Macroeconomic Update: Macroeconomic Review for Nigeria 2020 Q3 and Outlook


Wednesday, October 21, 2020 / 04:03 PM / By FSDH Research / Header Image Credit: Ecographics

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Kindly click here to download the full report on Macroeconomic Review for Nigeria 2020 Q3 and Outlook. Below is the summary:


Performance of Global Economy

  • In the World Economic Outlook released in October 2020, the International Monetary Fund (IMF) revised upwards its 2020 growth forecast for the global economy to -4.4% from -4.9%.
  • This upward review was necessitated by the easing of lockdown across several countries and improved consumer demand and public investments. 
  • Among the large economies, China is expected to lead recovery with an expansion of 1.9% in 2020. According to the IMF, China's exports recovered due to earlier restart of activities and a strong pickup in external demand for medical equipment.
  • Global GDP is expected to recover in 2021 with a growth of 5.2%.

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Data Source: IMF


Economic Outlook of Selected African Countries

  • Growth in Sub-Saharan Africa (SSA) for 2020 was revised upwards from -3.2% to -3% as economies begin to ease lockdowns and restrictions.
  • Oil exporting countries will experience a decline of -4.1% given their exposure to lower oil price and reduced demand.
  • Growth of Africa's biggest economy, Nigeria, was revised upward from -5.4% to -4.3% while South Africa's economy will contract by 8.0% in 2020.
  • Non-resource intensive countries led by Ethiopia and Tanzania showed better resilience. The economies of both countries will expand by 1.9% in 2020.
  • SSA is expected to recover in 2021 with a growth of 3.1%. The economies of Nigeria and South Africa will expand by 2% and 3% respectively in 2021.

Oil Price: OPEC members to sustain cuts till December

  • OPEC began its second phase of cuts from August to December to drive up crude oil prices, targeting a combined 7.7million b/d of cuts in August-December.
  • Year to date (Oct 15) crude oil price averaged US$41.1 per barrel.
  • Uncertainty around the second wave of COVID-19 outbreak and concerns about the global oil demand outlook could slow down price increase in the year.

COVID-19 Impact and Nigeria's Macroeconomic Environment

  • As at October 13, 2020, number of COVID-19 confirmed cases in Nigeria stood at 60,655.
  • As at October 13, 1116 deaths had been recorded, representing 1.8% of confirmed cases.
  • Nigeria has recorded lower number of deaths relative to several countries.

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Data Source: NBS

Source: World Bank Poverty Team - August 2020

"Nigeria's GDP growth was -6.1 percent in Q22020. This ended the 3-year trend of positive, but modest, real GDP growth recorded since the second quarter of 2017. Q32020 GDP growth is projected to be negative, which means the Nigerian economy is likely to lapse into a second recession in four years, with significant adverse consequences". Minister of Finance, Budget and Planning, Nigeria


Nigeria faces severe stagflation as GDP declines, Unemployment & Inflation rise


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Data Source: National Bureau of Statistics

  • The impact of COVID-19 was largely felt on output, employment and inflation.
  • With COVID-19, many companies engaged in non-essential items were forced to shut down operations.
  • As a result, the total number of individuals employed in the country declined to 35.6 million in 2020 Q2. Unemployment rate rose to 27.1% in the quarter.
  • Key sectors such as Agriculture, Trade and Manufacturing experienced significant job losses.
  • A fall in output was also accompanied by rising prices with inflation rate at 12.6% in June 2020 and peaked at 13.7% in September. Supply bottlenecks and value chain disruption were largely responsible for the rise in inflation.
  • Nigeria's inflation rate rose significantly to 13.7% in September 2020 from 13.2% in August.
  • Issues of insecurity, increase in VAT, structural factors relating to infrastructure and power supply deficit as well as exchange rate depreciation continue to drive up average prices in Nigeria.
  • Purchasing Managers' Index (PMI) which measures the level of business activities in the month is a major pointer to GDP performance in each quarter and is still in the contraction region (below 50 points) which suggests a possible recession.
  • Stability in crude oil price and the gradual opening up of the economy has resulted in improved economic activities in the third quarter of 2020.
  • Given this, we expect a better GDP performance in Q3, relative to Q2.


Nigeria's FX shortages could slowdown economic recovery in Q4

  • GDP decline of -6.1% in the second quarter of 2020 is the first negative growth since the first quarter of 2017. In the first half of 2020, GDP growth averaged -2.12%.
  • In H2, we expect this sluggish economic performance to continue especially given the lockdown of key sectors, the tough business climate and persistent challenges in the fiscal space.
  • In addition, Nigeria's foreign exchange challenge will play a major role in shaping economic outcomes in 2020H2. Already, there have been limited FX supply which has resulted in depreciation of the currency in the parallel market.
  • More recently, the CBN has embarked on FX rationing and exchange rate adjustments, among other measures, to reduce pressure on the Naira and maintain a stable exchange rate.
  • Drawing from experience during the last recession, limited availability of FX as well as FX rationing could have unintended consequences on broad economic aggregates such as GDP, Inflation, external reserves and foreign investments.
  • Growth of key sectors such as trade, manufacturing and agriculture could also be constrained by limited availability of FX to secure inputs.


