April 12, 2022/United Capital Research
Impact on Global Economy
Event: Russia’s “special military operations” in Ukraine
Sevens weeks ago, on 24th February, Russian President Vladimir Putin ordered a “special military operation” in Ukraine. Following Russia’s invasion of Ukraine, western allies of Ukraine have moved to aggressively punish Russia by imposing economic-destructive sanctions to isolate the Russian economy. Sanctions imposed include freezing Russian central bank assets and significant state-owned banks’ assets abroad, partial access restriction to the international payments system SWIFT, a hold on the Germany-Russian gas pipeline project, and a ban on Russian oil and non-oil products in the U.S market, among others. However, the responses from western allies have stopped short of direct military interventions against Russia as it seeks to avoid a direct altercation that could spark a world war. Both parties have made several peace talks and ceasefire negotiations; however, the possibility of a diplomatic resolution is far from possible in the near term. Thus, we seek to evaluate the impact of a prolonged war on the global economy, domestic economy, trade, commodities, and financial markets.
Implications for Nigeria
Macroeconomic Impact: Inflation and fiscal imbalance are major concerns
Nigeria appears to be one of several countries likely to feel the minimal impact of the crisis on economic activities. The biggest concern for Nigeria will be the impact of the crisis on inflation, trade balance, Fiscal balance, and FX liquidity. The implications for economic growth for 2022 are likely to be muted or marginal at most. Although higher energy prices could be a key concern for the manufacturing sector while higher inflation could weaken consumer purchasing power, we expect key growth drivers (Agriculture & Services) to remain upbeat amidst the crisis. Thus, we retain our GDP forecast of 2.1% for 2022.
We note that Nigerians should be set for another year of unabating an uptick in prices. First, energy prices are projected to be higher if the crude oil price remains at elevated levels (above $90.0/bbl). However, the impact on energy cost is likely to be moderate as petrol prices remain regulated with fuel subsidies still in place. The effect will be mainly on diesel prices, gas prices and other energy sources. In addition to energy cost pressures, we are likely to see the impact on food prices over the next couple of months. Prices of raw agricultural inputs like Wheat, Barley, and Corn are expected to sustain the uptrend, which would impact the prices of items like flour (and consequently pastries, bread etc.), fertilisers etc. Lastly, we expect to see the pass-through impact of imported inflation given the sizeable portion of imported goods consumed in Nigeria.
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