Covid-19 and Nigeria’s Economy in H2 2020

In an interview, Muyiwa Oni, Regional Head of Equity Research, West Africa at Stanbic IBTC Bank PLC, addressed the impact of Covid-19 on the Nigerian economy and business environment.

Muyiwa Oni has over 14 years’ experience in the financial services, with research capabilities covering various sectors. He is a renowned thought leader in his field.

Excerpts:

Question: We have witnessed an unusual disruption as presented by COVID-19. What are the significant challenges posed by the pandemic on the Nigerian economy?

The impact of the pandemic on the Nigerian economy has been negative with the economy declining by 6.1% year on year in quarter 2 of 2020, as lockdown measures taken to stem the spread depressed economic activity across the country. To provide some context, the oil sector contracted by 6.6% year on year and 10.1% quarter on quarter, which is the largest contraction since the attack on the country’s Trans-forcados pipeline in 2016. With the exception of agriculture, other key non-oil sectors slumped into near record contractions during the second quarter, as the Covid-19 containment measures significantly disrupted economic activity. The manufacturing, trade and construction sectors contracted by 8.8% year on year, 16.6% year on year and 31.8% year on year respectively, driven by supply chain disruption, and collapse in purchasing power due to job losses and pay cuts.

Nevertheless, the agriculture sector (1.6% year on year), the ICT sector (15.1% year on year) and the financial services and insurance sector (18.5% year on year) recorded positive growth during quarter 2 of 2020. Foreign exchange (FX) liquidity challenges have persisted since early Quarter 2, posing further challenges to the expected recovery in economic growth.

Question: As a country, what are the threats to the chances of investments in 2020?

Beyond the economic dampening impact of Covid-19, economic growth has been weaker in Nigeria post the 2016 recession. We have also seen a steady decline in net FDI and in recent times, a significant decrease in FPI inflows as a result of FX liquidity challenges. A prolonged situation of FX liquidity challenges is likely to keep FPI flows out and also dampened net FDIs considerably. Net FDI inflows have declined to below USD1bn in 2019 vs. a 10-year average of USD4.6bn and USD2bn in 2018. In recent times, the indistinct fiscal and monetary policy direction have restricted investments, and this makes planning for capital projects more challenging. An accelerated pace of execution of investment friendly regulations amid fiscal and structural reforms should reverse this trend.

Question: A number of sectors have thrived despite the pandemic and resulting economic lockdown; while some others, not so much. Among the thriving sectors are banks and telecoms companies. Can you highlight steps to be taken by the hugely affected sectors to enable them bounce back?

A steady reopening of the Nigerian and global economy should improve some of the contraction we saw in Q2 2020. So, as supply chain networks improve with the reopening of borders and further ease of lockdown within and outside the country, we should see steady improvements. The major part of the services sector and their value chains could still take some time to recover as social distancing protocols are still required. Ultimately, full recovery only seems sure after a global vaccine is found to eradicate the virus. However, beyond the challenges from the lockdown, purchasing power of Nigerians continue to decline which is a challenge for manufacturing companies as they are unable to increase price prices despite levating imput costs. Further investments in infrastructure and conducive regulatory environment should improve the operating environment in these sectors and hopefully spur growth.  

Question: There has been a significant rise in the number of infected persons and the expected time for the development of an appropriate vaccine is uncertain. What does this mean to businesses, especially SMEs? Are there steps the Nigerian Government should be taking to hasten economic recovery?

The timing of global availability of an effective vaccine can be as far out as 18 months, hence it is clear that we will have to live with covid-19 for a while. Hence it is understandable to see governments around the world continue to set up measures by which sectors and business can operate in a safe and healthy manner that limits the escalation of infections. We have seen the same situation in Nigeria whereby Government has phased the opening of sectors to give time to prepare for safe reopening. From phased opening of land boarders and airports to hotels, bars and restaurants.  

The government launched a NGN2.3tr economic sustainability plan in Jun in a bid to provide some stimulus and limit the economic damage of the pandemic. Furthermore, this accounts for 1.5% of GDP vs. 40% for developed countries such as Japan and the US. Even though monetary policy stimulus should provide ample liquidity and keep interest rates low so there will be excess money in circulation to allow broad-based economic growth, we believe the pace of execution is still being hampered by the lack of fiscal space and the inability to enact a few fiscal and structural reforms.

Question: A recap of Stanbic IBTC’s August 2020 private sector Purchasing Manager’s Index (PMI) recorded growth for the second successive month, to 54.6 from 50.4 in July and 46.4 in June. What does this mean to the man on the street?

So, from a top down standpoint, it implies that the Nigerian economy returned to expansionary territory in July vs. the June reading. However when we consider the current lockdown measures in the country, one can argue that beyond the telecoms sector, the services sector in general is still in contraction mode and is likely to remain in contraction territory till the end of the year in the absence of a vaccine, as social distancing measures dampens economic activity in the sector. A big positive from the PMI reading was stability in employment, although excess capacity remained as a result of the severe declines in new business during the second quarter. This is positive, showing stability from four successive month on month decline in employment as at the July PMI reading. Hence the job market remains soft, implying difficulty for the man on the street despite improving output.  

Question: What’s your assessment of the informal sector? How can it navigate these challenging and uncertain times?

The Nigerian economy is at least 65% informal and that basically speaks to the man on the street. In truth, these times will be tough for the informal sector but can also present an opportunity to learn/re-learn new skills to be able to take advantages of opportunities across different sectors as the economy opens up more.

Question: There has been an unprecedented rise in the rate of unemployment, as a result of the contraction in economic activities. What can be done to turn this around?

As economic activity improves, we should see an improvement in employment rate. Beyond the current Marco weakness, unemployment levels have remained elevated, reflecting the effect of low economic growth over the past five years. Implementation of measures highlighted in previous points should improve the investments outlook of Nigeria and increase employment opportunities and investments growth.

Question: Now that we are in this position, how soon can we expect a comeback?

This depends on what “comeback” refers to. If comeback means a return to positive growth, it is likely that happens in 2021 but we still don’t think the economy will grow by more than 1% next year. The current FX illiquidity challenges being faced by corporates will continue to dampen the level of recovery expected. The overwhelming concern remains the fact that even before the pandemic, economic growth in Nigeria was very low and even below average population growth rate. That is not sustainable and some of the measures already highlighted above could help correct that imbalance.