2022 – Neutralising COVID, Defining A Legacy, and the Clanging Cymbals of Politics

January 26, 2022

2022 – Neutralising COVID, Defining A Legacy, and the Clanging Cymbals of Politics

In 2022, the major themes that will dominate Nigeria’s economic landscape will be politics, the management of the fiscal deficit, the foreign exchange policy of the Central Bank and changes in prices and economic growth (or the lack of it). Of all these factors, politics will dominate the landscape due to the general elections in 2023. Nevertheless, the dominance of politics in 2022 will not diminish the importance of the other major economic themes. Nigeria’s failure to pursue macro-economic reforms over the last eight years has placed the country at a backfoot and in 2022 we expect that this reform inertia will persist even till the expiration of the current administration. This could effectively be the legacy of the current administration.

Other socio-political factors that will shape the economic landscape in 2022 also come in the form of headwinds. The crisis of insecurity characterised by kidnapping and armed banditry across flashpoints in the north and parts of the south will be the most dominant of these socio-political factors. Another social factor to watch out for will be the management of risks around COVID-19.

Overall, all of these factors will have a telling effect on industries in 2022. Thus, the success of industries in 2022 will largely be defined by the level of resilience within the industry.

We will examine these themes in our 2022 prognosis.

Management of the Fiscal Deficit

The rhetoric of Nigeria’s fiscal policy managers over the last decade has been one that downplays the risks around a widening fiscal deficit that has been largely funded by borrowings. Initial defence of the borrowings harped on Nigeria’s benign Debt to GDP levels albeit with less focus on debt service to revenue levels. At Debt to GDP ratio of 30%, Nigeria seems to have what genuinely looks like a benign ratio. But with 76% of the Federal Government’s revenue going into debt service alone in 2021, the country genuinely has a debt sustainability crisis that should lead to new thinking.

In 2022, we estimate that the debt to revenue ratio will cross the 80% mark and hover between 85% – 90% as election induced spending ramps up. While we do recognise the initiatives to grow fiscal revenues, Agusto & Co is of the opinion that these efforts will not be enough without due consideration to the expenditure element of the fiscal balance equation. Plans to more than double the non-debt recurrent expenditure to about N6.9 trillion in 2022 from about N3.5 trillion last year, indicates an absence of fiscal discipline to rein spending largely financed by borrowings. We also believe that this administration will not pursue other deficit financing options – particularly disposal of assets – in 2022. In 2021, the federal government estimated revenue projections from privatisation at N205 billion but ended the year without any proceeds from divestments of state-owned enterprises. In 2022, the Federal Government has budgeted N90 billion from the same source. We believe this will also not materialise.

Overall, we estimate a budget deficit of about N6 trillion in 2022 that will be funded largely by domestic (70%) and foreign borrowings (30%).

Source: Agusto & Co.
Source: Agusto & Co.

 

Foreign Exchange Environment

Nigeria has assumed a hawkish foreign exchange policy stance since 2015 and this has been elevated since 2020 to date. This hawkish FX stance has been characterised by political interference and demand management amidst a weaker supply of the US dollar in the FX market. The resultant effect of the demand management, has been the wide arbitrage between the official foreign exchange market and the parallel market with spreads exceeding 30% and even as high as 40%. Sadly, we believe this scenario will persist in 2022 resulting in more businesses having to source FX needs from the parallel market.

Harmonising FX rates between the parallel market and the official market will not only cut the arbitrage between these two markets but also cut the speculative bets on the naira. However, we note that policy options that could improve foreign exchange supply will have implications on the fiscal side in two major ways, partly because monetary authorities have left things a little too late. Harmonising the FX markets could create an upside at the fiscal revenue end as the country will earn more from the sale of crude oil. On the other end, foreign currency debts could also rise in naira terms. We project foreign currency debt could rise from about N15 trillion to N18 trillion if the Central Bank devalues at about 20%.

However, we note that the Federal Government’s borrowing stance creates a disincentive to review this hawkish FX policy stance. With FGN 91-day treasury yields trading at an average of 3% in 2021, the Federal Government is able to borrow at 12% below the inflation rate of 15% – an important benchmark to determine the price of money – thus leaving lenders with the short end of the stick.

 

Source: Central Bank of Nigeria, Agusto & Co
Source: Central Bank of Nigeria, Agusto & Co

 Inflation and Price Changes

Inflation in Nigeria in 2022 will largely be determined by two major factors. Firstly, energy prices particularly petrol and electricity tariffs. Secondly, food prices during the year. The energy prices especially that of petrol will be hinged entirely on the government’s appetite to push the politically unpopular reform of deregulation of the downstream petroleum industry. We do not think the government will like to expend its political capital on either deregulation of the downstream petroleum industry or even major upward price adjustments. However, scheduled adjustments on electricity tariffs due in February 2022 may come to fruition.  We estimate a blended average of 10% rise in electricity tariffs in 2022 which should help the industry operators recover costs to a larger extent.

Food prices will pose the most risks to price stability in 2022. The insecurity in the northern region has had a telling effect on farming activities and has resulted in price volatility on food items across the country particularly urban areas. We also note that with several flashpoints, the military’s capacity to pare back these attacks is quite stretched. Election induced violence may stoke more risks that could further affect farming activities. Thus, food prices will remain a sore point in maintaining price stability in 2022.

