Minimizing the Impact of COVID-19, the New and Unexpected Shock to the Nigerian Economy - FSDH


Wednesday, June 10, 2020 / 02:11  PM / FSDH Research / Header Image Credit: FSDH


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Highlights of the FSDH Macroeconomic Review Q2 2020 and Outlook


Global Outlook

  • In April, the International Monetary Fund (IMF) revised its outlook for 2020 and projected a 3% decline in global GDP in 2020 from a previous projection of 3.4%.
  • According to the IMF, economic outcomes across countries will largely depend on the following: (i)pathway of the pandemic (ii)the intensity and efficacy of containment efforts

(ii)the extent of supply disruptions (iv)the repercussions of the dramatic (v)tightening in global financial market conditions (vi)shifts in spending patterns (vii)behavioral changes (such as people avoiding shopping malls and public transportation) confidence effects, and (viii)volatile commodity prices.

  • The global economy is expected to recover in 2021 with a growth of 5.8%.


Sub-Saharan Africa

  • Growth in Sub-Saharan Africa (SSA) for 2020 was revised downwards from 3.7% to -1.6% due to the effect of COVID-19 on the region.
  • In the SSA region, oil and other resource intensive countries will be significantly affected given their reliance of commodities for export earnings and revenue.


Global Oil Prices Are Picking Up

  • As countries continue to relax lockdowns and restrictions, oil prices have picked up since late April.
  • Oil production cuts have also sustained price increase. Price rose to US$41 pb on June 8th.
  • Year to date average stands at US$40.3 per barrel.


OPEC Cuts Translate Into Loss Of Revenue

  • OPEC agreed a 23% production cut to address the supply glut and rebalance the oil market.
  • Nigeria is expected to cut 417,000 barrels per day with target production at 1.41 million barrels per day (mbpd).
  • Nigeria may lose an estimated N160bn to N200bn due to OPEC production cut


GDP Growth, Inflation and Exchange Rate

  • Nigeria recorded a GDP growth of 1.87% in the first quarter of 2020. This represents the lowest growth rate since the third quarter of 2018.
  • For Q2, the Nigerian economy will contract significantly following shut down of non-essential economic activities in several States in April.
  • Headline inflation rate for the month of April 2020 stood at 12.34% year-on-year, the highest in 24 months since April 2018. This represents a marginal increase from 12.26% recorded in March 2020.
  • The Naira fell from 367/US$ in early March to 401.6 in mid-April.
  • As oil prices increased in May following OPEC cuts and higher crude oil demand, external reserve situation also improved.
  • In addition, the Nigerian government's ability to secure US$3.4 billion loan from the IMF also contributed to the improvement in the reserves position.


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Market Performance

  • The Nigerian Stock Exchange reversed the gains recorded in the wake of the year.
  • Year to date (May 29, 2020), the market set on the recovery path as the NSE-ASI reached 25,267.82 index points.
  • The NSE30 which mirrors the stocks of large cap and best performing companies listed on the NSE recorded year to date losses of -23.39% and -6.92% as at March 31, 2020 and May 29, 2020 respectively.
  • As the Main board is recovering but still in the loss territory, so also are the major sectors on the NSE. The Consumer goods index remains the most hit sub-index losing 18.65% YtD, followed by Banking (14.78%) and Oil & Gas sectors (13.04%)
  • There was an uptick in average bond yields to 11.9% at the close of 2020Q1 from 11.5% at the end of 2019.
  • Despite low yields in the NT-Bill space, the market remained bullish as average yield has dipped from 4.85% it opened the year to 3.64% at close of 2020Q1. Year to date (May 29, 2020), average yields on the NT-Bill space pointed at 2.12%.


COVID-19 Impact on Government Budget

  • In response to the impact of the COVID-19 on government fiscal position, the FEC approved a revised 2020 budget of N10.52 trillion.
  • The budget adopted a crude oil benchmark of US$25 per barrel and a production benchmark of 1.94 million barrels per day.
  • The new budget is also based on an exchange rate of N360/US$1 from N305/US$1.
  • Deficit in the revised budget increased to N5.37 trillion from N2.18 trillion. The deficit will be financed through domestic, foreign loans and proceeds from privatisations.
  • In April, the Nigerian government secured a US$3.4 billion loan from the IMF, repayable under five years.
  • The loan was secured to address balance of payments challenges amidst the fiscal pressure from COVID-19.
  • The sum of US$1.5 billion and US$500 million loans are in the pipeline with the World Bank and African Development Bank (AfDB). These amount to US$5.4 billion (N1.94 trillion) in external borrowing.
  • This, in addition with domestic borrowing plans could raise public debts to over N33 trillion in 2020, which is an estimated 22.6% of GDP.
  • In addition to rising debt-to-GDP ratio, debt servicing as a share of revenue will experience a sharp increase, especially given the lower revenue projections in the year.
  • Money and capital market activities will also be stimulated in 2020. As a result, we expect interest rate on short term instruments to rise marginally towards the end of the year.


Monetary Policy

  • To respond to the impact of COVID-19, the MPC has reduced the MPR to stimulate economic activities. The CBN has is also implementing several intervention programmes to support affected businesses in key sectors.
  • We believe this move, if well implemented and complemented by fiscal policies, will have positive impact on the economy and possibly limit the negative impact of COVID-19 on key sectors.
  • We note the huge disparity among interest rates- MPR, lending rates, Tbills rate, OMO, Bond rates among others. We believe addressing such disparity remains crucial in ensuring stability and attracting investments into different segments of the markets.


Five Cardinal Areas For Government Interventions

  • Improve external reserves
  • Enhance government revenue
  • Attract foreign/local investment
  • Address rising inflation and limit welfare impact
  • Limit impact on sectoral/overall GDP growth


COVID-19 Scenarios (updated)

Three scenarios are presented and we think that the most likely scenario for Nigeria is the "Moderate Case" (Gradual opening of economic activities, partial implementation of business support initiatives)


Forecast for this moderate scenario:

GDP Growth at -2.9%

Inflation Rate at 12.85%

External Reserves at US$33 billion

Exchange Rate at N420/US$


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