The Coronavirus (COVID-19) has resulted in mass production shutdowns and supply chain disruptions due to port closures in China, causing global ripple effects across all economic sectors in a rare twin supply-demand shock.
As local airlines suspend operations, more local businesses adopt work-from-home processes and stocks fall, the COVID-19 pandemic may become an economic crisis if it is not contained promptly. Most of the economic impact of the pandemic on the Nigerian economy might be linked largely to behavioural responses as people take precautions to avoid the spread of the virus. It may, however, be too early for an accurate assessment of the impact of COVID-19 on the economy due to too many variables.
How long will the outbreak last? How many persons will be infected? How responsive will the public health system be in fighting the pandemic? How effective will fiscal and monetary stimuli be in cushioning the impact of the pandemic? These and many more questions create uncertainty about the overall impact of COVID-19 on the Nigerian economy.
For a country that has only recorded supply-shock-led recessions (FX shortage vis a vis oil price and output), a delay in containing the spread of COVID-19 poses a triple threat to the economy. Businesses were not prepared for a shock of this scale. As a result, COVID-19 is likely to increase short-term uncertainty in the investing environment, the country’s productivity and consumer demand.
Corporates to feel margin squeeze
Over the past month, the impact of the COVID-19 public health crisis that morphed into a supply chain crisis in China has come closer to home. With the continued rise in the number of confirmed cases and a perceived one to two week lag in testing, there is likely to be a continued increase in the number of infected persons. This raises the odds of a nationwide lockdown over the next few weeks to contain a further spread of the virus. Currently, full lockdowns have been enforced in a few states including Lagos, Ekiti, Ogun and the FCT while a number of other states have curfews to restrict night-time movement and gatherings. Amid a lockdown to enforce social-distancing, consumers are staying indoors and travel is restricted, potentially driving a sharp fall in consumer and business spending. As a result, a lot of businesses could lose revenue and lay-off workers (potentially pushing up unemployment levels) in a bid to reduce overheads in view of declining revenues.
The transport, hospitality and trade sectors are likely to be the worst hit if the pandemic persists. Health scares cause mass panic, and a panicked populace is likely to refrain from air travel and booking hotels for holidays. Also, a number of domestic airlines have temporarily suspended scheduled flight operations as part of measures to help curtail the spread of the virus. The government is also mulling the stoppage of interstate and inter-town travels as another strategy for containing the spread of the pandemic. These preventive measures will culminate in a loss of revenue to operators in the transport sector for the period of non-operation and weigh on their profit margins for the financial year.
Aside from the transport sector, players in the hospitality industry are also vulnerable to COVID-19 disease. Hotels will likely record a decline in bookings due to the health scare, while restaurants in the commercial capital (Lagos) are now restricted to offering only delivery services. The restriction on restaurants may be extended to other states, should there be a surge in cases outside Lagos. Restaurants operate with fresh food products, which are difficult to keep in stock as demand fluctuates. Profit margins in the hospitality industry are already razor-thin, and downward pressure from the impact of COVID-19 will make it extremely difficult for many of the industry’s players to continue paying staff with a sharp drop in sales.
Nigeria’s manufacturing sector is not spared from the root-to-branch shutdown of global supply chains. Port restrictions in China weighed on 14% of Nigeria’s manufacturing sector that rely on raw material import from China. While business activity seems to be looking up in China as shipping between facilities appears to be easing along with the movement of people, international shipping remains bottled up as ports are clogged. The extended shutdown of China meant that both inbound and outbound goods were stacking up at its ports and it may take months to clear the clog to allow for the free movement of vessels on its waters. Thus, the output from and income to Nigeria’s manufacturing sector may be subdued for as long as it takes for China to decongest its ports. In addition, while Nigeria’s seaports are likely to remain open, ports regulation on cargoes could become more stringent making it difficult for import-dependent manufacturers to access raw materials to continue their production process.
Also, the construction of the Apapa port roads has also been hampered by the pandemic, meaning that congestion at the port will likely remain post-lockdown. Knock-on effects on other key sectors On average, we anticipate a one to three-month lockdown to contain a further spread of the virus. However should the lockdown be extended, aggregate demand will suffer as consumers and businesses will be compelled to cut spending through the rest of the year. In the most affected sectors, the number of corporate layoffs could rise considerably, exacerbating existing food insecurity through reduced income or increased job insecurity. While the food and agricultural sector should in-principle be less affected than others, illness-related labour shortages, transport interruptions, social-distancing measures limiting access to markets and supply chain disruptions resulting in food loss and waste could affect supply. On the demand side, a loss of purchasing power caused by the disease could change people’s eating patterns, resulting in poorer nutrition. Panic purchases of food could break the local supply chain and cause localized price hikes.
Amid the crisis, an impact of the COVID-19 outbreak on education is probably being overlooked. In Nigeria’s COVID-19 epicentre, children and students have been forced out of schools and universities to limit contact and prevent further transmission. This could disrupt students’ learning process and the academic calendar, should there be an extensive spread of the disease. In view of the fact that digital learning is somewhat nouvelle in this clime, income to schools will be deferred for as long as schools remain closed, making it difficult to retain teachers on their payroll. In the entertainment industry, live shows and events are likely to be postponed indefinitely or outrightly cancelled while award shows and movie premieres, book and album launches will be suspended. Thus, the persistence of the pandemic has the potential to weigh on the industry’s overall income or even result in losses for engagements with fixed terms.
