Senior Research Analyst at FXTM
Africa’s
largest economy expanded by 1.87 percent in the first quarter of 2020, bucking
the global trend of recessions triggered by the coronavirus pandemic. For
comparison’s sake, the performance represented a contraction by 0.68 percent
compared to the 2.55 percent growth rate recorded in the Q4 2019 and 0.23
percent, when compared to 2.10 percent growth witnessed in Q1 2019.
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What does this
performance mean?
Nigeria
rolled with a succession of devastating punches in the first quarter. The
country’s resilience against tumbling Oil prices and the negative impacts of
COVID-19 not only beats expectations, it wins a round during which other larger
and developed economies lost growth and confidence on a massive scale.
The US
economy contracted by minus 5.0 percent while GDP in the UK shrank by two
percent. In the Eurozone, the economy declined by minus 3.8 percent. Tragically,
all those regions had high infection and mortality rates along with forced and
extensive lockdowns.
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While
Nigeria has not escaped the spread of coronavirus, at 8,915 infected and 259
deaths at the time of writing, the virus’ economic impacts were constrained
relative to other regions. Could the worst be over for Nigeria as global Oil
prices recover and economies relax lockdown measures amid gigantic stimulus
from central banks? As the worldwide economy slowly gets back on its feet,
Nigeria could be strongly positioned for a quicker-than-expected recovery, at
least on the basis of Q1 data.
On the
downside, uncertainty abounds. The negative impacts of the coronavirus
pandemic, low Oil prices and slowing global growth may be felt across the
economy for the rest of the year. The Naira remains exposed to negative shocks,
foreign exchange reserves have fallen to $33.4 billion and inflation has jumped
to 12.34 percent in April 2020, the highest since April 2018, meaning the
Central Bank of Nigeria may have little room for maneuver.
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Concerns
over a coronavirus driven economic recession has prompted the CBN to reduce the
Monetary Policy Rate (MPR) to 12.5 per cent, from 13.5 per cent in May.
Although lower rates may promote economic growth, this may come at the expense
of rising inflationary pressures. Given the current uncertainty around Oil
prices, the priority may be to boost consumption and continue diversifying the
economy. Oil prices going sub-zero earlier this year should be another major
wakeup call about the importance of diversifying away from Oil dependence to
other sustainable sources of growth.
Economic
data over the coming weeks will be critical in assessing whether Nigeria was
able to weather the tornado of domestic and external risks in Q1. I’m watching
for data from the banking sector on credit reports in June. Inflation and
labour force numbers are also set for release and are significant benchmarks of
economic health. Any serious deterioration or unexpected strengths in these
numbers could set the tone for the second half of the year.
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The
country’s outlook will also be affected by developments around the 2020 state
budget which was already revised down to 10.52 trillion Naira. It’s important
for investors to avoid either irrational euphoria or unreasonable negativity
under the circumstances. While the Q1 GDP data may offer some semblance of
hope, especially in comparison to other major economies, Nigeria is certainly
not out of the woods yet.
Fears
around a second wave of coronavirus rattling the global economy may put Oil
prices underwater again, rekindling recession fears. Then again, as the virus
curves flatten in key economies, growth and recovery are just around the
corner.
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In
conclusion, one thing is for sure; any recovery scenario would be supported by
Nigeria’s resilience and growing economic diversification.
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