Nigeria is in a recovery year, but the sluggishness of the pace remains a source of worry for all stakeholders.
The 0.51 percent real gross domestic product (GDP) growth recorded in the first half of this year illustrates the tepid nature of our GDP growth, as the oil segment was dampened by the lower output levels, while the non-oil sector had to struggle with the deep structural issues blighting the economy.
The World Bank’s six-monthly update on development in Africa’s most populous country acknowledged the ongoing recovery, but also stressed concerns that Nigeria’s post-COVID growth lagged that of other economies in sub-Saharan Africa (SSA), citing food inflation, insecurity, and stalled reforms as the impediments to growth.
The Bretton Wood institution went ahead to provide forecasts for Nigeria’s GDP growth, positing that real growth is expected to print at 1.9 percent and 2.1 percent in 2021 and 2022, respectively, relative to SSA growth estimates of 3.4 percent and 4 percent in the same periods.
OPEC, in its monthly oil market report, noted that Nigeria’s oil production dipped by 2.04 percent in May 2021 to 1.34mbpd from 1.37mbpd in the preceding month. This reduction reflects the presence of disruptions to local production as well as reduced oil demand from major trading partners like India, where the COVID-19 pandemic has shuttered their economy.
In addition, OPEC retained its world oil demand forecast for 2021 at 6.0mb/d, bringing the total oil demand to settle at 96.58mbpd. On the supply side, OPEC forecasted a supply growth of 0.8mbpd to average 63.7mbpd, up by 0.01mbpd relative to the preceding month’s estimate.
The upward revision in the supply estimate was buoyed by improved estimates for US liquids production.
A new provision (subsection (8) of section 317) introduced by the Senate into the PIB states that the Nigerian Midstream and Downstream Petroleum Regulatory Authority shall apply the backward integration policy in the downstream petroleum sector to encourage investment in local refining.
It states, “To support this, licence to import any product shortfalls shall be assigned only to companies with active local refining licences. Import volume to be allocated between participants based on their respective production in the preceding quarter.
“Such imports are to be done under the NNPC Limited Direct Sale/Direct Purchase scheme. To safeguard the health of Nigerians, imported petroleum products shall conform to the Afri-5 specification (50ppm sulphur) as per the ECOWAS declaration of February 2020 on adoption of the Afri-Fuels Roadmap.”
Nigeria’s external position improved in the first quarter of the year, as the CBN’s published Balance of Payment (BoP) report indicated that the current account deficit moderated to $1.75 billion (1.7% of GDP) from $5.26 billion (5.0% of GDP) in Q4 2020.
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Analysis of the breakdown shows that the trade deficit was 4 percent of GDP from 5.4 percent in the prior quarter. The deficit was driven by weakened export earnings, which declined by 8.7 percent quarter-on-quarter. This is concerning as the export value was lower than the pandemic level when global trade almost came to a halt.
While the crude oil price is at a two-year high of $74.43bbl, the OPEC+ agreement continues to place a cap on oil earnings, as oil production (excluding condensate) settled at 1.4mb/d in Q1. On the flip side, foreign outflows reduced, as imports declined by 18.7 percent quarter-on-quarter.
Inflation
In May 2021, headline inflation rose by 1.01 percent month-on-month, representing a 0.04 percent increase from the rate of 0.97 percent that was recorded in the previous month.
The yearly average rate rose to 15.50 percent, 0.46 percent greater than 15.04 percent recorded in the previous month. The rise in the monthly headline index rode on the back of upsurge in both the food and core sub-indexes, as inflationary drivers remained active.
Notably, the pass-through effect of a depreciating naira, disruptions to food supply as well as the impact of rising energy cost, continued to buoy the uptick in the headline index.
The food sub-index rose by 1.05 percent month-on-month, reflecting a 0.06 percent increase from the rate of 0.99 percent recorded in April 2021. The yearly average rate rose to 19.18 percent, 0.60 percent greater than 18.58 percent recorded in April 2021.
The food sub-index resumed its uptrend, blaming the insufficiency and disruptions to food supply. Core inflation stood at 1.24 percent month-on-month, up 0.25 percent from 0.99 percent recorded in April 2021. The yearly average rate also rose to 11.50 percent last month, 0.25 percent higher than 11.25 percent recorded in the preceding month.
