Emerging

Double whammy hits weakened economy

rd  
Eco Emerging // 3 quarter 2020 (completed on 16 July 2020)  
economic-research.bnpparibas.com  
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5
NIGERIA  
DOUBLE WHAMMY HITS WEAKENED ECONOMY  
Although the pandemic is well contained from a health perspective, the Covid-19 crisis combined with the downturn  
in oil prices will have severe economic consequences. With no real fiscal leeway, the government has implemented  
a very modest economic stimulus plan, while massive capital outflows and the collapse of oil exports have fuelled  
the rapid erosion of foreign reserves, bringing the naira under pressure. The deterioration in public and external  
accounts despite support from donor funds hampers any prospects of a recovery. Just four years after the last  
recession, real GDP is expected to contract significantly again in 2020. Without an upturn in oil prices, the rebound  
will be mild in 2021.  
With just 684 deaths reported in early July and more than 30,000  
confirmed cases for a population of 200 million inhabitants, the  
coronavirus pandemic has been relatively mild so far. Yet the number of  
new cases is rising constantly. Nigeria is one of the African countries that  
tests the least, and it is in the midst of easing the lockdown restrictions  
that were implemented at the end of March. Although reintroducing a  
strict lockdown does not seem very feasible given its socioeconomic  
consequences (the informal sector accounts for more than 40% of the  
economy according to the World Bank), persistent health risks will  
continue to weigh heavily on the prospects of an economic recovery.  
Above all, with its deteriorated macroeconomic fundamentals, Nigeria  
must deal with a powerful oil and financial shock.  
FORECASTS  
2
018  
2019  
2.3  
2020e  
-4.2  
2021e  
2.4  
Real GDP growth (%)  
1.9  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
12.1  
-4.3  
11.5  
-5.0  
13.0  
-7.1  
12.0  
-6.0  
Gen. Gov. debt / GDP (%)  
23.1  
0.9  
25.0  
-3.6  
31.0  
-3.4  
32.5  
-2.6  
Current account balance / GDP (%)  
e: ESTIMATES AND FORECAST  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
TABLE 1  
EXTERNAL ACCOUNTS: PERSISTENT PRESSURE  
Nigeria’s external position is not nearly as comfortable as it was during  
the previous shock of 2015. After three years of surpluses, the current  
account balance swung back into a deficit in 2019 due to surging  
imports of goods and services. In 2020, imports will decline with the  
drop-off in domestic demand, but this will not be sufficient to fully  
offset the loss of oil exports (90% of total exports). In addition to the  
collapse of Brent oil prices, commitments taken by Nigeria under the  
Opec+ agreement should reduce its oil production by more than 10%  
over the full year. All in all, oil exports are expected to be slashed in  
half in 2020 to less than USD 30 bn. To make matters worse, there  
has been unusual pressure on remittances from the Nigerian diaspora,  
which has accounted for more than 25% of current-account receipts in  
recent years.  
EXCHANGE RATE ADJUSTMENT AGAINST THE US DOLLAR  
NGN/USD  
00  
Official rate  
Parallel rate  
NAFEX rate  
6
500  
00  
300  
4
2
1
00  
00  
0
Consequently, the current account balance will continue to post a large  
deficit, estimated at more than 3% of GDP. The financial situation is also  
precarious. Massive capital outflows beginning in H2 2019 have led to  
a steady erosion of external liquidity. After declining to USD 35 bn at  
the end of April 2020, FX reserves have been rebuilt slightly thanks to  
the USD 3.4 bn emergency assistance from the IMF. Yet this respite is  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
CHART 1  
SOURCE: CBN, BLOOMBERG, ABOKI FX  
bound to be short-lived. In Q1 2020, the stock of portfolio investments allocations. The emergence of a significant spread in the parallel forex  
in short-term naira debt securities amounted to more than USD 20 bn, market since the beginning of the year despite the devaluation of the  
the equivalent of 60% of FX reserves. Non-resident investors sold a naira suggests that this might already be the case (see chart 1).  
large share of their stock of securities issued by the central bank. After  
peaking at USD 18 bn in mid-2019, this stock has fallen back to about  
NAIRA ADJUSTMENTS: NECESSARY BUT INSUFFICIENT  
USD 8 bn, 70% of which matures by year-end 2020. Sovereign spreads  
Under this environment, the exchange rate system has become a  
are still high at 753 basis points, signalling the persistent aversion to  
key issue again. After virtually four years of stability, the monetary  
Nigerian risk.  
authorities adjusted the official exchange rate by 15% on 20 March.  
