June 10, 2020 / 02:11 PM / FSDH Research / Header Image Credit: FSDH
Highlights of the FSDH
Macroeconomic Review Q2 2020 and 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
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%.
- 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$40.3 per barrel.
OPEC Cuts Translate Into Loss Of
- OPEC agreed a 23% production
cut to address the supply glut and rebalance the oil market.
- Nigeria is expected to cut
417,000 barrels per day with target production at 1.41 million barrels per
- Nigeria may lose an estimated
N160bn to N200bn due to OPEC production cut
GDP Growth, Inflation and Exchange
- Nigeria recorded a GDP growth
of 1.87% in the first quarter of 2020. This represents the lowest growth
rate since the third quarter of 2018.
- For Q2, the Nigerian economy
will contract significantly following shut down of non-essential economic
activities in several States in April.
- Headline inflation rate for the
month of April 2020 stood at 12.34% year-on-year, the highest in 24 months
since April 2018. This represents a marginal increase from 12.26% recorded
in March 2020.
- The Naira fell from 367/US$ 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.
- 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
- 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
- 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
- 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.
- 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
- 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
Five Cardinal Areas For Government
- Improve external reserves
- Enhance government revenue
- Attract foreign/local
- 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:
Growth at -2.9%
Inflation Rate at 12.85%
External Reserves at US$33 billion
Exchange Rate at N420/US$
Download Full PDF Report Here
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