2021 Economic Outlook - Light at The End of The Tunnel


Sunday, January 17, 2021 / 04:00PM / Atlass Portfolios Limited, A Member of CITITRUST Group / Header Image Credit: institute.global





2020 is a year many will never forget! The pandemic caused the biggest economic recession in decades. From the oil market to the capital market, the global economy faced a downturn in such an unprecedented manner as a result of the coronavirus outbreak. Global GDP is expected to contract in the year and rebound by 4.3% in 2021. This rebound will mainly be driven by emerging and developing economies. Our forecast on growth trajectory will depend on uncertainties related to COVID-19 vaccine development and deployment, containment of further wave of the virus, policies of the newly elected US government and ongoing trade negotiations including Brexit. Earlier deployment of the vaccine would propel faster recovery. However, a critical downside risk to this projection is the renewed lockdown measures embarked upon by countries to tackle the second wave of the pandemic.


Nigeria is heavily reliant on oil production for FX reserves, the oil production will continue to influence the economy and the capital market. Factors such as continuous weak demand, US and Iran tension, Trade wars, Production cuts by OPEC may exert pressure on crude oil prices in 2020.


The much-anticipated 2021 is finally here, it is a defining year and we believe that there is light at the end of the tunnel.


The outbreak of the COVID-19 pandemic apart from the high death toll has delivered a global economic shock which led to steep recessions in many countries such as never seen in decades. However, similarly to how people with pre-existing health conditions are more susceptible to coronavirus symptoms, the economic impacts of the pandemic are more severe in countries with existing economic and financial vulnerabilities. There are substantial differences across individual economies, which depends on the spread of the pandemic, growth trends before the crisis, the effectiveness of containment measures, depending on severely affected sectors such as oil and tourism.


In response to the pandemic, several economies around the world enforced regional lockdowns that invariably reduced physical interactions, closed borders and shut businesses. These measures, although set up to save lives and limit the impact of the pandemic dampened economic growth. The significant loss of working days as a result of social distancing caused a severe contraction in economic activities.

Recent updates on vaccines coupled with increased consumer demand have brightened the economic outlook, but we believe a slow deployment of vaccines across developing economies could hamper the return of activity to pre-pandemic levels. The pandemic disrupted global trade as borders were closed, international travels were restricted, business activities were dwarfed, emerging markets experienced capital outflows as investors sought safety in fear of uncertainty. Subdued economic activities led to accelerated job losses, governments increased spending and turned to debt to finance its budget, hence huge debt levels exist for many countries.


Several monetary authorities around the world adopted an accommodative stance in an attempt to limit the impact of the pandemic on the economy. The increased integration of global financial markets has enabled the spillover of shocks from one economy to other countries more rapidly. If trade tensions continue, it would foster unpredictability in economic policymaking and cause a drag on demand and capital investment.

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In an overall, the Sub Sahara economy is expected to recover and grow modestly by 2.8% in 2021 after the contraction in 2020. The weak recovery in the continent is expected as it's three largest economies – Nigeria, South Africa and Angola performed badly in 2020 falling into a recession with weak short-term outlook. Increasing debt burdens will push countries in the region to financial repression and printing of currency. Growth in Africa was stalled by weak external demand and lower commodity prices. Fiscal policy should be adjusted to act as policy response as financial conditions tighten globally and debt servicing rises. The tax revenue should be strengthened through effective anti-tax-avoidance provisions.


The establishment of The African Continental Free Trade Area should improve trade within the continent and foster economic growth. This agreement paves the way to unlocking Africa's economic potential and the ability to compete in global value chains.



Rising Debt

Global debt remains at historically high levels, and both household and corporate debt in many developed economies is higher than before the global financial crisis. Although rising debt can be justified as many countries sought after debt to provide a sort of economic buffer to the effects of the pandemic and also due to the need for growth-enhancing projects to meet development goals. However, excessive debts can accumulate to unsustainable levels and carries a lot of risks.


Heavy debt servicing could have a significant chop on government revenue especially in countries with double-digit interest rate, and this could lead to implementing a tighter fiscal policy to boost revenue which in turn could warn off investors. Debt management and prudent government spending should be implemented in emerging and developing economies.



Oil Prices

A confluence of demand and supply shocks led to an unprecedented collapse in oil prices. Quarantines, lockdown, travel restrictions, shutdowns of non-essential activities led to the collapse of Oil demand. Oil demand recovery will depend on the speed of deployment of the vaccines being developed. Although the demand is not expected to return to pre-pandemic levels until 2022. Another wave of the virus may further dampen the economic outlook, especially for the first quarter of 2021.


The rebound of transportation and industrial sectors will lead to oil demand growth in 2021. On the supply side, OPEC and non-OPEC producers in a bid to address the unprecedented instability in the market have agreed to cut their output cuts by 500,000 barrels per day from January 2021.


We expect Brent crude prices to average $55/b in 2021. The forecast for higher crude oil prices in 2021 is on the premise of rising global oil demand and restrained OPEC+ oil production.



