Macroeconomic Report & Economic Updates

Between January and February, Nigeria’s external reserves declined from US$37.2 billion to $35.5 billion, its lowest in over 2 years1. Although the reserve level remains above the $30 billion benchmark set by the Central Bank of Nigeria (CBN)2, the reserves have depleted considerably by 2.03% month-on-month. Since the beginning of the year, external reserves have steadily declined, falling by a total of $2.38 billion in 2020. The recent decline stems from a fall in crude oil prices occasioned by a slowdown in global economic activities following the Corona virus outbreak. Perhaps in reaction to the declining external reserves, CBN has decided to suspend the multiple exchange window policy which was hitherto used to determine the value of the Naira. The decision to collapse the multiple window rates is a step in the right direction as this will forestall some inherent demerits in using different rates which include currency roundtripping, non-reflective production costs, rent-seeking and corruption.

The Central Bank of Nigeria (CBN) has taken steps to ensure financial stability amid the COVID-19 pandemic. The steps include a reduction of interest rates for all CBN interventions from 9% to 5%, the creation of a N50 billion credit facility for households and SMEs impacted by the pandemic, and N100 billion in credit support to the healthcare industry3. Other policy actions were aimed at maintaining funding levels within deposit money banks in order to sustain lending capacity to the private sector. Overall, the CBN has committed over N1 trillion to support all critical sectors, which could help buffer the effect of a global recession4. While the fiscal stimulus package is in line with global best practice, it is critical to ensure that these interventions are not exploited. For instance, prospective beneficiaries may misconstrue these loans as grants; or may be unable to repay the loans leading to an enormous bad debt burden on the government. In addition, the extent to which these loans will reach certain businesses affected by the stay-at-home policy such as food vendors and artisans is debatable. However, MSMEs can utilize these interventions to boost local manufacturing and achieve import substitution in these industries.

Foreign capital imported to Nigeria declined by 32% from US$5.6 billion to US$3.8 billion between Q3 and Q4 2019, indicating a decline for the third consecutive quarter1. The decline during the period was driven by a fall in two components of foreign capital imports as portfolio investment and other investment declined by 37.7% and 30.5% respectively, while foreign direct investment increased by 24.5%. In 2019, the United Kingdom, the United States, and South Africa emerged as the top-three countries importing the highest capital while Lagos and Abuja remain the top destinations within the country. By sector, banking (31.92%), financing (26.18%) and shares (22.24%) emerge as the top sectors. Despite the decline in capital imports between Q3 and Q4 2019, there has been a 42.7% increase in the total value of capital imported between 2018 and 2019. Taking into consideration the impact of the COVID-19 pandemic on the global economy due to the decline in demand and widespread uncertainty, a further decline in foreign capital inflows is expected going forward.

In its worst performance since the 2008 financial crisis, the NSE All-Share Index and market capitalization depreciated by 13.49% to close the week at 22,733.35 basis points and N11.847 trillion respectively1. The decline in the market index is underpinned by the Saudi Arabia-Russia oil price war following Russia’s failure to cut oil supplies as well as the coronavirus pandemic. The NSE Banking Index, NSE Consumer Goods Index, and NSE Premium Index were among the worst hit as they fell by 26.2%, 21.7% and 16.1% respectively. Due to the high global connectivity and the dampened demand in developed countries as a result of the pandemic, the downslide in the Nigerian market is similar to ongoing trends in the markets of other African countries, Asia, Europe and North America; and is expected to continue until the risk factors are addressed. While the uncertainty has caused many investors to sell off risky securities such as stock, investors should rather take advantage of the low stock prices to increase their investments as the bearish trend in the market is driven by temporary risk factors and not a fall in companies’ fundamentals.

The Nigerian Stock Exchange All Share Index and market capitalisation declined by 4.28% to close the week at 26,216.46 and N13.658 trillion respectively4. This rise was primarily driven by the Financial Services industry, particularly Guaranty Trust Bank Plc, United Bank for Africa Plc, and Zenith Bank Plc, which comprised 82% of the total trade volume valued at N17.2 billion. Despite this, the top six price gainers were mostly non-financial services firms including May & Baker Nigeria, Ekocorp, Neimeth International Pharmaceuticals, BUA Cement, and Ardova Plc. As the equities prices continue to drop, the dividend yields will remain attractive not only to local investors but also to global portfolio managers which will drive improvements in market activities.