Overall, we project inflation of about 13% – 16% with the latter representing our best-case scenario and the former our worst-case scenario. Textbook standards indicate that high inflation numbers such as these should drive interest rates upwards. But we believe the Central Bank will continue to pursue its aggressive CRR stance which would result in lower yields on FGN debt securities.

 

Source: NBS, Agusto & Co
Source: NBS, Agusto & Co

 Economic Growth

Analysts have long argued that Nigeria will have to post economic growth of over 6% consistently for about a decade to lift millions of its citizens out of poverty and increase the standard of living and also help the country reach lower middle-income status. If this target is it be used as a benchmark, then the conclusion is that Nigeria lost the last decade and sadly, its performance in the early years of this current decade reflects a continuity of this weak economic growth. Sadly, this poor run of weak economic growth is set to continue in 2022, albeit with respite from a healthy post-COVID economic bounce.

In 2022, we project economic growth of about 3% – 4%, the highest in this administration. The growth will be driven by strong performances in sectors such as telecommunication, fintech and construction. We expect Telecommunications to gain pace and sustain the COVID induced surge as its contribution to GDP may cross the 12% to a new range of 13% – 14%. The post-COVID recovery in sectors such as Transportation, Accommodation and Food will also help provide the economic bounce. Risks to our forecast will probably emerge from the instability caused by insecurity especially within the farming belt of the country that has the effect of hurting agriculture and trade and commerce.

 

 Source: NBS, Agusto & Co
Source: NBS, Agusto & Co

 

Politics

Based on past trends, we believe the Independent National Electoral Commission’s official timetable for the 2023 general elections will have a kick-off timeline of August – September this year. Nevertheless, the underlying politicking is gaining pace and will only accelerate all through the year.  The nexus between politics and the economy will shape several outcomes in Nigeria in 2022 as we expect the former to overshadow the latter. As President Muhammadu Buhari serves out his last full year in Aso Rock in 2022, we expect the focus of his administration to shift to consolidating his legacy in power. Thus, the major theme in Nigeria in 2022 will be politics. Conventional political wisdom implies that Mr. Buhari – who will be statutorily barred from seeking another term in office – should gradually slip into a lame duck era, but in Nigeria the dynamics differ. The undue influence of the president on elections implies that he will still hold the aces in the political environment. Overall, we believe the impact of the politics of an election effectively dashes all hopes left of this administration to embark on economic reforms in its last 17-months in power.

Insecurity will continue to remain a sore spot for Nigeria in 2022, affecting lives and livelihoods in affected regions and also leading to global negative press which dampens the country’s investment credentials.

Conclusion

COVID-19 has defined the global economy over the last two years with the pandemic pushing Nigeria into its second recession in just five years. In 2022, we believe that COVID’s capacity to effectively paralyse the Nigerian economy – like it once did in 2020 – will be limited, albeit it still has to remain on the radar of businesses and the country’s economic managers. This prognosis implies that COVID will still possess the capacity to trigger uncertainties that can lead to temporary distortions in economic activities particularly in supply chains and travel plans. With the Nigerian local supply chain strongly dependent on imports, this risk can become embellished if or when this scenario materialises.

Businesses that will win in 2022 will have to critically plan on how to navigate the unorthodox Nigerian FX markets and the country’s high inflationary environment. These twin factors will provide some of the most elevated risks in the business environment. The insecurity in flashpoints will also have some negative effects on local supply chains. Thus, businesses will have to forge ways to navigate these issues.

Overall, we believe that being the penultimate year ahead of the general election, there will be some level of increased optimism in Nigeria’s investment narratives. Foreign investors who have either stayed out or reduced their exposure to Nigeria over the last five to seven years may begin to fancy the country’s prospects once again. Will Nigeria live up to its prospects? Time will tell.

https://ami.agusto.com/Report/industry_reports: Please check our industry coverage on the Agusto Market Intelligence (AMI) for our review of Industries. We have provided coverage on 30 industries on “What to watch for in 2022”.   

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Finance & Leasing

COMPANY RATING EXPIRY OUTLOOK COUNTRY
C&I Leasing Plc ₦10 billion 7-year Series II Bond Bbb+ Jun 03 , 2022 Stable Nigeria
C&I Leasing Plc ₦7 billion 5-year Series I Bond A- Jun 11 , 2022 Stable Nigeria
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Credit Direct Limited Bbb Jun 30 , 2022 Stable Nigeria
Citihomes Finance Company Limited SR3 Jul 05 , 2022 N/A Nigeria

Corporates

COMPANY RATING EXPIRY OUTLOOK COUNTRY
Axxela Limited A- Jun 30 , 2022 Stable Nigeria
Kawai Technologies Limited Bb Jun 30 , 2022 Neutral Nigeria

Corporate Bonds

COMPANY RATING EXPIRY OUTLOOK COUNTRY
Axxela Funding 1 Plc’s Series 1 Bond A- May 31 , 2022 Stable Nigeria
Viathan Funding Plc.’s ₦10 billion 10-year Series 1 Senior Guaranteed Fixed Rate Bond Due 2027 Aaa Dec 31 , 2027 Stable Nigeria
NSP-SPV PowerCorp Plc’s ₦10 Billion 15-year Series 1 Aaa Dec 31 , 2033 Stable Nigeria