Q2 2021 Economic Outlook: Off the Floor but a Low Ceiling

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 Wednesday, June 02, 2021 09:35 AM / by FBNQuest Research/ Header Image Credit:  ESI Africa

                                           

An unspectacular rebound for GDP

The economy has posted modest GDP expansion for two quarters but we struggle to see growth rates reversing the steady decline in incomes and the rise in poverty. COVID-19 and its global impact have exposed the weaknesses of the macro story, namely the continuing dependence on oil, the huge untaxed informal economy and the stuttering efforts at reform. The saga of the fuel subsidies is a case in point. We see growth this year at 2.8% (flat in per head terms), and 2.7% in 2022.


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Oil to the rescue (again)

The recovery in the oil price and revenue will give a small boost to government and household spending, and ease pressure on the current account and fx markets. (We could have made this same statement several times in recent years.) A combination of OPEC+'s discipline, steps toward a return to 'normality' in advanced economies and the struggles of the US shale oil industry have come to the rescue of non-diversified oil producers such as Nigeria. The FGN's adoption of a conservative oil price assumption creates a little headroom within the 2021 budget.


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Movement on FX policy at the edges

The CBN has moved close to unification of rates and may well complete the exercise in the months head. We are less convinced by its pledge to adopt "market-determined" fx rates because of its preference for managing and administering the market. The government's rate is now the NAFEX rate, which it does not set but which it can guide, being a core supplier of dollars (particularly when the foreign portfolio investors ((FPIs)) are not tempted by the returns). We therefore see a slow downward trend for the naira under the guidance of the CBN. This time around, we doubt that the FPIs will shore up reserves. Support will come in the form of an oil price recovery, a possible new allocation of SDRs and, the FGN trusts, the release of multilateral loans.

 

Yield retracement on the FGN's mega-deficits

A rise of close to 50% in the DMO's domestic funding target to NGN2.3trn this year, following a doubling in 2020, has driven a dramatic retracement in FGN bond yields. We are almost back to the level prevailing before the CBN-engineered collapse in Q4 '19. There may be a little more to come with the retracement, and we see mid-curve FGN bond yields settling in a 13.0% to 14.0% range over the next three months.


Central economic indicators

 

 

2019

2020

2021F

2022F

Real growth (in per cent)

2.3

-1.9

2.8

2.7

CPI (in per cent; y/y Dec)

12.0

15.7

16.5

14.5

Monetary policy rate (%; year-end)

13.5

11.5

12.0

12.5

Current account/GDP (in per cent)

-4.3

-1.2

-1.0

-1.5

Bonny Light (end-period spot; USD/b)

67

52

68

71

Bonny Light (average spot; USD/b)

66

44

63

70

Official fx reserves (in USD bn)

39

35

38

40

NGN/USD (NAFEX/I&E; end-period)

365

410

435

485

NGN/USD (NAFEX/I&E; average)

362

382

419

450

Source: CBN; National Bureau of Statistics (NBS); IMF; Bloomberg ; FBNQuest Capital Research

 

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 Proshare Nigeria Pvt. Ltd.


 Proshare Nigeria Pvt. Ltd.


 Proshare Nigeria Pvt. Ltd.

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