Nigeria 2021 Outlook - Navigating Unsteady Terrain


Thursday, December 17, 2020 / 02:20 PM / By Vetiva Research / Header Image Credit: Vetiva Research


2020 has been a turbulent year, not just for Nigeria, but for the world economy at large. The effect of the pandemic on the Nigerian economy was felt the most in the second quarter, as the imposed lockdowns during the period culminated in adverse disruptions to supply chains, which consequently led to a sharp contraction of 6.1% in Q2 GDP. Mimicking trends in the global space, the Nigerian government subsequently relaxed lockdown measures in the third quarter, in a bid to revive stifled business activities. Although this move was followed by a sizable increase in economic activities, it was far less than the boost needed to lift the economy back to levels attained at the start of the year.


While the worst is already behind us - given the recent development of effective vaccines for Covid-19 - a new economy with unfamiliar characteristics has been unveiled. In this report titled 'Navigating Unsteady Terrain', we assess what the macroeconomic environment portends for several sectors and the implications for our coverage companies. Firstly, for the banking sector, we expect a slow recovery in interest income amid low interest expense to result in a mild improvement in net-interest income in FY'21. While significant gains from an ongoing switch to a Holdco structure among some banks may not materialize fully over the course of next year, we believe this holds the prospects to considerably lift non-interest income in the outer years, even as we highlight the possibility of competition from FinTechs.


As per the real sector, our expectations point to an uneven road to recovery. For the oil and gas sector, we expect the recovery in oil prices - driven by improving oil demand across the globe – to subdue the effect of agreed supply cuts and consequently cushion earnings in FY'21; however, supply risk stemming from a possible Biden's move to revive the abandoned Iran nuclear deal and/or lesser compliance with OPEC+ cuts could alter our expectations for oil prices. Meanwhile, the consumer goods sector is expected to remain clouded by weak consumer wallets in FY'21, as inflationary pressures caused by devaluation-induced higher input costs will continue to erode the purchasing power of naira, leaving consumers with a bias for value pricing. Nonetheless, we see recoveries in the sector, but we expect that the fastest turnaround would be seen in companies that have quickly complemented their operations with winning e-commerce strategies, supply chain flexibility, consumer loyalty and efficient route to market.


For industrials, while improved capex disbursement - supported by improvements in oil receipts - would help deliver growth in public sector cement consumption, we envisage that a larger part of the growth would be driven by the low base witnessed in FY'20. On the other hand, the persistent low-yield environment will continue to support private sector cement consumption, and our expectation of an AfCFTA-influenced end to border closure would help spur cross-border cement sales. Finally, the agriculture sector is expected to sustain its growth trajectory in FY'21, as the CBN's financing initiatives such as the Anchor-Borrowers' Programme (ABP) and Agribusiness Small & Medium Enterprise Investment Scheme (AGSMEIS) will continue to support output, although there is a looming threat of price competition when the land borders are reopened.


Overall, we see recoveries across our coverage sectors in FY'21, but we reiterate that heightened FX-induced pressures on general price levels may dampen the pace of these recoveries.


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