MON 30 AUG, 2021-theGBJournal-Setting the weak 2Q21 GDP numbers aside- which, according to EFG Hermes Head of Macro Economy, Mohamed Abu Basha- confirms Nigeria’s weak recovery and growth, focus was directed to the upcoming Eurobond issuance – planned for September – as it is a potential trigger for much-awaited FX adjustment.
The upcoming Eurobond issuance, likely to be around USD3 to 5 billion, would potential mean that a USD7 billion reserve boost would be available to the CBN.
‘’We anticipate the Central Bank of Nigeria (CBN) to use this by devaluing the Naira to NGN430/440, pushing the parallel rates (currently trading at NGN522) to converge to the said range, according to Abu Basha.
Abu Basha expects the SDR allocation and Eurobond to provide the valuable ammunition, therefore enabling the CBN to bring FX markets under control.
The SDR allocation boosted reserves by the equivalent of USD3.3bn.
‘’We believe the devaluation, which would still add some inflationary pressure, should be accompanied by a tightening of monetary policy in order to bring interest rates to levels that are attractive to foreign investors. Tightening of the monetary policy will therefore be a key indication, in our view, as to how serious CBN is in resolving the country’s FX shortages.’’
Meanwhile, Nigeria’s 2Q21 GDP outturn according to EFG Hermes, presented a pale recovery from the pandemic and was largely in line with their projection.
Headline GDP grew 5.0% Y-o-Y, driven primarily by the low base effect after the economy contracted 6.1% in 2Q20 at the onset of the pandemic, while the non-oil economy grew 6.7% in 2Q21 vs. a contraction of 6.1% in 2Q20.
The key agriculture sector (25% of GDP and largest employer) grew an anemic 1.3%, the lowest in nearly three years, while the oil sector remained in contractionary mode, largely due to disruption in the Niger Delta, the country’s key oil production area, as well as OPEC’s production quotas.
Furthermore, the recovery in other key sectors, including manufacturing and construction, was relatively muted considering the extent of contractions suffered in the same quarter last year. The sectors that saw good recoveries were mostly trade and transport.
The underwhelming GDP outturn comes as no surprise, according to EFG Hermes, with the economy suffering from chronic structural imbalances, led primarily by lack of fiscal impulse, elevated inflation (which weighed heavily on consumers’ purchasing power, especially as it was food-price driven) and FX shortages.
‘’The lack of improvement in the latter, despite the sharp rise in oil prices YTD, is particularly concerning (we flagged this in a previous report). We maintain our projection of 2.5% real GDP growth in 2021 and expect c2.5% GDP growth in 2H21.
With less than 1% of the population fully vaccinated, the country remains prone to any surge in COVID-19 infection rates, hence any recovery remains subject to downside risks.’’
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