Friday,December 18, 2020 / 5:03 PM / By Cordros Research / Header Image Credit: Cordros Research
The ravaging impact of the twin shocks (the pandemicand downturn in oil prices) may have dissipated following the re-opening ofeconomies. Still, the clog in the wheels of economic activities will linger in2021. Although we expect the economy to recover from the deep contractionin 2020, we believe policymakers will be faced with the more difficult task oflifting output growth above population growth. Consequently, the recovery willremain mostly insufficient in boosting per capita income, stimulatingemployment opportunities, and addressing the growing disparity in incomelevels.
We are cautiously optimistic that the land borders,which were re-opened on 15th December, will ease pressures in food basket givenweak domestic capacity. Nonetheless, we expect the gradual increase inelectricity tariffs and higher distribution costs linked to higher PMS prices(especially if oil prices gain momentum) to offset the gains.
Despite the FX management strategies put in place bythe CBN to reduce FX demand for importation, we expect the current account tobe pressured by a faster increase in imports compared to exports. The pressurewill be amplified by a wider deficit in the services account, based on ourexpectations on improvement in the scale of international airline operationsand medical-related tourism. Taking into consideration the fragility ofmacroeconomic conditions coupled with the lingering liquidity constraints inthe I & E window, we expect FPI inflows to remain tepid. This view,alongside our expectation of a marginal increase in export earnings, impliesaccretion to the FX reserves will be limited, thus, hindering the ability ofthe CBN to defend the local currency.
On monetary policy, we believe the MPC will be at acrossroads. They will be faced with the difficult choice of keeping interestrates low to support economic recovery while easing government financingpressures or tightening to attract FPIs to mitigate currency pressures andrestore stability in the external sector. We expect the MPR to remain unchangedin Q1-21 but envisage tightening from Q2 onwards, due to our expectations oninflation and the need to stem currency pressures.
On fiscal policy, we expect budget performance to becharacterised by the recurring themes of underperformance in revenue targets,sub-optimal CAPEX spending relative to recurrent expenditure, and weak revenuefrom State-Owned Enterprises (SOEs). Ultimately, we believe the government willbe faced with the difficult task of balancing borrowings to support economicrecovery and avoiding a further buildup of debt that will further weaken debtsustainability metrics.
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