Welcome to week 2 of November 2020.
As many Americans and millions worldwide, celebrate the electoral victory of Joe Biden in the just concluded US Presidential elections; we can, in the words of former President Olusegun Obasanjo look forward to a return of “reasonably predictable measure of rule of law and respect for international agreements and treaties”.
Although the jury is still out on what a Biden presidency portrays for the US stock market and global economy; as part of our countdown to 2021 we will be discussing some things to expect from the Nigerian economy in the New Year.
- Declining oil prices: It is no news that crude oil prices in the global market have been on the decline and this has led to a large degree of budgetary stress for the country.
In fact, the 2020 budget was amended to reflect the reduced oil prices; which meant that the allocations to sectors such as education and health were slashed.
It is also key to note that in line with a new OPEC deal, the country is expected to still cut its daily production quota which means further decline in revenue.
The downside is that the 2021 budget may face such a fate in the coming year if revenue from crude oil sale and taxes shrink beyond budgeted figures.
This will negatively impact government spending which is critical to simulating economic activity.
- Continued foreign exchange pressures: as long as oil prices remain low, Nigeria will continue to experience foreign currency liquidity issues. This is expected given that crude oil remains our primary source of revenue.
All these, coupled with declining Foreign Direct Investment and Portfolio Investors, means that the pressure would not decrease anytime soon.
As such, we most likely will continue to experience increased activity from the Central Bank either with regards to forex allocation to companies and individuals as well as domiciliary account operations.
- Increased borrowing: It is no news that government spending has exceeded revenue over the past couple of years which meant that the government has had to borrow locally and from international sources.
As at June 2020, debt per capita was N145,664 up from approximately N121,000 in December 2019.
In fact, an announcement was made last week that a new loan of $1.5 billion is being expected from Brazil.
All these have meant that the repayment of these loans have led to major strain on revenue.
In Q1 and Q2 2020, debt repayment was 95% and 80% respectively of revenue.
This trend is expected to continue into 2021 (and maybe longer) if we do not grow revenue through earnings as well as taxation and fix our recurrent expenditure.
- Raising inflation: Only a stranger or newcomer to the country will not realise that prices of goods and services have gone up and are still on the raise.
Practically every aspect of our lives have experienced increased costs from VAT on goods and services, electricity tariffs, fuel and food prices (the cost of onions being the latest).
Inflation has increased steadily over the past 13 months with the September 2020 rate of 13.7% being the highest since 2018.
The major driver has been rising food prices, due in part to the devaluation, dollar restrictions and the prolonged border closure.
Goldman Sachs believes that the inflation rate will steadily rise over the coming months and projects that it could reach 18% year on year by Q2 2021.
- Declining Treasury Bill yields: This year, treasury bill rates have witnessed a steady decline from 4.6% p.a. to 0.5% p.a.
At the last auction (November 2020), which was incidentally oversubscribed, the 91 day bill sold for 0.34%; a record low rate. This means, investors are still willing to invest their funds at little or no yield.
It is instructive to note that most of these investors are institutional (pension funds and investment banks) and as such, it is unlikely that the Central Bank will be worried about this current scenario.
On the other hand, individual investors are opting for alternative assets such as equity, euro bonds and real estate.
The Nigerian Stock Market is expected to be a major beneficiary as investors divert funds to equity in a bid to maximise returns.
Currently, the blue chip stocks (known as NSE 30 are still relatively undervalued) have witnessed increased activities in recent months.
The bottom line is that the country’s economy is not yet out of the woods and individuals are encouraged to look for creative ways of cutting expenses, increasing revenue and maximising returns on investments.
May our eyes see and our hearts conceive uncommon things as we all try to make sense of all these scenario in the coming days.
Please note that there are indications that COVID 19 cases are now on the increase in Nigeria, especially in Lagos State and as such we must continue to take personal responsibility for ensuring our safety.
Kindly remember that there is still no cure for the corona virus and that prevention is always the better option.
Keep washing your hands, maintaining social distancing and wearing your face masks in public.
Till next week, do have a wonderful week ahead.