Last week the National Bureau of Statistics (NBS) reported GDP data for the fourth quarter (Q4) of 2020 and these surprised the market by showing growth, albeit a low level of growth.
Q4 2020 GDP grew by a meagre 0.11% year-on-year (y/y) though non-oil growth was a respectable 1.69% y/y. This came after a 3.62% y/y contraction in the economy in Q3, with the non-oil economy contracting by 2.51% y/y at that time. For the full year 2020, GDP fell by 1.92% y/y.
What is going on?
It is important to note that registering an economic recovery in Q4 2020 was close to policy makers’ hearts, the key to rating the Economic Sustainability Plan (ESP) as a success, and justifying last year’s crashing of market interest rates.
(1-year Nigerian Treasury bill rates fell from 5.40% at the beginning of 2020 to 0.15% at the beginning of December, and commercial bank credit expanded.)
Against this, the IMF was predicting a 4.3% recession in Nigeria in a report published in the middle of last year, and as recently as January the World Bank estimated that Nigeria’s economy had contracted by 4.1% in 2020.
Clearly, the data suggest that Nigeria has done far better than these estimates.
Quarterly GDP development, year-on-year
If there are questions about the data, it is difficult to point to exactly which data. For example, one eye-catching item was the 3.42% y/y growth in Agriculture in Q4, which had a significant effect on overall growth because Agriculture itself accounts for 26.95% of GDP.
We can back-test this and ask what the overall Q4 growth rate would have been if Agriculture has grown by merely its average trend growth rate of 2.15% y/y over the previous eight quarters.
The answer is that the entire economy would have contracted by 0.22% y/y in Q4 2020 but that non-oil GDP would still have grown at a respectable 1.33% y/y.
However, it is not possible to question such data with any evidence and, in any case, the difference between the actual data and the extrapolated trend is often small. What such back-tests do show, however, is certain robustness in the non-oil economy as opposed to the oil-related economy.
In Q4, the oil & gas sector (which accounts for 5.87% of the economy) fell by 19.76% y/y, which reflects low oil prices during Q2 and Q3 (oil contracts are generally sold forward).
There was a noticeable improvement in the trend for Trade (15.46% of the economy) where the rate of contraction improved from 12.12% y/y in Q3 to 3.20% y/y in Q4. In Manufacturing (8.60% of the economy) the rate of contraction was maintained at 1.51% y/y for both Q3 and Q4.
It seems that both these large segments of the economy, while still contracting year-on-year in Q4, had made significant adjustments to difficult trading conditions and had adapted to exchange rates, including the exchange rate in the parallel market.
One significant effect of this, naturally enough, would have been upward pressure on inflation as import costs for traded items and raw materials were passed through to customers.
The least surprising development was the continued growth of Telecoms (12.45% of the economy) which maintained its rapid development, growing by 17.64% y/y in Q4. Homeworking and data streaming likely account for its success.
The most surprising sector was Real Estate (6.38% of the economy) which ended its long recession by growing by 2.81% y/y in Q4. The six sectors mentioned so far (Agriculture, Trade, Manufacturing, Telecoms, Oil & Gas and Real Estate) together account for 75.71% of GDP and are the ones on which we concentrate our analysis.
Implications for markets
Policymakers are likely satisfied with their performance in 2020, as it can be argued that a combination of low-interest rates, credit-generating policies and the ESP prevented the recession (the full-year recession of 1.92% y/y) from being worse.
Inflation was not a central concern of policymakers in 2020 (who saw it as more of a structural than a monetary issue), but we expect them to return to this topic in 2021.
After all, if low-interest rates are needed during a recession, then we can infer that a growing economy can bear higher rates than before.
We are seeing market interest rates move sharply up this year and we expect this process to continue. We expect Nigerian Treasury Bill (T-bill) rates of 10.0% by mid-year.
One important note to make here is that commercial banks may find it difficult to adjust their savings rates upwards, as a large proportion of their funds are still tied up by the Cash Reserve Ratio (officially 27.5% but, according to the recent Article IV report from the IMF, closer to 46.0% in practice), earning very low rates.
Savers wishing to earn interest income are likely to head for Money Market Mutual Funds, in our view, as these do not bear such reserves.
Equities performed extremely well in 2020, the Nigerian Stock Exchange All-Share Index (NSE-ASI) recording a gain of 50.53%. This, in our view, was closely related to the significant decline in market interest rates.
As rates rise we would expect the attractions of equity investments generally (but not all equity investments) to wane.
At the same, the growth in the economy is not necessarily enjoyed by listed companies and we have argued for a long time (see Coronation Research, Power to the Price Point, May 2019) that consumers on moderate incomes buy products from predominantly unlisted food manufacturers (and most of their food purchases are of basic commodities, anyway).
In conclusion, the resumption of growth signals a move away from the radical and heterodox policies of 2020 towards a more conventional policy mix in 2021.
Though market interest rates are a long way from the rate of inflation (16.47% y/y in January) we expect them to move in this direction. Savers in Money Market funds look to be the winners of this process.