By Obinna Ezugwu
The year 2021 may hold brighter economic omens for Nigeria than the outgoing one, renowned economist and member of the Presidential Economic Advisory Council, Mr. Bismarck Rewane has said.
But this would only be achieved if all hands are on deck and there is a solid commitment towards ensuring that pragmatic steps are taken to sustain a recovery momentum, while mitigating the many risk factors that continue to hover around.
In a presentation at the Lagos Business School last week, entitled ‘2020: A year to remember or forget,’ Rewane, who is the Chief Executive of Financial Derivatives Company Limited, generally made the case for a more upbeat attitude going forward, observing that the worst may indeed be over.
From his projections, among the specific engines expected to stimulate growth in the incoming year is the African Continental Free Trade Area, AfCFTA. A vehicle designed to help boost continental trade integration through a policy that promotes the relatively unhindered flow of goods and services across the 55-members of the African Union, the scheme provides for a tariff-free regime that would cover 90 percent of all traded goods and services, and would expectedly become practically operational from January 1st, 3021.
Analysts say that it may very well be a review of the deeper implications of what not fully cooperating with the AfCFTA process could translate into for the highly beleaguered Nigerian economy that had finally persuaded the presidency to come out in support of the treaty and to then take consequential action in this regard.
Among others steps taken, the treaty was signed by the President and then approved by the Federal Executive Council, FEC, with its instruments now deposited at the AU Secretariat in Addis Ababa. Also, a Nigeria AfCFTA Office has been set up and quite importantly, the land borders with Nigeria’s Western and Central African neighbours that had been shut for over a year, ostensibly over smuggling concerns, have now been re-opened.
At the domestic level, Rewane goes on to suggest that ‘the year will start off difficult and challenged even as he points out that the first vaccines to help mitigate the lingering COVID-19 challenge, will likely ‘come to Nigeria in Q2.’
Though he notes that the current inclination towards economic recovery that had been foreshadowed by the reduced deficit GDP figures in Q3 2020 will continue, he goes on to state though that the current spate of economic recession – the second in the Muhammadu Buhari civilian presidency – would not be lifted in the short term as ‘positive growth will not come until Q2 and Q3.’
Ostensibly to combat the challenging times, Rewane projects that ‘tough policy decisions will be made in Q1’ and that ‘this will include further liberalization of the forex market and flexible exchange rates.’ And on the contentious subject of fuel price increases, he simply drops the hint that, in all likelihood, ‘as oil prices increase also will the pump price of petrol.’
The notable economist has a somewhat more hopeful storm before calm expectation on the other troubling concern: inflation, which at the moment has inched quite close to the 15 percent mark. His permutations: ‘inflation, which could climb to 16% in January, will decelerate in Q3 towards 11%. Another area where some succor could come in his view is from the fixed money markets as he forecasts that ‘treasury bill interest rates will begin climbing in Q1 and could increase towards 5%-6% by Q2 & Q3.’ This he hazards may come at a cost: the current ‘stock market rally will fizzle as interest rates spike.’ However, ‘stocks in some sectors, principally telcos, insurance and construction, will maintain their rally’ while ‘banking stocks will differentiate between those with low cost-to-income ratios and the others.’
Looking ahead, Rewane also makes the call that it would indeed also not be uhuru for the naira as it would ‘oscillate between N450/$ and N470/$ in the parallel
market’ while ‘at the I & E window the rates will trade N440/$ – N450/$.’
On the consumer flank, the prognosis is that ‘retail and shopping malls will start to experience foot traffic but not to pre pandemic levels.’
However, more upbeat for the veteran economist is the expected impact of the coming on stream of the Lagos-Ibadan railway scheme, which his presentation very generously forecasts would ‘be a major game changer.’
On the flip side however, there are also some noticeable economic threats that the report calls attention to:
The first is that a situation of financial risk could be precipitated by any ‘sharp fall in oil prices’ which could in turn then ‘limit fiscal and external revenue accretion.’ Still on the vagaries of the oil market, there is also the potential downside effect that could come from ‘higher oil prices feeding into PMS price’ and aggravating tensions from unions and the public in a situation where the management of the oil sector has been less than salutary and left the country with a lose-lose scenario.
Other potential risk downsides could be those connected with a ‘debt crisis and an accompanying debt service risk due to higher interest rates, a broader default risk, the expansion of the Covid-19 outbreak, or a resurgence of wide scale protest in the mould of the agitation over and by youths to EndSARS, or even groups like MEND or a GhanaMustGo venting.
On the key economic metrics, Rewane quotes OPEC estimates that Nigeria’s oil production will be capped by its quota: 1.46mbpd even as the number of active rigs are expected to increase in tandem with production in 2021.
He agrees with NIBSS that the value of transactions across the e-payment channels to keep increasing and that they could rise to N30trn by 2021 even as more consumers and corporates use these channels instead of cash.
At the same time, he envisages that average FAAC disbursement would return to pre-pandemic level of approximately N700bn based on higher oil receipts and increased VAT remittances while manufacturing PMI would remain above 50 points in 2021. He is equally upbeat on the prospects for an increase in economic activities in sub-indices points like supplier delivery time, output and employment levels.
