Tuesday, January 28,2020 / 1:56 PM / Afrinvest Research / Header Image Credit: Afrinvest Research

Nigeria in the New Decade: Nothing Ventured,Nothing Gained 

The Nigerian economy suffered mixed fortunes in thepast decade. In the first half of the decade, an average growth of 6.1% droveunemployment to a low of 5.1%. This was on the back of peak oil prices andstable oil production, which supported oil revenues and a strong exchange rate.In turn, inflation was relatively low, averaging 10.7%, due to a strongcurrency. However, fiscal and structural reforms were on the backburner whilefiscal buffers meant to smoothen budget spending during harsh times were emptied.The oil boom sustained the penchant for subsidies, which was cut partially in2012 as the implementation of the 2010 minimum wage doubled personnel costs.

The latter half of the decade began with an oilshock that started mid-2014, with oil prices falling to US$30.8/bbl. by January2016. Without fiscal buffers and a flexible exchange rate market, the Nigerianeconomy was on a tailspin, recording its first recession in 25 years in2016.  Economic growth averaged 1.2%, unemployment rose to 23.1% and inflationaveraged 12.9% between 2015 and 2019. Considering sustained energy subsidies,higher wages in the public sector, a rigid foreign exchange market and delayedreforms, it is clear that the lessons of the past have not been learned. Withlower for longer oil prices, the carbon funded growth in Nigeria is fading andthe next oil shock is even more imminent, especially given the transition tocleaner energy due to climate change.

In 2019, growth remained weak at an estimated 2.2%,below population and long-term growth of 2.7% and 7.1% respectively. Similarly,inflation was elevated at a monthly average of 11.4%. 2020 ushers in a newdecade, with another chance for Nigeria to lay a sustainable foundation for itseconomy. Our economic and financial market outlook for 2020 explores howNigeria can build a more stable macroeconomic environment. In our opinion,Nigeria needs new growth levers to accelerate economic growth and prosperity.We believe the levers should include dumping petrol subsidies, establishing amore flexible FX market, leveraging on technology for human capital developmentand incentivising the private sector to lead a much-needed infrastructureboom.  Without a change in policy direction, the current low-growth cycleis likely to persist.

In the financial market, the playbook has rapidlychanged following the CBN's decision to shut out non-bank financialinstitutions, local corporates and individuals from its large OMO market. Withweak depth in the treasury bills and bond markets, and without other outletsfor low-risk and high yielding investing products, there has been a dramaticfall in yields. The fixed income market has now become a less attractiveproposition for investors. With another cloud gathering over the economy, givenexternal account pressures, low foreign investment, weak investor confidence,high inflation and weak oil prices, the future of the current arrangement looksuncertain. Thus, investing in 2020 would require extra craft. Based on ourinvestment strategy, we believe there is opportunity for outperformance in theequities market following two consecutive years of negative returns, steadygrowth and high liquidity searching for high returns. In the fixed incomemarket, we believe investors must be extra alert to the dynamics of the market.In H1:2020, we believe investors can take advantage of falling yields forstrong gains by prioritising high duration bonds. The strategy in H2:2020 couldchange given the prospect for higher rates, which means active trading may be required.

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