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Nigeria Week Ahead: PMI’s, Trade Balance and NFP in Focus 

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By Lukman Otunuga, Senior Research Analyst at FXTM,

In a move that caught many by surprise, the Central Bank of Nigeria (CBN) pulled the trigger on lower interest rates for the first time since March 2019.

The decision, which was in line with the strategy adopted by many central banks may stimulate economic growth ahead of a potential economic recession triggered by lower oil prices and the coronavirus pandemic. Although Africa’s largest economy was able to expand 1.87% during the first quarter of 2020, fears remain elevated over the economy descending into a recession this year.

On the bright side, markets remain hopeful that the worst of the coronavirus pandemic is over with economies reopening across the globe. While economic data is expected to paint a gloomy picture over the coming months, there is a strong sense of hope that stability will return by 2021. It now becomes a question of whether the CBN and government exhausted all their tools to mitigate the negative impacts of the coronavirus to economic growth and stability.

On the data front, the manufacturing PMI sank to 42.4 in May which was its steepest pace of contraction in manufacturing activity since August 2016. Non-manufacturing plunged to 25.3 during the same month, pointing to the sharpest monthly contraction in services since July 2014. Confidence over the economy may be shaken in the near term as economic data paints a very gloomy picture. Investors will direct their attention towards the latest trade balance figures on Wednesday and inflation data next week.

Outside of Nigeria, there will be a strong focus on the possible OPEC meeting, European Central Bank policy meeting and US jobs report on Friday. Given how Oil accounts for a handsome chunk of Nigeria’s export earnings and government revenues, the outcome of the OPEC meeting and potential impacts it will have on Oil prices will be felt in Nigeria. Other key themes driving global sentiment will revolve around US-China trade tensions, Brexit and lingering concerns over slowing global growth.

 


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Ugo Onwuaso is an ICT enthusiast. He believes technology should be used for general good. He holds a Master of Public Administration (MPA) degree from the Lagos state University.

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Arik Air Resumes Domestic Flights July 8

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Arik Air has announced the resumption of its domestic flights from July 8, following the federal government’s decision to re-open Lagos and Abuja airports for flight operations.

Roy Ilegbodu, Arik Air Chief Executive Officer, disclosed this in a statement in Lagos.

Mr Ilegbodu said that the airline would be operating three daily flights from Lagos to Abuja in the first phase of the restart.

He said further that Port Harcourt would be added to the schedule from July 11, when the Port Harcourt International Airport would be reopened for operations.

“Passengers have been assured of their safety and wellbeing at every stage of their flight.

“The airline has put various measures in place, in line with COVID-19 health protocols, as recommended by the World Health Organisation (WHO), International Civil Aviation Organisation (ICAO) and the Federal Government of Nigeria.

“Passengers are advised to arrive at the airport three hours before scheduled departure time so as to have ample time to undergo all security and health protocols before flight.

“Furthermore, all passengers are required to come properly kitted with their face masks.

“We are ready to fly our esteemed customers again. All preparations have been made to make flying in this extraordinary period in the world safe and pleasurable.

“Arik has worked actively with aviation agencies for an effective re-start of the industry and also ensure that agreed health measures are effectively implemented,” Mr Ilegbodu said.


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Some of the Tools for the Job in Hand

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BY Gregory Kronsten

The principal losers from COVID-19, as with other global viruses and all national disasters, are the poorest members of society. They have fewer, if any savings. They generally live on top of one another. Their income is received in cash because their jobs, if any, are not secure.

 

They depend upon the state for education and health so when the government seizes up for whatever reason, they are left without. We could go on. The lucky ones are the “professionals” who can work from home and adapt to the restrictions imposed by their government.

The authorities in Nigeria have sought to respond with monetary and fiscal stimuli. The headline measure on the monetary side was the rate cut of 100 basis points (bps) announced by the monetary policy committee (MPC) last month.

The impact of rate changes is limited for well-documented reasons, which explains the consensus view (including our own) ahead of the meeting on 28 May that there would be no change. The cut was the signal/message, whatever its effect, that central banks and MPCs across the world have sent in the face of COVID-19 and the ensuing lockdowns.

On 16 April, the CBN governor outlined a package of regulatory and credit measures that was costed at N3.5trn in aggregate. The largest intervention was a N1trn facility for agriculture and manufacturing, of which N93bn had been disbursed for 44 projects one month later. Similarly, for the N100bn healthcare intervention, a total of N10bn had been released.

