Global Outlook: Pandemic Related Risks Expected to Shape Growth in 2021
Global growth was brought to a screeching halt, as the impact of the unprecedented event dampened growth forecasts, induced financial market shocks, risk aversions and supply-chain disruptions, prompting broad-based monetary and fiscal responses. The coronavirus pandemic which emerged from Wuhan, China spread over 150 countries, claiming over 2.0mn lives so far, with rising numbers of international cases, that necessitated partial or complete lockdowns. Hence, trickling economic data recorded historic fallouts worse than the aftermath of the 2008-09 Global Financial Crisis (GFC), as the International Monetary Fund (IMF) projects a 3.5% downturn in the global economy in 2020, with an expected rebound of 5.5% in 2021.
While the pandemic hit off sharply in Advanced Economies like France, Germany, Italy, United Kingdom and the United States, resulting in severe output declines, the extent and timing of the shock varied across the Emerging and Developing Economies (EMDEs). Owing largely to less equipped health systems, the collapse in oil prices, the lack of extensive fiscal space, pressured currencies, large informal sectors, and daunting debt challenges, the brunt of the pandemic was mainly felt by the EMDEs. Yet, the implementation of lockdowns to curb the virus spread began to yield positive results, as infections grew at a modest pace, and businesses gradually reopened.
These were further buttressed by concerted efforts by fiscal and monetary policy measures alongside other social interventions. By the third quarter, output cornered expansions in the United States (+7.4%), Germany (+8.5%), United Kingdom (+15.5%), France (+18.7%), and others. A similar trend was seen across the EMDEs, given the batch of positive growth in China (+2.7%), Brazil (+7.4%), South Africa (+13.5%), India (+21.9%), amongst others.
Although, much was learned about the virus in the first wave, as countries maintained various social restrictions, a second wave erupted strongly amid the discovery of a new strain of the virus, reaching countries that had successfully curbed the first surge in infections. Nonetheless, positive news on highly effective vaccines at year-end raised expectations and reversed uncertainties around economic recovery, but setbacks caused by logistical challenges and the quantum of vaccines produced, restored partial restrictions and even full lockdowns across different countries.
In view of all these, recovery is likely to be divergent, as countries with access to vaccines, effective policy actions, and slowing COVID-19 cases would be front-runners. This should further resuscitate consumption, investment and employment, particularly in EMDEs. Concerns for global growth, however, should border around mounting infections and deaths from the ravaging pandemic, delayed rollouts of vaccinations, debt distress, tighter financing conditions, add on to rising social unrests. All of these could deepen the impact of the already brutal shock.
The outlook for commodity prices remains skewed to the upside, as stronger demand due to a pick-up in economic activities coupled with the low base of the previous year should fuel rising prices for these commodities. Growth in global trade should also move in tandem with the global activities, however, this would be uneven with merchandise volumes recovering faster than services trade. Supply chains heavily disrupted by tensions around trade war uncertainties and further intensified at the onset of the pandemic would have a limited effect on trade activities.
Domestic Growth Should Pan out, Albeit Mildly
Growth in the domestic economy slowed considerably to a low point of 1.87% in the first quarter of 2020, having posted a 12-month uptick, since the oil-induced recession in 2016. However, the historic fall in oil prices (an 18-year low of USD19.33pb) exacerbated by the pandemic shock, led Nigeria's GDP to contract by 6.10% and 3.62% in the second and third quarters respectively, confirming another economic recession, the second in four (4) years. In addition, other persistent challenges in the form of the upward trending inflation, insecurity challenges, weak aggregate demand, lingering high unemployment rates, deficits building to unprecedented levels and currency volatilities remained in play for the most part of the year 2020.
On the fiscal side, policy responses took the shape of social safety nets to vulnerable persons. The amendment of the 2020 budget, temporary reliefs given to the power and oil sectors, together with pronounced external financing helped stem near term pressures. Notwithstanding, the strength of the country's macro-economic environment faces significant risks of oil revenue volatility, rising debt service levels, dwindling exchange rate and a low external reserve base. We believe that interesting sets of reforms along the lines of the Economic Sustainability Plan (ESP) and the newly approved 2021 budget (NGN13.6tn), would benefit an economic recovery.
