Economic and Risk Outlook 2021 for West Africa

10 February 2020

Economic and Risk Outlook 2021 for West

Africa

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Economic and Risk Outlook 2021

Muhammad JafreeSolutions SpecialistMoody’s Analytics

Gega ToduaEconomicstMoody’s Analytics

Marcel OkekeChief Executive OfficerMascot Consult & Communications Ltd

Metin EpozedmirSolutions SpecialistMoody’s Analytics

West Africa Webinar

Gega Todua, Economist, Economics and Business Analytics February, 2021

Economic and Risk Outlook West Africa 5

Soft End to 2020Global Business Cycle Status, Dec 2020

Source: Moody’s Analytics

Expansion

In recession

At risk

Recovery


Synchronized Recovery in 2021


Real GDP growth, %

-9

-7

-5

-3

-1

2

4

6

8

World NorthAmerica

SouthAmerica

Asia Europe Africa West Africa

2019E 2020E 2021F 2022F


Daily Infection CasesConfirmed cases of COVID-19 per 100,000 population, 7-day MA

0

2,000

4,000

6,000

8,000

0

20

40

60

80

100

15 0220

18 0320

19 0420

21 0520

22 0620

24 0720

25 0820

26 0920

28 1020

29 1120

31 1220

01 0221

West Africa (L)

Nigeria (L)

United States (R)

Europe (R)

Sources: WHO, Moody’s Analytics


Economic Exposure to Pandemic-Sensitive Industries

Sources: World Bank, Moody’s Analytics

%, fuel exports + tourism receipts as a share of GDP

64.231.8

23.018.9

13.412.2

8.3

8.36.85.7

5.14.9

4.44.2

3.53.53.22.8

1.20.2

0 10 20 30 40 50 60 70

LibyaAngolaAlgeriaSudanNigeriaGhanaTunisia

MoroccoCameroon

South AfricaSenegal

EgyptTanzania

Ivory CoastUgandaEthiopiaZambiaKenya

ZimbabweDRC

GDP-Weighted

Average = 11.3%

Note: Graph includes average calculated for 20 largest economies in Africa


Policymakers Respond

Country Fiscal policy Monetary policy

Nigeria

$1.4 bln fiscal stimulus (0.4% of GDP)

Cut government budget by 1% of GDP

$3.4 bln in emergency support from IMF

Monetary policy rate cuts to 11.5%

Devaluated the exchange rate

Congo, Democratic

Republic of

$135 million (0.3% of GDP) package

Temporary VAT exemption for basic goods

Grace period for renters

Rate cut in March (150 bps) to 7.5%; increased to 18.5% in August

Postponed new minimum capital requirements program

$25 million foreign exchange intervention against depreciation

pressures

Ghana

$310 million (0.5% of GDP) package

Cut spending by $187 million (0.3% of GDP)

$218 million (0.4% of GDP) from the stabilization fund

Rate cut in March (150 bps) to 14.5%

Lowered reserve requirements

Guinea $337 million (2.3% of GDP) emergency package

Rate cut to 11%

Lowered reserve requirements

Gambia

$20 million (1.1% of GDP) budget reallocation;

$11.5 million (0.6% of GDP) financial assistance from donorsRate cut (total 250bps) to 10%

$21.3 million (1.2% of GDP) from IMF on-lend to the Treasury

Senegal (7% of GDP) resilience package

BCEAO set refinancing rate at 2.5%

3-month grace period for NPL


Oil Price HitBrent crude oil price, exchange rate, CPI: 2019Q4=100 index

Sources: National Bureau of Statistics of Nigeria, SIX Financial Information, Moody’s Analytics

10.5

11.5

12.5

13.5

50

63

75

88

100

113

125

19Q4 20Q2 20Q4 21Q2F 21Q4F

Brent price, $ per bbl (L) NGN per $ (L)

CPI (L) Monetary Policy Rate (R)


80

83

86

89

92

95

98

101

104

107

-9

-7

-5

-3

-1

1

3

5

19Q1 19Q3 20Q1 20Q3 21Q1F 21Q3F

Nigeria: government balance % of GDP (L)

Global demand (R)

Global supply (R)

Demand Recovery Key to Oil Market Mil bpd

Sources: IEA, Moody’s Analytics


Timing of Renewed Expansion VariesJanuary baseline forecast, quarter when real GDP exceeds pre-pandemic level*


Country 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4 2022Q1 2022Q2 2022Q3 2022Q4 2023Q1

China

S. Korea

U.S.

