Expectations from the economy in 2021 amid second wave of COVID-19

As the fears of another round of devastating effects of COVID-19 pandemic rises, CHIMA NWOKOJI in this report, examines the economic landscape vis-a-vis outlook of finance and economic experts on the Nigerian economy in the current year.

GOVERNMENTS, companies and individual households often make estimate of income and expenditure for a set period of time. But there are countervailing forces that determine whether such budgets are achievable or not.

Early signs in the Nigerian economy seem to indicate that a lot of these forces may work against various types of budgets in 2021.

2020 was a year many will never forget. Just as people with pre-existing health conditions are more susceptible to coronavirus symptoms, the economic impacts of the pandemic are more severe in countries like Nigeria, with existing economic and financial vulnerabilities. With signing of Coronavirus disease health protection regulations by President Mohammadu Buhari, it is feared that 2021 will pose similar challenges as the past year.

The pandemic caused the biggest economic recession in decades. From the oil market to the capital market, the global economy faced a downturn in such an unprecedented manner as a result of the coronavirus outbreak.

However, as the saying goes, “life goes on,” at a virtual presentation of the breakdown of the 2021 Federal Government Budget recently, Minister for Finance, Budget, and National Planning, Dr Zainab Ahmed, disclosed that the 2021 Budget of the Federal Government christened “Economic Recovery & Resilience” will give top priority to Security, Human Capital Development, and Infrastructure in the nation.

She also described the signing of Fiscal Act 2020, as a significant step in fostering closer coordination of monetary, fiscal, and trade policies, accelerating economic recovery and growth in the nation.

Taking the budget as a compass that help stakeholders navigate through the economic waters, a herd of finance and economic experts through the lens of the budget, have predicted what to expect from beginning of the year 2021 to the end.

Some foresee light at the end of the tunnel as authorities make effort to bring about the expected recovery, while others remained pessimistic judging from economic difficulties in the country.

According to Ahmed, the overall expected budget deficit was N5.6 trillion which was 3.93 per cent of the country’s Gross Domestic Product (GDP).

However, looking at the macroeconomic situation in Nigeria from last year to this time, especially the impact of COVID-19 on output, employment and inflation, a lot of fund managers have given an opener concerning where to invest, what to expect, how to manage finances in order to keep afloat, difficulties to contend with this year and what may not work despite promises by government/politicians among others.



There have been fears that even though growth is expected to return in 2021 at 2.33 per cent, as the economy gradually recovers from the shocks caused by the pandemic, there are risks to the growth forecasts due to the rising number of COVID-19 cases in the country. This would threaten full recovery of some of the worst hit sectors.

Experts from one of Nigeria’s investment bank and fund manager, Comercio Partners Asset Management are not expecting remarkable GDP growth in 2021. According to them, “we maintain moderate expectations of the growth prospects for 2021, with GDP growth expected to sit between 1.5 per cent and 2.4 per cent at full year.

Growth for the most of 2021 they clarified, is expected to be sluggish, even with a recovery in oil prices. This is attributable to the monocultural nature of Nigerian economy which they said will continue to put a strain on the broad macroeconomic variables of Nigeria “as we remain highly susceptible to headwinds from the international oil market.”

The Comercio Partners Asset Management analysts do not expect any major interventions by the monetary and fiscal authorities in the near term, as all focus will be directed at dragging the economy out of its recessionary depths.

“We foresee slight improvements in both the manufacturing and non-manufacturing PMI indices in the coming months, as economic activities increase, and we also start to see more growth-oriented government spending from the approved 2021 appropriation bill.

“Nevertheless, concerns of a renewed wave of the Covid-19 pandemic still lingers, and this could derail any expected recovery,” the experts stated.

Financial Derivatives Company Limited says the Nigerian economy will post positive growth of 1 per cent-1.2 per cent driven by a projected increase in oil output and price above $50pb. There is an expectation of an increase in the national savings ratio to GDP – as the federal government securitizes its debt, it stated.

Analysts at Bismark Rewane-led FDC Limited further projected that “the loss in forex receipts from challenges in cocoa pricing as the cartel of Ghana and Ivory Coast lose bargaining power will be offset by a surge in the price of Liquefied Natural Gas (LNG).

