After slipping into its second recession in 5 years, Nigeria's economy is projected to expand by 2.0% in 2021 on the back of a modest fiscal stimulus and targeted private investment. This is the view of the Research team at FBNQuest and was a key talking point during the Leading Conversations with FBNQuest webinar hosted by the firm to elaborate on its 2021 Outlook report published earlier this month.
With the theme "Tentative emergence from the shadow of COVID-19", the outlook report captured the firm's view on the Nigerian economy, socio-political environment and traditional asset classes (fixed income and equities) against the backdrop of the economic contraction that followed the COVID-19 pandemic which started last year.
The report notes that the second term of Nigeria's President, Muhammadu Buhari, has been "hijacked" by COVID-19, with a sharp decline in oil prices and unprecedented lockdowns spurring a recession in 2020. However, Nigeria's government, unlike its counterparts in many advanced economies, has limited ammunition to catalyse a robust recovery in 2021. The report also highlights that the combined monetary and fiscal stimulus amounts to just 4% of GDP, compared to over 10% of GDP in large economies such as Brazil, Turkey, the United States, Canada, and Japan.
As Nigeria comes to grips with the challenges brought about by COVID-19, the report cites the speedy passage of the federal budget for the second year in a row and the end of fuel subsidy payments as positive reforms. However, the insecurity in many parts of the country and the slow pace of oil sector legislative reforms were recognised as negatives for an economy desperate for strong and inclusive growth.
Nevertheless, FBNQuest expects low interest rates in the United States and an average Bonny Light Crude price of US$56 per barrel to support Nigeria's economic recovery in 2021. In addition to fiscal stimulus and private-sector investment, the report identifies financial technology, agriculture, and ICT as primary drivers of growth in 2021.
With regards to asset prices, FBNQuest projects another positive year for equities in 2021. The research team notes that lower yields and the elevated liquidity available to domestic institutions buoyed stocks in 2020. The impact of lower rates is expected to carry over into 2021, albeit with less dramatic impact, as domestic institutions are swayed by dividend yield offered by bank stocks. A number of non-financial stocks such as Seplat, Flour Mills, Nestle Nigeria and UAC of Nigeria are also expected to outperform in 2021.
FBNQuest projects that the NSE All Share Index will rise 20% in 2021, while in the fixed income market, yields are projected to rise by 3 percentage points to 10% to 11% on most bonds by the end of the year. According to the firm, however these comments are not a recommendation to buy, sell or hold any stocks, as the report only seeks to present projections based on analyses.
On the exchange rate, the FBNQuest view is that a combination of higher oil revenue, multilateral loans and Eurobond sales should underpin reserves this year and allow the CBN to contain NGN exchange-rate depreciation. The forecast for average I&E/NAFEX rate is NGN419 per USD at end-2021.