On the turf of seaport activities, Rewane projects that it is expected to increase as global trade picks upon increased covid-19 vaccinations by 2021 and that the number and range of vessels awaiting berth at Lagos ports would decline significantly. He however calls on the authorities to note that there is still a high need to utilize other seaports and de-congest Lagos ports.
On monetary policy, he expects the CBN to shift focus back to price stability in 2021 but that multiple objectives will undermine monetary policy effectiveness. Also, a change in interest rate policy he contends is most likely as well as the introduction of special bills will serve as an additional tool for liquidity management and the signalling cue for an increase in interest rates.
On the fiscal policy side, Rewane sees that the Federal Government will very likely be confronted with wider fiscal deficit (N5.19trn) amid lower revenues and that it will then attempt to spend its way out of the recession and in the process significantly boost domestic revenue mobilization. He notes however that the options before government are limited and that they include: broadening the excise base, increasing rates for excises (e.g. fuel), increasing the VAT rate gradually to the ECOWAS average of 15% by 2025 as well as a change in the interest rate environment which would however increase debt servicing costs.
On the positive side, he avers that the New Petroleum Industry Bill (PIB) will very likely be passed and that this would structurally makes a return to the regime of petrol price controls less likely. Notably also, he projects that the PIB will encourage upstream oil investment by bringing clarity to fiscal terms within the industry.
On the stock market, he sees a possible market reversal, arguing that the current rally is not backed by strong economic fundamentals. Also in view for him is a possible increase in yields of fixed income instruments even as banking stocks may continue to dominate activity levels due to high sensitivity to liquidity.
Overall however, he projects that the market would very likely see more delisting than listing of new companies, a further consolidation in the insurance space and that net foreign outflow situation would persist especially with improved FX liquidity.’
Indeed, analysts also say that there is a sense in which the root of Nigeria’s relatively strong economic performance in the past decade is actually traceable to the second term reforms initiated during the second term of President Olusegun Obasanjo, and including most notably, the banking sector consolidation programme and the support given to business players like Alhaji Aliko Dangote, as well as the broader privatization programme that the administration had pursued. They aver that to give enhanced bite to Nigeria’s economic trajectory going forward, the Buhari administration would need to similarly explore ambitious and high value economic movements of a fundamental nature.
Continuing with the Rewane projections for 2021 however, and breaking it into sectoral frames, it also comes out that he expects that the year would introduce a situation of ‘different strokes for different folks.’
In the insurance sector for example, the projection is that there would be ‘likely consolidation across the industry which would be driven by the need to meet up with the new capital requirement.’
This is even as the industry’s attractiveness deteriorates and banks move to encroach on the industry space through the holdcos.
Part of the challenge he concedes is that the increasing poverty rate and decline in purchasing power makes the idea of insurance unthinkable to many Nigerians recommending a need for players to offer specific products desirable to various income and demographic levels. On the upbeat side, he says that the ‘recent #EndSARS crisis presents an opportunity.’
For supermarkets, the reality going forward is that logistics would continue to remain king even with the present and continuing ‘drop in foot traffic.’ There would therefore continue to be a boost in delivery services while also entertaining some rise in foot traffic going forward. But delivery services would clearly become more rampant.’
On the FMGCs, Rewane admits that they have indeed had a tough time in 2020. Realistically however, 2021 still holds tough cards for them as ‘COVID-19 exacerbated underlying issues and low purchasing power would continue to weigh on revenue.’
Along the line also, pricing has become a key source of competitive advantage, smaller brands with lower prices have continued to gain market share from larger players.’
Going forward, he expects players to benefit from low cost of borrowing and that firms like Flour mills would now have to seek fresh benefits from the end of the season of lingering border closure.’
Financial services, and notably banks, would expectedly continue to brave the tides, albeit on their feet!
‘Competition is expected to intensify – especially in the retail space, possible mergers and acquisitions are on the radar within and across tiers and macroeconomic weaknesses are likely to be reflected in the FY results as well as a significant increase in impairment charge, a drag on capital adequacy, and lower deposit repricing to support growth in net interest income.
On the positive side, further naira devaluations will present the industry with revaluation gains, there will be a broadly net positive foreign assets position, the move to holdco structure by tier 1 banks would improve their revenue sources and the current era of increased operational and financial resilience is very likely to persist.’
As for the telecoms sector that has largely sustained relative gains in the pandemic era, the projection is that the sector would ‘further compete with financial Institutions, Pursue PSB licenses, partner with digital content providers, focus on increased network capacity, expanding rural coverage, 4G coverage and deepened multi-products propositions.’
As for the Aviation Industry in 2021, the prognosis is that it would commence the process of recovering though it would ‘remain in a loss position ($38bn) in 2021
The Covid vaccine would boost global travel with significant gains at the end of 2021 and Cargo activities would recover to pre-pandemic levels in 2021. Several airlines will survive on existing reserves, but many may run out of cash before the vaccine is widely distributed.’
You have been alerted. Have a great year as best as you can.