Despite upcoming financial assistance from several donors (about USD  
At 360 NGN per USD, the naira is nearing the NAFEX rate (70-80% of  
3
.5 bn), FX reserves are expected to decline again in H2 2020 to end  
commercial and financial transactions) without completely eliminating  
the spread: the NAFEX rate is still about NGN 390 per USD. The central  
bank has indicated that it might unify the two exchange rates in the  
near future. The project is still vague but seems to be advancing.  
the year at less than USD 30 bn. This is barely equivalent to 4.7 months  
of imports of goods and services, compared to 9.3 months at year-end  
2
017. This would bring FX reserves back to the 2015-2016 level, when  
the authorities decided to restrict considerably their foreign-currency  
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rd  
Eco Emerging // 3 quarter 2020 (completed on 16 July 2020)  
economic-research.bnpparibas.com  
2
6
According to Bloomberg, at an auction for importers on 4 July, the  
monetary authorities asked that bids for foreign exchange be made at  
NGN 380 per USD, implying another 5.3% devaluation.  
DRAMATIC FALL IN ECONOMIC ACTIVITY  
Although unifying exchange rates would be an undeniable step forward,  
the strength of the naira will continue to be a problem. Even aligned  
with the NAFEX rate, the official exchange rate would still be 20% lower  
than in the parallel market. Fierce downward pressure can also be  
seen in the offshore market, where the 1-year forward rate is NGN 460  
per USD. Moreover, nothing says that the monetary authorities  
are prepared to move towards greater flexibility. Persistently high  
inflation amid a stable exchange rate leads to an appreciation in the  
Real Effective Exchange Rate (REER), which is a source of external  
imbalances. Despite the nominal adjustment of the exchange rate in  
March, REER is still 22% higher than at year-end 2016.  
Real GDP, y/y, %  
PMI index (RHS)  
8
6
4
2
0
2
4
6
70  
65  
60  
55  
50  
45  
40  
35  
30  
-
-
-
PUBLIC FINANCES: LITTLE FLEXIBILITY  
-8  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
The double whammy of the pandemic and the downturn in oil prices  
has made the fiscal equation even more complicated. Based on an  
initial assumption of oil prices at USD 57 a barrel, the budget had to  
be modified repeatedly before being approved using the conservative  
hypothesis of USD 28 a barrel. With the oil sector generating over  
half of its resources, one of the world’s narrowest fiscal base (non-oil  
revenues barely exceeded 4% of GDP in 2019) and capital expenditure  
amounting to less than 1% of GDP, fiscal flexibility is virtually non-  
existent. Despite adjustments in non-essential spending and the  
elimination of energy subsidies, the consolidated fiscal deficit could  
reach 7% of GDP this year, which is two points higher than in 2019.  
CHART 2  
SOURCE: NBS, STANBIC IBTC  
1
00 basis points to 12.5%. This was a surprising decision because it  
coincided with accelerating inflation (+12.4% in May). Moreover, the  
transmission channels seem to be reduced. The banking sector will  
come under pressure given its high exposure to the oil sector (27% of  
loan portfolios) and the high level of dollarization (40% of loans are  
in foreign currencies). Moody’s expects to see the doubtful loan ratio  
more than double to between 12% and 15%.  
Covering financing needs will continue to be problematic. Faced with  
deteriorated conditions, the government is unlikely to tap the interna-  
tional bond markets this year. Despite major support from donors, the  
central bank will be largely called on once again. In 2019, 75% of the  
fiscal deficit was monetised, essentially via overdraft facilities. Given  
the squeeze on domestic liquidity, this year the proportion should be  
relatively similar. Yet direct financing from the central bank is costly  
All in all, real GDP is expected to contract by more than 4% in 2020, just  
four years after the previous recession. Without a significant rebound in  
oil prices, the expected recovery in 2021 is bound to be mild, estimated  
at 2.4%, which is even lower than demographic growth. Although a  
positive outcome is still possible (thanks to reforms), this time the  
alarming erosion of macroeconomic fundamentals could force the  
authorities to request a financing programme with the IMF. They were  
opposed to such a move during the previous shock.  
(
key rate +3%). Although public debt is small (31% of GDP in 2020,  
less than a third of which is in foreign currencies), interest payments  
could absorb more than 40% of general government revenues in 2020,  
more than twice the 2019 figure. In comparison, the state allocated  
less than 10% of its resources to interest payments in 2014. Given this  
environment, the rating agencies S&P and Fitch downgraded Nigeria’s  
sovereign rating in March-April, while Moody’s switched to a negative  
outlook. There is also regular speculation that the authorities seek to  
benefit from a temporary freeze of their debt servicing with official  
creditors, although the finance ministry denies this.  
REAL GDP GROWTH: ANOTHER RECESSION  
Economic growth was still positive at 1.9% year-on-year in Q1 2020,  
but leading indicators signalled a sharp drop in Q2 GDP. Despite  
a slight rebound since May in tandem with the easing of lockdown  
restrictions, PMI is still below the 50 threshold (see chart 2) after  
hitting an all-time low of 37.1 in April. The economy will continue to  
face powerful headwinds because the drop-off in oil exports is having  
numerous repercussions on the economy as a whole. Faced with this  
situation, the fiscal stimulus package seems small (1.6% of GDP) as do  
the support measures implemented by the monetary authorities.  
In addition to liquidity injections in the banking sector (2.4% of GDP)  
and the possibility of temporary loan restructuring for clients hit  
hardest by the crisis, the central bank has cut its key rate by  
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