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Sigma Pension 2021 outlook sees Nigeria return to normalcy with tough policy choices ahead

Sigma Pensions Limited has shared its outlook of the economic and investment landscape in 2021, seeing Nigeria return to normalcy this year, but with tough policy choices ahead.

According to the Pension Fund Administrator, this is following on from a year with so much uncertainty about life, politics and markets, stating that 2021 holds the promise of a return to a semblance of certainty and a vaccine aided V-shaped global economic recovery.

It notes that, in response to the greatest health crisis since the Spanish flu, national governments adopted a cocktail of strict movement restrictions and border lockdowns in a bid to limit the spread of the COVID-19 virus, reduce burdens on stretched healthcare systems and contain the human toll. These measures were accompanied by large scale economic stimulus programs to help households and businesses cope with the economic impact of movement restrictions.

Sigma Pensions Limited provides retirement planning, investment management and pension administration services to over 700,000 working Nigerians and retirees.

In 2021, focus will shift to how quickly countries roll-out vaccination programs to immunize populations from COVID-19. Politically, the world also appears to look to the hope that a new American president (Joe Biden) would work to normalize what had become unpredictable trade policies and geo-politics.

On the home front, amid an improved outlook for oil prices, Nigeria continues to grapple with the aftershocks of the coronavirus recession as external and fiscal imbalances propagate negative shocks across the exchange rate and inflation channel. The resulting macroeconomic turmoil will require a return to credible policy settings, implying that more than ever before, the direction of policy responses will be crucial. Overall, we believe that the investment landscape in 2021 will be shaped by: V-shaped global economic recovery and accommodative global monetary policy; A weaker USD and tighter crude oil market supports optimism over oil prices; Nigeria to exit recession, but external account imbalances pose downside risks to the Naira; Higher inflation on account of food, electricity and fuel price pressures.

As with the global environment, we expect Nigeria’s economy to experience a V-shaped bounce back from a recession in 2020 as the removal of most COVID-19 restrictions should benefit the non-oil sector where the restrictions hurt activities badly. That said, oil output is likely to remain in recession as compliance with OPEC+ curbs restrains oil production to 1.7-1.8mbpd, a development likely to remain in place until H2 2021. The recovery in growth is where the good news ends.

We view the combination of still weak oil exports and resurgence in import demand pointing to large external imbalances over 2021. Given current policy settings around the exchange rate, we see limited options for financing the looming current account deficit and expect Naira weakness over the year. Alongside these FX pressures, we see soaring food prices, occasioned by an underwhelming 2020 crop harvest, border closures, higher electricity tariffs and petrol prices (following the move to remove gasoline subsidies) as fuelling a surge in inflation towards 16 percent levels in 2021 (2020e: Avg. 13.2 percent). Though the CBN has ignored inflationary pressures and muddled through the FX situation over 2020, we think the economy’s return to growth and the need to stem the widening parallel market premiums will drive a shift to monetary tightening at some point over 2021. Also, fiscal imbalances loom large for the second consecutive year with the Federal Government proposing another record deficit (N5.2trillion) to be financed via large foreign and domestic borrowings.

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