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Outlook 2021: Understanding the Mega Trends of a Crucial Year for an Economy

Reviews & Outlooks	4556 VIEWS
Reviews & Outlooks
4556 VIEWS

Thursday, January 28, 2021 /03:00 PM / By Proshare Research/ Header Image Credit: EcoGraphics

Executive Summary

Hold on to your dream. Don't let past failures or dire economic forecasts make you a pessimist. Keep your youthful dreams alive and create your own opportunities. - Paul Zane Pilzer

Paul Pilzer may well have been making a pitch to Nigerian youths, as the events of the last twelve months have been disruptive enough to shoot down stars from the clearest of skies. The 2020 coronavirus pandemic was a scorching experience that drilled massive holes into the pockets of governments around the world as citizens queued up at isolation centres to fight off a venomous disease, lacking in empathy.

Hospitals came under strain as health workers and patients caught the bug and death loomed like a Godzilla. Factories closed dust-caked windows, cinemas went silent and airplanes lay like coffins on parade as economies slowly but painfully sank into despair. Nevertheless, with 2020 in the rearview mirror, and factories gingerly restarting to hum again as airlines and airplanes reawake, analysts are more optimistic at the beginning of 2021 than they were pessimistic at the end of 2020. Dreams are coming alive and opportunities seem to be reemerging.

Nigeria in Six Charts

Nigeria's economy went into free fall in Q2 2020 as the coronavirus pandemic worsened and tumbling international oil prices poisoned an already difficult situation. By the end of the second quarter the country's gross domestic product (GDP), a measure of economic output, shrunk by -6.10% before recovering in Q3 2020 by -3.62%. The two-quarters of negative GDP growth nudged the economy into an official recession with job loss rates rising and inflation rate scampering. A few analysts believe that the 2020 economic decline was less severe than would have been the case if the Central Bank of Nigeria (CBN) had not adopted a policy of quantitative easing (QE) and the ministry of finance (MoF) had not permitted a larger-than-expected fiscal deficit. Subsequent information suggests that the CBN had put in the palms of the fiscal authorities a shimmering N2.38trn credit lifeline by its ways and means mechanism, hence leaving the finance authorities with a massive future fiscal funding gap of over N2trn.

The country's macroeconomic balance can be viewed in six charts and a theory.

GDP- Understanding the Chicken Run

Nigeria's GDP has had an interesting run as it has dipped and swerved from optimistic growth to scary depression, back to growth, and then on to depression in 2020. Before 2015, the economy's growth engine had purred at a nice pace of slightly over +6% as it drove smoothly along an upward trajectory from an average of +6.23% in 2014 but slipped to an average of +3.2% in 2015 and slammed the brakes as it skidded into a recession between 2016 and Q1 2017.

GDP fell from -0.67 in Q1 2016 to -1.49% in Q2, -2.34% in Q3, and -1.73% in Q4 by Q1 2017 GDP saw a slight but still negative recovery of -0.91%. As the global recession passed by in Q2 2017 and GDP growth ramped up to +0.72%, the economy appeared to be on the mend even though the population growth rate was plodding ahead at a disturbing +2.6% per annum (see chart 1 below).

Chart 1: Nigeria's GDP Growth Rate (%)

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The harsh times of 2016 left the jobless rate up in double digits, while domestic consumption stumbled and manufacturers saw net sales slide, the purchasing manager's index (PMI) equally took a knock. The GDP growth reversal in 2017 put smiles on manufacturers' faces as output rose as the jobless rate started to fall with GDP growth rising from +2.11% in Q4 2017 to +1.95% in Q1 2018 and +2.38% in Q4 2018. In between Q1 and Q4 2018, the growth rate fell to +1.5% in Q2 and +1.81% in Q3.

Manufacturers and workers were optimistic that 2019 would prove better than the previous year, 2020, and they were right. GDP rose by +2.1% in Q1 2019, +2.12% in Q2, +2.28% in Q3 and +2.55% in Q4. The first quarter of 2020 saw GDP growth rate climb by +1.87% before the coronavirus outbreak led to a reversal with Q2 2020 witnessing a major contraction as GDP growth slid by -6.10% before retracing its steps in Q3 2020 with the growth rate slowing less rapidly by -3.62%.

