NIGERIA INSIGHT: Recovery Continues, But Economy Remains Fragile

LAGOS (Capital Markets in Africa) — Nigeria has managed to get the virus under control, for now at least, enabling the government to lift most lockdown restrictions. This, together with easing OPEC production cuts, has supported a gradual pick-up in output. The recovery, however, remains fragile, with uncertainty around the vaccine rollout and ongoing foreign exchange restrictions posing downside risks.

We now expect the economy to rebound 2.4% this year, with GDP growth expanding by a modest 0.2% year-on-year in the first quarter. A further easing of OPEC production quotas and a faster vaccine rollout should boost the recovery thereafter, assuming no new tightening of lockdown restrictions.

This compares with a 2021 consensus estimate of 2% , suggesting some downside risk to our forecast.

Modest, but Fragile Recovery
Nigeria’s output posted a marginal expansion in 4Q20, as growth in the telecommunications, agriculture and related manufacturing sectors offset declines in the rest of the economy. The surprise expansion lifted the overall GDP level, but a second wave of infections and deeper oil production cuts slowed the recovery heading into 2021.

Nigeria reached the peak of its second infection wave in January. At the same time, oil production was further restricted, reflecting the need to compensate for overproduction in the previous months. This slowed the recovery at the start of the year, before the easing of lockdown restrictions and pick-up in oil production in February raised the pace again.

The recovery, though, remains modest — the average PMI reading for 1Q remains relatively unchanged from the 52 recorded in 4Q20. We therefore expect only a marginal expansion in output of 0.2% year-on-year in 1Q, up from 0.1% in the previous quarter.

A further easing of oil production quotas should pave the way for a more modest recovery this year, with a ramp-up in the rollout of vaccines providing a further boost. This should support a growth rebound in 2021 of 2.4%, up from the sharp contraction seen last year. We expect increased growth in 2022, when the OPEC production quotas are completely lifted.

GDP Outlook
Nigeria kick-started its inoculation program in March, with over 600,000 health-care workers vaccinated so far (0.2% of its 200 million population). The government aims to inoculate 40% of the population by the end of this year and a further 30% by the end of 2022. At the head of the queue are front-line workers, those above the age of 50 and other high risk individuals.

The country received 3.92 million vaccine doses in March, the first shipment of over 16 million doses allocated to the country through the COVAX facility. A further 42 million doses have been allocated through the African Union, however, it’s not yet clear when they’re expected to arrive. Details on the procurement of additional doses remain thin.

Policy Response
Rising debt service costs have limited the scope for fiscal policy to provide further relief from the pandemic, leaving the central bank to carry the burden of support. The Central Bank of Nigeria has cut interest rates by 200 basis points in response to the pandemic and also provided extensive lending support through its various financing initiatives.

Forex Restrictions Hinder Recovery
These efforts, though, have been thwarted by the devaluation of the naira, tightening foreign exchange restrictions and surging inflation. As a result, we expect the CBN to raise rates again later in the year, when the economy is on a stronger footing.

Risks
There are significant downside risks to our outlook:

Our central forecast assumes the virus remains under control and more restrictive containment measures are avoided. Recurring waves of infection amid a slow vaccine rollout, however, remain a possibility that could upend the recovery.

A second wave of infections in advanced economies reduced the global demand for oil, forcing OPEC to keep a lid on output in 1Q, so there’s a risk the envisioned lift in output from April continues to be constrained, undermining the recovery.

Source: Bloomberg Business News