Friday, January 3, 2020 / 6:49 PM / By Teslim Shitta-Bey, Managing Editor / Image Header Credit: EcoGraphics
With the end of 2019, the direction of economic growth in the new year 2020 is still largely cloudy as analysts take disparate positions on how the Nigerian economy would shape up in the new year.
To fully or partially understand the outlook for the Nigerian economy in 2020 would require interpreting the events of 2019 and how these would affect outcomes in the new year.
2019 in Context
Inflation: An aircraft in flight mode
Inflation started trending downwards in Q1 and Q2 2019, but in Q3, signs of a reversal had emerged as the Central Bank of Nigeria's (CBN's) restriction on food-related imports started putting pressure on local food prices and other manufacturing inputs. Inflation which started 2019 at +11.37% in January fell to +11.22% at the end of Q2 2019, and by July the aggregate price level growth had slowed to +11.02%, raising optimism that the CBN would by Q2 2020 be within its target band of Between +6% and +9% (see chart 1 below). Unfortunately, the CBN's to tighten the noose on importers of food and related-products by denying them access to the official foreign exchange market and the importers and exporters foreign exchange window (IEFX) added to the rise in the price of food (see food price inflation increases in chart 2 below). Food inflation grew faster than the general headline inflation rate throughout 2019. Food inflation rose from +13.51% in January 2019 to +13.56% at the end of Q2 2019 and fell slightly by +0.05% to +13.51% at the end of Q3 2019. At the end of 2019, food inflation worsened and rose to +14.48% in November.
Chart1 Inflation rate Jan.-Dec 2019
Source: NBS Statistical Data, Proshare research
Chart 2 Food Price Inflation Rate Jan.- Dec. 2019
Source: NBS Statistical Data. Proshare research
GDP: Running fast slowly
Gross Domestic Product (GDP) growth in 2019 was uninspiring; the GDP growth rate fell behind the 2016 estimated growth rate of the Nigerian population of +2.6%. To a large extent, the slow GDP growth reflected a tight monetary policy stance of the CBN. The central bank kept interest rates high for most of 2019 for two reasons:
1. Containing inflation growth
2. Keeping the external value of the Naira stable, the naira to dollar rate stayed at N360/$ for the year
High domestic interest rates as a result of double-digit rates on risk-free government treasury bills (T-bills) and bonds resulted in the federal government "crowding out" private sector access to credit and investment. The consequence of the frequent government borrowing from the local money market made real sector growth difficult. However, growth varied across sectors in 2019.
The agricultural sector, which grew at +4.93% in Q3 2016, saw growth fall to +1.79% in Q2 2019 but climbed back up to +2.28% in Q3 2019. The manufacturing sector in 2019 also had a rough patch, the sector declined by -0.13% in Q2 2019 but went up by +2.28% in Q3 2019. The service sector, especially information, communication and technology (ICT), rose from +9.01% growth in Q2 2019 to +9.88% in Q3 2019. Another service sector economic segment that has seen strong growth in 2019 has been the arts, entertainment and recreation sector, which rose from growth of +0.81% in Q2 2019 to +2.89% in Q3 2019. Indeed, for most of 2019, the service sector pushed the growth needle forward a few ticks higher than other sectors (see Table 1 below).
Table 1 GDP Growth By Sector Q2 and Q3 2019
Source: Central Bank of Nigeria (CBN), Proshare research
Other GDP sectors saw differential growth rates in 2019. Mining and quarrying sector growth fell from +7.00% in Q2 2019 to +6.19% in Q3 2019; this was surprising considering the federal government's insistence that it was pursuing an economic diversification agenda to de-risk the economy from the overshadowing presence of the oil & gas sector. The power sector equally performed unimpressively in the year with growth declining from an already anorexic +0.43% in Q2 2019 to a negative -11.81% in Q3 2019 (see Table 2 below).
Table 2 GDP Growth By Sector Q2 and Q3 2019
Source: Central Bank of Nigeria (CBN), Proshare research
In aggregate terms, GDP grew from +2.12% in Q2 2019 to +2.28% in Q3 2019. The GDP growth rates across industries improved in Q3 2019 but fell short of the economic recovery and growth plan (ERGP) rate of +4.5% for the year.
Domestic interest rates: Rising prices and flattened yields
Nigeria's Domestic bond yields in 2019 were attractive as risk-free rates stayed at double digits throughout the year. But the tide turned in Q4 2019 when the CBN restricted open market operations to foreign investors and domestic banks, treasury yields were better than potential returns on equities, explaining why the local equities market lost -15.34% of its market value in Q4 of 2019.
Deposit rates have also stepped up over the last ten years as rates on twelve-months deposits fell from 12.85% in 2009 to 4.64% in 2011 and then rose to 9.16% in 2014 at the beginning of a global economic slump. The following year 2015 saw twelve-month rates fall to 8.68% indicative of the build-up to a domestic recession by 2016 twelve-month rates dipped further to 6.22% as the recession was well on its way. From 2017 to 2019, twelve-month deposit rates averaged 10.49% (see last column, Table 3 below).
Table 3 Nigeria's Average Deposit Yields Across Tenors 2009-2019
For the first three-quarters of 2019, investors had the benefit of a federal government in need of monetary support by way of T-bill market purchases by foreign and domestic investors. The tune has changed somewhat in Q4 209, as individual domestic investors become fenced from the OMO activities of the CBN. The reduction in the number of investors with access to OMO resulted in yields turning flat at the end of 2019, with digital piggy banks forced to look for alternative outlets for their depositor's money as treasury rates thinned down.
