Global Economy

The global economy is projected to rebound by 6.0% in 2021, supported by the continued covid-19 vaccine rollout and dovish monetary stance. However, supply chain pressures, rising commodity prices and rapid domestic demand in major economies have intensified global inflation pressures.

SSA: Growth in the region is projected to reach 3.4% in 2021 driven by stronger external demand from the region's trading partners (China and the US), higher commodity prices, and better containment of Covid-19. Furthermore, domestic consumption is poised to increase, on the back of normalisation of economic activities in heavyweight countries. This confirms the improved PMI reading witnessed in recent months.

 

Domestic Economy 

Growth: We project growth to settle at 2.4% in 2021. For the non-oil sector, (1) positive pass-through from low base in 2020, (2) recovery in the services GDP as the NCC has lifted the embargo on SIM registration in the country and (3) resilience of the agriculture sector is expected to drive the non-oil sector growth. Outlook for the oil sector remains cautiously optimistic. Although oil prices have soared, oil production is unlikely to reach pre-pandemic levels till 2022. We forecast average crude production of 1.8 million barrels a day for the rest of the year. 

Inflation: Over the second half of the year, inflation is projected to further moderate, mainly due to the high base effect from the corresponding period last year. We project average inflation rate to print 16.6% in H2 2021 (H1 2021: 17.6%).

External sector: In 2021, the CA deficit is expected to narrow to 1.2% of GDP, supported by a rebound in oil prices and recovery in the global economy. Remittances are expected to recover as rising vaccination rates and effective containment measures strengthen foreign labour markets.

FX: NGN remains overvalued, but the recent tightened spread in Naira valuation, continued rebound in crude oil prices and expected inflows from Eurobond issuance are likely to shield a large devaluation.

Monetary Policy: With growth projected to strengthen for the rest of the year and inflation expected to further dissipate, the CBN might progressively re-direct its policy to a hawkish stance, in favour of exchange rate stability. We see a likely rate hike of 50-100bps in H2 2021.

Fiscal policy: Fiscal deficit to print at 5.0% of GDP in 2021. While this is slightly lower than the 2020 deficit, it is significantly higher than the 5-year average of 3.4%. High debt servicing cost at 2.2% of the GDP 2021f will continue to limit fiscal space.

Fixed income market

We believe that the fixed market is not at an inflection point. For one, we expect paper supply to increase in H2, supported by the recently approved supplementary budget of N982bn. Furthermore, the CBN is likely to turn hawkish, to support foreign inflows into the economy.