Outlook 2021: Understanding the Mega Trends of a Crucial Year for an Economy

Thursday,January 28, 2021 /03:00 PM / By Proshare Research/ Header ImageCredit: EcoGraphics

Executive Summary

Hold on to your dream. Don't let past failures or direeconomic forecasts make you a pessimist. Keep your youthful dreams alive andcreate your own opportunities. - Paul Zane Pilzer

PaulPilzer may well have been making a pitch to Nigerian youths, as the events ofthe last twelve months have been disruptive enough to shoot down stars from theclearest of skies. The 2020 coronavirus pandemic was a scorching experiencethat drilled massive holes into the pockets of governments around the world ascitizens queued up at isolation centres to fight off a venomous disease,lacking in empathy.

Hospitalscame under strain as health workers and patients caught the bug and deathloomed like a Godzilla. Factories closed dust-caked windows, cinemas wentsilent and airplanes lay like coffins on parade as economies slowly butpainfully sank into despair. Nevertheless, with 2020 in the rearview mirror,and factories gingerly restarting to hum again as airlines and airplanesreawake, analysts are more optimistic at the beginning of 2021 than they werepessimistic at the end of 2020. Dreams are coming alive and opportunities seemto be reemerging.

Nigeria in Six Charts

Nigeria'seconomy went into free fall in Q2 2020 as the coronavirus pandemic worsened andtumbling international oil prices poisoned an already difficult situation. Bythe end of the second quarter the country's gross domestic product (GDP), ameasure of economic output, shrunk by -6.10% beforerecovering in Q3 2020 by -3.62%. Thetwo-quarters of negative GDP growth nudged the economy into an officialrecession with job loss rates rising and inflation rate scampering. A fewanalysts believe that the 2020 economic decline was less severe than would havebeen the case if the Central Bank of Nigeria (CBN) had not adopted a policy ofquantitative easing (QE) and the ministry of finance (MoF) had not permitted alarger-than-expected fiscal deficit. Subsequent information suggests that the CBNhad put in the palms of the fiscal authorities a shimmering N2.38trn creditlifeline by its ways and means mechanism, hence leaving the finance authoritieswith a massive future fiscal funding gap of over N2trn.

Thecountry's macroeconomic balance can be viewed in six charts and a theory.

GDP- Understanding the Chicken Run

Nigeria'sGDP has had an interesting run as it has dipped and swerved from optimisticgrowth to scary depression, back to growth, and then on to depression in 2020.Before 2015, the economy's growth engine had purred at a nice pace of slightlyover +6% as it drove smoothly along anupward trajectory from an average of +6.23% in2014 but slipped to an average of +3.2% in2015 and slammed the brakes as it skidded into a recession between 2016 and Q12017.

GDP fell from -0.67 in Q1 2016 to -1.49% in Q2, -2.34% inQ3, and -1.73% in Q4 by Q1 2017 GDP saw a slight but still negative recovery of -0.91%.As the global recession passed by in Q2 2017 and GDP growth ramped up to +0.72%, theeconomy appeared to be on the mend even though the population growth rate wasplodding ahead at a disturbing +2.6% perannum (see chart 1 below).

Chart 1: Nigeria's GDP GrowthRate (%)

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Theharsh times of 2016 left the jobless rate up in double digits, while domesticconsumption stumbled and manufacturers saw net sales slide, the purchasingmanager's index (PMI) equally took a knock. The GDP growth reversal in 2017 put smiles on manufacturers' faces as outputrose as the jobless rate started to fall with GDP growth rising from +2.11% in Q4 2017to +1.95% in Q1 2018 and +2.38% in Q4 2018. In between Q1 and Q4 2018, thegrowth rate fell to +1.5% in Q2 and +1.81% in Q3.

Manufacturersand workers were optimistic that 2019 would prove better than the previousyear, 2020, and they were right. GDP rose by +2.1% in Q1 2019, +2.12% in Q2, +2.28% inQ3 and +2.55% in Q4. The first quarter of2020 saw GDP growth rate climb by +1.87% before the coronavirus outbreak led toa reversal with Q2 2020 witnessing a major contraction as GDP growth slid by -6.10% before retracingits steps in Q3 2020 with the growth rate slowing less rapidly by -3.62%.