For the month of June 2021, foreign capital flow into the Nigerian economy via the I&E window dropped to $967 million from $1.04 billion recorded in the previous month, representing a 7.2 percent decline month-on-month.
In the month under review, FX inflows from the CBN declined by 25 percent to $325 million compared with $435 million recorded in the previous month. Similarly, inflows from foreign portfolio investors (FPIs) stood at $124 million in June 2021, down 36 percent from $194 million recorded in May.
Total outflow through the I&E window eased to $901 million in the period under review from $1.07 billion recorded in the previous month of May. The 15 percent decrease in FX outflow was driven by a 55 percent and 95 percent reduction in outflows from FPIs and the CBN, respectively.
Foreign exchange market
The average monthly value of the naira depreciated by N80.03 at the I&E FX Window, with the average exchange rate of the currency to a unit of the dollar climbing to N411.30 in June 2021 from N411.27 in May 2021.
Total monthly turnover traded on the I&E FX window was up by 20.32 percent to $3.01 billion in June 2021 from $2.5 billion in May 2021. Despite the persistent rise in crude oil price, the naira remained pressured downwards.
This can be attributed to the existing backlog of FX demand and the low foreign exchange earnings from Nigeria’s crude oil sales, which was a consequence of reduced oil demand from India, one of the major buyers of Nigerian crude, in the wake of the resurgence of the COVID-19 cases.
The average quarterly value of the naira depreciated by N88.42 at the I&E FX window with the average exchange rate of the currency to a unit of the dollar climbing to N410.98 in Q2 2021 from N402.56 in Q1 2021.
Equities market
The second quarter of the year was quite the hibernation period of the local bourse, as investors retained caution towards risk assets. The first month in the quarter ended on a positive note, fuelled by the FY’2020 results season and benefit declaration. A few offshore accounts reinvested their dividend proceeds mainly for the lack of viable means to repatriate their funds.
The remaining months saw the bourse return to an anchorless status quo, plagued by rising fixed-income yields and FX illiquidity. Shallow trade metrics were the order of the day with a few outliers here and there.
The quiet demeanour of the market was unwavering, even Brent touching $76 during the quarter could not stimulate a holistic positive reaction across the exchange.
Offshore participants who typically track oil prices were indifferent to the price gain, focusing more on repatriating their funds. The yield on the 1-year NTB retraced 4 consecutive times from the end of May into June, yet no reaction from institutional investors in the local bourse. Most local fund managers are currently enjoying high returns (over 14%) on money market instruments, and as such, are not incentivised to take on risks.
To provide more context, the NGSE declined further by 4 percent since the yield on the 1-year NTB started its decline.
The outlook for growth remains weak, but a meaningful upswing is expected in the second quarter of the year, due to the impact of a low base effect, and a recovery in the oil sector following a 4-quarter long contraction.
The passage of the PIB is a welcome development, but the impact on growth would only become more apparent after its swift implementation. Also, there is the possibility of an increase in Nigeria’s production quota by OPEC should the group finally reach some policy agreement.
Looking ahead, we expect oil exports to improve, supported by increasing crude oil prices and improved crude oil production, as OPEC production cuts are poised to reduce.
Also, we expect the re-opening of the borders and the implementation of the African Continental Free Trade Area (AfCFTA) agreement to support non-oil exports.
Besides, the commencement of operations at Dangote’s refinery scheduled for this year will reduce both crude exports and fuel imports, with a modest net impact on the balance of payments, emanating largely from savings on freight cost.
Based on these factors, we estimate a decline in the current account deficit to 1.2 percent of the GDP for 2021. To correct this external imbalance, we see a likely devaluation of the naira by 6 – 9 percent by year-end.
The base effect is expected to remain supportive of both headline and food inflation in the coming months; hence, entrenching a sustained downtrend.
While the depreciating naira and the pass-through effect of rising production input costs (electricity and petrol) are expected to push the core segment inflation rate upwards, the food sub-index should have the impact of the harvest season cushion the consequential pressure from such inflationary drivers.
On the policy front, the sustained moderation in year-on-year inflation is enough incentive for the monetary authorities to commit to a dovish stance, keeping economic growth as the policy priority in the interim.
