Q2 2021 Economic Review - Strengthening Economic Recovery: The Need for Speed and Urgency


Wednesday, July 14, 2021 / 09:57 AM /  By FSDH Research / Header Image Credit: FSDH


FSDH Macroeconomic Projection for 2021

  • Growth at 1.3%
  • Inflation Rate at 16.6%
  • External Reserves at US$34 billion
  • Average Exchange Rate at N430/US$


IMF updates global GDP growth projection for 2021 to 6%

  • The International Monetary Fund (IMF) in April revised upwards its projection for 2021 for many economies. The Fund projected a global GDP (Gross Domestic Product) growth of 6.0% for 2021, an increase from 5.5% projected in January.
  • In addition to the relaxation of lockdowns due to improved vaccine roll-out, the continued fiscal and monetary support across economies will drive the higher growth projections.
  • However, there are expectations of diverse performance across countries due to the differences in the pace of vaccination and government interventions.
  • For 2022, the global economy will expand by 4.4%.


Many African economies poised to recover in 2021

  • Sub-Saharan Africa is projected to grow by 3.4% in 2021.
  • Growth will be mainly driven by rising commodity prices, improving consumer demand, higher government spending and effective vaccines administration in countries with high COVID-19 cases.
  • The economies of Nigeria and South Africa will expand by 2.5% and 3.1%, respectively.
  • Nigeria  posted positive growth in 2021Q1, South Africa recorded its fourth consecutive quarterly contraction following the spread of COVID-19.
  • Non-oil economies are expected to experience relatively higher growth in 2021 as Ghana and Kenya are projected to grow by 4.6% and 7.6% respectively.


FSDH Analyst Views on the Global Economy and Africa

  • The massive vaccination going on across countries alongside fiscal and monetary stimuli will continue to be the major driver of growth as we have been witnessing in some countries.
  • However, we believe the pace of recovery as projected by the IMF and World Bank for the global economy alongside regions and countries appears to be too optimistic.
  • Some countries like USA, China and Nigeria are already on the path to recovery for 2021 but the reality is tough for some countries as constraints to economic growth abound. Key risks include surge in COVID-19 cases and high oil price for importing countries
  • In 2020, only 13 African countries recorded positive annual GDP growth.
  • For 2021, the outlook is brighter as many African economies will recover from the pandemic.
  • In essence, the pace of recovery will be more divergent for African countries and for commodity-exporting countries, those that are able to reap the benefits of high commodity prices will recover faster.
  • Crude oil-exporting countries like Nigeria and Angola could be in for some positives.
  • The AfCFTA agreement commenced in 2021. However, we do not expect it to contribute to the recovery process as most African countries are still working out programmes to enable them tap into the benefits of the deal.


Nigeria's Macroeconomic Update

  • Nigeria maintained positive growth in 2021Q1, Q2 growth will be higher
  • In the first quarter of 2021, the Nigerian economy grew by 0.5%. This represents a consecutive positive quarterly growth since the recession in 2020.
  • The non-oil sector remained the driver of growth with an expansion of 0.8% while the oil sector contracted by 2.2%.
  • Specifically for the second quarter of 2021, economies that recorded deeper GDP contractions in the second quarter of 2020 due to lockdowns will emerge with significant growth in the corresponding quarter of 2021.
  • This is mainly due to the base effect.
  • As a result, real GDP growth in Nigeria is expected to improve significantly in 2020Q2.
  • We expect growth to at least fall in the range of 1%-3% in Q2. 

Inflation: Increase in price of goods and services slowed down in 2021Q2

  • The upward trend in inflation rate was halted in the month of April.
  • Inflation rate declined marginally by 10 basis points in April to 18.1% from 18.2% in March. In May, it declined further to 17.9%.
  • The slowdown in price increase was driven by food inflation rate, which also fell from a peak of 22.9% in March to 22.3% in May.
  • Month-on-month inflation rate also slowed to 0.97% and 1.01% in April and May, respectively from 1.56% in March 2021.


