Nigeria 2021 Outlook: COVID-19 Recession and the Long Road to Economic Recovery


Tuesday, December 15, 2020 / 03:52 PM / by FSDH Research / Header Image Credit: FSDH Research


Kindly click here to download the full report on Macroeconomic Review and 2021 Outlook for Nigeria. Below is the summary:


Performance of Global Economy

  • Global GDP is expected to dip by 4.4% in 2020 due to the impact of COVID-19.
  • The economy will however recover in 2021 as countries relax lockdown and social distancing policies.
  • The discovery of vaccine for the virus, coupled with improved consumer demand will speed up recovery in 2021.
  • Among the large economies, China is expected to lead recovery with an expansion of 8.2% in 2021. According to the IMF, China's exports recovered due to earlier restart of activities and a strong pickup in external demand for medical equipment.
  • The US economy will expand by 3.1% while the economy of Sub Saharan Africa will expand by the same figure in 2021.


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Data Source: IMF


Many Sub Saharan African Countries will recover in 2021

  • The economy of SSA is expected to expand by 3.1% in 2021 after a contraction of -3% in 2020.
  • This suggests a V-shaped recovery as the impact of COVID-19 wanes out.
  • Many African countries have been reopening their economies due to the high social and economic costs of lockdowns and restrictions.
  • Some downside risks to recovery include the strength of health systems, the path of COVID-19 and availability of financing.
  • According to the IMF, more urgent than ever, many African economies will need to implement transformative domestic reforms to promote resilience including revenue mobilization, digitalization, and fostering better transparency and governance.


Oil Price: COVID-19 resulted in disruptions in the crude oil market

  • The outbreak of COVID-19 significantly reduced the demand for crude oil due to lockdowns and movement restrictions.
  • Oil price began trending upwards in May following a relatively higher demand.
  • Year to date (Dec 11), crude oil price has averaged US$41.5 per barrel.
  • Crude oil price has fallen by 25% ytd.
  • Production cuts by OPEC and non-OPEC countries as well as improved demand resulted in upward price movement in November and December.


Oil producers agreed to further cut production in January 2021

  • Given the need to ensure a stable crude oil price, oil producers agreed in December to cut production for January 2021.
  • The voluntary cuts in production was led by Saudi Arabia and Russia.
  • Overall, producers agreed to cut back 7.2 million b/d.
  • OPEC-10 had the highest share of 4.56 million b/d. Non-OPEC participating countries agreed to cut 2.64 million b/d.
  • Nigeria is expected to produce 1.52 million b/d after a voluntary adjustment of -313,000 b/d.
  • These cuts are expected to bring some stability to oil price in January 2021.


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Data Source: OPEC


Nigeria's Macroeconomic Environment

  • The problem with the Nigerian economy is beyond COVID-19; it is more of a structurally-weak economy affected by externally-induced shocks.
  • The Nigerian economy slipped into a recession in the third quarter of 2020 following a GDP contraction of -3.62%.
  • This is the second recession since 2016.
  • Recessions in Nigeria have mostly been caused by a fall in the price of crude oil and the absence of large fiscal/monetary buffers in a structurally weak economy.


How is the current Recession different from the 2016 recession?

  • Deeper contraction in 2020
    • Economic growth reached its lowest point at the first contraction in Q2 2020 (-6.1%). The depth of contraction narrowed in 2020Q3 (-3.62%).
    • At the height of the 2016 recession, 10 out of the 19 economic sectors contracted. In 2020Q2, 13 sectors contracted.
  • GDP may recover quickly relative to 2016, but structural factors will slowdown recovery or worsen other socio-economic indicators.
    • Inflation, unemployment, poverty, exchange rate are likely to worsen even in the face of output recovery until structural factors such as infrastructure, power, insecurity, FX issues, etc are addressed.
  • The impact of the 2020 recession on individuals and businesses is more severe because of its nature.
    • With COVID-19, businesses were forced to shut due to lockdown and social distancing.
    • This had a toll on individuals' income, corporate and government finances.


COVID-19 & other disruptions resulted in an output loss of N11.6 trillion in 2020

  • We estimate the loss in real output from COVID-19 and other disruptions in 2020 at N5.8 trillion*.
  • In nominal terms, this loss is estimated at N11.6 trillion**.
  • In addition to the direct output loss, there have also been significant job losses, income losses, erosion of monetary value, among others.
  • COVID-19 and other disruptions have reversed the gains achieved since 2017.


COVID-19 and closure of land borders resulted in increase in general price level

  • Inflation is higher than pre-COVID-19 levels.
  • Closure of land borders, VAT increase and structural challenges have driven up prices of goods and services.
  • Inflation will likely trend upwards going into 2021.