“The risks to growth include a surge in COVID-19 cases that the government is unable to handle. This could trigger an-other lockdown and prolong the recession – and possibly spark civil unrest as many businesses will be unable to operate. A sharp drop in oil prices below $40pb and the negative impact on government revenue and external imbalances is also a major risk to GDP growth and overall macro-stability.

“Also, the growth trajectory is expected to be slow and tepid as structural challenges linger. Although the re-opening of the land borders is expected to ease supply constraints and boost trading activities, other structural factors, especially low total factor productivity, forex illiquidity and currency misalignment, will continue to impede output growth and slowdown the pace of economic recovery.”

Similarly, in their Annual Outlook for 2021, analysts at Meristem Research believe that global economy should recover in 2021, with real GDP projected to expand by 5.2per cent as projected by the IMF. The optimism for global growth derives from the current vaccination efforts across the world and the public health measures put in place to ensure a safe resumption of economic activities in 2021. The outlook for commodity prices is also improved by expectations of stronger demand as economic activities gradually kick back into gear.


Foreign Exchange

On the foreign exchange (FX) space, expectations are high that the Central Bank of Nigeria (CBN) will continue to support foreign flows into the Investors and Exporters Foreign Exchange (I&E FX) Window as foreign participants remain on the sideline.

The pent-up demand for FX at the I&E window from 2020 is expected to filter into the first quarter of 2021, putting more pressure on the Naira. They foresee a likely more devaluation of the Naira by the CBN in the mid- to long-term as there remains a gap in its official rate and parallel market rate. For instance, Nigerian Tribune findings show that as at Thursday January 21, there was N81 spread between the official and parallel market rates as the naira exchanged for N394 to dollar at the I&E window and N475 to dollar at the parallel market.

Some analysts expect that oil price recovery will ease currency pressures but is unlikely to completely restore balance to the external sector.

“Trying to do another naira devaluation could become inevitable to allow the CBN to ease its forex rationing. As the CBN sustains its regular interventions in the forex market, the external reserves level will remain under pressure – in spite of higher oil prices.

“We believe the CBN will reduce forex rationing and allow a crawling peg in its battle to bring inflation under control. A crawling peg will effectively allow the naira to fluctuate within a band – permitting a managed depreciation (probably monthly) of the currency rather than a large one-off devaluation,” FDC analysts said.

The multiple exchange rate regimes will persist in 2021, however, further convergence is likely to occur as the CBN continues with its reform in the forex market FDC said.

There are fears that if oil prices fall below $40pb and capital outflow pressures continue due to the artificially low domestic interest rates, the CBN could be forced to devalue the currency again at the official market in 2021 after two devaluations in 2020. This could push the official rate to N390-400/$ from N379/$ at the end of 2020, bringing the official rate closer to the NAFEX rate


The Equities market

Nigerian Tribune analysis show that the equities market recovered from deep selloffs to finish as the best performing equities market last year. Unattractive yields in the fixed income market, excess liquidity and relatively resilient corporate performance in the middle of a pandemic were the major factors which drove the market.

In 2021, sentiment for stocks depends on the direction of monetary policy, particularly in relation to the yield environment, says another fund manager, United Capital in its outlook for 2021.

The firm noted that a sharp reversal of rates is likely to trigger a sell-off in the equities market considering that the current average market price-to-earnings (P/E) valuation multiple (15.2x) is considerably higher than the 5-year historical average (11.9x).

While analysts at United Capital predict that the rate reversal, which appeared to have been triggered in December 2020, will become more apparent from Q2-2021, the yield environment may not reverse to double digits until late 2021 or later.

Accordingly, “our prognosis for the Nigerian stock market in 2021 is that domestic interest, fueled by dividend expectations, is likely to sustain the market rally in Q1-2021. However, in the absence of foreign demand, we see a short-term bear market from Q2 to Q3-202,” they wrote in a note to clients.

Also, analysts from Meristem Research expect the good performance to continue, thereby sustaining the positive momentum of the market through the better part of the year.

