Q3 2021 Economic Outlook: A Tame Post-COVID Recovery

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Friday, September 03, 2021 / 11:48 AM / by FBNQuest Research / Header Image Credit: Experian

                                        

Dull Prospects for Growth

The inadequacies of the macro narrative have been brutally exposed by the COVID-19 pandemic. Growth at pre-2014 levels looks elusive. Structural flaws in the economy, the deterioration of the infrastructure, growing insecurity and the large informal economy all limit the scale of the recovery. The FGN can offer a small fiscal stimulus. Further, we can anticipate investment spending in targeted industries. We would like to be very positive about the passage of the petroleum industry bill: the best we can say is that it is long overdue, should help revenue collection and is a chance to test investor appetite in challenging times for the global oil industry.  We now see growth this year at 2.9% and at 2.8% in 2022.

 

Along with a Slowdown in Inflation

The monetary policy committee has been sitting on its hands for reasons with which we sympathize (ie it is not armed to tackle supply-side constraints). It may well revert to tightening in 2022 in the name of fighting inflation. Base effects have finally turned the corner, and we now see headline inflation back towards 13% y/y at end-2022.


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A Boost to International Liquidity and Support for the Exchange Rate

The IMF's allocation of SDRs and the FGN's plan to tap the Eurobond market next month together point to a decent increase in gross reserves. A level of +/- USD40bn is finally within view. Additionally, there should be support arising from the improving prospects for oil prices and production in Nigeria. These developments make a "big bang" move on the naira still less likely. The authorities are set against such a change and now the pressure on them has softened. Small adjustments remain the order of the day within the CBN's definition of "market-determined" rates.

 

A Plateau for FGN Bond Yields

The huge funding challenge for the DMO has brought a retracement in FGN bond yields almost to the level prevailing in Q3 '19. Non-bank domestic institutions provide healthy demand at auctions, and we see mid-curve FGN bond yields settling in the current 11.5% to 12.5% range over the quarter.


Central economic indicators

 

 

2019

2020

2021F

2022F

Real growth (in per cent)

2.3

-1.9

2.9

2.8

CPI (in per cent; y/y Dec)

12.0

15.7

15.8

13.1

Monetary policy rate (%; year-end)

13.5

11.5

11.5

12.5

Current account/GDP (in per cent)

-4.3

-1.2

0.2

-0.4

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

67

52

73

76

Bonny Light (average spot; USD/b)

66

44

68

73

Official fx reserves (in USD bn)

39

35

40

43

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

365

410

420

440

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

362

382

412

430

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

 

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