Q2 2020 Economic Outlook: Two External Shocks to Rock the Boat

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Friday, June 05, 2020 / 10:57 AM / By FBNQuest Research / Header Image Credit: FBNQuest

                                          

The Cost of the Virus and the Oil Price Crash

The recession this year will be smaller than in advanced and many peer economies because of the limits to Nigeria's integration within the global economy. For the same reason its U-shaped recovery in 2021 is likely to disappoint. Household demand remains squeezed.


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Nightmare Scenario for Oil Avoided

We have conservative oil price forecasts because of the huge unsold tonnages on floating tankers and the possibility of negative demand shocks.  An assumption of US$30/b in the 2020 budget would surely give the authorities a little headroom.

 

Another Overshoot on the FGN Deficit

The FGN has maintained its expansionary fiscal stance in the face of obvious threats to domestic revenue collection this year. Multilateral loans (already obtained and sought) will partly compensate for any shortfall. Nonetheless, the FGN deficit will continue to climb well above the funded target. We do not rule out a return to the Eurobond market in the period under review.

 

FX and TINA (There is no Alternative)

We favour a muddle-through scenario for the CBN on fx. The oil price is off the floor and external concessional loans will shore up reserves as FPIs make and plan their exits. Little has changed in that once again the CBN has had to tinker with its regime at the margins because of an oil price shock. It will continue to 'manage' rates, deploy administrative measures and make small fx adjustments when it has no room for manoeuvre.

 

A Small Rise in Bond Yields Expected

Additional fiscal pressures and the doubling of the DMO's domestic funding target to N1.6trn this year will surely feed into a modest rise in the FGN's borrowing costs. In the next quarter we see the yield on mid-curve FGN bonds in a range of 11.00% to 11.50%.

 

Central economic indicators

2018

2019

2020F

2021F

Real growth (in per cent)

1.9

2.3

-3.1

2.2

CPI (in per cent; y/y Dec)

11.4

12.0

13.1

12.2

Monetary policy rate (%; year-end)

14.0

13.5

12.0

12.0

Current account/GDP (in per cent)

1.1

-4.3

-4.9

-4.5

Bonny Light (end-period spot; US$/b)

62

67

38

42

Bonny Light (average spot; US$/b)

73

65

37

41

Official fx reserves (in US$ bn)

43

39

29

30

N/US$ (NAFEX; end-period)

364

365

410

440

N/US$ (NAFEX; average)

362

362

389

430


 

Sources: CBN, NBS, Bloomberg; FBNQuest Capital Research



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