World

GCC

Europe

West Africa

Nigeria

* 2020Q1 level GDP

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Former Chief Economist & Group Head, Research & Economic

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Being presentation as a Guest Speaker at the Risk Management

Association of Nigeria, RIMAN & Moody’s Analytics, UK, joint

Webinar; Wednesday, 10 February, 2021

NIGERIA: ECONOMIC AND RISK OUTLOOK FOR 2021

BY

MARCEL OKEKE

15

OUTLINE1. Nigeria’s Economic Output: GDP

➢ Oil Export Trend

➢ Hurting Unemployment

➢ Spiking Public Debt

➢ Exchange Rate Volatility

➢ Food Dominance in CPI

2. Risks to Growth Outlook

➢ Covid-19

➢ Monetary & Fiscal Policy

➢ Socio-political risks

3. Watch Out!

16

Nigeria’s Economic Output

17

This graph aptly depicts Nigerian economy’s slip into recession, the second

time in five years, after 12 consecutive quarters of feeble expansion.

The economy (measured by GDP) contracted by 6.1% in Q2’2020 mainly driven

by the crash in crude oil price and the implementation of lockdown and

restrictions engendered by novel Coronavirus pandemic.

In Q3’2020, the economy fell into a recession with a contraction of 3.6%.

This is now complicated by a stagflation environment with simultaneous

occurrence of high inflationary pressures, contracting output (GDP); high

unemployment and weak consumer demand, etc.

Nigeria’s Economic Output (contd’)

18

Oil Export Trend

Source: National Bureau of Statistics

Figure 2: Nigeria: Oil Exports & Price

19

Nigeria’s external reserves increased to US$36.23 billion as at 21st January,

2021 compared with US$34.94 billion at end-November 2020.

This essentially reflected improvements in crude oil prices, mild global

economic recovery amid optimism over the discovery and distribution of

COVID-19 vaccines by most developed economies.

Nigeria’s 2021 budget is built on oil price benchmark of US$40pb; at present,

the Brent crude sells around US$60pb (i.e. US$20 above the benchmark). But

the rampaging Covid-19 second wave and lockdowns, among other factors

could disrupt this scenario and cause much volatility in the market.

Oil Export Trend (contd’)

20

Figure 3: Trend of unemployment Rate in Nigeria (percent)

Hurting Unemployment

21

As shown in figure 3, from a low level of 6.4% in Q4’2014, rate of

unemployment jumped to 14.4% by Q1’2017. (NBS data).

By Q2’2020, it had almost doubled, to stand at 27.1%.

Combined unemployment and underemployment rate stood at 55.7% as at

June 2020 (NBS data). Of the total population, youths (aged b/w 15-35)

account for 60%.

NBS data show that youth unemployment rate rose from 30% as at September

2018, to 35% as at June 2020. The actual figure is 14 million. This huge size

of jobless youth portends serious risks.

Every indication is that this scenario is getting worse, given the layoffs,

furloughs and factory closures engendered by Covid-19 in the past 12 months.

Hurting Unemployment (contd’)

22

Concern over consistently rising public debt stock, with its attendant

debt servicing challenges. In Q2’2020 alone, Govt’s external debt

service gulped US$287 Mn in the face of thinning income flow.

By end-September 2020, total public debt stood at N32.2 trillion

(about US$85 Bn), rising from N17.4 Bn five years ago (in 2016).

Figure 4: Nigeria Public Debt Stock (N,Trillion)

Spiking Public Debt

23

Although a chunk of the debt is ‘soft loan’, Govt. borrowings from

local financial market (including ‘Ways & Means’ from the CBN) is

‘Crowding Out’ private sector operators.

This scenario heightens the risk of further debt accumulation, and

raises concerns about debt sustainability and vulnerability of the

economy to financial crisis.

Spiking Public Debt (Contd’)

24

Figure 5: Movement of exchange rates (N/US$)

Exchange Rate Volatility

25

Food Dominance of CPI Basket, %

Source: National Bureau of Statistics

Figure 6:

26

Rising Consumer Price Index (CPI), dominated by cost of food items; in

turn, this reflects the adverse impact of insecurity on food (according

to CBN’s MPC). Farmers can no longer safely get to their farms.

As shown in figure 6 above, food and related items account for 52%,

followed by Housing & Utilities.

This trajectory could get worse, given the heightening insecurity in

the country.

The Government late 2020, placed a ban on the importation of food

items into Nigeria, thereby heightening food shortage.

Legacy structural factors, including major supply bottlenecks (e.g.

poor road network) across the country; which is yet a pointer to the

subsisting huge infrastructural financing deficit.

Food Dominance of CPI Basket, % (Contd’)

27

Risks to growth outlook

28

COVID-19 The discovery of new, more infectious COVID-19 variants and worries

about rise in new cases and fatality rate poses risks to Nigeria's

economic prospects in 2021. The vacillations and politics around the

timing and supply of vaccines portends even more risks, uncertainties

and worries.

Also, the return of several countries to different degrees of lockdown

is already slowing and/or disrupting the global trade recovery. There

could be a disruption of the crude oil market—mainstay of Nigeria’s

economy.

Already there are some forms of restrictions; some economic

activities are yet to resume (e.g. in the leisure and entertainment

industry).