Nigeria's GDP chicken run over the last seven years has reflected uncontrollable external factors and perfectly controllable policy choices. The country's fiscal and monetary policies have often been out of alignment and the route to desired economic prosperity has been littered with hope rather than logic, ethnic bias rather than a competitive advantage, and favouritism rather than competence.

Inflation Rate- When What is Real Begins to Matter

Nigeria's latest inflation figures for December 2020 showed that headline inflation grew by +15.75% and food inflation spiked at +19.56%, an indication that domestic real asset values were being pulverized as the country's poverty index hit new highs.

The rise in domestic prices has been unnerving in the last two years as headline inflation has steadily increased without let. In January 2019 inflation rate was just over +11% but by October the rate had risen to +11.61% and by year-end December 2019 inflation rate had skimmed just under +12% to +11.98%.

With COVID-19 fears kicking-in by Q1 2020, the inflation rate rose more sharply as supply chain links were decoupled and factories' gates closed. The country's inflation rate in January 2020 was +12.13% by March it had risen to +12.26%, in June 2020 the domestic inflation rate had scrambled up by a further +12.56%. By the end of Q3 2020, the domestic price level had again increased by +13.71%. The beginning of Q4 2020 saw the inflation rate leap further by +14.23% as the delayed impact of earlier input supply disruptions, farmgate security challenges, and land border closure combined to knock the wind out of the economy's sail (see chart 2 below).

Chart 2: Nigeria's Inflation Rate (%)

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This explains why the inflation rate still rose in December 2020 by +15.75%, a throwback to November 2017. The continuous rise in the inflation rate in 2020 hurt the value of financial assets as real yields took a beating as inflation-adjusted returns became negative leading to several investors leaping out of fixed income securities and seeking solace in the equities market. The NSE All Shares Index (ASI) went up +50.03% year-t0-date (YTD) at the end of 2020, making it the best performing market in Africa (see the section on the African equities market in this report).

With the inflation rate at +15.75%, it would take only four years and three months for the value of every naira asset to be worth roughly half of its present value, if the double-digit rate persists. If the monetary authorities are to encourage savings in the country (a critical factor in wriggling away from slow medium-term growth), real rates of return on deposits must go up by between 10% and 12%, otherwise, owners of idle cash balances would probably search for near-liquid assets that track inflation much better.

Good investors search for value but great investors search for inflation-proofed value, a growing number of Nigerian investors are moving from good to great.

Debt -Staying Catholic, Or Perhaps Not?

Nigeria's domestic and foreign debt numbers have easily galloped in the last six years. Nigeria's combined domestic and foreign debt numbers rose from N12.6trn in 2015 to N17.4trn in 2016, at the beginning of a short-cycle recession. The debt figure continued to rise with a recovery in GDP growth numbers in 2017 as Nigeria's total debt stock climbed to N21.7trn.

The low-growth recovery of GDP between 2017 and 2018 was unable to stop the viral growth of debt as Nigeria's debt stock has continued to rise, leapfrogging from N24.4trn in 2018 to N27.1trn in 2019. In H1 2020 the total national debt had risen to N31.01trn (see chart 3 below).

Chart 3: Nigeria's Total Debt (N'trn)

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The five-year compound annual growth rate (CAGR) of the nation's total debt was 21.1% as of 2019, but the rate could be closer to +16% if 2020 debt numbers are taken into consideration and a base rate adjustment is made. For example, if the H1 figure of N31.0trn were to be used to calculate CAGR for full-year 2020 and the base rate was shifted to N17.4trn for 2016, the new five-year growth rate would be +15.62%. If the Q3 2020 figure of N32.22trn is applied the CAGR would be +16.65%.

The growth rate of debt is higher than the growth rate of inflation, thereby worsening the plight of taxpayers. Taxpayers would be slammed with an 'inflation tax' as they would also be forced to pay for higher fiscal borrowings. The double whammy of abstinence from Catholic prudence and cheerful fiscal spending leaves no heavenly solace for the innocent. Taxpayers will have to hunker down and grit their teeth in 2021 as they pay for public sector exuberance.

