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
- 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
- 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
- The US economy will expand by 3.1% while the economy of Sub Saharan Africa will
expand by the same figure in 2021.
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
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
- These cuts are expected to bring some stability to oil price in January 2021.
Data Source: OPEC
- 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
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
- 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.
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
- Lower inflows from crude oil intensified in the second quarter when oil price
- 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
- As a share of total trade, exports accounted for 36% while imports had a share
- 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
- Already, this is higher than N3 trillion added to the debt stock in full year
- 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
- 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
- In the first quarter of 2020, the Capital market witnessed severe capital
flight as foreign investors divested due to drained confidence on the Nigerian
- 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.
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:
for 2020 vs Actual
- Moody's -
Nigeria's Deficit and Debt to Stay High After Coronavirus and Oil Shocks
Takes Ratings Actions on 32 Banks in Africa Following Update to Country
- Risks to
Nigerian Banks' Asset Quality Loom in 2021 and Beyond
Announces Changes in Country Ceilings Following Methodology Update
- Q4 2020
Economic Outlook: Out of Reverse and into Second Gear
Ratings Sees Gradual Recovery for African Banks in 2021
- DCSL to
hold its 13th Webinar Series Focused on the Year 2020 Business Review
Recovery: 10 Macro Trends That Will Shape 2021
Affirms Seplat at 'B-'; Outlook Positive
- Agusto and
Co Unveils its 2020 Consumer Digital Banking Satisfaction Index
Equity Market Outlook: COVID Out, Riots In?
Update: Macroeconomic Review for Nigeria 2020 Q3 and Outlook
Revises Kaduna's Outlook to Stable on Sovereign Action; Affirms at ''B''
Revises Lagos's Outlook to Stable on Sovereign Action; Affirms at 'B'
Revises UBA Senegal's Outlook to Stable; Affirms at 'B-'
Affirms Union Bank of Nigeria Plc at 'B-'; off RWN; Outlook Negative
of Fitch's Revision of Nigeria's Outlook to Stable from Negative
Affirms First City Monument Bank at 'B-' Stable; off Rating Watch Negative
Affirms Sterling Bank at 'B-' Stable; off Rating Watch Negative
Maintains Wema Bank's Long-Term IDR of 'B-' on Rating Watch Negative