Nigeria Exits Pandemic-Induced Recession

Where Covid-19 has left Nigeria's health system Brandspurng
The Nigerian government struggles to contain Covid-19 while other diseases suffer some measure of neglect Photo by Kola Sulaimon/AFP via Getty Images

Nigeria has joined China, Egypt and Ivory Coast on the path to economic recovery, exiting its pandemic-induced recession by a hair’s breadth in Q4’20.

The National Bureau of Statistics (NBS) confirmed this in its latest Q4’20 GDP report, which showed that the country defied the disruptive impact of the protests to advance by 0.11% y/y in the last quarter of the year.

However, the -1.92% y/y (Vetiva: -2.68% y/y) full-year contraction was unavoidable due to the lockdowns in Q2’20 and a sluggish return to normalcy through the rest of the year.

Technology drives output growth

The surprising recovery in Q4’20 and subdued output gap for FY’20 is attributed to the telecommunications (ICT) sector, which contributed 12.18% to GDP.

Considering the shift in business operations from physical offices to virtual environments, the increased adoption of digital services and investments boded well for the sector, which propelled a stellar 15.90% y/y growth in FY’20 (FY’19: 11.41% y/y).

Where Covid-19 has left Nigeria's health system Brandspurng
The Nigerian government struggles to contain Covid-19 while other diseases suffer some measure of neglect Photo by Kola Sulaimon/AFP via Getty Images

Alongside the ICT sector, gains in the Agricultural sector moderated the contraction in the non-oil sector to -1.25% y/y (FY’19 growth: 2.06% y/y) in 2020.

The oil sector, on the other hand, recorded a deeper contraction of -8.89% y/y in FY’20 (FY’19 growth: 4.59% y/y). More specifically, the sector tanked by – 19.76% y/y (Q3’20: -13.89% y/y) in Q4’20, driven by OPEC production cuts and production downtime at export terminals (Qua Iboe and Brass River terminals).

As a result, production levels averaged 1.78mb/d in FY’20, compared with FY’16 (1.81 mb/d), when the country experienced a similar recessionary episode. Thus, the sector’s contribution to GDP fell from 8.78% in FY’19 to 8.16% in FY’20.

The global disruption in supply chains contributed to the slump in trade (FY’20: -8.49% y/y) for the fifth consecutive year, as the sector continued to reel from an exacerbated impact of restrictive trade policies.

Also directly impacted by the pandemic is the transport sector, which fell sharply by 22.26% y/y in FY’20 (Q4’20: -5.95% y/y), due to movement restrictions, curfews and higher fuel prices.

Elsewhere, the real estate sector (FY’20: -9.22% y/y) remained in the woods, as the pandemic and its butterfly effects further pressured income levels limiting consumers’ abilities to spend on big-ticket items.

Meanwhile, the financial services sector maintained its resilience, growing by 9.37% y/y in FY’20. Notably, the financial services sector – unlike other sectors – has grown at a faster pace every year, since the 2016 recession. However, due to the previous year’s high base effect, the sector slipped by -3.63% y/y in Q4’20.

Oil drags tangible output

The tangible sector – which includes the agriculture, mining, manufacturing and construction sectors – outperformed the broader economy with a -1.60% y/y slump in FY’20.

The resilience of the agricultural sector (FY’20: 2.17% y/y) moderated the downturn from both the mining (FY’20: -8.54% y/y) and construction (FY’20: -7.68% y/y) sectors, while the manufacturing sector relapsed by -2.75% y/y in FY’20.

The agricultural sector maintained a clean sheet in 2020, supported by intervention efforts of the Federal Government and the development finance activities of the Central Bank.

This was despite the interruptions to farming activities and food transportation, caused by floods and lockdown measures respectively experienced during the year. In addition, border closure measures boosted production, as the lid on food supply supported investments in the sector.

Thus, the sector contributed 55.76% to tangible output growth in FY’20, compared to 53.70% in FY’19.

