COVID-19: Bailout for States Inevitable, Says FSDH

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Obinna Chima
The disruptive effects of the spreading COVID-19 pandemic will make bailout for states in Nigeria inevitable if it prolongs, analysts at FSDH Merchant Bank Limited have stated.

The financial institution stated this in its latest macroeconomic review for the first quarter of 2020, titled: “Steering a fragile economy in the face of uncertainties,” that was obtained yesterday.

According to the Lagos-based firm, there would be need for the disbursement of intervention funds to vulnerable households that are affected by the virus, at both federal and states level, so as to cushion the impact on Nigerians.

The report predicted that the outbreak of the virus was expected to have both direct and indirect impact on Nigeria’s economic growth this year.

It showed that already, the Central Bank of Nigeria’s (CBN) Purchasing Manager’s Index (PMI), the manufacturing PMI fell from 59.2 in January 2020 to 51.1 in March, just as the Non-Manufacturing PMI contracted from 59.6 to 49.2 in March – after 34 consecutive months of expansion.

Nigeria’s Gross Domestic Product (GDP) growth averaged 2.3 per cent in 2019 and Nigeria recorded the highest quarterly growth of 2.6 per cent in the fourth quarter of 2019. Inflation rate rose for the sixth consecutive month to 12.2 per cent in February 2020, the highest rate recorded since April 2018.

Growth in inflation rate was reflected in food inflation which rose to 14.9 per cent in February, from 14.85 per cent in January. Food inflation was driven by increase in prices of bread and cereals, fish, meat, vegetables, oil and fats.

“The impact of the pandemic will be more visible on economic activities in March, following the shutdown of airports, cancellation of events/ conferences, slowdown of business and the sharp decline in crude oil price.

“The lower GDP growth will stem from: Fall in government spending; depreciating naira; high inflation; sectoral impacts due to shut downs; movement restrictions, etc. Given these, we believe economic growth in the year will fall under two per cent, far below our initial estimate of 2.5 per cent,” it stated.

The outbreak of the pathogen led to a decline in crude oil demand from major importing countries such as India and China, even as talks between Russia and Saudi Arabia collapsed in March, forcing crude oil price to fall sharply to below $30 per barrel, from $52 per barrel on March 5.

FSDH predicted that crude oil price could fall further if the virus outbreak worsens.
“One major factor that will drive up inflation rate in March is panic buying as a result of uncertainties on the coronavirus situation. As the coronavirus situation worsens across Europe and the U.S., supply chains have been disrupted and stores continue to run out of stocks.

“Some Nigerians fear that this could be the case, especially as the number of confirmed cases continues to increase. This has resulted in panic buying, which has ultimately resulted in increase in the price of some food and non-food items.
“In March, the Federal Government reduced the price of fuel from N145 per liter to N125, following lower oil prices and a drop in landing costs for petrol.

“While this is a good move particularly given the importance of petrol in determining general prices of both food and core items, the impact will be minimal on average prices, which are often sticky downwards. The fall in oil price and consequently external reserves led to a devaluation of the naira to N380/US$ in March. Given this development, we hereby revised upward our inflation estimate to 12.6 per cent for 2020.

“The Nigerian forex condition is further challenged with a declining external reserves, which stood at US$36 billion on March 18, 2020,” the merchant bank added.

With pressure on the reserves, the CBN in March adjusted the exchange rate to NGN360/US$ from NGN306/US$. The CBN also harmonised the forex market windows as the new rates range from NGN360/US$ to NGN380/US$. In bid to ensure stability in the forex market, the CBN in it last Monetary Policy Committee (MPC) meeting unanimously voted to retain all parameters.

Total investment inflows in the country increased to $24 billion in 2019, from $16.8 billion in 2018. However, the report showed that on a quarterly basis, inflows declined consistently from $8.5 billion in 2019 first quarter, to $3.8 billion in the fourth quarter of 2019. In terms of composition, it showed that portfolio investment accounts for 68 per cent of total inflows while other investment had a share of 28 per cent.

“FDI inflows stood at $934 billion, accounting for just four per cent of inflows in 2019. Major factors responsible for the decline in foreign investment inflows include uncertainty on the economy, inconsistent policies, declining external reserves, insecurity and harsh operating environment for FDI.

“As stated in our outlook released in January, the above factors will continue to limit the inflow of foreign investment in 2020. Investment inflows in 2020 is expected to be lower than $24 billion recorded in 2019.

“As predicted in our previous Macroeconomic reports, FDI inflow remained at US$934 million in 2019 still below the US$1 billion mark. The outbreak of Coronavirus across developed and fast developing countries will slow down investment inflows in the year. Already, equities market in Nigeria have been hit; while investors are asking for higher rates on OMO securities.

“With the outbreak of coronavirus, trade figures will be negatively hit in the first quarter of 2020. Growth forecasts for Nigeria’s major export partners – India, Spain, France and Europe in general-have been cut due to restriction of movements of people and goods as well as shut down of industrial facilities.

“In the first week of March, Nigeria struggled to find buyers for its crude oil due to a supply glut arising from response of major oil producers to compete for market share, among other factors. This implies that the negative trade deficit recorded in the last quarter of 2019 could continue in 2020 first quarter,” it stated.