Nigeria'sGDP chicken run over the last seven years has reflected uncontrollableexternal factors and perfectly controllable policy choices. The country'sfiscal and monetary policies have often been out of alignment and the route todesired economic prosperity has been littered with hope rather than logic,ethnic bias rather than a competitive advantage, and favouritism rather thancompetence.

Inflation Rate- When What is Real Begins to Matter

Nigeria'slatest inflation figures for December 2020 showed that headline inflation grew by +15.75% and food inflationspiked at +19.56%, an indication thatdomestic real asset values were being pulverized as the country's poverty indexhit new highs.

Therise in domestic prices has been unnerving in the last two years as headline inflation has steadily increased without let. In January 2019 inflation rate wasjust over +11% but by October the rate hadrisen to +11.61% and by year-end December2019 inflation rate had skimmed just under +12% to +11.98%.

WithCOVID-19 fears kicking-in by Q1 2020, the inflation rate rose more sharply assupply chain links were decoupled and factories' gates closed. The country'sinflation rate in January 2020 was +12.13% byMarch it had risen to +12.26%, in June 2020the domestic inflation rate had scrambled up by a further +12.56%. By the end of Q3 2020, the domesticprice level had again increased by +13.71%.The beginning of Q4 2020 saw the inflation rate leap further by +14.23% as the delayed impact of earlier input supplydisruptions, farmgate security challenges, and land border closure combined toknock the wind out of the economy's sail (see chart2 below).

Chart 2: Nigeria's Inflation Rate(%)

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Thisexplains why the inflation rate still rose in December 2020 by +15.75%, a throwback to November 2017. Thecontinuous rise in the inflation rate in 2020 hurt the value of financialassets as real yields took a beating as inflation-adjusted returns becamenegative leading to several investors leaping out of fixed income securitiesand seeking solace in the equities market. The NSE All Shares Index (ASI) went up +50.03% year-t0-date (YTD)at the end of 2020, making it the best performing market in Africa (see the section on the African equities market in thisreport).

Withthe inflation rate at +15.75%, it would takeonly four years and three months for the value of every naira asset to be worthroughly half of its present value, if the double-digit rate persists. If themonetary authorities are to encourage savings in the country (a critical factorin wriggling away from slow medium-term growth), real rates of return on depositsmust go up by between 10% and 12%, otherwise, owners of idle cash balanceswould probably search for near-liquid assets that track inflation much better.

Goodinvestors search for value but great investors search for inflation-proofedvalue, a growing number of Nigerian investors are moving from good to great.

Debt -Staying Catholic, Or Perhaps Not?

Nigeria'sdomestic and foreign debt numbers have easily galloped in the last six years.Nigeria's combined domestic and foreign debt numbers rose from N12.6trn in 2015to N17.4trn in 2016, at the beginning of a short-cycle recession. The debt figure continued to rise with a recovery in GDP growth numbers in 2017as Nigeria's total debt stock climbed to N21.7trn.

Thelow-growth recovery of GDP between 2017 and 2018 was unable to stop the viralgrowth of debt as Nigeria's debt stock has continued to rise, leapfrogging fromN24.4trn in 2018 to N27.1trn in 2019. In H1 2020 the total national debt hadrisen to N31.01trn (see chart 3 below).

Chart 3: Nigeria's Total Debt (N'trn)

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Thefive-year compound annual growth rate (CAGR) of the nation's total debt was 21.1% as of 2019, but the rate could be closer to +16% if 2020 debt numbers are taken intoconsideration and a base rate adjustment is made. For example, if the H1 figureof N31.0trn were to be used to calculate CAGR for full-year 2020 and the baserate was shifted to N17.4trn for 2016, the new five-year growth rate would be +15.62%. If the Q3 2020 figure of N32.22trn isapplied the CAGR would be +16.65%.

Thegrowth rate of debt is higher than the growth rate of inflation, therebyworsening the plight of taxpayers. Taxpayers would be slammed with an 'inflation tax' as they would also be forced to pay for higher fiscalborrowings. The double whammy of abstinence from Catholic prudence and cheerfulfiscal spending leaves no heavenly solace for the innocent. Taxpayers will haveto hunker down and grit their teeth in 2021 as they pay for public sectorexuberance.

PMI-Making Manufacturers Cry

Itwas tearful. Nigeria's manufacturing sector in 2020 was slam-dunked. TheCOVID-19 pandemic cut supply lines, deferred production inputs, and primed thepump for expensive inventories. This translated to higher costs (debt servicedoes not sleep during pandemics), lower or non-existent operating cash flow,and rising cost-0f-carry.

