In January 2020, we estimated that better trade terms between the US and China, improved clarity on the UK-EU economic ties, as well as an accommodative monetary policy stance by central banks across the world would bolster global growth in 2020. Against the run of play, the outbreak of the COVID-19 pandemic threw a curveball at our forecasts, as global attention was shifted to the public health crisis, at a huge economic cost.
In H2-2020, global trade is unlikely to return to the pre-COVID-19 level, as economies around the world continue to grapple with the impact of the pandemic on both global demand and supply value chains. Clearly, the initial euphoria that greeted the last-minute US-China Phase-1 trade deal signed in Dec-2019 has fizzled away. No thanks to COVID-19 which added a new dimension to the brawl between both countries over China’s transparency and information hoarding on the virus. Overall, we believe a rebound in global trade volume is hinged on how soon normalcy will be restored and the pace of economic recovery around the world.
Elsewhere, we expect economic policies to remain broadly expansionary to hasten recovery. As such, liquidity in the global economy will be enormous, thereby strengthening risk-on sentiment and the flow of capital in search of alpha. In the absence of fresh surprises, oil prices are likely to hover from $35.0/b to $45.0/b for the rest of the year. With no clear green light on a vaccine breakthrough before the end of 2020, we are of the view that questioning a global recession in 2020 is pointless. The historic lockdown experienced in H1-2020 has crippled demand and halted supply chains, hence, the key question to ask is nature of recovery.
Sub-Saharan Africa: By far the most vulnerable
Though the last to be ensnared by the plague, authorities in Sub-Sahara Africa (SSA) imposed one form of restrictions on the movements and economic activities or the other. This worsened the already fragile social and economic conditions of most countries within the region. The informal sector which accounts for over 80.0% of total employment according to World Bank is clearly the worst hit. Again, while the health crisis exposes the vulnerable countries with an ageing population and a large number of citizens with underlying ailments, the economic cost will be felt the most by poor SSA countries which are most vulnerable economically. As such, GDP growth in SSA is projected to contract by 3.2% in 2020, the lowest level in more than 20 years due to the collapse in commodity prices.
Looking ahead, we believe the shape, duration, and size of recovery will vary from country to country, depending heavily on the improvement in the external dynamics and the timeframe required to bring economic activities back to pre-COVID-19 levels. We note that recovery will be more strenuous in countries with little to no monetary or fiscal headroom to provide large bailouts for economic recovery amid rising debt profiles. However, the rapid financial support and debt forgiveness from the IMF other multilateral agencies will go a long way to help.
Beyond 2020, we believe the effective implementation of the now postponed Africa Continental Free Trade Agreement (AfCFTA) will be pivotal to building economic resilience against future crises. The agreement will help strengthen regional value chains, reduce vulnerability to external shocks, and advance the digital and technological transformation required to accelerate development in the region.
Nigeria: Can stimulus packages prevent a recession?
What could have been a flourishing year for the Nigerian economy was caught in the web of a global public health crisis which grounded domestic and external economic activities. Already, domestic economic growth in Q1-2020 slowed to 1.87% and the figure for Q2 2020 is set to come in negative, despite the series of stimulus packages announced by the authorities aimed at easing the impact of the pandemic on businesses and households.
Notably, given that the current crisis is supply-side heavy (restriction of movement and business shutdown), it is clear that the demand-side responses by both the fiscal and monetary authorities (liquidity injections) would not be enough to prevent an economic contraction in the short term. However, the palliatives and reforms that are being announced may reduce the probability of sliding into a deep recession or quicken recovery once the incidence rate of the pandemic begins to drop and the economy is fully re-opened.
Overall, the Nigerian economy may enter a technical recession by Q3-2020 (after two consecutive quarters of contraction in Q2 and Q3-2020), with a chance of early recovery by Q4-2020 or Q1-2021. Accordingly, we have lowered our real GDP growth forecast for 2020E from 2.3% to -2.69% in 2020. The biggest downside risk to the above projections remains the possibility of a second round of lockdown, especially if the virus continues to spread rapidly. Thus, this might delay the possibility of an early recovery or a V-shaped recovery to a more strenuous U-shaped or W-shaped recovery. By implication, corporate earnings will be pressured except for sectors such as healthcare, technology, and household utilities.
Also, our outlook for the headline inflation rate remains biased upward in H2-2020 and we expect the headline inflation rate to settle at 13.3% y/y in 2020 (Pre-COVID-19 expectation – 11.9% y/y). On the exchange rate, we believe the odds are in favour of a further naira adjustment which may take the official rate to N410/$ – N430/$ by year-end. However, we believe the CBN will continue to defend the value of the local unit for as long as it can. Thus, concerns around further adjustment are likely to discourage large-sized FPI and FDI inflows for the rest of the year.
Naira Assets: …still a corporate issuers’ game
The spread of the COVID-19 disease across the world triggered unanticipated global financial market volatility and Nigeria was not left out. FPIs and local investors flew to safety amid the collapse in oil prices and currency adjustments. Investors repriced the risk on naira assets, driving the average yield on OMO bills and domestic bonds from 13.1% and 10.8% at the end of Dec-2019, to 15.1% and 11.9% respectively as at the end of Mar-2020. Also, the stock market tumbled by more than 20.0% in Q1-2020.
However, in Q2-2020, the financial market rebounded sharply, as the yield curve moderated amid optimism in the global and domestic market economy. Also, the equity market almost recovered to its pre-selloff level largely driven by domestic investors who took advantage of the market valuation amid a mild recovery in oil prices in the month of May 2020.
In H2-2020, we maintain that the fixed income space will remain a corporate issuers’ game due to the sustained low yield environment. However, we expect a mild increase in the yield curve, as the dynamics of demand and supply for debt instruments in H2-2020 is anticipated to be driven by thinning system liquidity, FPI flows when intervention sales resume, the CBN’s resolve to defend the naira using unconventional methods and increased borrowing from the DMO.
Overall, we expect the yield curve to remain normalized, with a marginal upward shift, as market forces move in favour of demand. For equities, the believe the path remains gloomy, amid pressure on corporate earnings, concerns about the exchange rate and the second wave of the pandemic. As a result, we expect the market to remain highly volatile and ‘short-term gain’ driven.