Recession! I think we all saw this coming. The Nigerian economy declined for the second consecutive quarter by 3.6% YoY in the third quarter of 2020, following a 6.1% drop in the preceding quarter. It marks the 2nd recession in the country in four years amid a significant decline in the oil sector, coupled with the rippling effects of the restrictions implemented across the country in early Q2 in response to the COVID-19 pandemic.
During the Sunday sermon, my pastor made a spirit-filled statement. He said, “it is hard to create sustainable wealth with a shaky foundation.” This statement did not only resonate with me spiritually, but it also did economically.
In the case of Nigeria, ever since we shifted all attention to crude oil, it has been one economic struggle or the other. If I start talking about the macro-economic and sociocultural headwinds that watered down the effect of the fiscal and monetary stimulus packages, I would be forced to ‘off my mic’. At the end of the sermon, we were all asked to say this short prayer “Oh Lord, heal my foundation.”
I also made the same prayer for Nigeria. However, deep down, I know we will need just more than prayers to address the fundamental issues of hindering growth in the economy. The question remains, how long will it take to diversify the economy?
Over the years, huge amounts of investment have gone into the Agricultural sector in a bid to diversify the economy from crude oil. However, the agricultural sector remains underdeveloped and unable to sustain the economy (maybe we need to decide on what sector can really take us to the promised land).
Although Nigeria is not the only country that has been gravely affected by the Covid-19 pandemic, I think it is safe to say that the Nigerian economy was already showing signs of weakness following a steady decline in crude oil prices and external reserves.
Just thinking out loud, for a country that is so rich in natural recourses, has a youthful population, favorable weather and fertile land, why do we struggle to generate multiple revenue streams? I guess it is true what they say, “one man’s trash is another man’s treasure.”
The oil sector recorded a real growth rate of -13.89 percent YoY, driven by the depressed price of crude oil this year. We also witnessed a significant drop in oil production, which declined by 18.13% YoY to 1.67 Mbps, representing its lowest level since the third quarter of 2016, due to compliance with OPEC+ cut agreements.
ICT remains the outperformer in the non-oil sector
The non-oil sector recorded a real growth rate of -2.51 percent YoY in Q3 2020, which is down by 4.36 percent relative to the rate recorded in Q3 2019, but represents an improvement of 3.54 percent when compared to the 6.05 percent contraction recorded in the preceding quarter.
The gradual economic reopening pursued during the third quarter aided the improvement. The underlying subsectors that supported the non-oil sector include Information and Communication (14.56%), Agriculture (1.39%), Construction (2.84%), Financial and Insurance (3.21%), and Public Administration (3.58%).
For how long?
With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector. We expect that the N2.3 trillion stimulus package contained in the economic sustainability plan will play a major role in supporting the recovery of the non-oil sector. Nevertheless, the economic impact of the #EndSARS protest remains a concern as well.
All eyes are on the MPC meeting…
The MPC will be holding its last meeting for the year and with the recent macro-economic data (GDP and inflation), market participants will be anticipating the outcome of the meeting more than ever.
The MPC will have to decide between further supporting economic recovery or taming inflation. The Central Bank of Nigeria unexpectedly slashed its monetary policy rate by 100 bps to 11.5% during its September 2020 meeting, bringing anchor to the lowest since 2016.
Inflation vs Interest rate (2015-2020)
Where is the money?
The decision of the MPC will be a major determinant of market direction for the rest of the year. We face three possible scenarios.
- Bull case (rate cut): A further rate cut at the MPC will most likely renew interest on the long end of the curve in the bond market as the short to mid end have received most of the traction in weeks. We will also witness renewed interest in the equities market after last week’s pullback created possible entry points.
- Base case (maintain status quo): The relatively quiet trend will persist in the bond and equities market. Participants will be looking forward to the PMA on Wednesday where stop rates could print negative.
- Bear case (rate hike): Although least likely, this would lead to a sharp knee jerk negative reaction across all financial assets especially in the fixed income market.