One of Nigeria’s leading financial advisory and investment banking firms, United Capital PLC, has suggested ways to cope with the unprecedented uncertainty in the global and domestic economy and financial markets brought about by the novel coronavirus pandemic.
In a webinar titled: The Economy & Financial Markets In H1-2020: What Next? the investment bank, in its assessment of historical investment trends, noted how exceptional the disruption to economic activities and Nigeria’s financial markets the pandemic has been.
“Most vulnerable economy”
Mr Wale Olusi, Head of Research at United Capital, said that prior to the pandemic, the Nigerian economy was poised for what could have been a “flourishing” year.
He explained that the oil industry, Nigeria’s foremost source of revenue, saw promising levels of growth in 2019. It was expected to reach 3% growth in 2020, a significant increase from rates of less than 1% in previous years.
Ms Ayobami Omole, a Banking & Finance Research Analyst, pointed out that besides the fall in oil revenue, Nigeria is also experiencing a significant reduction in foreign direct investments (FDIs).
She projected that further naira adjustments could see the exchange rate fall to as low as ₦410 or ₦430 naira by the end of 2020. She noted that Sub-Saharan Africa is one of the most vulnerable regions in the global economy.
Ms Busola Jeje, an Oil & Gas Research Analyst attributed the impact of the Coronavirus pandemic on African economies to four predominant factors which include the ongoing commodity price fluctuations which has reduced export earnings and government revenue; low capital inflows because of Africa’s high dependency on foreign direct investments; limited financial capacity to roll out stimulus packages like the developed economies and weaker healthcare systems, which are ill-equipped to manage the crisis.
“All four put together have made us the most vulnerable [economy],” She added.
Domestic investments into the economy as a solution
Stakeholders at the webinar concluded that the African economies need to redirect focus on stimulating greater domestic investment. Olusi commented that Africa’s consistent dependence on factors beyond its control is detrimental to the economy. He added that industrialisation solves Africa’s vulnerability to sharp movements in commodity prices. Africa countries are rich in raw materials and are often at the beginning of commodity production processes. Yet, many do not produce finished products. Cash yielding raw materials such as crude oil and cocoa are more volatile than petrol and chocolates.
Industrialisation, Olusi said, would allow raw materials to be refined in Africa and be exported to other countries, generating revenue. This will reduce Africa’s dependency on external dynamics and create more economic stability.
To prepare for the future, it is important to consider how the economy will recover from the adverse impact of the pandemic.
A “V-shaped” global recession, that is one in which a sudden plunge in economic activities is followed by a rapid rise in output, is now looking unlikely. Given the dependence on the global economy, it may be more reasonable to expect Nigeria to have a “U-shaped” recovery, a return to growth after a prolonged period of decline.
Because of the nation-wide lockdown and restrictions of movement between March and June in Quarter 2, Nigeria’s purchasing managers’ index (PMI)fell below the threshold required for economic growth. The PMI is a popular group of indicators of economic conditions which track, amongst other things, the level of inventory and new orders as disclosed by business decision-makers. “Nigeria has already hit rock bottom, so where else can we go but up?” Olusi asks. It is not clear if the Nigerian Government will release another round of palliatives for homes and businesses to support growth in Quarter 4.
The consensus view at the webinar was that domestic investors should either preserve their capital or keep it in safe assets that have long-term returns. Investors can take advantage of the high volatility of the financial markets, Olusi said, but they need to know when best to enter and to exit the market.
Interestingly, Olusi adds that a temporary fall in market shares can be a suitable opportunity to invest in the equities market because the accrued dividends by 2021 will be more significant than returns from the money market or bond funds.
Alternatively, Olusi advises investors to buy into mutual funds to enhance their returns.