Economic Outlook – Out of reverse and into second gear
Off the floor but no dramatic GDP rebound
The economy, while still contracting, picked itself up off the floor in Q3’20 due to the end of the domestic and external lockdowns, which have given a boost to the crude price. The benefits from the discovery of vaccines for Covid-19 will be felt with a lag in Nigeria.
The GDP contraction this year and the recovery next year will be subdued, as we have consistently warned, because of Nigeria’s limited global integration and the slow pace of policy reform.
Oil as ever the determinant of a modest recovery
This latest recession, like the last and its predecessors, can be traced to oil price softness (as well as the pandemic). For a successful exit, we must look for an oil price recovery because project diversification of the economy remains just that (a project). The FGN needs the tax revenue from oil to make the changes.
OPEC+’s relative discipline, the hit taken by the shale industry in the US and the positive news on vaccines all point to such a recovery. This will give authorities headroom within the 2020 budget as global demand for crude, led by Asia, gathers momentum, and will compensate for faltering collection of non-oil taxes.
Just enough to get by on FX
Repetitive we regret but our view on FX policy and direction has not moved. The CBN’s plan is to make small FX rate adjustments once it has exhausted all administrative measures. This time around, foreign portfolio investors (FPIs) will not underpin the rate and shore up reserves. The rescue will come in the form of an oil price recovery and, the FGN trusts, the release of multilateral loans. The authorities should therefore be able to adhere to their plan.
Bond yields to settle after declining
The doubling of the DMO’s domestic funding target to NGN1.6trn this year has not created a spike in yields. Rather, the CBN’s management of liquidity and use of its regulatory powers, as well as the shortage of investment alternatives for domestic institutions, have caused yields to tank: almost nothing now for NTBs and the yield for the FGN bond maturing in ’50 at half the rate of inflation.
At these levels of return and allowing for global macro and FX considerations, the FPIs have dropped the Nigeria credit story. They have decamped to Egypt and elsewhere. We see FGN bond yields in the mid-curve in a range of 4.0% to 5.0% over the next quarter.
|Central economic indicators||Year-end December|
|Real growth (in per cent)||1.9||2.3||-2.5||1.8|
|CPI (in per cent; y/y Dec)||11.4||12.0||14.8||14.1|
|Monetary policy rate (%; year-end)||14.0||13.5||11.5||11.0|
|Current account/GDP (in per cent)||1.1||-4.3||-1.0||-1.1|
|Bonny Light (end-period spot; USD/b)||62||67||49||53|
|Bonny Light (average spot; USD/b)||73||65||42||51|
|Official FX reserves (in USD bn)||43||39||35||36|
|NGN/USD (NAFEX; end-period)||364||365||395||420|
|NGN/USD (NAFEX; average)||362||362||382||415|
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