2021: A Year of the Unexpected


Sunday, January 09, 2022 08:20 AM / by FDC Ltd/ Header Image Credit: Worldering Around


2021 was an interesting year on all fronts. Globally, we saw economies recover, albeit sluggishly, from the pandemic-induced recession of the prior year. As countries started to relax their grips on movement and vaccination rates picked up across advanced economies, the Delta covid variant and more recently, Omicron, reared their ugly heads. Alas, restrictions were reluctantly reintroduced; thus, exacerbating a global supply shortage problem that trigged a spike in consumer prices. Developed economies such as the US and UK saw new record-highs of inflation, US (39-yr high of 6.8%) and the UK (10-yr high of 5.1%). This prompted discussions of an earlier-thanexpected scaling back of loose policies and a switch to policy normalization by monetary authorities in advanced economies.


The Bank of England for the first time in three years raised its benchmark interest rate by 15 bps to 0.25%, while the US Fed plans to end its bond purchases by March 2022 and increase interest rates three times next year. A more hawkish stance by developed economies towards monetary policy has significant implications for emerging and frontier markets such as Nigeria which have recorded build-ups in their debt stocks to mitigate the impact of covid on revenues. Nigeria for instance, recorded an 18.66% increase in its external debt stock to $37.96bn as at Q3’21 from $31.99bn a year ago. These countries have enjoyed low interest rates. However, this will change in 2022 as rate hikes occur, leading to higher debt service burden.


Regionally, several African countries also witnessed a persistent rise in their inflation rate, with Ghana touching a 5-yr high of 12.2% and South Africa a 4-yr high of 5.5%. However, the Nigerian inflation rate has moved in the opposite direction, but we will get to that in a bit.

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Global commodities- Winners & Losers

One can comfortably say that crude oil was one of the top winners in the commodities market this year. It was also one of the most volatile commodities in 2021, rallying to as high as $86pb, from a low of $51pb. Market dynamics were influenced by geopolitical tensions, bad weather (hurricanes and tropical storms), covid concerns and relaxed output quotas of OPEC+ member countries. Average price of oil was $70.8pb, 63.51% above 2020's average of $43.3pb and 77% above Nigeria's 2021 budget benchmark of $40pb. This helped offset low production levels of oil dependent countries such as Nigeria.


Gold was another winner. Due to its safe haven appeal, the precious metal benefitted from the global uncertainty surrounding monetary policy, economic recovery and covid. The price of an ounce of gold averaged around $1800/ ounce from $1,775/ounce in 2020 and touched a high of $1940/ ounce in January 2021.


Cocoa did not fare as well as other commodities. This could be attributed primarily to low demand for cocoa related products- especially chocolates. Leading producers (Ivory Coast and Ghana) also battled with weather conditions and oversupply in some cases, which kept the price of cocoa hovering around an average of $2,500/mt all through the year (2020: $2474/ mt).


Nigeria- sluggish growth, falling inflation, weaker naira and policy ambiguity

This is the story of Nigeria in 2021. Cumulative GDP growth was 3.18% in 9M'21 compared to 4.93% in Ghana and 0.17% in South Africa. Headline inflation fell for 8 consecutive months (since April 2021) to a 12-month low of 15.4% in November, moving contrary to the global inflation trend. Eyebrows were raised especially as market reality portrayed a different picture- sharply higher prices of almost 95% (based on FDC's synthetic basket). A plausible explanation could be due to base effects, seasonalities and consumer price resistance.


The forex market and exchange rate dynamics were the talk of town throughout the year. From various policy announcements and forex rationing by the CBN (e.g adopting NAFEX as the official rate, to halting the sale of forex to BDCs, etc), to the steady depreciation of the currency. No clear policy path was charted with respect to the Nigerian forex market.


Let's hope 2022 paints a more distinct picture. The naira lost at least 20% of its value (YTD) in the parallel market, falling to as low as N580/$ before recovering to N566. Other market rates such as the Investor & Exporter forex market (IEFX) rate and IATA rate suffered similar fates, falling to as low as N435/$ and N463/$ respectively. The sharp depreciation in the IATA rate which is used by airlines to price tickets, led to a spike in ticket fares. The Nigerian stock market's performance was mixed. It was driven by economic vulnerabilities, corporate earnings and market sentiment. The NGX ASI recorded a YTD gain of 6.07% in 2021, sharply lower than the 50% gain recorded in 2020.


Policy delayed; policy denied

Several government policies were announced in the course of the year. The 2022 budget of N17.13trn has been passed by the Senate, and signed into law by the president. Fuel subsidy removal and electricity tariff hikes have been moved to 2022, basically, kicking the can down the road further. The government has said by February there would be no more fuel subsidy payments (fingers crossed). While this is good news for the government with respect to more funds to invest in capital projects, Nigerians will be paying more for petrol especially with oil prices remaining elevated at $80pb. The end of subsidy payments should also coincide with the commencement of the Dangote petroleum refinery which would ease the burden of imported refined crude on the government.


2022: what should we expect?

1. Covid-19 will remain a threat to global economies


2. Global interest rates to start to increase slowly but surely, increasing the debt service burden of emerging and frontier markets


3. A structural and strategic shift to electric vehicles dampening global fuel demand


4. SSA to remain vulnerable to external shocks, as economic recovery will be uneven across the region


5. Nigeria's economic growth to remain positive in 2022, rising to as high as 3.4% (EIU)


6. Monetary policy will be relatively unchanged, at least in the first half of 2022, and a possible hike in H2'22 to curtail inflationary pressures


7. Fuel subsidy removal and resumption of Dangote refinery operations


8. H2'22 will be more of politics than economics as the elections fever takes over


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