PMI-Making Manufacturers Cry

It was tearful. Nigeria's manufacturing sector in 2020 was slam-dunked. The COVID-19 pandemic cut supply lines, deferred production inputs, and primed the pump for expensive inventories. This translated to higher costs (debt service does not sleep during pandemics), lower or non-existent operating cash flow, and rising cost-0f-carry.

The country's purchasing managers' index (PMI) seesawed between 57.1% and 60.8% in 2019 but slumped between 41.4% and 51.1% in 2020. In June 2020 the Index collapsed to 41.4% amid the coronavirus economic lockdowns but bounced back mildly in July to 44.9% before rising a notch to 46.9% in September and then skipped to 49.4% in October, 50.2% in November, and dropped to 49.6% in December 2020. The gradual rise in the PMI towards the end of the year, according to analysts, reflects a slow but noticeable turnaround in the country's economic fortunes (see chart 4 below).

Chart 4: Nigeria's Manufacturing PMI (%)

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Nigeria's manufacturing sector is expected to chug along modestly in 2021 but a lot depends on how quickly the COVID-19 pandemic is resolved and how fast domestic supply rigidities are addressed.

Unemployment-Hard Times, and Swollen Feet

Nigeria's unemployment rate has once been described as a mystery locked inside a box, as the bureau of statistics has done a marvelous job of keeping up with macroeconomic data on every other headline macroeconomic indices except the national unemployment rate. Indeed, inquiries concerning the Q4 2018 to Q1 2020 unemployment numbers revealed that the federal government had been shy in spending money on collating the unemployment figures for the missing periods for reasons that are yet to be explained (see chart 5 below).

Chart 5: Nigeria's Unemployment Rate (%)

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The unemployment rate for Q2 2020, however, stood at 27.1% up from 23.1% in Q3 2018. The reason why the rising unemployment rate is such a major concern in Nigeria is that it is estimated that over 60% of the country's population is between the ages of 16 and 35 years, making it one of the youngest populations on the planet. This implies that the demography would require broader access to qualitative education, superior healthcare facilities, and improved opportunities for their skills and learning to be deployed to rapidly growing sectors of the economy. So far, has not happened.

The structure of the Nigerian economy (high dependence on oil for foreign exchange earnings and low domestic manufacturing activities) suggests that many young persons will remain unemployable. The country has an estimated 40.5m small and medium-sized businesses with the majority of these enterprises barely able to scrap up decent earnings as high running costs clip their wings. Unfortunately, the country's educational system has only recently started to reposition its admission policy and curricula to favour the hard sciences in contrast to liberal arts and the social sciences. The mismatch between qualifications and job requirements will produce a pressure cooker society with crisis persistently simmering just beneath the surface.

Indeed, the difference between the skills the Nigerian economy needs and the skills Nigerian youths possess can only worsen the domestic unemployment rate and raise touchpoints for social disaffection, dislocation, and revolt. Analysts have noted that the problem starts with a slow-moving economy that has idled along at a rate below the +2.6% annual population growth rate, thereby reducing the country's income per person.

To be sure, for those who have taken time to monitor unemployment, disaster does not always come in a flash, it sometimes grows like an Indian Baobab tree, slow at first until it reaches a tipping point, where it explodes into a forest giant. Behavioural economists note that social crisis stares Nigeria in the face if it does not pull its GDP up by at least an additional 8% per annum. The quietly climbing jobless rate could very suddenly burst into a mass movement of troubled youths seeking work and finding long queues, frustration, and sore feet.

Although bandaged feet are bad enough, it would not be as damaging as the bruised egos, the sense of despair, and the burning desire to make somebody pay for their hardship.

Capital Importation-When Foreigners Vote with their Dollars.

As was noted in the previous section Nigeria has a myriad of socio-economic challenges that threaten growth and stability, prominent of which has been unemployment and underemployment. However, to help temper the severity of the problem imported capital has proved supportive as international investors pour dollars into the local economy, and Nigerians in the diaspora take a hard look back in search of higher investment yields.

