July 9, 2021/CSL Research
The Nigerian economy expanded by o.5% in Q1 2021 from 0.1% in Q4 2020. The positive output was mainly driven by the non-oil sector (+0.8%), while OPEC’s production cut commitments led to a contraction in the oil sector (-2.2%). We expect the GDP output gap to narrow going forward, with the economy projected to grow by 2.4% in 2021.
Nigeria’s unemployment rate rose to 33.3% in Q4 2020 (Q3 2020: 27.1%), the highest since at least 1980. This trend is likely to persist due to the pre-existing weak infrastructure of the country and the weakened macro-economic environment. Inflation moderated to 17.9% in May, the second consecutive month of decline. This was supported by the high base from the corresponding period last year. Over the second half of the year, inflation is projected to further taper, averaging 16.6% (H1 2021: 17.6%).
In the first half of the year, Naira was relatively stable at the I&E window, but the parallel market rate scaled to an all-time high. Despite the rebound in oil prices, reserve continues to decline, reflecting increased CBN’s FX interventions and low impetus for new foreign inflow. Naira remains overvalued by about 9%, but a large devaluation is unlikely, as we expect liquidity to improve, emanating from a likely IMF SDR allocation of US$3bn and a likely issuance of Eurobond.
Over the first half of the year, the MPC held the rate constant at 11.5%, giving the elevated output gap and the poor transmission of rate adjustments to curb inflation, which remains supply sided. We see a likelihood of a rate hike of 50bps in H2. We project the fiscal deficit of N6.5trn (5% of GDP) in 2021, on the back of increasing recurrent expenditure and elevated debt servicing.
Overview of the equities market in H1 2021
The Nigerian Equities Market continued its downtrend into Q2 2021, as the NSE ASI declined further, down 2.91% to 37,907.28pts. As of the end of June 2021, the NGSE ASI index was down 5.87%. The bearish trend in H1 was driven largely by losses in the Industrials -8.02%, and Banks -6.76%. On the flipside, the Oil & Gas, Insurance, and the Consumer goods sectors were up 38.41%, 7.57% and 4.80% respectively in the period. Daily average value declined by 71.09%, mainly due to reduced participation from both domestic and foreign portfolio investors. Reversal in fixed income yields at primary auctions which began in Q1 continued in Q2, triggering an upward repricing of yields in the secondary market. Consequently, investors
continued to reduce their equity exposure to take advantage of yields at the short end of the curve. As of 30 June 2021, daily total transactions in volume at the nation’s bourse was down 70.92% from N710,706,432 as of 31 December 2020 to N206,843,040 as of 30 June 2021.
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