Lukman Otunuga,
Senior
Research Analyst at FXTM
Africa’s
largest economy commenced the final quarter by facing some of the biggest
protests witnessed since military rule ended in 1999.
The protests boiled over during an already turbulent and rocky time not in the local but global economy. The cumulative effects of the COVID-19 pandemic lockdowns and other restrictions triggered a downturn together with a sharp increase in public debt. Given the resulting uncertainty from the protests, financial markets were spooked once again with the strong knock-on effects hitting Nigeria’s stock market and international bond while further clouding its economic outlook.
Before
this development, the International Monetary Fund (IMF) projected a 4.3 percent
contraction in GDP because of COVID-19. Depressed Oil prices enduring a
prolonged lapse in demand has not helped matters with the aftermath of the
protests projected to cost over N700-billion Naira in output – something that
may drag on real GDP.
Inflation becoming a cause for concern
Nigeria
has been scarred by three consecutive quarters of rising inflationary
pressures, shaky economic fundamentals, Dollar scarcity and low Oil prices. A
24-hour curfew imposed on Lagos worsened the outlook for the already fragile
economic landscape and local businesses which bore the marks of deep wounds
from COVID-19.
Inflation
rose for 13 months straight, hitting 13.71 percent in September. Price
increases were seen mainly in medical treatment, electricity, food supplies and
passenger air travel but so far have not impacted the Oil industry. This is a
welcome development given that Oil accounts for over 90 percent of export
earnings and 70 percent of government revenues.
Banks clamp down on speculation
Focusing
on the Naira, the banking system clamped down on speculation and limited
foreign exchange transactions by individuals and corporations. The intention
was to stabilise the currency which was at the centre of a perfect storm of low
Oil prices, Dollar scarcity and a weaker economy. The results of the foreign
currency restrictions in the banking sector remain to be seen.
External pressures
likely to influence outlook
Presidential
elections in the US added to the uncertainty prevailing around Nigeria’s
economic outlook, especially when it comes to Oil prices. According to national
polls, Democrat challenger Joe Biden is leading the incumbent Donald Trump but
electoral polls are the kind of forecast that can change last minute. Whatever
the political race’s outcome, the result is critical for the US and global
economy and may heavily influence the financial markets.
When it comes to Oil, Trump’s policy of backing the US Shale industry and ramping up US Oil production may fall by the wayside in the case that Biden wins the election. In turn, this could pressure global Oil prices and send them even lower. The downside scenario may weigh on Nigeria’s economy in spite of its efforts to diversify and reduce its reliance on the Oil industry.
A
Trump win may increase confidence in the Oil markets in the short term but in
the medium term, COVID-19 is still the main problem for Oil demand. OPEC
forecasts lingering effects of COVID-19 on the Oil markets and in the long
term, sees demand for the fossil fuel reduced by green and renewable energy
sources like hydrogen.
Nonetheless,
Oil will continue to have the largest share of the energy mix until 1945,
according to OPEC.
In
summary, Nigeria’s economy faces unprecedented headwinds in the fourth quarter
and in the first quarter of 2021. The challenge is to get through the storm of
a weakened economy facing internal and external threats and reach a place where
there is smoother sailing. Now more than ever, it is important to keep
diversifying the economy and make provisions for a calmer future where Nigeria
can recover from its recent trials.
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