The mining sector faced a major drawback, as both obligatory and non-obligatory factors culminated in a slump in production levels. The collapse in external demand, that made the country even struggle to find buyers, coupled with the breakdown in OPEC+ agreements culminated in oil prices tanking to record lows.

Thus, the country had to deepen its production cuts, in line with the cartel’s efforts, to support recovery in prices, amid weak external demand. Despite the eventual pick-up in demand in H2’20, subsequent production downtime combined with compensatory production cuts for earlier overproduction contributed to further contraction in the sector.

Thus, the mining sector recorded a -8.54% y/y contraction in FY’20, contributing lesser (FY’20: 17.68%) to tangible output than it did in 2019 (FY’19: 19.02%).

Although the construction sector grew by 1.21% q/q in Q4’20, the pandemic scars of the mid-quarters of the year held the sector down by -7.68% y/y (FY’19: 1.81% y/y) in 2020.

Despite recovering sharply during the reopening phase, the sector was held back by lower infrastructure spending, devaluation of the naira and weak consumer demand. Thus, the sector contributed 7.44% to tangible output in FY’20, compared to 7.93% a year earlier.

On the receiving end of business climate hostilities is the manufacturing sector, which tanked by -2.75% y/y in FY’20 (FY’19: 0.77%), driven by increased costs of doing business.

From the dual devaluation of the naira to the deregulation in the downstream sector, the operating environment became tough for manufacturers. 9 out of 13 sub-sectors contracted, with the textile sector being the most affected.

Meanwhile, the cement sector outperformed with a 3.88% y/y growth, attributed to exclusions of key players from the border closure policy, as players could access their export markets through the land borders.

Overall, the performance of the manufacturing sector trailed the underwhelming manufacturing purchasing managers’ index outcomes for 2020.

Base effect supports recovery

Following a bumpy 2020, the economy is on course to recover in 2021, riding on the previous year’s low base. Barring the return of hard lockdown measures, we expect higher growth outcomes in 2021 especially in the mid-quarters (Q2 & Q3), which were the most hit by the pandemic in the previous year.

Consequently, we expect the economy to bounce back by 3.47% y/y in FY’21. However, an unfavourable base from Q1’20 could limit the pace of recovery in the quarter to 0.75% y/y.

The agricultural sector could maintain its positive performance despite the reopening of the borders. The inclusion of key agricultural products in the exclusive list – under the AfCFTA arrangement – could support investments within the sector.

However, adequate measures are required to prevent herder-farmer clashes, ethnic conflicts, and adverse weather conditions from underwhelming agriculture output.

Meanwhile, the ICT sector could continually drive overall GDP growth in the years to come. With a rising demand for technology solutions, the ICT sector could sustain the growth momentum.

We recall media reports of the acquisition of Paystack in Q4’20, which showed the potentials of the sector as a hub of foreign direct investments. However, we note the possible downside risks posed by wanton regulations, which could delay the influx of investments into the sector.

In the financial services sector, we anticipate a milder growth outcome, given the spate of loan restructurings in 2020. A gradual return to business activity could spur the creation of risk assets. However, a cautious lending approach may be prevalent, as banks consider the operating environment of businesses, given the country’s FX conundrum and energy situation.

More specifically, the continued erosion of consumer’s purchasing power – amid rising inflation and Naira pressures – could extend the recession in both the trade and real estate sectors to 2021. The manufacturing sector could recover from pandemic-lows supported by the 2020 low base.

However, the devaluation of the Naira and deregulation in the downstream sector could be pressure points for the sector. The construction sector could record stellar recovery, driven by the early passage of the budget, improved infrastructure spend and 2020 favourable base.

Finally, we anticipate a recovery in the oil sector, driven by improved CAPEX spend; possible easing of output cuts as oil prices extend recovery; the possible passage of the Petroleum Industry Governance Bill (PIGB), which could attract investments in the sector; alongside deregulation in the downstream sector.

Meanwhile, the slower-than-expected pace of negotiations between the U.S. and Iran could further cushion oil prices and possibly induce more capex spend among major oil producers.