratified the Africa Continental Free Trade Area (AFCFTA) agreement, we do not expect significant improvement in trade volumes with African countries unless border closure measures are relaxed in line with regional integration efforts. Full relaxation of border closure measures will improve external demand for Nigerian exports, abate inflationary pressures associated with supply shortage and propel a timely recovery in trade come 2021.