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Macro-Economic Update - August 2020

• FX sales to ease pressure on parallel market - The paucity of flows at the IEW continued into August as foreign investors sentiment remained soured. Uncertainties surrounding Nigeria’s economic growth and FX policy continued to keep investors at bay. Precisely, offshore inflows so far in August currently prints at a meagre $65 million (-21% MoM). Meanwhile, inflows from local corporates continued to hold steady printing at $312 million (+62% MoM). Overall, inflows (ex CBN) currently prints at $429 million (+41% MoM). On the other hand, outflows expanded by 69% MoM to $407 million, but still remains low compared to historical period. On balance, balance of flows printed at a net inflow of $21 million compared to a net outflow of $64 million in July. Furthermore, the CBN made no sale at the IEW for the fifth consecutive month. Reflecting the paucity of flows (oil and non-oil inflow) together with FX sales at other segments, the reserves depleted by $214.9 million to $35.7billion. Meanwhile, rates at both the IEW and parallel market recorded some gains over the month, appreciating by 0.82% MoM and 2.5% MoM respectively.
• Going forward, with the recent update of lower FX sales to BDCs, we have modelled FX sales to BDCs amounting to $240 million in September and October respectively while we expect a pickup to $600 million on average in November and December. This adjustment takes our reserve expectation to $32.4 billion (previously $29 billion) by year end excluding inflow from World Bank. Given our expected level of reserve relative to CBN’s proclaimed comfort level of $30 billion, we see limited downside in FX rates over the rest of the year. We expect rate at the NAFEX to close the year between N380/$1 – N400/$1 while rates at the parallel close the year between N400/$1 – N450/$1 as resumption of sales to BDCs ease the pressure in the parallel market.

 

• 2020 GDP: The storm may be over, but the rubbles remain - The Nigerian economy recorded the steepest contraction in over 9 years with Q2 2020 GDP printing at -6.10% YoY. This was driven by contractions in both oil and non-oil sector. The oil sector contracted by 6.6% YoY relative to 5.1% growth in Q1 2020, owing to a moderation in crude oil production which printed at 1.81mbpd (vs Q1 2020 crude oil production of 2.07mbpd). Meanwhile, the non-oil sector declined by 6.1% YoY (vs Q1 2020: 1.5% YoY). Dissecting the components in the non-oil sector revealed all sectors contracted save the Agric sector which expanded by 1.58% YoY (Q1 2020: 2.2% YoY). We believe movement restrictions and below-average access to inputs, amongst other factors curtailed growth in agricultural activities during the period under review. On the other hand, disruption in production value chain - a fall out of the pandemic – as well as devaluation of the Naira, weighed heavily across the manufacturing (Q2 2020: -8.8% YoY vs Q1 2020: 0.4% YoY) and Trade (Q2 2020: -16.6% YoY vs Q1 2020: -2.8% YoY) sectors.  Elsewhere, services sector contracted by 2.61% YoY for the first time since Q4 17 as declines in Transport (-49.2% YoY), Real Estate (-22% YoY) and other services subsectors more than outweighed growth in ICT (+18.1% YoY) – the highest in over 9 years and Finance (+18.5% YoY) subsectors. Notably, increased use of internet services during and after the lockdown spurred growth in ICT.
• Going further into the year, while we believe the worst may be over, we expect Nigeria to test the recessionary waters in 2020 as we mentioned in our H2 2020 NSR report ().  Since the gradual reopening of the economy, economic activities have shown signs of improvement. The PMI data which tracks the level of business activities showed an improvement compared to the prior months.  Manufacturing PMI for August printed at 48.9pts (July 2020: 44.9pts) while the Non-manufacturing PMI printed at 44.7pts (vs 43.3 pts in July 2020).  Albeit, we expect a contraction in the oil and non-oil sector relative to 2019. Overall, we revise our FY 2020 growth estimate downwards to a 3.05% YoY contraction (previously -1.6% YoY). Albeit, our estimate is less pessimistic than the IMF forecast of -5.4% contraction. In H1 2020 where we had the lockdown, the economy contracted by 2.12% YoY. To meetup with IMF’s GDP forecast  of -5.4%, the economy will have to contract by -8.68% in H2 2020 which we believe has a low probability of occurring due to pick up in economic activities. For Q3 2020, we expect a contraction in GDP to -5.42% YoY driven by a contraction in the oil sector (-21.6% YoY with crude oil production estimate of 1.6mbpd including condensates) and shrinkage in non-oil sector by 3.7% YoY.