NIGERIA: BETWEEN A ROCK AND A HARD PLACE

When you arise in the morning, think of what a precious privilege it is to be alive – to breathe…

Marcus Aurelius.

Coming into 2020, there was optimism about economic growth especially after some acceleration over the last quarter of 2019, when the National Bureau of Statistics (NBS) reported that Nigeria’s economy expanded by 2.55 percent.

However, as with everything since the outbreak of the Covid-19 virus, Nigeria’s economic growth prospects have considerably darkened.

How deep will the recession be and how long will it last? We hope to shed some light in this piece.


The Covid-19 hand brake on Nigeria’s economy

As breathing is essential to human existence, so is economic growth to the sustenance of nations. At the start of 2020, breathing and economic growth were taken as given, but with the outbreak of the Severe Acute Respiratory Syndrome Coronavirus 2 (SARS-CoV-2), more popularly as Covid-19, the world has changed.

Indeed, in response to the greatest pandemic since the Spanish flu in 1918, countries across the globe have implemented a host of measures: social distancing, border closures, flight bans and city-wide lockdowns in a bid to limit the spread of the covid-19 virus.

However, these measures have negative implications on world trade, international travel and global supply chains.

The International Monetary Fund (IMF) now expects that the global economy will fall into a recession in 2020 (as against its earlier forecast for growth to rise to 3.3 percent from an estimated 2.9 percent in 2019).

For Nigeria, the Covid-19 outbreak alongside a slump in global crude oil price collectively presents what could be the largest peacetime economic shock since independence in 1960.

Unlike earlier episodes of economic downturns such as the oil-led recessions of 1982-1984 and 2015-16, the Covid-19 outbreak directly attacks both the oil and non-oil sectors of the Nigerian economy which points to a deep recession unless things turn around very quickly.  

Figure 1: Trends in Nigeria’s Quarterly GDP growth

Non-oil output to contract on lockdowns and restrictions, but positive for Telecommunications and Healthcare

Following the index Covid-19 case in late February by a traveler from Italy, events have sharply deteriorated in Nigeria with climb in infections to 362 (as at 14 April) though most cases in Nigeria appear to be relatively mild with deaths largely linked to pre-existing medical conditions.

In line with the global trend, the Nigerian government has instituted similar measures: flight bans, border closures and state-wide lockdowns in the key economic regions which present challenges to a wide range of activities in Nigeria’s non-oil sector (90percent of GDP).

In the immediate line of fire are those sectors where activity is impossible without physical presence: trade (16% of GDP), construction and real estate (10% of GDP) as well as transportation (1% of GDP) which will swiftly descend into contraction over the next two quarters as human traffic declines.

For the manufacturing sector (10% of GDP), while the lockdowns exempted only those in essential sub sectors defined as food, petroleum distribution and electricity (around half of manufacturing output), the suspension of production activity for other sub sectors presents a high hurdle for growth within the sector.

Furthermore, the entire manufacturing sector faces demand destruction which we expect will tilt the sector into recession over the Q2 2020 and Q3 2020.

High frequency data for the manufacturing sector has provided a fore runner with the Purchasing Managers Index (PMI) showing a slump over March to the lowest level since April 2017 while the non-manufacturing PMI dipped below 50 into contraction zone.

Figure 2: Trends in Nigeria’s PMI

However, we must flag that the lockdowns are not negative for all parts of the non-oil sector, as people replace physical contact with communication (voice and online) which will lead to more hours on the phone as well increased data consumption.

We view the shift to remote work as positive for the telecommunications space (13percent of GDP) and expect this sector to remain in growth. We also see increased attention to boosting health care (1percent of GDP) with a ramp-up in bed space and production of intensive care units as a potential to boost growth in the sector.

Nigeria’s oil sector to come under pressure

On the oil front, the outbreak has resulted in dramatic change in global crude oil markets as the lockdowns and travel restrictions has resulted in a drop in crude oil demand with estimates by the Organization of Petroleum Exporting Countries (OPEC) and International Energy Agency (IEA) pointing to a drop of 20-30 million barrels per day(mbpd).

This occurred against the backdrop of a breakdown in the relationship between oil producing heavyweights, Saudi Arabia and Russia, which resulted in a glut across crude oil markets in March. Consequently, crude oil prices plunged by over 50 percent.

The depth of the oil price collapse presents strong headwinds to the Federal Government (as oil accounts for 65 percent of revenues) with the initial 2020 budget pegged at an average price of USD57/bbl.

Though OPEC and its G20 allies in early April cobbled a historic agreement that would see the cartel cut 13-14 million barrels over May and June, this would require member nations embark on reduction in their oil production which places Nigeria at 1.4mbpd (exclusive of 300-400kbpd condensates).

In 2019, Nigeria’s oil production, inclusive of condensates, averaged 2.02mbpd.

Figure 3: Trends in Nigeria’s oil production and oil prices

Source: NNPC, CBN

In response to the outbreak, governments have responded with aggressive easing of fiscal and monetary policies to help manage the impact of the outbreak on their economies, however as high frequency data appears to be revealing, these measures may not be enough. 

Nigeria’s Finance ministry recently unveiled a series of fiscal policy measures to tackle the economic impact of the Covid-19 outbreak. However, unlike other economies where the policy space for economic managers to maneuver appears large due to healthier fiscal reserves, Nigeria appears more vulnerable with low fiscal buffers (unlike the 2009 global financial crisis) which limits the size of any potential stimulus measures.

Furthermore, with significant under-investment in healthcare overtime, the likely policy response towards fighting a Covid-19 outbreak relies largely on implementing lockdowns on a large segment of the population which means the economy will have to take the hit.

From a structural standpoint, economic activities in Nigeria are dominated by consumption spending (60percent of GDP) which will be under lockdown. Given the significant informal share of economic activities (estimated at 42 percent of GDP), the lockdown will drive significant reduction in aggregate consumption over the period which is difficult to sustain given the large-scale welfare impact on the populace.

Accordingly, we think the lock-down is unlikely to be long lasting which will imply a less severe recession over 2019.

In terms of outlook, we expect economic growth to move into negative territory over Q2 and Q3 (after a modest expansion in Q1) before a possible recovery in the last quarter of the year.

Over the year we forecast a contraction in GDP in the region of 3.3 percent (down from the 2.3 percent growth in 2019).

Figure 4: Annual Real GDP growth

Source: NBS, Sigma Pensions Research