In all, the rapid spread of the new variant of the Covid-19, associated

spike in fatalities and the recent re-introduction of containment

measures across several economies, may dampen the recovery in

2021.29

Monetary & Fiscal Policy

In 2020, the CBN devalued the Naira twice; this year, there is the risk of further devaluation and increased illiquidity. This would adversely affect consumer discretionary income and production cost.

The subsisting uncertainty in Nigeria’s macroeconomic environment is such that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria at its first meeting in 2021, agreed to hold all policy parameters constant. (Watching to see how the world is ‘unfolding’).

The MPC noted that NPLs ratio rose to 6.01% at end-December 2020 from 5.88 % at end-November 2020 and above the prudential maximum threshold of 5.0 %.

This trend which reflects the not-so-good financial health of corporate borrowers poses macro-prudential challenge; NPLs could spike further in the near term (that is, rising credit risk).

30

Monetary & Fiscal Policy (contd’) The combination of raised Value Added Tax (VAT), hiked electricity

tariff, fuel subsidy removal, in recent months, sustains the high and

rising inflation rate (standing at about 16% by end-December 2020).

This inflation rate has far exceeded the Monetary Policy Rate (MPR)

(11.5%); and this has created a suppressed yield environment and

negative real returns on most of Nigeria's investment instruments.

Financing of the N13.08 Tr 2021 budget, with a deficit of about N5.02

Tr (of which N4.28 Tr is to be borrowed), portends lots of further

distortions to the market.

31

Socio-political risks Civil disorders and socio-political concerns are some of the risks to

growth prospects in Nigeria. The rising spate of insecurity, reflected in

widespread terrorism, kidnapping, banditry and recurring cycles of

deadly clashes between herdsmen and crop farmers.

The population of Internally Displaced Persons (IDPs) is on very rapid

increase; according to the UN Office for Coordination of Humanitarian

Affairs (UNOCHA), the number IDPs now runs into millions.

Consequences of this include a slowdown in FDIs, FPIs and low

domestic investor-confidence/apathy;

Higher operational risks and increased insurance premiums which

could increase the cost of doing business in the country.

Policy inconsistency and high level of corruption as indicated in the

Transparency International Corruption Index (2020) recently released,

in which Nigeria ranked its worst since 2015: standing at 149 out of

180 countries; and the second most corrupt country in West Africa,

after Guinea-Bissau 32

Watch Out!

Commencement of the African Continental Free Trade Area (AfCFTA)

in January 2021. Motely of challenges, including weak infrastructure

could pose risks for Nigeria.

‘Brexit’ and the ‘New Europe’: what relationships with Nigeria?

The new Joe Biden government in the US: what impact on Nigeria?

Trade ‘wars’, the WTO with Dr Okonjo-Iweala as D-G: whither Nigeria?

The new US government last week endorsed Dr Okonjo-Iweala for the

job.

Advancement in digital techs has continued to drive digital innovation

with speed and agility. Amid the COVID-19 Pandemic, businesses are

increasingly embracing remote working arrangements while consumers

are shifting to digital channels as a means of payment. 2021 may,

therefore, record surge in cybersecurity risks.

33

THANK YOU

34

35Economic and Risk Outlook West Africa

Credit Risk Remains ElevatedAverage Probability of Default for Corporate (All Industries)

Source: Based on Moody’s Analytics EDFTM Credit Measure and Point in Time Converter Model

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020

Probability of DefaultCOVID -19 Impact


Sectoral Differences in Credit RiskIndustries with Most and Mild Impact from COVID-19

Source: Based on Moody’s Analytics EDFTM Credit Measure and Point in Time Converter Model

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Q4-2019 Q1-2020 Q2-2020 Q3-2020

AEROSPACE & DEFENSE

UTILITIES, GAS

TRANSPORTATION

OIL, GAS & COAL EXPL/PROD

AUTOMOTIVE

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Q4-2019 Q1-2020 Q2-2020 Q3-2020

FOOD & BEVERAGE

AGRICULTURE

PHARMACEUTICALS

INSURANCE - LIFE

INSURANCE - PROP/CAS/HEALTH


Defaults Rates are Rising and Expected to PeakSectors most exposed to Pandemic: Moody’s Financial Monitor


» Consider multiple sources and perspective on credit risk where information is

available e.g. Fundamental view, Equity, Bond or CDS Markets view etc.

» Consider credit cycle adjustments or proforma projections for the financial

statements if they do not yet capture the impact on borrower.

» Identify any data sources for indicators and develop tool kit for early warnings.

» Identify vulnerabilities in the portfolio with what if, scenario and stress test

analyses, taking in to account pandemic impact via overlays

» Analyse portfolio risk considering concentrations in industries by risk contribution

How to Manage Credit Risk During Pandemic


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Economic and Risk Outlook 2021 for West Africa

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