Thecountry's purchasing managers' index(PMI) seesawed between 57.1% and 60.8% in2019 but slumped between 41.4% and 51.1% in 2020. In June 2020 the Indexcollapsed to 41.4% amid the coronavirus economic lockdowns but bounced backmildly in July to 44.9% before rising a notch to 46.9% in September andthen skipped to 49.4% in October, 50.2% in November, and dropped to 49.6% inDecember 2020. The gradual rise in the PMI towards the end of the year,according to analysts, reflects a slow but noticeable turnaround in thecountry's economic fortunes (see chart 4 below).

Chart 4: Nigeria's ManufacturingPMI (%)

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Nigeria'smanufacturing sector is expected to chug along modestly in 2021 but a lotdepends on how quickly the COVID-19 pandemic is resolved and how fast domesticsupply rigidities are addressed.

Unemployment-Hard Times, and Swollen Feet

Nigeria'sunemployment rate has once been described as a mystery locked inside a box, as thebureau of statistics has done a marvelous job of keeping up with macroeconomicdata on every other headline macroeconomic indices except the national unemployment rate. Indeed, inquiries concerning the Q4 2018 to Q1 2020 unemploymentnumbers revealed that the federal government had been shy in spending money oncollating the unemployment figures for the missing periods for reasons that areyet to be explained (see chart 5 below).

Chart 5: Nigeria's UnemploymentRate (%)

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Theunemployment rate for Q2 2020, however, stood at 27.1% up from 23.1% in Q32018. The reason why the rising unemployment rate is such a major concern inNigeria is that it is estimated that over 60% of the country's population isbetween the ages of 16 and 35 years, making it one of the youngest populationson the planet. This implies that the demography would require broader access toqualitative education, superior healthcare facilities, and improvedopportunities for their skills and learning to be deployed to rapidly growingsectors of the economy. So far, has not happened.

Thestructure of the Nigerian economy (high dependence on oil for foreign exchangeearnings and low domestic manufacturing activities) suggests that many youngpersons will remain unemployable. The country has an estimated 40.5m small andmedium-sized businesses with the majority of these enterprises barely able toscrap up decent earnings as high running costs clip their wings. Unfortunately,the country's educational system has only recently started to reposition itsadmission policy and curricula to favour the hard sciences in contrast toliberal arts and the social sciences. The mismatch between qualifications andjob requirements will produce a pressure cooker society with crisispersistently simmering just beneath the surface.

Indeed,the difference between the skills the Nigerian economy needs and the skillsNigerian youths possess can only worsen the domestic unemployment rate andraise touchpoints for social disaffection, dislocation, and revolt. Analystshave noted that the problem starts with a slow-moving economy that has idledalong at a rate below the +2.6% annualpopulation growth rate, thereby reducing the country's income per person.

Tobe sure, for those who have taken time to monitor unemployment, disaster doesnot always come in a flash, it sometimes grows like an Indian Baobab tree, slowat first until it reaches a tipping point, where it explodes into a forestgiant. Behavioural economists note that social crisis stares Nigeria in theface if it does not pull its GDP up by at least an additional 8% per annum. Thequietly climbing jobless rate could very suddenly burst into a mass movement oftroubled youths seeking work and finding long queues, frustration, and sorefeet.

Althoughbandaged feet are bad enough, it would not be as damaging as the bruised egos,the sense of despair, and the burning desire to make somebody pay for theirhardship.

Capital Importation-When Foreigners Vote with their Dollars.

Aswas noted in the previous section Nigeria has a myriad of socio-economicchallenges that threaten growth and stability, prominent of which has beenunemployment and underemployment. However, to help temper the severity of theproblem imported capital has proved supportive as international investors pourdollars into the local economy, and Nigerians in the diaspora take a hard lookback in search of higher investment yields.

Capital importation has been wavering in the last half-decade between 2016 and 2020. At thebeginning of the economic recession in 2016 capital imports became historicallylow. Imports were almost forgettable over the four quarters of 2016 but rosenoticeably as the global economy shrugged off the after-effects of the economicdownturn by Q3 2017. In the third quarter of 2017 capital importation got toUS$ 4.15bn before climbing to US$5.38bn in Q4 of the same year. Withglobal economies showing signs of a sustained recovery in 2018, and investorconfidence springing back as they become less risk-averse, the capitalimportation figures spiked as capital inflows rose to US$6.3bn in Q1 andUS$5.51bn in Q2 2018.

