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A look a global governments and COVID-19

Governments in Western democracies are admittedly spending again in response to the second wave.

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As much of Europe and the US struggle with the second wave of COVID-19 infections, it seems a good time to share a few opinions on what their governments and their health practitioners have learned from the first wave that broke in March.

The number of new cases has soared in these countries in recent weeks, due in part to the continued growth in testing capacity. Fortunately, there has not been a corresponding increase in the number of deaths. This probably reflects lessons learnt by medics in treating COVID-19 during the first wave.

Unfortunately, we cannot be as generous with governments in the West on their learning from the first wave. They have access to resources beyond the dreams of their counterparts in low-income countries. Before any recent measures, the additional fiscal stimulus in response to COVID-19 in the UK was estimated at 14.5% of GDP in August, compared with 1.5% for the response to the global financial crisis in 2008. The comparable figures from the same source for the US were 12.1% and 4.9%, and for Brazil 5.5% and 0.6%. With the exception of South Africa and a few other states, the figure for African countries would be less than Brazil.

Governments in Western democracies are admittedly spending again in response to the second wave. They do not want to appear uncaring or faceless, and are responding to pressure from the political opposition, the media and the soaring number of policy units. Had it not been for the imminent presidential election, the US Congress would surely have agreed on a second fiscal relief package. Nevertheless, several of them have acknowledged that their fast-disbursing loan schemes for business are targeted by criminals. In the UK and US for example, there seems little doubt that taxpayers will be footing a very large bill for fraud, yet given the circumstances we do not see what else the governments in question could have done.

The reality remains that there is no standard official response to the second wave. This tells us that the jury is out on what was the best response to the first. Some have closed down hospitality completely, some have closed down part of it and others have shortened opening hours. In some cases, schools have been closed and in others they remain open.

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Governments have limited the restrictions because of the cost, and because of worries about compliance. A small minority of the population are opposed to the controls on libertarian grounds and on the basis of assorted conspiracy theories, but the far greater threat comes from fatigue with restrictions. We must now question whether severe lockdowns on the scale seen in France and Spain for example in the first wave are feasible a second time. Are there enough police to enforce the controls, particularly in volatile inner cities? If there are not, are the new controls warranted? The riots in major Italian cities in recent weeks may provide an answer.

COVID-19 has given a huge boost to forecasting and modelling in macroeconomics, medical science and behavioral science. But governments are guided by at best average advice because to be very blunt, practitioners simply do not really know. Perhaps we should not be surprised, because we are in new territory with the first global pandemic in modern times. The best we can expect is that, as events unfold, our medics and our leaders will learn from experience.

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Effects of the recession on families and how to cope

For families, it will require a lot of sacrifice, adjustments and prudence in the management of resources to navigate the economic storm.

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The National Bureau of Economic Research defined a recession as a significant decline in economic activities spread across sectors, lasting more than a month, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale/retail sales.

According to the just-released data by the National Bureau of Statistics, Nigeria’s Gross Domestic Product (GDP) declined by -3.62% (year-on-year) in Q3 2020, thereby marking a full-blown recession and second consecutive contraction from -6.10% recorded in the previous quarter (Q2 2020).

READ: CBN gives up on its policy of attracting dollars

The year 2020 has been a trying time, not only for Nigerians but for the world generally; this is as a result of the novel coronavirus, which has impacted the economy negatively.

The Nigerian economy over the years has been striving to be stable because of the mismanagement of funds, high debt rate and unemployment, etc. However, the recent recession compounded Nigeria’s socio-economic challenges caused by the COVID-19 Pandemic and Post #Endsars Violence.

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READ: AutoGas: President Buhari to launch scheme on December 1

Furthermore, to curb the spread of the pandemic, a lockdown was imposed nationwide, during the period of March to August 2020 and a lot of families found it challenging to survive the impact of disruptions to daily commercial activities.

Some had to dip into their savings to remain stable during that period. Jobs were lost as some companies could not afford to pay salaries, while some companies had chosen salary reduction as a way of sustaining their businesses.

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Prices of goods and services also increased astronomically during this period. On the other hand, economic activities, religious and social gatherings were limited to contain the pandemic across the nation and the negative effects on the economy.

READ: VAT collection edges higher but indicates weaker economy

The following are the major causes of recession in any given economy as drawn from the past Nigeria economic recessions:

  • A general rise in price of goods and service which leads to low purchasing power.
  • Increase of debt, especially foreign debts.
  • High-interest rates discouraging investors
  • Importation bans in Nigeria which increased poverty rate in Nigeria.
  • Mass unemployment and general loss of confidence in the government due to the challenging economic indices.

READ: Explainer: What does GDP actually mean, and how does it affect you?