Capital importation has been wavering in the last half-decade between 2016 and 2020. At the beginning of the economic recession in 2016 capital imports became historically low. Imports were almost forgettable over the four quarters of 2016 but rose noticeably as the global economy shrugged off the after-effects of the economic downturn by Q3 2017. In the third quarter of 2017 capital importation got to US$ 4.15bn before climbing to US$5.38bn in Q4 of the same year. With global economies showing signs of a sustained recovery in 2018, and investor confidence springing back as they become less risk-averse, the capital importation figures spiked as capital inflows rose to US$6.3bn in Q1 and US$5.51bn in Q2 2018.

Rising capital import continued in Q1 2019 after a sharp drop to US$2.86bn in Q3 and US$2.14bn in Q4 2018. Capital imports in Q1 2019 hit a high of US$8.51bn before dropping back to US$6.05bn in Q2 and US$3.8bn in Q4 2019. Surprisingly, the beginning of 2020 saw capital importation rise strongly to US$5.85bn in Q1 at the start of the coronavirus pandemic, even though, Nigeria was not immediately threatened by the outbreak. By Q2 2020 with the decision to partially lockdown the Nigerian economy the levels of capital importation shrank. For example, capital importation fell from US$5.85bn in Q1 2020 to US$1.29bn in Q2 and US$1.46bn in Q3 2020, representing two low-base capital import figures that were last seen in the recessionary year of 2016 (see chart 6 below).

Chart 6: Nigeria's Capital Importation ($'bn)

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A Rebound and Alphabet Soup

The outlook for the Nigerian economy in 2021 is mildly optimistic. Analysts believe that GDP would grow at a steady rate of between +1.5% and +2.4% as manufacturers regain their bearings, supply chains become reestablished and consumer demand rises. However, much depends on how fast coronavirus vaccinations can be provided for the most vulnerable members of the population. The projection that 40% (or roughly 80m citizens) of the population would receive vaccinations in the year is wildly hopeful. The country would at best vaccinate a fraction of the proposed number.

This means that herd protection may become increasingly critical in keeping the economy open throughout the year. The various governments would need to keep citizens safe by enforcing non-pharmaceutical measures to bring down the numbers of infected people. The COVID-19 inter-personal contact protocols would need rigorous adherence to stop the rapid communal spread of the virus in places like Lagos state, Rivers state, and Abuja. Besides, the distribution consideration for vaccines must shelve the suboptimal concept of so-called 'federal character' and deal with epicentres faster than places with lower virus incidences.

If the economy stays open throughout the year, the letter W would more closely describe its recovery pattern, in contrast to other alphabet patterns such as V which suggests that the economy will not suffer a growth relapse as a result of the virus or the letter K which indicates that larger corporations will rebound more quickly than their smaller counterparts who may suffer a steady decline as they find it difficult to reestablish supply chains and recover customer demand.

More recently some local economists have proposed a square root recovery which would involve a small and short GDP uplift before a long decline followed by a steep recovery that heads into a period of flat future growth. This shaped recovery is theoretically plausible but practically unlikely.

Indeed, the growing consensus amongst local analysts is that the W-shaped recovery remains the most likely portion of the alphabet soup of recovery outcomes expected between 2021 and 2023. A lot, however, depends on how well the governments at different levels handle the COVID-19 pandemic. An accelerated spread of the disease could pivot recovery from a W-shaped recovery to an L-shaped one with manufacturing and output sliding down and getting caught in a low-base growth trap.

If the virus is tackled effectively without necessitating a renewed shutdown, then growth will progress steadily while the inflation rate falls gradually between Q3 and Q4 2021. Without a further lockdown inflation rate may average +14.2% in 2021, as it adjusts downwards from the recent December 2020 rate of 15.75%. Analysts expect inflation to be above 15% in both Q1 and Q2 2020, as food inflation remains a worrying fixture of domestic consumer prices.

Illustration 1: Government Policies Enacted in 2020 and Impacts on Nigerian Commodities

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The escalating insecurity in the country's farm belt as a result of incessant attacks of farmers by gun-wielding cattle herdsmen will put pressure on farmgate food supplies. This would worsen the preexisting farming problems of poor road networks, the absence of bulk farm produce storage facilities, and road levies charged by non-state actors along traditional rural to urban centre farming routes.

Section 1 of the report takes an overview of global economies and how they have coped with the coronavirus pandemic and the global economic outlook for 2021. The section also looks at African economies and how they will shape up to meet the challenges of 2021 as global supply chains become recoupled and international trade becomes gingerly restored.