“We expect this to continue in 2021 given the loose stance of monetary policy. We see a correction on the horizon given the overbought status of the market, especially for major bellwethers. Nevertheless, the first half is expected to be dominated by attractive dividend yields and the low yield in the fixed income market, which we expect to persist through the first half of the year at the very least. Our models forecast a weighted return of -6.09 per cent says,” Meristem Research.


Crude oil prices

Fears has been expressed that global oil prices will remain subject to high levels of uncertainty due to the spike in COVID-19 cases in top energy consuming regions like the US, Europe and Asia.

Some said constrained global demand will continue to limit oil price growth. Already, Goldman Sachs reduced its global oil demand forecast for 2021 to 92.5mbpd from 93.5mbpd and the International Energy Agency (IEA) warns that renewed lockdowns would depress oil demand. Nonetheless, increased vaccination in these regions is expected to keep sentiments positive for the oil markets in 2021.

For another fund manager Atlass Portfolios Limited, Member of CITITRUST Group the oil production will continue to influence the economy and the capital market. Factors such as continuous weak demand, US and Iran tension, Trade wars, Production cuts by OPEC may exert pressure on crude oil prices in 2020, it said.

According to the firm, the much-anticipated 2021 is finally here, it is a defining year and “we believe that there is light at the end of the tunnel.”

Also, FDC believes that Nigeria’s oil output quota could also be raised from the current 1.41 million barrels per day (mbpd) as OPEC+ begins to gradually ease production cuts.

“We expect the emergence and deployment of the COVID-19 vaccines to be crucial in sustaining the global economic recovery and boosting global oil demand. This is in addition to OPEC+’s apparent readiness to do whatever it takes to prop up oil prices. The strategy should keep Brent crude prices above $50 per barrel (pb) in 2021,” analysts at FDC wrote in their outlook for the economy.


Monetary Policy

Analysts said the monetary policy in 2021 will be driven by the need to urgently stimulate growth in the face of a recession. As such, the Monetary Policy Committee (MPC)/CBN will sustain its accommodative stance to ensure a V-shaped recovery and avoid a W-shape.

Others opine that the CBN can still make use of a number of policy tools within its disposal to guide its accommodative tone.

For instance, the CBN retains discretion over the rollover of the N4.1trillion special bills which it could use to bolster liquidity should it intend to remain accommodative. That said, United Capital analysts think the CBN may revert to a hawkish tone later in the year should economic activities recover considerably considering galloping inflation and weak FX inflows from Foreign Portfolio Investors (FPIs).

“It is our view that the monetary policy committee (MPC) will prioritise price stability and hike interest rates as inflation is projected to rise further. This will ease currency pressures, restore stability in the external sector and attract foreign portfolio investments. However, higher interest rates will raise the government’s financing costs and could stifle the economic recovery,” analysts from FDC emphasised.

The Monetary Policy Committee (MPC) of the CBN will be faced with a dilemma: keep interest rates low to bolster the economic recovery and ease the pressure on government financing costs or shift to a tightened monetary stance to curb inflation and attract capital inflows, staving off currency pressures and restoring external sector stability


Banks and Bankers

In view of second wave of COVID-19, Banks and bankers will have to cope with a new customer environment defined by less physical interaction, more demanding digital user experience and interaction (UX/UI) and greater fluidity in consumer loyalty as the young people begin to become a larger segment of bank’s customer base, even though they may not constitute the largest demography by nominal deposit value.

Similarly, Nigeria’s large informal sector is still fairly digitally unsophisticated. While it is true that the unstructured supplementary service data (USSD) codes have been very successful in meeting the mobile payment solution needs of retail customers, the small enterprise solutions are yet to be as popularly adopted.

As long as bank customers have foreign product supply linkages and export-oriented operations both the banks and their customers would be affected by foreign exchange translation costs. The local businesses would also be affected by movements in global interest rates as investors move money across territories in search of superior returns.

Experts believe that Banks would, therefore, need to gradually wind down their exposure to the oil and gas sector and take a second look at the power sector too. A crucial area banks may need to address is the size of their shareholder’s funds, the larger the funds the more resilient the bank would appear to be. The implications would be that going into 2021 some mergers and acquisitions (M&As) may occur to consolidate the industry and strengthen corporate balance sheets.


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