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Domestic Macro-Economic Review

Nigeria slipped into its second recession in 5 years as Q3 GDP contracted by -3.62% following a contraction in Q2 (-6.1%). The decline was largely attributable to significantly lower levels of both domestic and international economic activity during the quarter, which resulted from nationwide shutdown efforts aimed at containing the COVID-19 pandemic. The domestic efforts ranged from initial restrictions of human and vehicular movement implemented in only a few states to a nationwide curfew, bans on domestic and international travel, closure of schools and markets etc., affecting both local and international trade.


The performance of the economy in Q3 2020 reflected residual effects of the restrictions to movement and economic activity implemented across the country in early Q2 in response to the COVID-19 pandemic. As these restrictions were lifted, businesses re-opened and international travel and trading activities resumed, some economic activities have returned to positive growth.


In 2021, we expect the oil sector to witness volatility as demand continues to waver and Nigeria cuts down on production in compliance to OPEC. Hence, we expect recovery would be majorly driven by the non-oil sector as activities led by the service sector. Nigeria needs to focus on diversification as further reliance on the oil sector would expose the economy to future oil shocks. Low oil prices will cause a strain on the budget and non-oil revenue will not be sufficient to handle its expenditure, coupled with the country's heavy debt servicing.


We expect Nigeria to exit the recession and return to positive growth by Q3 2021. This assumption is made on the premise of recovery in oil prices and the reopening of borders which will reverse the decline of the trade sector.


The commencement of the AfCFTA will impact the economy positively, however, the private sector including the SME's which remains a core driver of the Nigerian economy should be encouraged to leverage on the opportunities the agreement presents. The government should enforce a good policy to encourage them.


Inflation has steadily been on the increase since September 2019, largely due to cost-push factors. The border closure increased pressure on food inflation as commodities supply became limited. This combined with supply chain disruptions, higher logistics costs and electricity tariff hike exacerbated inflationary pressures. A steadily increasing inflation rate is often a sign of a struggling economy, causing prices to fluctuate, unemployment and poverty to increase. We expect inflation to continue to rise in 2021 and reach 18%.



Equities Market

The Nigerian bourse had a fantastic run in 2020 posting a YTD returns of 45.70%, making it the best performing stock exchange in the world. This was an incredible feat considering the economic shocks caused by the pandemic. Usually, the stock market mirrors activities in the economy, the economic strain faced by the Nigerian economy which slipped into recession was not evident in the stock market. Although the equities market was also affected by the pandemic, the market rallied in the fourth quarter following the excess liquidity in the fixed income space.


Foreign participation in the capital market was weakened in the year as foreign investors took to flight in reaction to the pandemic shocks and subdued external reserves. This capital flight further pressured the foreign exchange.


The global crises coupled with the Nigerian economic policies caused an exit of foreign investors from the Nigerian capital market, as investors sought to rebalance their portfolios. The dominance of the local participation in the stock market reduced the market's volatility to external shocks. The domestic investment was buoyed by the excess liquidity in the market owing to the low fixed income space, as investors adjusted their risk appetite to seek better yielding assets.


The dovish stand of the CBN also supported the rally. The MPC reduced the MPR by 200 basis points to 11.50% to boost lending, discouraging savings and drive growth to counter the pandemic effect on the economy, while also keeping rates low in the fixed income market. Also, the restrictions by the CBN on OMO participations helped to divert attention to the equities market.


The NSE ASI remains the only investment window in the country that outperformed inflation. The re-opening of the nation's borders, excess liquidity in the system, low yields environment in the fixed income space, uptrend in oil price, the discovery of a COVID-19 vaccine have contributed to the much-expected economic recovery in 2021. Also contributing to the outlook on the short term is investors' anticipation of dividend payout.


We expect the rally to continue in the short term, with over N5 trillion in fixed income expected to mature in 2021; some of which will be divested into the equities market. Also, with the reopening of the economy and many businesses returning to full operation in 2021, companies will have better opportunities to make profit. Many of the top tier banks and large-cap stocks posted good results in Q3 2020, this shows that they were able to manage the impact of the pandemic well.


However, we note that the current rally in the market is not backed by strong fundamentals and any possible increase in yields of fixed income instruments could pose a threat to the rally. Investors should pay attention to highly liquid stocks and stocks with good fundamentals and dividend-paying history.


Once the effect of the pandemic begins to fade off, foreign investors may be attracted by the performance of the Nigerian bourse. Also, with the continuous fall in the interest rate for short term investments, investors should find their way back to the market. The PFA's will dominate the local market players and could equally find stock prices reliable.


With uncertainty looming over the economy, investors anticipate companies' full-year results, many anticipate fair earnings considering the lockdown and the effect on the economy. Very few companies on the NSE operate in a COVID-19 proof sectors such as healthcare, technology, and household utilities. Hence, corporate earnings will be pressured except for such sectors.


In the year ahead, we believe the risks which poised the global and domestic economy will fade away gradually but slowly as there's light at the end of the tunnel. However, this will largely be affected by the assumptions stated in this report. If a prevalence of positive events occurs, then the economy grows, and vice versa. Our robust database managed by a team of seasoned securities analyst, economist and strategists at CITITRUST Group, who review the impact of the pandemic on economic activities and investments in the year 2020 as well as provide insights and projections on the direction of the 2021 projections will continue to aid our analysis which we will share as we move into the year.



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