…Experts hope for a U-shaped recovery

Nairametrics held its third Economic Outlook for 2020 on Saturday, 5th of September. A virtual gathering of about 1,000 participants, due to the social distancing measures. The webinar, which centered on the topic, “Projecting Nigeria’s Economic Recovery” garnered over 2,000 registrations.

During the insightful webinar, a set of five expert panelists projected the nation’s economic recovery, and dissected the various recovery shapes to be expected. They also offered possible solutions to the nation’s recovery.

The panelists were Partner & Chief Economist, PwC Nigeria, Andrew Nevin; Group Executive, Energy & Infrastructure, FirstBank, Bashirat Odunewu; Head of Research, Coronation Asset Management, Guy Czartoryski; Chief Commercial Officer, Mixta Africa, Rolake Akinkugbe-Filani and Senior Vice President & Head of Financial Advisory, Africa Finance Corporation, Fola Fagbule. Founder, Nairametrics, Ugodre Obi-Chukwu, moderated the event.

Nevin kicked off the webinar with a detailed presentation of an overview of the current Nigerian economy, the economic outlook for 2020, global risks & concerns, and its impact on the global economy. He analyzed how the collapse in oil prices is destabilizing the economy among other key issues.

According to him, “the IMF, as at January 2020 projected that global growth will improve from 2.9% in 2019 to 3.3% in 2020.” He said, “This implies that the world will enter into a recession this year, with the outlook much lower than it was during the financial recession in 2008.”

Despite the Federal Government’s expectation of a 4.69% fiscal deficit to GDP in 2020; Nevin expects both oil and non-oil revenue to worsen, and severe constrain of the implementation of fiscal policy targeted at expediting economic recovery.

“Without the COVID-19 shock (the counterfactual scenario), about 2 million Nigerians were expected to fall into poverty in 2020, as population growth surpasses economic growth. With the pandemic, the recession is likely to push an additional 5 million Nigerians into poverty in 2020, bringing the total newly poor, to 7 million this year.

“This implies an increase in the total number of poor people in Nigeria, from about 90 million in 2020 to about 96 million in 2022. Having vulnerable employment, receiving remittances, and being already poor are factors that help explain this increase in poverty.”

On the way forward, he said, “The Federal Government needs to unlock its dead capital in a meaningful way, and it should unlock value from government’s assets that are lying idle or underutilized. The VAT reforms in the Finance Act 2020 should be implemented, and maintaining the increase in VAT rate to 7.5% is key to recovery.”

What is the nation’s recovery shape?

The U, V, L, and W shapes are the common shapes used by economists to describe different types of economic recovery. They are informal shorthand to characterize recessions and their recoveries.

The shapes take their names from the approximate shape economic data make in graphs during recessions. While the V-shaped recession means the economy suffers a sharp but brief period of decline with a clearly defined trough, followed by a strong recovery; a U-shaped recession is longer than the former and has a less-clearly defined trough.

The W-shaped recession or double-dip recession means the economy falls into recession, recovers with a short period of growth then falls back into recession before finally recovering.

A typical ‘down-up-down-up’ pattern. An L-shaped recession or depression occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever.

So, which shape is attributed to the Nigerian case? Nevin projected that there will be a lot of pressure on the economy due to states taking over the responsibilities of their economic destiny, and the forced nature of the COVID-19 disaster. We need to have a great level of investment, unlock idle assets to recover.

“I am not trying to be an alarmist, but if the country does not take advantage of the period to accept the moment of truth, there will be pressure. So, I will opt for a U shape recovery” he said.

For Odunewu, some factors would hinder the economic recovery, desired by the government. Some of them are oil prices that hover around $40-$45 per barrel. 90% of the nation’s revenue still comes from oil, and low compliance of Nigeria to the OPEC cut deal has forced a reduction in our oil production for the next few months.

She said, “If you look at the combination and the fact that the economy is opening up globally, by September end, we believe the Nigerian economy will be better and I will say it is a U-shape recovery.

However, the second wave of COVID-19 could be a threat. I hope that never happens but if it does, we may end up in a W shape, which will be worse. If vaccines are available as promised by some nations by the end of October, the recovery may change from U to V shape.”

Akinkugbe-Filani chose a different path. According to her, the reality is that the nation will run out of the letters of the alphabets of the recovery. Why? It is because she sees the nation as one that lives above its means, like seeking to borrow in a way that is not sustainable and seeking an economic construct that may not be sustainable.

She said, “I wonder the type of recovery we are looking at when the fundamentals of the economy has not changed. Regardless of the pandemic, we have always been a cyclical economy because of the oil price, the export-driven oil, and the lack of value creation.

“The recovery for me, in order to be sustainable, we have to learn from the past. The overall spending of the nation is about 7% of the GDP. There is still a lack of integration and focus strategy in terms of infrastructure.

For recovery from the pandemic, we need to create local demand for our consumption, so that we are not so vulnerable. I will love to see a U-shape recovery, but the reality on the ground will lead me to say that the recovery is between U-shape and W-shape.”

In his own case, Czartoryski is optimistic as always. He voted for a U-shape recovery. His reasons, “On the foreign exchange, it is not as bad as it was in 2016.

By the beginning of 2017, we had an official rate of N317 and a parallel rate of over N500, but today is not so bad with an interbank rate of about N388, and the parallel rate was N477 last week. That is not even 30% away. The forex distortions are not as large as they were,”

“There is light at the end of the tunnel, though with some complications. Foreign Portfolio Investment is massively down due to the oil price, and we should not have to rely on the FPI at all. We are also living beyond our means. We need to create domestic savings, like looking into the pension funds, money market, and fixed income funds.”

Fagbule of AFC is optimistic about Nigeria’s recovery. “I would love to be on U-shape. Based on fact, Nigeria never came out of the last recession, as it was only at the beginning of recovery, which never held.”

According to the Senior Vice President of AFC, “the nation cannot recover without working on her Trade and Investment, as it is the only way out of the economic lull.

He emphasized that government expenditure is never going to be sufficient to take Nigeria out of the woods, and it is time for the West African nation to emulate countries like Gabon, China, and India, whose Investments contribute 30%, 40% and 31% to their GDPs respectively; when Nigeria only does 14%.”

The Nairametrics quarterly economic outlook event is a 2-hour town hall meeting that brings together experts and stakeholders to discuss the Nigerian economy, and expectations for each quarter.

The first installment in January 2020 was a physical gathering in Lagos, while the other two installments were on zoom.



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