Risingcapital import continued in Q1 2019 after a sharp drop to US$2.86bn in Q3 andUS$2.14bn in Q4 2018. Capital imports in Q1 2019 hit a high of US$8.51bn beforedropping back to US$6.05bn in Q2 and US$3.8bn in Q4 2019. Surprisingly, thebeginning of 2020 saw capital importation rise strongly to US$5.85bn in Q1 atthe start of the coronavirus pandemic, even though, Nigeria was not immediatelythreatened by the outbreak. By Q2 2020 with the decision to partially lockdownthe Nigerian economy the levels of capital importation shrank. For example, capitalimportation fell from US$5.85bn in Q1 2020 to US$1.29bn in Q2 and US$1.46bn inQ3 2020, representing two low-base capital import figures that were last seenin the recessionary year of 2016 (see chart 6 below).

Chart 6: Nigeria's CapitalImportation ($'bn)

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A Rebound and Alphabet Soup

Theoutlook for the Nigerian economy in 2021 is mildly optimistic. Analysts believethat GDP would grow at a steady rate of between +1.5%and +2.4% as manufacturers regaintheir bearings, supply chains become reestablished and consumer demand rises.However, much depends on how fast coronavirus vaccinations can be provided forthe most vulnerable members of the population. The projection that 40% (orroughly 80m citizens) of the population would receive vaccinations in the yearis wildly hopeful. The country would at best vaccinate a fraction of theproposed number.

Thismeans that herd protection may become increasingly critical in keeping theeconomy open throughout the year. The various governments would need to keepcitizens safe by enforcing non-pharmaceutical measures to bring down thenumbers of infected people. The COVID-19 inter-personal contact protocols wouldneed rigorous adherence to stop the rapid communal spread of the virus inplaces like Lagos state, Rivers state, and Abuja. Besides, the distributionconsideration for vaccines must shelve the suboptimal concept of so-called 'federal character' and deal with epicentres faster than places with lowervirus incidences.

Ifthe economy stays open throughout the year, the letter W would more closelydescribe its recovery pattern, in contrast to other alphabet patterns such as Vwhich suggests that the economy will not suffer a growth relapse as a result ofthe virus or the letter K which indicates that larger corporations will reboundmore quickly than their smaller counterparts who may suffer a steady decline asthey find it difficult to reestablish supply chains and recover customerdemand.

Morerecently some local economists have proposed a square root recovery which wouldinvolve a small and short GDP uplift before a long decline followed by a steeprecovery that heads into a period of flat future growth. This shaped recoveryis theoretically plausible but practically unlikely.

Indeed,the growing consensus amongst local analysts is that the W-shaped recoveryremains the most likely portion of the alphabet soup of recovery outcomesexpected between 2021 and 2023. A lot, however, depends on how well thegovernments at different levels handle the COVID-19 pandemic. An acceleratedspread of the disease could pivot recovery from a W-shaped recovery to anL-shaped one with manufacturing and output sliding down and getting caught in alow-base growth trap.

Ifthe virus is tackled effectively without necessitating a renewed shutdown, thengrowth will progress steadily while the inflation rate falls gradually betweenQ3 and Q4 2021. Without a further lockdown inflation rate may average +14.2% in 2021, as it adjusts downwards from therecent December 2020 rate of 15.75%.Analysts expect inflation to be above 15% inboth Q1 and Q2 2020, as food inflation remains a worrying fixture of domesticconsumer prices.

Illustration 1:Government Policies Enacted in 2020 and Impacts on Nigerian Commodities

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Theescalating insecurity in the country's farm belt as a result of incessantattacks of farmers by gun-wielding cattle herdsmen will put pressure onfarmgate food supplies. This would worsen the preexisting farming problems ofpoor road networks, the absence of bulk farm produce storage facilities, androad levies charged by non-state actors along traditional rural to urban centrefarming routes.

Section1 of the report takes an overview of global economiesand how they have coped with the coronavirus pandemic and the global economicoutlook for 2021. The section also looks at African economies and how they willshape up to meet the challenges of 2021 as global supply chains becomerecoupled and international trade becomes gingerly restored.