Coordinated fiscal and monetary response
In light of the current economic realities and its potential adverse impact on the Nigerian economy, both the fiscal and monetary authorities have coordinated policy tools to limit the human and economic impact of the COVID-19 pandemic. While the Central Bank of Nigeria’s (CBN) stimulus-response is largely business-centric – including a loan rate cut and a one-year repayment moratorium -, the proposed economic stimulus bill by the government tends to cater for the security and welfare of individual citizens through tax relief for corporates who retain their employees and pay promptly, as well as mortgage moratorium for displaced Nigerians to enable them to keep their homes without accumulating penalties.
The priority of Nigeria’s authorities, for now, is to help households and companies in the most vulnerable sectors to weather the pandemic by preserving jobs and capacity so the economy can quickly rebound. Uncertainty over how severe the impact may become brings into question the potential efficacy of these palliative measures as the persistence of the virus will continue to undermine any fiscal or monetary stimulus package that is rolled out by the authorities. Therefore, the policy responses need to be matched with a responsive public health system to manage and rein in the COVID-19 pandemic. That said, the above-stated stimulus packages (effective or not) largely cater to just the formal employment sectors, leaving Nigeria’s informal sector (est. at c.65% of the economy) to deal with the fallouts of the pandemic without government stimulus.
Nigeria is vulnerable to a prolonged period of low oil prices
A twin shock to demand and supply in the oil market has kept prices subdued at sub-$30/bbl. It is worthy to note that OPEC has made an unprecedented move to hold talks with Texas-based US shale producers about coordinated output cuts, although an agreement is yet to be reached between both parties.
We believe a considerable cut – in millions of barrels a day – could help cushion oil prices, possibly raising Brent price to about $40/bbl. However, oil demand is expected to remain frail for the rest of the year, as the fallout from COVID-19 continues to bite economies across the globe. This will weigh on oil demand and could soften the impact of anticipated supply cuts.
Persistently low oil prices could mark the beginning of a long-term drop in upstream oil and natural gas investment in the country. Upstream investment is highly sensitive to changes in oil prices because exploration becomes less profitable as oil price sinks. Seplat Petroleum Development Company Plc, an operator in the sector, is already mulling a 30% reduction in its capital spending that would see its drilling plans reduced to three wells from the 10 it had initially planned, to cushion the impact of the crash in crude prices. The impasse of the Petroleum Industry Governance Bill (PIGB), exacerbates the already gloomy outlook for oil investment by creating regulatory uncertainty in the sector. This intensifies existing operational and infrastructure challenges that are limiting the country’s ability to ramp up its production.
In addition, low oil prices put the Nigerian government under financial stress as it translates to immediate pressure on the budget. The government relies on crude oil earnings for about 60% of its revenue to finance its budget and also ensure macroeconomic stability, amid a weak domestic resource mobilization framework. Non-oil revenue is also likely to underperform as economic activities are expected to slow in the event of a coronavirus-induced lockdown in the country. Notably, revenue from ports will be significantly impacted due to the restriction of passenger and freight traffic as well as a general
economic downturn following disruption from the virus. The detection of six COVID-19 cases on a vessel led the country to impose more stringent measures on cargo traffic, allowing only vessels that have been at sea for more than two weeks to dock in its ports.
In view of the financial risks associated with the coronavirus pandemic, the government has announced some significant changes to its 2020 budget as measures to contain the effect of the viral outbreak on the nation’s economy – including a downward revision of its oil price benchmark to $30/bbl and a 20% and 25% cutback in capital and recurrent expenditure budgets respectively. With the slump in oil prices, recurrent expenditure items like the budgeted fuel under-recovery have reduced to zero while non-essential recruitment has been put on hold.
Capital expenditure to bear the brunt of COVID-19’s impact
While we believe there is little to no room left for a further cut on recurrent expenditure, we foresee capital expenditure taking a back-burner to recurrent should fiscal risks crystalize in the course of the year if oil prices plummet further. As a result, we see the possibility of weaker CAPEX performance in 2020 as external and domestic financing environments continue to reel from the direct and indirect effects of the pandemic. Notably, due to the uncertainties in the global financing environment, the Ministry of Finance has postponed its planned $3.3 billion Eurobond offering, originally meant to fund
infrastructure spend as they “wait for better market conditions”.
With the country’s medium-term economic growth prospects significantly impaired due to the impacts of the pandemic on business activity, we also foresee revisions to planned capital spending from the private sector. Economic theory suggests that the largest determinant of private sector capital spend has always been economic growth prospects. Simply put, households and firms only invest in infrastructure when there is a reasonable guarantee of return on assets. We believe this theory has held true in the past 8 years, with PPE spend on listed companies hitting a peak in 2014 (the height of crude prices) and dovetailing afterwards amidst projected economic headwinds, before promptly rising again in 2018 following the country’s recovery from recession.
Based on this premise, we expect to see more private capital expenditure – particularly in the real estate space – being deferred as corporations continue to monitor the business and economic environment. The pandemic also represents bad news for cement producers and construction companies in Nigeria as revenues are likely to be hit by moderations in capital spend from both the private and public sectors. We also envisage that the anticipated fall in aggregate demand could stoke tensions in an already over-competitive cement market, leading to further drops in operating margins as prices moderate. Selling and distribution expenses are also likely to rise as producers focus on marketing to drive products in stores.