| Reviews & Outlooks |    1926 VIEWS  |
| Reviews & Outlooks | |
| 1926 VIEWS | |
 |
Friday,
December 18, 2020 / 5:03 PM / By Cordros Research / Header Image Credit: Cordros Research
The ravaging impact of the twin shocks (the pandemic
and downturn in oil prices) may have dissipated following the re-opening of
economies. Still, the clog in the wheels of economic activities will linger in
2021. Although we expect the economy to recover from the deep contraction
in 2020, we believe policymakers will be faced with the more difficult task of
lifting output growth above population growth. Consequently, the recovery will
remain mostly insufficient in boosting per capita income, stimulating
employment opportunities, and addressing the growing disparity in income
levels.
We are cautiously optimistic that the land borders,
which were re-opened on 15th December, will ease pressures in food basket given
weak domestic capacity. Nonetheless, we expect the gradual increase in
electricity tariffs and higher distribution costs linked to higher PMS prices
(especially if oil prices gain momentum) to offset the gains.
Despite the FX management strategies put in place by
the CBN to reduce FX demand for importation, we expect the current account to
be pressured by a faster increase in imports compared to exports. The pressure
will be amplified by a wider deficit in the services account, based on our
expectations on improvement in the scale of international airline operations
and medical-related tourism. Taking into consideration the fragility of
macroeconomic conditions coupled with the lingering liquidity constraints in
the I & E window, we expect FPI inflows to remain tepid. This view,
alongside our expectation of a marginal increase in export earnings, implies
accretion to the FX reserves will be limited, thus, hindering the ability of
the CBN to defend the local currency.
On monetary policy, we believe the MPC will be at a
crossroads. They will be faced with the difficult choice of keeping interest
rates low to support economic recovery while easing government financing
pressures or tightening to attract FPIs to mitigate currency pressures and
restore stability in the external sector. We expect the MPR to remain unchanged
in Q1-21 but envisage tightening from Q2 onwards, due to our expectations on
inflation and the need to stem currency pressures.
On fiscal policy, we expect budget performance to be
characterised by the recurring themes of underperformance in revenue targets,
sub-optimal CAPEX spending relative to recurrent expenditure, and weak revenue
from State-Owned Enterprises (SOEs). Ultimately, we believe the government will
be faced with the difficult task of balancing borrowings to support economic
recovery and avoiding a further buildup of debt that will further weaken debt
sustainability metrics.
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