Thesection dissects the Nigerian economy while delivering a few prognoses. Itnoted that opening closed land borders, improving domestic healthcaremanagement, and creating supporting infrastructure could help to push up growthand reduce inflation rate uncertainty. According to the report, "The recent decline in the rate of contraction could betied to the easing of restrictions on businesses, the reopening ofinternational and domestic travels, and a resumption of wholesale and retailtrading activities. The shift in the economic needle in the last three monthsreflects an expected rebound in businesses but still carries the threat of apandemic-induced reversal accompanied by a potential fall in oil demand andprices".

Illustration 2: Understanding the Economy; Beyond the Numbers

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Thereport looked at the major economic numbers that characterised 2020. It alsolooked at the year beyond the numbers and settled on a few base rateassumptions about 2021 and how economic agents look at the way things couldshape up. Section 1 equally took a position of the prospects for capitalimportation, investment, consumption, monetary and fiscal policy, trade, anddomestic unemployment (see Nigeria's unemploymentdistribution in illustration 3 below).

Illustration3: Distribution of Unemployment in Nigeria

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Insection 2 the report reviewed the country's major economic indicatorsand drew up frameworks under which the economy could see growth in 2021.Furthermore, the section forecasted how the various economic indicators wouldfare in 2021 (see illustration 4 below)

Illustration 4: Macroeconomic Forecastfor 2021

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Section3 reported what was turning into a perfect policy stormin 2020 and its implications for 2021. The report considered how both theFederal Ministry of Finance (MoF) and the Central Bank of Nigeria (CBN) werepairing up to meet the challenges of inflation, unemployment, and falling GDPgrowth in addition to how the COVID-19 pandemic was wedging a spanner in theworks. The report noted that "As COVID-19 took a biteout of economic activities and international oil prices, investors pulled backfrom intended capital commitments as they decided to sit on the fence. Theuncertainty in the global economy has since hurt domestic investment flows".

Investorsare expected to return in Q2 2020 as supply chains gradually become restoredand uncertainty about the future pivots towards optimism. With COVID-19vaccination being administered globally, economies are expected to open up astravel numbers rise, and the hospitality sector experiences greater naira flowsas theatres, parks, event centres, and other public places gradually restoreactivities to their pre-COVID-19 levels. The growth in businessactivities will open the wallets of investors as they see mega naira cash flowsin the future becoming a real proposition.

Section4 looked at how the different sectors of the economyfared in 2020 and what the tea leaves have said about their fortunes in 2021.The COVID-19 pandemic affected Nigeria's various economic sectors differentlywith some sectors winning and others ending up with black eyes. Winnersincluded technology-based companies including companies in thetelecommunications and entertainment sectors. Losers included shopping malls,cinemas, clubs, restaurants, hotels, airlines, manufacturing companies, and toa lesser extent logistic firms.

Thesection provided scenarios under which reversals could occur in each sector andprovided context for expected 2021 industry narratives.

Section5 addressed market indicators and how financial marketsfared amid the COVID-19 pandemic. It took a scenic detour across variousmarkets and painted the picture of what was, is, and could be for the marketsin 2021.

Section6 of the report concentrated on the ten megatrends thatare likely to define the economic and financial arena that Nigerians willreside in 2021. It plays up the big moves that will shake up the world ofNigerians the way they have known it. From changing educational templates toflexible working arrangements, the next normal will see a shift in socialrelationships and mental perception. According to the report "The newdigital work culture accelerated by the global health pandemic may lead topermanent changes in the way people work, live, and even love".

Thereport notes that "Nobody can say for now how successful a vaccine would bein containing the spread of the virus. There are different expectations basedmore on hope than science. If the vaccine works well, then economies willrevert to pre-COVID-19 outputs, incomes, and job rates within eighteen months.Nevertheless, this is conjecture rather than fact. A lot will depend onthe vaccine's efficacy and the speed with which it is circulated and used. Sofar, judging from the distribution of the vaccine in the USA and Europe,enthusiasm appears mooted".

Section7 concludes the report and conjectures on how Nigeriacan take advantage of the ongoing economic and health challenges to reset theeconomy and establish an equitable and productive society committed to the bestof global economic and democratic practices (seeillustration 5).

Illustration 5: 10 Trends That WillShape 2021

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