For Businesses In Nigeria, Perforating 2020 And Its Challenges For 2021 -By Adeyinka Adebayo

In 2020, the world experienced the stark reality of a major health crisis and it ushered in a devastating impact on the entire global economy. In fact, the year brought in the steepest social, economic and financial meltdown ever since the great 1930’s recession.

The health crisis as an outbreak of Covid-19 pandemic came by with lockdowns around the globe, social distancing in the communities with a general synchronized slowdown in global economic activities and unarguably, the crisis chaperones a negative influence on the demand for and prices of crude oil in the international markets. In line with that, global oil market crashed as Brent prices fell to a record of $20 at the close of market trading in April, 2020. This evidently led to significant capital flight, dollar scarcity and naira depreciation in all segments of the country’s foreign exchange market. The monetary authority of the country in their response to this surge of volatile financial market and conditions advised financial institutions to restructure existing loans and slashed the MPR by 200 basis points from 13.5% to 11.5%. Moving forward from the emergency of this new variant of Covid-19, the recently developed vaccines records a significant milestone on the path of global economic recovery. Reliably, it could be said that in 2021, global economic growth would be led by a digital recovery in all fronts. Meanwhile, as the infections keep unfolding, this crisis poses several risks to businesses.

Fiscal and monetary stance

By the dip of 2% in the MPR from the monetary authority to 11.5%, reduction in the interest rate on intervention loans to 5% and introduction of liquidity to boost liquidity in the economy. Therefore, the monetary authority is expected to sustain its accommodative policy stance to cushion the impact of the second wave or possibly the third wave of the virus on businesses and Nigerians at large. Also, the support from the fiscal end of the FGN is expected to continue. However, the CBN may maintain the rate on intervention loans at 5% to targeted sectors of the economy and likely extend the deadline on loan forbearance, among other policy supports therefore, regulatory uncertainty still remains about the actions that could be taken by regulators to cushion the impact of pandemic in 2021.

A shot at demand in 2021

The general demand for goods and services is expected to drop with a significant decline characterized by;
– The high rate of unemployment at 27.1
– Income inequality
– Removal of subsidies and deregulation of the pump price of PMS
– Recent hike in electricity tariff by about 100%, from N30.23/kwh to N62.33/kwh
– The impact of naira depreciation on the purchasing power of the naira and the rising consumer price index, currently at 14.89%.

Source: Bloomberg, Author’s Computation

With all these, a synchronized drop in effective demand for goods and services in 2021 is certain. Albeit, the demand for essential goods and services, such as food, drugs, and other essential consumables are expected to be price inelastic. Businesses need to tweak models and factor in this prognosis.

Oil and its bullish market

The oil and gas market has been drastically influenced in the year, the crisis accompanied a negative impact on the demand for and prices of crude oil in the international commodity markets. On April 28, 2020, global oil market crashed as Brent crude prices fell to a record low of $20.37 a barrel. However, the development and rollouts of Covid-19 vaccines have provided fresh momentum for Brent crude price recovery, closing the year 2020 on a bullish note at $51.09 per barrel. This momentum is expected to be sustained this year on the heels of significant production cut by Saudi Arabia and Russia. The U.S. Energy Information Administration (EIA) expects global oil demand growth to rise by 5.6 mb/d in 2021 while crude oil price (Brent crude) is projected at $52.7 a barrel this year. Although crude oil prices start on a bullish note, the resurgence of the pandemic could pose considerable risk to the oil price outlook and fiscal position of oil-dependent economies like Nigeria

Hobbled FX

For organization that desires foreign direct investment, there is a huge setback as the net foreign assets position of domestic money banks in Nigeria fell to a record low in 2020, as they seek means to cushion the impact of significant naira depreciation on their assets and earning quality. The twin-shocks of oil prices and global health emergency have led to significant margin calls and capital outflows. The resultant dollar scarcity had limited the capacity of foreign investors to repatriate the proceeds of their investment. The pent-up FX demand in Nigeria’s foreign exchange market are being met through the CBN FX intervention, Investors’ and Exporters’ window and the parallel market segment.

In 2021, a sustained rebound in equities and commodity prices would sharply improve FX liquidity in all segments of Nigeria’s foreign exchange market. This would be driven by momentum from the rollout of Covid-19 vaccines and improving oil price fundamentals. If the current trend is sustained, it may encourage foreign investors to renew their confidence in the Nigerian economy. Therefore, further depreciation of the naira in 2021 is not expected, but advisably, both local and foreign investors should hedge against foreign exchange risk.

Puncturing credit worthiness and counterparty risk

Ongoing lockdowns of cities and economies around the world have considerably reduced the capacity of credit customers to meet their financial obligations. Despite a record policy support by global central banks to cushion the financial impacts of the pandemic. Even here in Nigeria, there was an extension of one year moratorium on CBN loans, tax rebates, intervention funds yet loan-loss is on the rise as firms deal with liquidity crisis and financial insolvency. The development could result in higher non-performing loans and impair the asset quality of both domestic and foreign banks. Consequently, in 2021, the real impact of Covid-19 related credit risk may likely appear on the mainstream. Also, as the virus bites harder, counterparty risk rises. The resurgence of the pandemic may further worsen corporate insolvencies this year, which may increase the risk of a counterparty default, rating downgrade of corporates, and impair regulatory capital. Strategic reduction in the size of the credit exposures and monitoring counterparty limits would help to mitigate the risk.

Health, safety and wellness in the tough times

Evidently, Nigeria is experiencing the second wave of this pandemic as the virus keeps ravaging cities globally and inevitably, the third wave is here in a jiffy. The nation needs an effective strategy to vaccinate a considerable but reasonable number of the Nationals but unfortunately prioritization of vaccines to health workers and the older Nigerians sets in. Say 100,000 doses for 50,000 countrymen in the said category when the vaccines eventually arrive in February 2021. This will pose a serious challenge as it could take a decade to effectively vaccinate the entire population of the country. And to businesses, safety and operational risks will surely persist throughout 2021. Hence, organizations are expected to keep track with proactive measures towards protecting employees, relevant stakeholders and other germane interests against infliction of the raging virus.

Socio-economic challenges

The social wheel of pressure is spinning to a tipping point as an estimated 5million Nigerians could slip into extreme poverty in 2021. This would be driven sharply by the contraction of remittances and the high unemployment rate. Albeit, the 2020 Finance Act has the potential to reduce the cost of living of Nigerians this year, various interest groups may go on strike this year to seek redress for income inequality, social injustice, and exclusion. This could pose significant operation and credit risks for businesses.

Equities market and its bubble

Not all gloom and doom, the frenzy over the rebound of global equities markets may also lead to a price bubble this year. However, the sentiment for stocks depends on the direction of monetary policy, particularly in relation to the yield environment. A sharp reversal of rates is likely to trigger a sell-off in the equities market considering that the current average market price-to-earnings (P/E) valuation multiple (15.2x) is considerably higher than the 5-year historical average (11.9x). But the prognosis for the Nigerian stock market in 2021 is that domestic interest, fueled by dividend expectations, is likely to sustain the market rally in 2021 and it cedes an opportunity for businesses.

Source: Bloomberg, Author’s Computation

Adeyinka is a manqué journalist, an economist by academic training and a banker by profession. He writes in from Abuja to unravel the knots and jargons that matter about the economy so as to help businesses and individuals in their finances.