This is not particularly fast or slow. The CBN has tested procedures to follow. There are not the resources available for the quick fix. In the US the government sent a cheque to each household. In several European countries such as Germany, Switzerland and the UK, banks released government-guaranteed loans for small business after credit checks that could charitably be termed light.

There is little doubt that some of these loans were fraudulent and that many will turn sour. However, governments in advanced economies can take the hit.

The Federal Government of Nigeria’s (FGN) contribution to the fight against COVID-19 is the inclusion of a N500bn COVID-19 crisis intervention fund within the latest version of the 2020 budget, approved by the National Assembly on 11 June.

This fund is to be targeted on improvements to healthcare facilities and a special scheme of public works to employ 770,000 Nigerians. Additionally, the FGN will request funding from the World Bank Group for its Nigeria Centre for Disease Control (NCDC), the country’s leading public health institute, and from a West African disease surveillance vehicle to provide US$100m for the state governments to tackle the impact of COVID-19.

These initiatives will complement programmes financed by the US$5.5bn multilateral borrowing in the budget, of which the IMF has already disbursed US$3.4bn. A further US$290bn has been approved for release by the African Development Bank.

It is far too early to say how much COVID -19 will hit the health of Nigerians, let alone the broader economy. An analysis of the victims elsewhere tells us that the young average age of the population stands in Nigeria’s favour.

We should also cite the possibility that the average temperature counts as another positive. All advantages, and we will add the sizeable domestic investment institutions that will fund most of the FGN’s borrowings, are to be valued since Nigeria has limited resources to fight off COVID-19.

Gregory Kronsten is Head Macroeconomic and Fixed Income Research, FBNQuest


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Subdued Hit from COVID-19, Subdued Rebound Too

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By Gregory Kronsten

The impact of COVID-19 on output in Nigeria is likely to be less severe than on many comparable economies. The IMF’s World Economic Outlook in April saw GDP contraction of -3.4 per cent this year and a rebound of just 2.4 per cent in 2021.

We might think that in the early days of COVID-19 (outside China) the Fund then lacked the materials to make credible projections. Yet earlier this month the World Bank’s Global Economic Prospects came up with a similar narrative (-3.2 per cent in 2020 and 1.7 per cent next year). For the record, FBNQuest Research’s projections are -3.1 per cent and 2.2 per cent respectively.

Official sources in Nigeria have a melancholier take. Earlier this week Sarah Alade, Economic Advisor to the President and Former Central Bank of Nigeria (CBN) Deputy Governor, was quoted as sharing a best-case scenario of -4.4 per cent this year and a worst of more than -8.0 per cent contraction.

The governor has suggested, in contrast, that the damage could be less than indicated by the Fund. The point of interest is less the precise number than the underlying story.

We see several domestic and external reasons for Nigeria’s hit to be less strong than that of other emerging markets (EMs). The World Bank projects contraction of -7.1 per cent in South Africa this year, for example, while its central bank (SARB) forecasts -7.0 per cent.

Agriculture is the largest sector of the Nigerian economy and has a large subsistence component that is insulated from COVID-19. The Nigerian economy as a whole enjoys some protection from global headwinds with the obvious exception of the crude oil price.

Manufacturing produces consumer goods for the domestic market, and the reach of global supply chains into Nigeria is limited. Unlike large EMs such as Brazil and Argentina, it is not an important trading nation. Nor is Nigeria a regional hub for air transport. Unlike South Africa and Kenya, it is not a tourist destination other than for its large diaspora in the holiday season.

These factors should limit the contraction of the economy. That said, all the forecasts mentioned for the year would still result in one of the worst GDP outturns ever for Nigeria. We should remember that the per head figure would be far worse, given the annual growth in the population of 2.8 per cent.

A Lagos-based survey by REACH Technologies has indicated an average decline in incomes of about 30 per cent between March and end of May. Carried out on behalf of FBNQuest, the survey also found that respondents cut their spending on high-value items by about 22 per cent over the same period.

As the hit this year will be weaker than that on its peers, so will the rebound in 2021 be for the same reasons. Ideally Nigeria’s growth trajectory would be closer to its peers because it would then be more incorporated within the global village. The federal government does have the opportunity to make changes to increase that degree of incorporation. We note that the federal finance ministry has been quoted as saying that it has permanently exited gasoline subsidies.

We saw an earlier statement to the same effect from the top brass in the Nigerian National Petroleum Corporation, which has been absorbing the cost below the operational in its accounts. Taking the two together, we are hopeful.

Gregory Kronsten is Head Macroeconomic and Fixed Income Research, FBNQuest


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