The Nigeria Economy In 2020

Since 2015, Nigeria’s economy has struggled. During the five years ended 2019, real output grew by 1.2% p.a. while population grew by 2.4% p.a. This means that average income per person fell from US$3,000 in 2014 to US$2,000 in 2019. Unemployment rate increased from 6% in 2014 to about 23% in 2019 and just under half of the work force is either unemployed or underemployed.

Will the unemployment situation improve in 2020? Will the Nigerian economy experience strong growth in 2020?

THE NIGERIAN ECONOMY IN 2020
The external sector
Nigeria’s oil export revenues will be between US$50 billion and US$60 billion in 2020. Workers’ remittances and other non-oil sources will contribute another US$30-35 billion to dollar inflows into the economy. Total USD inflows will therefore be between US$80-95 billion.

The Central Bank of Nigeria (CBN) will continue to peg the NGN/USD exchange rate at around 360/1. This means that the CBN has to continue to meet demand for USD at this rate and demand will grow. We estimate that, even with CBN management, the demand for USD (to pay for goods, services, interest, dividends etc.) will be between USD90-95 billion in 2020. This means that Nigeria’s current account may slip into negative in 2020.

Net foreign investment into Nigeria has averaged about US$2 billion per annum during the past five years. This includes average foreign currency (FCY) borrowing of US$4 billion per annum. We expect the FGN to borrow about US$5 billion in 2020 to partly finance her budget deficit but net foreign investment will remain in the region of USD2 billion. 

Net savers in Nigeria are finding it difficult to find local investment outlets that will give returns higher than the long-term rate of inflation of 12%; some also doubt the ability of the CBN to sustain the NGN/USD exchange rate peg at 360/1 for a fourth year when there is a 10% difference between NGN inflation and USD inflation.

They may seek to move their savings into FCY increasing demand for USD thereby putting further pressure on reserves and exchange rates.

The finances of the FGN
The 2020 Budget of the FGN has been signed into law. This means that the government will have a full year to implement its capital budget compared to recent years when budgets were signed into law mid-year. Total federation account revenue for 2020 will be about NGN10 trillion and the FGN’s share will be about NGN4.2 trillion. FGN’s total revenue (including independent and other revenue) will be about NGN4.8 trillion but she projects NGN7.6 trillion. Historically, actual revenues have been about 60% of projections.

The FGN plans to spend NGN9.4 trillion in 2020, but we doubt her ability to fund this level of spending as this would mean a budget deficit of around NGN4.6 trillion. As usual, the FGN will meet its obligatory spending (interest payments, statutory transfers, payroll and some pensions) totaling about NGN6.0 trillion. We expect aggregate spending of about NGN8.2 trillion with capital expenditure of about NGN1.5 trillion. 

This means a budget deficit of about NGN3.4 trillion and this will be financed with about US$5 billion foreign currency borrowing and at least NGN1.5 trillion of domestic borrowing. However, we believe that the FGN may struggle to source this level of domestic borrowing if the returns on its short-term debt instruments remain significantly below the rate of inflation.

Money and banking
Inflation will remain around the long-term rate of 12% as demand for goods and services continues to outstrip supply. If the currency depreciates, inflation will be higher.

Currently, banks are holding mandatory cash and other non-interest bearing reserves amounting to 30% of their LCY deposits with the CBN. Normally, this ratio is 5-10% of deposits. The CBN will not normalize cash reserves in 2020 and this will continue to constrain net interest income of banks and their ability to lend to businesses and households.

The banking industry’s after-tax return on assets will be about 2.5% in 2020 and after-tax return on equity will be about 18% compared to our estimated cost of equity of 27%. This means that the stocks of most banks will continue to trade at a discount relative to their book values.

Real Sector - Businesses
Key businesses in the real sector have struggled to grow their sales in real terms. This will continue into 2020 because wages have not grown in real terms. Operating profit margins will remain weak but will not deteriorate. Currency depreciation, if any, will reduce profit attributable to shareholders as a number of these companies have net liabilities in hard currencies.

Leverage is low and the use of interest bearing debt to finance assets is falling. Overall, the financial condition of key real sector businesses will remain good but profitability will remain weak.

Real Sector - Households
Nigeria’s population will grow by 5 million in 2020. Real output per person per year will be NGN360 thousand compared to NGN382 thousand in 2014.

Real output will grow by about 3.0% while population will grow by 2.4%. One and a half to two million people will enter the job market but the economy is too weak to create jobs for all these people, therefore unemployment will continue to rise.

CONCLUSIONS
Oil export revenue will not grow significantly in 2020 therefore ability to grow USD supply to the manufacturing sector will be constrained. Net foreign investment will remain in the region of USD2 billion per year. The ability of the CBN to sustain the NGN/USD exchange rate at 360/1 will be tested. The FGN will not be able to fund its capital budget in full but this year’s funding will be significantly higher than last year’s with some benefits to the construction and related sectors. The CBN will not ease monetary policy as it pursues its goal of stable exchange rates. The ability of banks to lend to businesses and households will remain constrained by above normal cash reserve requirements. Real GDP growth will remain tepid and unemployment will continue to rise.

The Finance Bill which is now an act includes some positive measures aimed at boosting non-oil taxes and stimulating growth in the non-oil sector but government needs to partner more with the private sector (particularly on railways, electric power and oil & gas) if she wants to deliver higher growth rates and reduce unemployment.

Credit: This article was written by Bode Agusto