Like a good action movie, 2020 never quite let up. From a pandemic, global recession, record breaking bushfires on two continents, locust infestation and many more, 2020 changed the world in ways we will remember for years to come. The COVID-19 pandemic is a significant part of these changes, reshaping the politics, economy, and healthcare of every country.
As we put finishing touches to our review of 2020 and our forecast of 2021, we did a review of our key predictions from last year and how these have panned out…
Expect slightly better growth in 2020. The World Bank and the International Monetary Fund (IMF) have respectively projected that the global economy will grow at 2.6% and 3% in 2019. If so, this will mean a slight reduction from 2018 growth figures. The culprits of this slow growth include rising trade and geopolitical tensions, which have increased uncertainty about the future of the global trading system and international cooperation, thereby taking a toll on business confidence and investment decisions. The direction of global growth in 2020 will, therefore, be heavily reliant on the outcome of US-China trade talks and Brexit, and we foresee that because Donald Trump is facing re-election in 2020, he will be more open to dialogue with China thus opening the way for more global growth in 2020. Like pretty much every analyst out there, we got this wrong. The coronavirus saw to that.
Expect volatile oil prices in 2020 as OPEC struggles to rein in production. OPEC has forecast that oil process prices may dip against the backdrop of US-China trade war negotiations. With the likes of Nigeria and Iraq still overproducing their quotas, OPEC will rely on Saudi Arabia to keep a lid on production. The Saudis have continuously expressed their desire to see oil prices around $65, but at these prices, US Shale producers will be incentivised to crank up their own production, which will again tip the balance on the supply side and exert downward pressure on prices. Considering the US entering into the net exporter markets for the first time in decades, Trump’s economic outlook and the slowdown in China mirroring a global slowdown, it is likely that oil prices will be fixed at $40 by the end of 2020. Correct. Whilst oil price dipped below $20 during the year, it is on track to finish the year above $40.
As for Nigeria, we expect 2020 growth to beat the World Bank’s forecast and come in about 2.4% on the back of improved oil revenues. We believe that Nigeria would be stuck in a low-growth cycle for the next few years unless more critical reforms are implemented. A high growth rate will require attracting targeted investment in identified growth-driving sectors like oil and gas, agriculture, manufacturing, and telecoms, all of which are unlikely. Wrong, COVID-19.
The government will struggle to meet its 2020 revenue targets. The Buhari administration has proposed a ₦10.33 trillion budget (+20%y/y) due to higher revenue target from Tax and Customs Duty. The government will likely struggle to meet its revenue targets like in recent years. For example, only 47% of the revenue target was achieved in 2018, and for the first half of 2019, only 58% of the revenue target for the period was achieved. Correct. The government did not meet its revenue target.
Despite the increase in VAT to 7.5% starting in January 2020, we expect FAAC numbers, which were lower in 2019 compared to 2018, to continue to fall in 2020. This revenue shortfall will force the government to increase its borrowing. Correct.
Inflation will continue its sharp rise in 2020 leading with food inflation. The last few months in 2019 have seen an increase in inflation at the back of FX supply restrictions on certain food items and partial border closure. While the CBN Governor expects inflation to moderate within 3 to 4 months, we expect an average of 13% in 2020. This is because beside the two factors already listed, we expect the VAT increase and a possible increase in electricity tariffs and the retail price of petrol to further drive inflation higher. Correct.
Nigeria’s land borders will not be reopened on 31st January, and we believe that more reasons will be offered as to why the borders should remain closed deep into the year. Correct. As of the end of November, and despite signing and ratifying the African Continental Free Trade Agreement, the borders remain closed.
More oil majors will sell off assets in Nigeria. Wrong. Due to COVID-19 the value of oil assets fell considerably in 2020 so whilst oil companies took major impairments on their books they postponed sell-offs as recovery of oil prices will give them a chance to sell the assets at slightly higher prices in future years and write back the profits on the books.
Just like in 2019, the FX market will likely have a stable 2020. In the absence of positive macroeconomic news, FDIs will keep away while FPIs will only take short term positions and the net FX inflows will oscillate. Keeping the exchange rate stable in 2019 came at a cost, with depletion of the reserves by over $3.3 billion in the second half of the year, to just over $40 billion levels presently. The CBN Governor has already stated the triggers for devaluation – reserves at $25 billion to $30 billion, and oil prices at $50 to $45. If the current trend continues, the CBN will have to take a decision regarding devaluing the naira to relieve some pressure on the reserves. Partially correct. Whilst the FX market was anything but stable in Q2, FDIs did keep away and the CBN was forced to devalue the naira.
The naira will be devalued. We expect the OMO bubble to burst and much of the hot money propping up the naira to take flight. The Federal Government’s revenue position is alarmingly untenable, and with the modest increase in the National Minimum Wage still yet to take effect, the CBN simply cannot continue to defend the naira at current levels. We expect the government to be forced into the hard choice of devaluing the currency sometime within the first half of 2020. Correct. The CBN was forced by the various tiers of government to devalue to naira in Q2 as oil revenues fell. This allowed FAAC numbers to maintain a “dignified” appearance.