Real interest rate improves on the back of rising interest rate and falling inflation

  • As anticipated in our previous Macroeconomic outlook reports, the gap between interest rate and inflation narrowed further in 2021Q2. 
  • While average interest rate continued its upward trend to 9.7% in May 2021, inflation rate subsided in both April and May.
  • Given these, real interest rate improved in April and May 2021.
  • Although real interest rate remained negative in May 2021, we expect to see further improvements particularly a moderation of inflation in coming months. This is based on the expectation that the security situation will improve in subsequent quarters.


Exchange rate stabilizes in the I&E window but external reserves felt the pressure

  • In the second quarter of 2021, the Naira was fairly stable in the I&E window, relative to the previous quarter.
  • The Naira closed the quarter at N411.5/US$, having opened the quarter at N409.3.
  • This relative stability in the I&E window was reflected in the performance of external reserves which was severely pressured in the quarter. Reserves lost 4.4% of its value in the quarter.
  • In the parallel market, the Naira depreciated, reaching N500/US$ due to forex scarcity and speculative activities, following the CBN's adoption of NAFEX rate in May.
  • Consequently, the gap between the NAFEX rate and the parallel market expanded in the quarter.
  • We expect forex pressure to continue into the third quarter owing to limited inflows from both crude and non-oil sources and rising imports.


Unification of the official Exchange Rate by the CBN

  • On Monday, May 24, 2021, the CBN displayed the NAFEX exchange rate on its website.
  • The Naira exchanged at N410.25/US$, an adjustment of 8.2% from N379/US$ in the early part of May 2021.
  • Recall that the IMF in its Article IV recommended "establishing a market-clearing unified exchange rate with the near-term focus on allowing greater flexibility and removing the backlog of requests for foreign exchange". 
  • Likewise, the Federal Government's Economic Sustainability Plan (ESP) proposed to "unify exchange rates to maximise naira returns to FAAC from foreign exchange inflows". 
  • The adoption of rates in the I&E window is long awaited and is among measures to regain market confidence and unlock funds from multilateral agencies including the World Bank and the IMF.
  • Previous exchange rate adjustments by the CBN were not aligned with prevailing market rates. They were below the rate in the I&E window.
  • This time, however, the CBN adopted the rate in the I&E window as its official rate.
  • We believe this is a first and major step towards gaining back investor’s confidence on the economy, which in turn could improve forex inflows into the economy.
  • The federal government has also hinted the issuance of Eurobond which is expected to improve reserves position and ease pressure on the exchange rate when issued.


Huge gap between announced and actual investment points to doing business hurdles

  • Nigeria's investment climate remains challenged despite the huge potentials of the economy.
  • This is evident in the gap between announced investment and actual FDI inflows into key sectors.
  • In the first quarter of 2021, announced investments in Nigeria was US$8.4 billion, 50% short of the figure in the previous quarter.
  • The manufacturing sector accounted for the highest share (60%) of announced investment, followed by construction (34%).
  • FDI is expected to remain under $300 million in the quarter, especially given the tough doing business environment.


FSDH Analyst Views on GDP Growth, Inflation, Investment and Foreign Trade


GDP Growth

  • Nigeria recorded a real GDP growth of 0.5% in 2021Q1. This represents the second positive growth since 2020Q3.
  • We expect growth in 2021Q2 to be higher than the corresponding and previous quarters mainly due to the base effect.
  • In 2020Q2, Nigeria implemented lockdown and restrictions which limited economic activities. Because GDP calculation compares one quarter with the previous corresponding quarter, this is expected to significantly influence Q2 results.
  • Key sectors that will drive GDP growth in Q2 include Agriculture, Information and Communication and Healthcare.
  • Factors that will influence growth will include consumer spending on food and transport as well as government spending on construction, defence and other areas.
  • In terms of structure, we do not expect any significant change in the structure of the economy.