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Data Source: National Bureau of Statistics


Forex Market: Exchange rate was highly pressured and volatile in 2020

  • In 2020, the CBN devalued/adjusted the Naira on three occasions to ameliorate the pressure. The adjustments were also steps to bridge the gap between official and parallel markets rates.
  • On several occasions, these adjustments, coupled with lower FX inflows extended the gap in both markets.
  • As at the end of November 2020, the Dollar to Naira rate in the parallel market stood at N495/US$ from N361/US$ at the beginning of the year. The Naira on the I&E Window closed at N392/US$ from N360/US$.
  • At the CBN Official Window, the Naira closed at N379/US$.
  • Increasing demand for US Dollar, lower Forex inflows and economic uncertainty are key factors that have pressured the exchange rate in Nigeria.


Forex Market: Reserves declined for the most part of 2020 but stabilized at US$35bn

  • As at December 10th, External Reserves has lost 8.2% of its value since the beginning of the year.
  • Limited forex inflows due to COVID-19 exerted pressure on External Reserves in the year.
    • Lower inflows from crude oil intensified in the second quarter when oil price fell significantly.
    • Capital inflows reduced - foreign investment inflows dipped by 50.9% year on year to US$7.15 billion in 2020H1 from US$14.56 in 2019H1.
    • Rising demand for foreign currency fuelled mainly by rising imports and capital outflows have also influenced Reserves movement.
  • The inflow of foreign loans and a gradual pick-up of crude oil price have managed to ensure some level of stability of reserves.
  • While the long term solution in growing External Reserves requires improving non-oil exports significantly, forex policy clarity is important in instilling market confidence in the short term.


External Trade: Trade Balance worsened following supply chain disruptions

  • For the fourth consecutive quarter, Nigeria experienced yet another negative trade balance of -N2.4 trillion in 2020Q3, despite an increase in the value of total.
  • As a share of total trade, exports accounted for 36% while imports had a share of 64%.
  • Continued closure of land borders, increasing demand for imported goods coupled with weakened demand for exports are some factors that have expanded Nigeria's trade deficit in Q3.
  • Despite the challenges in the crude oil sector in 2020, crude oil still accounted for 81% of total exports, while non-oil exports declined, accounting for 7% of exports in the quarter.
  • Given these statistics, Nigeria needs to urgently implement reforms that will improve production and exports of non-oil goods and services.
  • Clearly from the data, Nigeria's policies are still not strategically clear with regard to: 1. diversifying exports 2. divorcing its long-time marriage with crude oil.
  • How can trade improve when borders are still shut? Data shows that non-oil exports have fallen for the most part since the borders were shut. What have been the gains since the borders were shut? Are rice producers now able to compete now that the government plans to reopen?
  • Nigeria needs to seriously start the conversation about what will replace the fast-dwindling or insufficient oil dollar inflows in the next decade. What are we doing to improve non-oil exports & investment inflows to earn FX? How can we leverage on our weak currency and AfCFTA?


Nigeria adds N3.6 trillion to public debt stock in H1 2020

  • In June 2020, total public debt stood at N31 trillion.
  • In the first 6 months of 2020, Nigeria has added a net amount of N3.6 trillion to its debt stock- the highest net additions ever recorded in a six-month period.
  • Already, this is higher than N3 trillion added to the debt stock in full year 2019.
  • COVID-19 and its associated impact led to lower government revenue, thereby increasing government budget deficits and borrowing.
  • With the increase in fiscal deficit in the proposed 2021 budget, public debt is expected to rise further in the short to medium term.


Monetary Policy: Outlook and Expectation

  • With the need to drive economic recovery, the MPC will likely cut the benchmark rate in 2021.
  • The MPC will also be concerned about the misalignment of interest rates in the fixed income market. This could further support rate cut in 2021.
  • The introduction of the new CBN Special bill as an alternative investment vehicle, will absorb a proportion of the liquidity in the system and stabilize the interest rate environment, at least in the short run.
  • As regards price stability, the monetary authority had earlier hinted that structural factors are more responsible for the increase in inflation rate. This view therefore creates more room for expansionary monetary policy in 2021.


Nigerian Capital Market: Regimented investment climate, major driver of equity market rally

  • The markets rallied in the fourth quarter of 2020 following the excess liquidity in the fixed income space - the market ended October with the highest monthly growth that was last experienced in February 2018.
  • Foreign participation in the capital market was weakened in the year. In addition to constrained inflow of foreign exchange, there is a surge in foreign outflows.
  • In the first quarter of 2020, the Capital market witnessed severe capital flight as foreign investors divested due to drained confidence on the Nigerian economy.
  • Nine months into 2020, total foreign participation stood at N510.25 billion, 65.64% of which was outflows from the stock market.
  • This further pressured the foreign exchange market.


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What to Expect in 2021 

There are some necessary conditions under which government interventions to drive recovery can be more effective. In 2020 and beyond, reforms must cover these broad areas:

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Macroeconomic Estimate for 2020 vs Actual

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Macroeconomic Projection for 2021

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