Monetary policy remained quite accommodative in the year, as the Central Bank of Nigeria (CBN) created stimulus packages targeted at the healthcare industry, manufacturing sector, SMEs and households. That said, the reduction in the Monetary Policy Rate (MPR) and the increase in Cash Reserve Ratio (CRR) underpinned its pro-growth stance. We opine that risks of higher inflation expectations, depleting external reserves, combined with mounting fiscal risks for 2021, may prompt the CBN to revert its dovish stance and tighten monetary policies towards the end of 2021. Given these considerations, an envisaged upturn in the non-oil sector, a supportive low base, and a moderate pick-up in the oil sector put our 2021 growth rate at 1.1%.
Equities: Gains Expected to Slow, Supports Baseline Forecast of +14.0%
On the equities end, the Nigerian bourse started off 2020 on a bullish note, as the Year-to-Date (YtD) return hit an impressive 10.4% in just eight (8) days of trading. However, the oil price crash and the pandemic shock dampened investor sentiment and sent the year's return to a low of 23.0% in April 2020. More precisely, foreign investors dumped shares of top counters in the Banking and Consumer Goods sectors, ushering in the historic lows seen on these stocks. Nonetheless, investors' reactions to better-than-expected earnings reports, subdued fixed income yield, and relatively cheap valuations of top counters returned the market to a tremendous +50.0%, at a closing landmark of 40,270.7pts, and a market capitalisation of NGN21.1tn.
Ultimately, the Nigerian Stock Exchange All Share Index (NSE-ASI) emerged the world's best performing index in 2020, according to a Bloomberg Survey. The predominance of domestic participation over foreign participation (66.4%:33.6%) was a major driver of this return. Similar factors that shaped 2020 are expected to be sustained in 2021, such as the unattractive fixed income environment, favourable dividend yields, sustained control by domestic investors and robust technology platforms.
Our base case scenario places the year-to-date return at +14.0% at year-end, on the back of persistent interests by Pension Fund Administrators (PFAs), and an increase in public offerings. It is also worthy to note that our models keep foreign investors out of the picture, as we expect country risks' emanating from FX challenges and continued oil price volatility would be major concerns for foreign investors.
Fixed Income: Yields to Remain Unattractive, Amid Steady Participation
The narrative was somewhat different in the Fixed Income market, as robust system liquidity compounded by the review of players in the Open Market Operations (OMO) market at the twilight of 2019, and the capital repatriation difficulties pressured yields lower in the secondary market. The Primary Market Auctions (PMA) also followed a similar trend with oversubscriptions being recorded, reflecting the dearth of alternatives in the market. Reality thus stand that real return remains deep in the negative region, given the upward movements in inflation rate, (at 15.75%, December 2020).
Going into 2021, we believe returns will remain low at the fixed income market at an average of 300bps in the treasury bills market. The continued segmentation (NT-bill & OMO-bill) of the bills market portends that the Apex Bank will continue to utilize the OMO-bill window as a conduit to attract foreign flows into the market, while giving the CBN means to hike (ease) rates in one segment of the market. In addition, buoyed system liquidity expected all through 2021 (NGN8.1tn), should drive an influx of corporate debt stock as well as sub-national issuance larger than the NGN100.0bn witnessed in 2020.
We see more corporates taking advantage of low-interest rates to refinance existing debt and/or raise capital to drive business objectives. As a result, investors who seek to increase their return in 2021 will have to increase their risk appetite by venturing into the corporate offerings (commercial papers and corporate bonds) universe in bolstering alpha in their portfolio.
We consider the vaccine a promising sign that the global pandemic would be contained in 2021, though it is our view that it might not be an immediate panacea for the already subdued growth, as the pandemic's still-uncertain future will likely trigger bursts of uncertainties over the course of the year.
In our view, the pandemic has indeed altered the course of economic growth and disrupted the normal trends seen in the past. Hence, whilst the economic impact of the virus should wane over time, the scars of the pandemic on other facet of lives such as work, public health, globalisation, digitalisation, amongst others will be more permanent. As such, we believe unboxing the new realities is critical to positioning ourselves for the opportunities that will be birthed in 2021 and years to come.