By Charles Abuede
- Amidst increasing economic risks that could raise Nigeria’s risk profile in 2021, which sector has the bright spot?
A new study by Agusto & Co, a research, credit ratings and credit risk management firm, says that amidst the myriad risks from the global health pandemic, which could increase economic risks globally, opportunities abound for Nigeria. The study seeks to examine some of the major themes which will shape the economic landscape of Nigeria in 2021 on a macro level.
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The report, titled ‘2021: The year of the vaccine’, noted that despite the obvious weaknesses in testing and data management which would have led to lower numbers in covid-19 cases in Nigeria, the second wave of the pandemic is challenging the pliability of the fragile health system especially in Lagos, which is the epicentre. The report further revealed that risks still abound in 3 ways for Nigeria despite her lower than expected numbers.
Firstly, Nigeria remains significantly vulnerable to the economic contagion arising from a weak global environment. Secondly, weaknesses in the global macro environment pose significant downsides to the crude oil market which further exposes Nigeria’s vulnerabilities. Thirdly, the discovery of new strains of the virus also portends greater systemic risks to the broader economy and particularly to the health sector as the management of COVID-19 undermines the response to other ailments and the healthcare needs of the populace. However, Agusto & Co believes that the geopolitical complexities with sourcing the vaccines places Nigeria and the rest of Africa on the backfoot and a mass vaccination programme capable of creating herd immunity may not occur in Nigeria in all of 2021.
Another major macro theme to shape Nigeria’s economy in 2021 is the country’s average inflation rate which has ranged between 11 per cent and 12 per cent over the past two decades but currently seats above 15 per cent as at the close of 2020. This indicates that Nigeria is a high-inflationary country. However, Agusto predicts that Nigeria’s inflation will surpass this long-term average to about 14 per cent – 15 per cent and further exert more pressure on the naira. The credit rating firm also believes Nigeria’s high inflation reflects the country’s weak economic fundamentals and needs to be reined to set the country on the path of long-term prosperity.
The exchange rate, according to Agusto & Co, will be another major theme to shape Nigeria’s economy in 2021. This is premised on the fact that the local currency currently trades at an unhealthy arbitrage of N80 to N100 to the dollar between the parallel and the official market as monetary authorities struggle to maintain stability in the foreign exchange market. With naira inflation projected to be stubbornly stuck above 15 per cent in 2021 and dollar inflation at a benign 2 per cent, the odds against the naira indicate an inflation rate differential of about 14 per cent between the naira and dollar.
The major issue is the demand-supply dynamics in the foreign exchange market. Nigeria has entered a period of low oil and gas export revenues. In 2021, we project about $30 billion in oil & gas exports, down 20 per cent from about $36 billion in 2020. With net foreign investment also likely to be negative in 2021 due to the demand management strategy of the Central Bank, there will be significant pressure on reserves and the naira versus US dollar exchange rates.
Sectors to watch for the bright spots
The credit risk management firm highlighted major sectors to watch out for to shine the brightest spots in the year amidst the increasing economic risks posed by the pandemic to raise Nigeria’s risk profile in 2021. According to Agusto, the sectors with opportunities in 2021 include:
- The data segment of the telecommunication sector will continue to see an upside in 2021 significantly as the work from home trends continues. The firm projects double digit growth of about 10% in the telecommunications sector GDP in 2021. Also, the increased adoption of virtual engagements for business meetings and conferences, schooling, and even social gatherings, in addition to increased social media consumption will also drive growth in the sector.
- The Nigerian Fintech space will also witness an upside as more consumers take to digital payment solutions. In 2021, it is anticipated that the value of e-payment transactions will surpass the N100 trillion mark to become bigger than the country’s GDP.
- Also, Agusto & Co is of the belief that in 2021, central bank’s reforms in the foreign exchange market, which now permits recipients of diaspora remittances to access their funds in foreign currency, will increase the competitiveness of the official foreign exchange market against the parallel market.
- With risk free yields of treasuries currently at low levels of less than 3 per cent, the research and credit rating firm project significant growth in debt market offerings by corporates at both the short end of the market (in commercial papers) and in long-term maturities via corporate bonds and accepting the belief that corporate debt markets will become more attractive especially for firms that can issue investment grade debt instruments. Basically, in 2021, over N1 trillion in corporate debt instruments will be raised, representing a 10 per cent boost from the N910 billion raised in 2020.
Conclusively, Agusto & Co. in its study said that the winners in 2021 will be firms and individuals who learn to navigate volatility with greater stability. However, it assumes that the year will throw up momentous volatility that will call for resilience to withstand the shocks and on the other end, foresights to help construct paths to success even amidst uncertainty.