The decision whether to invest in equities (for example, banking sector stocks) or to put surplus cash in Treasury bills for 2019 was an easy win for Treasury bills. Two facts were clear from available data; The NSE bank stock index was a volatile measure of bank values and produced returns that failed to match the domestic inflation rate, which hovered above +11% for most of the year. The banking index rose from 17.61 in 2010 to -31.28 in 2011 and then climbed up to +31.86% in 2013 and +73.32% in 2017 before crashing to -16.09 in 2018 and -13.42 in 2019. On the other hand, Treasury bill rates climbed from +3.85% in 2010 +13.64% in 2012, +10.50% in 2014 and +12.34% in 2017. By 2018 the rate fell to +10.09% before climbing a notch to +10.44% in 2019.
Returns from Treasury bills over the last decade have, on average, provided less risky and better returns than their banking stock alternative. Investing in bank stocks over the last two years (2018 and 2019) have been particularly precarious (see chart 3 below).
Chart 3 Nigeria's Banking Index and Treasury Bill Returns 2009-2019 (%)
Source: Central Bank of Nigeria (CBN), Proshare research
Fiscal deficit: Inside the Pork Barrel
The federal government's escalating fiscal deficit since 2015 has raised concerns both nationally and internationally. Economists have argued that the sustained budget deficit and annual fiscal borrowings and debt service obligations could combine in a complex manner to tip the economy's balance.
Two events will shape the nature of the country's fiscal position in 2020:
Chart 4 Brent Crude Oil Price and Budget 2019
Looking Into 2020
Analysts' general outlook for 2020 remains conflicted, ranging from optimistic to pessimistic and neutral. United Capital Limited (UCL) analysts, however, see the year 2020 outcomes coloured by a gradual recovery of GDP growth (+2.3%) and persistence in inflationary pressure (headline inflation to average +11.9%). Other perspectives include the following:
Chart 4 CBN's Monetary Policy Rate (MPR) 2014-2019
In a 2020 preview report titled "Nigeria Outlook 2020: A Different Playing Field", analysts at UCL note that "our outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch. From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity."
"However, this will not be enough to trigger a major rally in the absence of the demand from FPIs. Overall, our base case scenario sees equities market return at +5.3% in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity", United Capital analysts conclude.
The market specialists at UCL further noted that "a quick sequence of monetary policy actions, particularly those relating to sales of CBN's OMO bills announced since July 2019, changed the dynamics in the Nigerian financial market in H2 2019. While the currency market remained broadly stable, supported largely by the CBN's sustained FX intervention, the equities market tumbled -14.6% year-on-year (Y-o-Y). Also, the average yield in the fixed income market moderated from 14.5% in December 2018 to 9.7% in December 2019". The lower yields in the fixed income market drove local investors in search of alternative returns elsewhere, but whether the local stock market will provide refuge is uncertain.
The analysts note that 2020 will be a different playing field for capital market operators. According to UCL's market monitors, "The fixed income market will be a corporate/ private issuer market due to the buoyant level of liquidity and the low yield environment. Yields on FGN T-bills will stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in H1 2020. Hence, interest in riskier assets, mostly corporate papers, will increase. The rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in Q1 2020 while preserving the stock of reserves above the $30.0bn threshold. Overall, we expect the sovereign yield curve to remain normal in H1 2020. However, this may reverse to a hump-shaped curve from Q3 2020."
In other words, analysts expect short term market yields to be lower than longer-term yields in the very short term, but by the third quarter of the year, the long-term yields will turn lower than short term yields as investors become increasingly circumspect of economic stability and forward inflation rates.
The Year 2020 and Ides of Imponderables
In a breakfast meeting at the Lagos Business School, analysts at Financial Derivatives Company (FDC) gave a few insights into likely developments in 2020, which they confessed involved "imponderables." The analysts noted the following:
Costs in 2020 may rise higher as the following factors could raise prices:
Money Market Meekness
Policy Outlook 2020: When More is Less
Illustration 1 Central Bank of Nigeria's 2020 Policy Dilemma
FDC analysts in their 2019 Review and 2020 Outlook believe the following possible outcomes are likely in 2020;
Pondering the Imponderables
The year 2020 throws up a variety of outcomes equally likely but with major drivers being external shocks from developments in the international crude oil market and internal fiscal policy orientation. Fiscal policy will depend on the government's boldness and determination. Boldness would be required to remove subsidy on domestic sale of petrol or PMS and determination is needed to cut back the excessive recurrent fiscal spending of government ministries, departments and agencies (MDAs).
The federal government will equally need to decide to sell off idle assets that would best be managed by private entrepreneurs based on experience, competence and ability to raise the full purchase price within the stipulated Offer period. The government needs to optimize its operations by creating liquidity and reinvesting cash in capital projects that are self-sustaining and self-financing. Road and hospital projects, in particular, would low be hanging fruits for investing the proceeds of privatization.
Throwing money at small and medium-sized enterprises (SMEs) is not going to be a sustainable way of creating wealth and generating inclusive growth in the new year, the best place to start would be to concentrate on massive infrastructure development involving roads, rail and sea transportation. In the area of air transportation, the government should concern itself with supporting private sector construction and management of a world-class maintenance, repair and overhaul (MRO) facility rather than getting snared by running an airline or airlines. Arik and Aerocontractor should both be sold off by the debt resolution company of the CBN, the Asset Management Company of Nigeria (AMCON).
If the government of President Muhammadu Buhari is to fulfill or betray its destiny, in 2020, it would have to make hard, intelligent and far-reaching decisions and take decisive actions regardless of their popularity, or lack thereof. Populism has its place but not in the management of an economy that would have to cater to 300m people in the next two decades.
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