The section dissects the Nigerian economy while delivering a few prognoses. It noted that opening closed land borders, improving domestic healthcare management, and creating supporting infrastructure could help to push up growth and reduce inflation rate uncertainty. According to the report, "The recent decline in the rate of contraction could be tied to the easing of restrictions on businesses, the reopening of international and domestic travels, and a resumption of wholesale and retail trading activities. The shift in the economic needle in the last three months reflects an expected rebound in businesses but still carries the threat of a pandemic-induced reversal accompanied by a potential fall in oil demand and prices".

Illustration 2: Understanding the Economy; Beyond the Numbers

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The report looked at the major economic numbers that characterised 2020. It also looked at the year beyond the numbers and settled on a few base rate assumptions about 2021 and how economic agents look at the way things could shape up. Section 1 equally took a position of the prospects for capital importation, investment, consumption, monetary and fiscal policy, trade, and domestic unemployment (see Nigeria's unemployment distribution in illustration 3 below).

Illustration 3: Distribution of Unemployment in Nigeria

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In section 2 the report reviewed the country's major economic indicators and drew up frameworks under which the economy could see growth in 2021. Furthermore, the section forecasted how the various economic indicators would fare in 2021 (see illustration 4 below)

Illustration 4: Macroeconomic Forecast for 2021

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Section 3 reported what was turning into a perfect policy storm in 2020 and its implications for 2021. The report considered how both the Federal Ministry of Finance (MoF) and the Central Bank of Nigeria (CBN) were pairing up to meet the challenges of inflation, unemployment, and falling GDP growth in addition to how the COVID-19 pandemic was wedging a spanner in the works. The report noted that "As COVID-19 took a bite out of economic activities and international oil prices, investors pulled back from intended capital commitments as they decided to sit on the fence. The uncertainty in the global economy has since hurt domestic investment flows".

Investors are expected to return in Q2 2020 as supply chains gradually become restored and uncertainty about the future pivots towards optimism. With COVID-19 vaccination being administered globally, economies are expected to open up as travel numbers rise, and the hospitality sector experiences greater naira flows as theatres, parks, event centres, and other public places gradually restore activities to their pre-COVID-19 levels. The growth in business activities will open the wallets of investors as they see mega naira cash flows in the future becoming a real proposition.

Section 4 looked at how the different sectors of the economy fared in 2020 and what the tea leaves have said about their fortunes in 2021. The COVID-19 pandemic affected Nigeria's various economic sectors differently with some sectors winning and others ending up with black eyes. Winners included technology-based companies including companies in the telecommunications and entertainment sectors. Losers included shopping malls, cinemas, clubs, restaurants, hotels, airlines, manufacturing companies, and to a lesser extent logistic firms.

The section provided scenarios under which reversals could occur in each sector and provided context for expected 2021 industry narratives.

Section 5 addressed market indicators and how financial markets fared amid the COVID-19 pandemic. It took a scenic detour across various markets and painted the picture of what was, is, and could be for the markets in 2021.

Section 6 of the report concentrated on the ten megatrends that are likely to define the economic and financial arena that Nigerians will reside in 2021. It plays up the big moves that will shake up the world of Nigerians the way they have known it. From changing educational templates to flexible working arrangements, the next normal will see a shift in social relationships and mental perception. According to the report "The new digital work culture accelerated by the global health pandemic may lead to permanent changes in the way people work, live, and even love".

The report notes that "Nobody can say for now how successful a vaccine would be in containing the spread of the virus. There are different expectations based more on hope than science. If the vaccine works well, then economies will revert to pre-COVID-19 outputs, incomes, and job rates within eighteen months. Nevertheless, this is conjecture rather than fact. A lot will depend on the vaccine's efficacy and the speed with which it is circulated and used. So far, judging from the distribution of the vaccine in the USA and Europe, enthusiasm appears mooted".

Section 7 concludes the report and conjectures on how Nigeria can take advantage of the ongoing economic and health challenges to reset the economy and establish an equitable and productive society committed to the best of global economic and democratic practices (see illustration 5).

Illustration 5: 10 Trends That Will Shape 2021

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