Trade and Investment

  • Nigeria's investment climate remains tough, compounded by insecurity in different parts of the country. As a result, investment inflows into the real sector will remain subdued until there are improvements in the security situation.
  • For trade, imports will continue to trend upwards mainly due to challenges associated with local production as well as a huge and growing appetite for imported products. This will have negative implication on foreign exchange and add pressures on the reserves.
  • We expect marginal improvements in exports following improved demand conditions across the globe and reopening of land borders. We believe that trade deficit will begin to narrow in the third quarter as oil production and export improves.
  • Nigeria's investment climate remains tough, compounded by insecurity in different parts of the country. As a result, investment inflows into the real sector will remain subdued until there are improvements in the security situation.
  • For trade, imports will continue to trend upwards mainly due to challenges associated with local production as well as a huge and growing appetite for imported products. This will have negative implication on foreign exchange and add pressures on the reserves.
  • We expect marginal improvements in exports following improved demand conditions across the globe and reopening of land borders. We believe that trade deficit will begin to narrow in the third quarter as oil production and export improves.



  • We noted in our previous report that the rate of change in prices (inflation) will moderate as the government will intensify efforts to address insecurity concerns. This materialized in 2021Q2. 
  • However, we believe that inflation-stoking factors such as high fuel cost, logistics bottlenecks and infrastructure deficit will persist in the year.


Foreign Exchange Situation

  • The action by the Central Bank to unify the exchange rate is a positive move for the economy. This was a recommendation in our Macroeconomic Review for 2021Q1. With this move, the CBN has taken a step towards ensuring clarity and improving market confidence. Nigeria can also unlock funding from several multilateral organisations such as the IMF and World Bank and ease the pressure on the exchange rate in the medium term. However, exchange rate unification is not a sufficient factor in attracting significant capital into the country. What should follow the CBN's recent actions, in our view, are a set of consistent forex policies that seek to improve market liquidity and prevent every form of forex arbitrage and unnecessary forex subsidies. The CBN will also need to clear forex backlogs to further instil confidence in the market. In February 2021, the IMF estimated backlogs at US$2 billion. We believe this will be done gradually.
  • As much as Nigeria needs effective management of forex and unification of exchange rate to breed confidence, the supply shortage of forex is still a major problem. Increasing forex supply from non-CBN sources is vital in maintaining exchange rate stability in the I&E window and reducing speculative activities. In addition, the planned issuance of Eurobond by the government is expected to provide some relief in the market and boost external reserves in the short term. 
  • From the fiscal and trade perspective, Nigeria will need to leverage on the African Continental Free Trade Area (AfCFTA) Agreement to boost non-oil exports and increase forex inflows. Providing direct incentives for businesses to produce for exports, implementing port reforms as well as developing a comprehensive industrial and trade strategies are important steps that the government must take.
  • We believe that the Naira will settle around N430/US$ in the later part of 2021. Forex inflows are expected to also improve, especially when the Eurobond is issued, but increasing demand pressures from imports and other payments, will continue to exert pressure on the rate and on the reserves.


Total Public Debt rose marginally in 2021Q1 to N33.1 trillion

  • Nigeria's public debt stock rose marginally to N33.1 trillion (US$87.2 billion) in the first quarter of 2021.
  • The IMF estimated debt to GDP in 2020 at 34.4%, when CBN Ways and Means and AMCON bonds are included.
  • Debt is expected to rise further in 2021 following the anticipated revenue shortfall (against projected revenue). The key challenge to debt sustainability is Nigeria's low revenue profile.