Nigeria's External Reserves stable at US$35.7 billion, following stable oil prices

  • External Reserves has maintained a stable trend at US$35.7 billion in the month of September and October 2020.
  • Relatively stable crude oil prices and output has also improved dollar inflows into the foreign exchange market.
  • Rates continued to face pressure in the I&E window as the CBN moved to clear FX demand backlogs in the past few weeks. At the BDC/parallel markets, exchange rate depreciated to N460/US$ due to speculative factors and supply challenges.


Exchange Rate: Performance of Naira was mixed across Forex windows

  • The pressure on the foreign exchange market persisted in 2020Q3 owing to slow down in the global oil prices and continued pressure on external reserves.
  • Consequently, in bid to reduce pressure and unify the foreign exchange market, the CBN for the second time in 2020 devalued the Naira on the official window in 2020Q3 to N380/US$ from N361/US$.
  • The Naira, though, stabilized on the I&E Window, went as high as N395.84/US$ on a mid-day trade. At the end of 2020Q3, the Naira stood at N386/US$ from the opening value of N386.50/US$. As at October 9 2020, the Naira stood at N385.83/US$.
  • Much of the instability occurred in the Parallel market. The Naira soared  to as high as N486/US$ from the 2020Q3 opening figure of N460/US$ (5.65% change).
  • The news of CBN resumption of sales of Forex to Bureau De Change caused the Naira to appreciate in the Parallel market to N440/US$. The CBN sold about US$400 million on a series of sales, yet the Naira depreciated reversing the appreciation recorded.
  • At the close of 2020Q3, the Naira stood at N465/US$ in the parallel market (1.09% change) and as at Oct 9, the Naira closed at N457/US$.
  • As at October 16, exchange rate was N460/US$ in the parallel market.

Total investment inflows in 2020 will record a significant decline due to the impact of COVID-19 coupled with foreign exchange challenges, among other factors.

  • Foreign Investment inflows into Nigeria stood at US$1.3 billion in 2020Q2.
  • This is the lowest quarterly inflow since 2017Q1 and is a 79% decline when compared with US$6 bn in 2019Q2.
  • The significant decline was due to economic uncertainty especially given the outbreak of COVID-19 and its associated impact.
  • There was a significant change in the composition of foreign investment inflows in 2020Q2.
  • FPI no longer accounted for the largest share of inflows (30%) while Other Investments emerged on top with a share of 59%.


Federal Government proposed 2021 Budget records large fiscal deficit

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Market Performance:
Fixed Income: Bond Yields on a downward trajectory

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Data Source: FMDQ


Are low bond yields an advantage?

  • The FGN Bond market continued to witness suppressed yields across tenors. Inflation at double digits, FX liquidity is thin, and Sovereign FCY bonds are trading at much higher yields.
  • Average yield on FGN Bond dipped to 6.84% to close 2020Q3 from 8.55% in 2020Q2. This is a further decline from 11.91% in 2020Q1. However Nigerian bonds outperform most EM/FM LCY bond markets.
  • This was on the back of increased liquidity in the system that followed the CBN's OMO policy that restricted non-bank corporates and individuals from participating in OMO transactions.
  • Moreover, continued decline of Monetary Policy Rate in a bid to channel more credit to the private sector as a measure against the recessionary impact of COVID-19 further drove down yields on FGN Bond. As at October 9th, 2020, average yield on FGN Bond pointed at 6.25%.
  • In the Bond Market in 2020Q3, the FGN borrowed a sum of N408.48 billion. Year-to-date, it has borrowed a sum of N1.72 trillion.


Treasury bills yields continue to dip

  • The NT-Bill market is also witnessing suppressing yields.
  • Average yield in the NT-Bill market dipped to 1.85% to close the third quarter of 2020 from 2.15% in the previous quarter. This is a further decline from 3.68% in the first quarter of 2020.
  • Liquidity factors coupled with the need to drive credit to the private sector also intensified the continual drop in yields.
  • As at October 9th 2020, average yield on the NT Bill market pointed at 1.44%.
  • In the Bond Market in 2020Q3, the FGN borrowed a sum of N408.48 billion. Year-to-date, it has borrowed a sum of N1.72 trillion.
  • In the OMO space, yields are fast declining.
  • Average OMO yield declined to 1.86% at the close of 2020Q3 from 5.07% at the close of 2020Q2.
  • This is a further decline from 15.05% recorded in the first quarter of 2020.
  • As at October 9th 2020, the average yield on the OMO space pointed at 1.39%.

Equities Market: All sectors recorded gains in 2020Q3


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