The Nigerian economy suffered mixed fortunes in the past decade. In the first half of the decade, an average growth of 6.1% drove unemployment to a low of 5.1%. This was on the back of peak oil prices and stable oil production, which supported oil revenues and a strong exchange rate. In turn, inflation was relatively low, averaging 10.7%, due to a strong currency. However, fiscal and structural reforms were on the backburner while fiscal buffers meant to smoothen budget spending during harsh times were emptied. The oil boom sustained the penchant for subsidies, which was cut partially in 2012 as the implementation of the 2010 minimum wage doubled personnel costs.
The latter half of the decade began with an oil shock that started mid-2014, with oil prices falling to US$30.8/bbl. by January 2016. Without fiscal buffers and a flexible exchange rate market, the Nigerian economy was on a tailspin, recording its first recession in 25 years in 2016. Economic growth averaged 1.2%, unemployment rose to 23.1% and inflation averaged 12.9% between 2015 and 2019. Considering sustained energy subsidies, higher wages in the public sector, a rigid foreign exchange market and delayed reforms, it is clear that the lessons of the past have not been learned. With lower for longer oil prices, the carbon funded growth in Nigeria is fading and the next oil shock is even more imminent, especially given the transition to cleaner energy due to climate change.
In 2019, growth remained weak at an estimated 2.2%, below population and long-term growth of 2.7% and 7.1% respectively. Similarly, inflation was elevated at a monthly average of 11.4%. 2020 ushers in a new decade, with another chance for Nigeria to lay a sustainable foundation for its economy. Our economic and financial market outlook for 2020 explores how Nigeria can build a more stable macroeconomic environment. In our opinion, Nigeria needs new growth levers to accelerate economic growth and prosperity. We believe the levers should include dumping petrol subsidies, establishing a more flexible FX market, leveraging on technology for human capital development and incentivising the private sector to lead a much-needed infrastructure boom. Without a change in policy direction, the current low-growth cycle is likely to persist.
In the financial market, the playbook has rapidly changed following the CBN’s decision to shut out non-bank financial institutions, local corporates and individuals from its large OMO market. With weak depth in the treasury bills and bond markets, and without other outlets for low-risk and high yielding investing products, there has been a dramatic fall in yields. The fixed income market has now become a less attractive proposition for investors. With another cloud gathering over the economy, given external account pressures, low foreign investment, weak investor confidence, high inflation and weak oil prices, the future of the current arrangement looks uncertain. Thus, investing in 2020 would require extra craft. Based on our investment strategy, we believe there is opportunity for outperformance in the equities market following two consecutive years of negative returns, steady growth and high liquidity searching for high returns. In the fixed income market, we believe investors must be extra alert to the dynamics of the market. In H1:2020, we believe investors can take advantage of falling yields for strong gains by prioritising high duration bonds. The strategy in H2:2020 could change given the prospect for higher rates, which means active trading may be required.