July 10, 2020 / 06:38 PM / FSDH Research / Header Image Credit: FSDH
Global Economic Outlook
- In June, the International
Monetary Fund (IMF) revised its projection downwards and forecasted a
-4.9% contraction in global GDP from -3% projected in April.
- Advanced economies, led by the
United States (US) and the Euro Area, are expected to lead the decline in
global economic growth.
- The global economy is expected
to recover significantly by 5.4% in 2021, although this is lower than 5.8%
that was previously anticipated.
- Growth in Sub-Saharan Africa
(SSA) for 2020 was further revised downwards from -1.6% to -3.2% due to
the effect of lockdowns on economies in the region.
- Major oil producing countries
such as Nigeria and Angola have been badly hit by the pandemic.
- Nigeria's growth forecast for
2020 was revised to -5.4% from -3.4%.
- South Africa, which is the second
largest economy will experience a significant decline of -8% in 2020,
mainly due to restrictions imposed on the economy.
- Non-resource intensive
countries showed better resilience led by Ethiopia and Uganda. The
economies of both countries will expand by 3.2% and 3.5% respectively.
- SSA is expected to recover in
2021 with a growth of 3.4%. In 2021, the economies of Nigeria and South
Africa will expand by 2.6% and 3.4% respectively.
According to the IMF, economic outcomes across
countries will largely depend on the following:
- The length of the pandemic and
- Displaced workers' ability to
secure employment, possibly in different sectors
- Scarring from firm closures and
unemployed workers exiting the workforce
- Global supply chain
reconfigurations that affect productivity
- The extent of cross-border
spillovers from weaker external demand as well as funding shortfalls
- Eventual resolution of the
current disconnect between asset valuations and prospects for economic
FX Inflows in Nigeria
- Following the outbreak of
COVID-19, Forex inflows into the I&E Window reduced significantly in
2020Q2 on the back of lower Foreign Portfolio inflows.
- FPI inflow declined to US$27.2
million in June 2020 from US$2.04 billion in January 2020. On a quarterly
basis, inflows declined from US$3.65 billion in 2020Q1 to US$225.7
million in 2020Q2.
- CBN intervention increased from
US$390 million in January 2020 to US$2.48 billion and US$2.89 billion in
February and March respectively.
- The attendant effect of
COVID-19 on oil price constrained the CBN's capacity to intervene further
as dollar inflow dwindled in April.
- Following the lockdown and
restriction of economic activities in April and May, total inflows to the
I&E Window dropped from US$3.7 billion in March to US$459.2 million in
April, US$492 million in May 2020.
- FX Inflows dipped further to
US$248 million in June 2020 (Q1'20=US$11.92 billion VS Q2'20=US$1.2
billion). In early July, the CBN adjusted exchange rate in the Secondary
Market Intervention Sales (SMIS) - a window where importers access foreign
currencies - from N360/$1 to N380/$1.
Equities Market - Capital flight continues to dominate foreign participation
- Relative to the last quarter of 2019, there was
increase in investors' participation in the market to N626.87 billion in
2020Q1 from N463.72 billion in 2019Q4. Month on month participation
continues to shrink.
- Domestic investment continued to dominate foreign
counterparts. Total domestic transaction for 2020Q1 stood at N374.98
billion compared with N251.87 billion from foreign investment. This amount
to a share of 60% to 40% while it was 70% to 30% in May 2020 respectively.
- Foreign participation continued to decline.
Participation from foreign players is more of capital flight than
investments in the exchange, however, this is slowing in recent months.
- The continued capital flight and dampening inflows will
impact Nigeria's forex position.
- Improvements in oil price could slow down capital
flights in coming months but declining reserves position is concerning.
CBN moves to unify the
- In early July, the CBN adjusted
exchange rate in the Secondary Market Intervention Sales (SMIS) - a window
where importers access foreign currencies - from N360/$1 to N380/$1.
- More recently, the Nigerian naira resumed trading on the official
market at 381 to the dollar (CBN official rate: 381/1$ posted on
FMDQ on July 7th, 2020 )
- As contained in the Economic
Sustainability Plan (ESP), which was launched in June as government's
response to the COVID-19 pandemic, part of the monetary measures to
support the economy is the unification of exchange rates to maximise naira
returns to FAAC from foreign exchange inflows. This is expected to be
implemented in the first 12 months, according to the ESP.
- The recent move, therefore, to
unify the exchange rate is in line with the government's agenda as well as
with demands for multilateral agencies who are heavy lenders to the
government. The IMF and World Bank had requested for a unified and
flexible exchange rate from the monetary authority as Nigeria secured
foreign loans from both institutions.
- While the movement is in the
right direction it is not enough
Expected Impact: FSDH
- This upward adjustment of the
Naira is expected to have positive implications on government revenue and
in turn, reduce pressure on the exchange rate in the short term.
- However, other markets are
expected to adjust accordingly- the move would translate to higher
pressures in other markets like the parallel market, raising speculative
concerns in coming months.
- With the Reserves at US$36
billion and relatively stable oil price, there appears to be a
considerable amount of firepower to intervene in the markets. But as
economic activities improve, higher imports and lower foreign investment
inflows relative to 2019 will add pressure on the reserves. Despite the
adjustments, the CBN will continue to intervene to maintain exchange rate
stability and prevent large FX fluctuations.
- The move is also expected to trigger
a marginal increase in inflation rate, particularly imported food
- FSDH maintains its forecast for
average rate of 420 NGN/$1
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