FSDH Analyst Views on Fiscal and Monetary Policy


Fiscal Policy

  • Nigeria's fiscal performance in the first five months of 2021 showed mixed outcomes of fiscal indicators, although the outcomes were largely negative.
  • As with previous budget periods, revenue was short of its targets while expenditures (except capex) were either close to or exceeded their targets. This was the case for non-debt recurrent expenditure and debt service.
  • On a positive note, there was improvement in non-oil revenues due to higher VAT and CIT. This is a welcomed development that must be sustained in the second half of the year.
  • Actual oil revenue was 49.5% below its target in the period. This has grave consequences on the economy as reflected in declining reserves and exchange rate pressure.
  • For full year 2021, we expect actual deficit to be higher than the budgeted deficit of N5.6 trillion mainly due to revenue shortfalls.
  • This implies the total public debt will increase further, and this will raise concerns on debt servicing costs going forward.


Monetary Policy

  • All through the year, Monetary Policy Committee will be caught in the battle of either raising rates to attract foreign exchange inflows into the economy or reducing rates to support economic growth.
  • Since the last MPC meeting in May, Reserves have fallen below US$34 billion, while interest rates have risen to pre-COVID-19 levels as we envisaged in our previous outlook reports.
  • The MPC's decision in the next meeting will be based on the need to strike a balance between growth and foreign exchange stability. This decision will also be influenced by 2021Q2 GDP growth figures and the performance of the Purchasing Managers Index.
  • Following that inflation rate trended downwards in Q2 and given our expectation of improved Q2 GDP performance due to the base effect, we believe the Committee will keep rates stable to allow for further improvements of these two indicators.
  • At the moment, Nigeria needs to attract foreign inflows and high interest rate will serve as an incentive. Rather than increasing the MPR, we believe the CBN will adopt other measures to tighten monetary policy. 


Market Performance


Market participation suggests switch in investors sentiment from equity

  • Following the dousing momentum in the NGX, investors' participation in the equity market persistently contracted as market participation fell short of N100 billion in May 2021.
  • Market participation over the first five months of 2021 stood at N933.65 billion, representing 6.74% rise when compared with corresponding period of 2020.
  • Foreign participation continued to decline and was significantly lower when compared with domestic participation. Particularly, foreign participation over the first five months of 2021 was 41.66% lower than the corresponding period of 2020.
  • The dominance of domestic investors in the market persisted, with participation in the market increasing by 37.56% when compared with corresponding period of 2020.
  • Participation in the market was dominated by outflows from both foreign and domestic investors, but largely from domestic investors.
  • Foreign investors continued to use the dual listed stocks as avenue for capital mobility as shortage of forex bites harder.

Capital Market: FSDH Analyst Views - Outlook and Expectations


Fixed Income

  • The 2021 budget of the federal government was heavy on borrowing with a deficit of N5.6 trillion. The Federal Executive Council (FEC) has approved a draft supplementary budget of N895 billion, part of which will be funded by borrowing.
  • In addition, the huge gap between actual and targeted revenue in the first five months of the year means that government debt will increase further in the year.
  • Consequently, interest rates on the various segments of the fixed income market will experience further expansion.
  • The existence of the CBN Special Bill will continue to support the OMO auctions in managing the liquidity in the system. As such, we do not expect any shock of liquidity surge despite an estimated N2 trillion in maturities of FGN Bond, NT-Bill and OMO to come in 2021Q3.
  • Hence, we anticipate yields to settle at double digit towards the end of the year.
  • Lastly, falling reserves raises the possibility of the issuance of dollar denominated bond in H2.


Equity Market

  • In our previous reports, we anticipated a recovery in the market deep into the second and third quarters on the back of dividend payment. However, the outcomes from companies' financial reports have not been impressive enough to drive recovery in the market.
  • The increasing interest rate appetite of the government following expanded government's debt programme and its impact on interest rates in the fixed income market have continued to trigger negative sentiments towards the  equity market.
  • Moreover, the enduring impact of COVID-19 on the economy and associated uncertainties continue to influence investors' participation in the market negatively. This impacts the general performance of listed stocks and continues to subdue market performance.

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