Fixed income yields to trail inflation. Correct. CBN’s drive to increase credit to boost growth with its LDR target of 65% will persist in 2020, and this will force banks to reject high-cost deposits. Since the FPIs and banks have not been excluded from the OMO window, the pressure for the CBN to reverse its ban on non-banks from accessing the window will be manageable. This basically means there are two fixed-income rates—the OMO rate and the T-bills rate.
We expect the former to remain above inflation rate to keep FPIs in the market while the latter is closer to single digits. This should persist in 2020. Partially correct. After COVID-19 shock, the CBN junked inflation and focused on growth. This led to a collapse of interest rates whilst inflation ballooned.
Equity prices should improve. Correct. As interest rates plummeted, FPIs fled whilst local investors, led by the pension funds, turned to the stock market.
With the OMO window closed to pension funds and other non-bank investors, we expect some funds to rotate to equities by Q1, 2020, as investors seek attractive dividend yields of blue-chip stocks. We do not expect the market to rally like previous years, but prices should appreciate to levels higher than in 2019. Correct.
The petrol subsidy will be adjusted/removed. The subsidy is unsustainable and is a drag on government revenues. Despite the populist stance of his administration, we expect President Buhari to announce an increase in the price of petrol at some point in 2020. Whether this administration has the political will to go for full deregulation of the sector remains to be seen. Correct.
The economy will remain sluggish. The third quarter of 2019 saw modest economic growth of 2.6% as the economy continues to struggle out of recession. Given the food price inflation caused by the border closure, we expect to see even these modest gains wiped out in the fourth quarter of the year as the border closure continues to bite. With the government unable to inject any kind of stimulus due to its precarious financial position, the economy may dip back into recession before 2020 is out. Correct.
The death of Abu Bakr al-Baghdadi has left ISIS in a strange position. Its “caliphate” has been completely wiped out, and its organised armies have been dispersed. Crediting the aforementioned Turkish invasion of Syria, a few hundred of them have been able to escape to sub-Saharan Africa, which is hospitable to them at the moment. We expect to see an influx of battle-hardened ISIS fighters from the Middle-East to reinforce their comrades in the Sahel and create a bigger problem for the Nigerian military. Correct.
Boko Haram insurgents will remain a significant threat with attacks remaining at the levels in the first half of the year of 2019 and witness a decline afterwards as both sides settle into an uneasy accommodation. Partially correct. While Boko Haram did remain a significant threat all through the year, the attacks worsened in the second half of the year, the worst in terms of optics coming with November’s massacre of farmers at Zabarmari village in Borno State.
Piracy on the Gulf of Guinea will increase as seafaring groups range further for targets. We think that during 2020, other countries will follow India’s lead and place restrictions on their seafarers coming to the region. Wrong.
The threat of cultism will persist and intensify in the Niger-Delta as more young people will be drawn to these groups in the face of increasing economic hardships. We got this correct.
There will be a decline in the intensity of the pastoral conflict as villages are empty of people. The IDP camps will struggle to cope with the now settled refugees. We got this wrong. In 2020, clashes between herders and farmers escalated and this began to show on dinner tables in Southern Nigeria. Attacks by pastoralists and bandits increased this year, with the total number of people killed so far in 2020 in these attacks at 624, compared with fewer figures from last year (521). The trouble extended to hitherto “safe” states like Jigawa and Kano which saw more attacks this year.
The threat of kidnapping will persist across the country and possibly escalate. Correct. Kidnapping has become one of the few “industries” in Nigeria that can be defined as a growth industry.
Economic hardship will likely sustain the high level of crime across the country. This was sadly correct.
The service chiefs are likely to be replaced by the president in 2020. We got this wrong. President Buhari, despite growing calls and measurably abysmal performances, has kept faith with his service chiefs.
The year 2020 will be a year of limited governance and more focus on politicking as various groups within the ruling APC will try to position themselves in anticipation of the 2023 elections. We expect that the president’s closest allies will fall out with one another in 2020. Correct.
Within the larger APC, cracks that have started to appear between the South-West based ACN faction of the party, and the Northern CPC faction will widen, leading to these groups seeking allies in the Niger-Delta and the South-East. Correct.
The opposition PDP will decline further in 2020 as infighting and a lack of access to funds will see more of its members decamp to the ruling APC. By the end of the year, we expect that Nigeria will have moved closer to be a one-party state with opposition mainly from within the APC itself. Partially Correct. While the PDP has weakened, there have only been two high profile defections from the party this year—David Umahi (governor, Ebonyi) and Elisha Abbo (senator, Adamawa North) who both decamped to APC. The PDP however, received Godwin Obaseki, who won a second term in the election in Edo State.
Of the 26 projections we made at the end of 2019, 17 (65%) were correct, six (23%) were wrong, while three (12%) were partially correct.
SBM Intelligence’s forecast for 2021 will be published at noon WAT on Friday, 11 December 2020.