In a recession, families with little or no barriers to resist the effect of recession are most likely to be hit severely. Though there are some families who may not be able to avoid the effects of the recession, they can make changes that can improve their situations and help them prepare for the future, while they wait for an economic upswing,

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Nigeria’s Q3,2020 Recession, below are the implications on families and households

  • Rising food inflation of over 17% will impact the cost of food prices as the festive season beckons.
  • Purchasing power parity of Nigerian households is challenged due to the economic situation.
  • Marital issues crop up, as financial pressures can damage mental health which can lead to depression and frustration in marriages.
  • The low-interest yield environment in the Nigerian capital market also affects appetite for savings in the fixed income market.

READ: Emefiele tells economists to stop “overdramatizing” analysis that can create Panic

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The unfortunate condition could be managed by families with these measures:

  • Families are advised to cut down costs ruthlessly, especially in this festive period. Have a reasonable festive celebration.
  • They should have a budget/financial plan put in place for the year 2021 as no one knows how things will unfold.
  • There is a need to have another stream of income or work overtime to sustain your family during this period and this can be achieved if you are skillful.
  • It is also advisable to purchase all you need for the festive season now, as prices of goods and services might triple because of the festive period.
  • It is crucial for some families to switch to cheaper schools around with the same qualities and standards to reduce expenses.
  • FMCGs are already tailoring the sachet-economy to the lower-class families whose earnings have dropped this year.
  • Households experiencing financial difficulties during this period are advised to position themselves to see how they can benefit from the various interventions from the Government for citizens.
  • Couples should have conversations around their finances and prioritize expenses while adapting to the new economic realities and coping with necessary adjustments

READ: Nigerian economy going into recession, might contract by -8.9% – Finance Minister

What Government can do to enhance the economy

  • Tax rates should be reduced on individuals, corporation, and small businesses. This high tax rate is affecting many small-scale businesses. Foreign investors will also be encouraged by the reduction in tax rate. This will increase inflow of dollars to Nigeria’s economy, and ultimately increase investment and standard of living. It will solve the problem of high exchange rate.
  • It is important for the government to curtail any unnecessary expenditure and focus more on expanding her export earnings and production through wise investment. Putting funds into the economy is a good idea, but there is need for diversification, allowing the free flow of naira and stabilizing the oil sector, modernizing agricultural sector. By this, Nigeria can spend her way out of recession wisely.
  • Enhanced Access to Credit: Here, the Nigerian government, especially the federal and the state government, should grant soft loans to small and medium scale enterprises, to enable them boost gross domestic product (GDP) of the country. In the same vein, agricultural credit should be given to farmers to enhance adequate food production and reduce the bike of farm produce in the country (Nigeria).
  • Nigerian Government should increase its expenditure on skills. It is only skills that lead to productivity and competitiveness as a nation. So, government should invest in skills acquisition in ICT, Telecommunications, Agro-allied, Sports, Vocational training among others. The training should be 80% free practical. There is need for multiple competence, particularly among youths as a measure to curb increase in global joblessness. The greatest challenge today in Nigeria is unemployment. The government should partner with private organizations, to organize entrepreneurship and skills acquisition programs for the youths. There should be a high level of transparency in the program to ensure the best candidates are picked. This way, Nigeria will soon see herself on top of the fastest-growing economy in Africa.
  • Increased Agricultural Production: There is need to reposition agriculture as a major driver of the economy, like in the 1960s when it was the major revenue earner in the country. Today, Nigeria spends billions of US dollars a year on the importation of agricultural products. The youths, as earlier stated, should be encouraged to go into Agri-business covering the entire value chain.

READ: World Bank: Lower oil demand may persist till 2021

Conclusion

For families, this will be a challenging time, and it will require a lot of sacrifice, adjustments and prudence in the management of resources to navigate the economic storm.

Financial institutions should be encouraged to support the real sector playing the intermediation role.

In the Fiscal Policy space from the Finance Bill 2020 the government has taken some key steps in taxation and duties to reduce the burden on families and companies, but the process must be followed through effectively for implementation.

READ: Nigeria’s oil sector contracts by 13.89%, as covid-19 plunges economy into recession

The Government should demonstrate its seriousness in policy by cutting down costs from the Federal to State, and block all the leakages ensuring that funds are invested in infrastructure, healthcare, education and security.

Nigeria is a nation with resilient people. Families should remember that this is just challenging period to navigate what has been an unprecedented year in the nation’s socio-economic space.

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Recession; proactive measures not cyclical factors can resuscitate economy

The National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession.

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FG warns Nigerians about on-going N3million COVID-19 grant scam, IMF, World bank loans, Over 56% of 2019 budget expenditure was released for capital projects , FG changes decision to sell stake of oil assets in JVs, Finance Bill: Nigeria exempts small businesses from Company Income Tax , Finance Bill is for the good of Nigerians – Finance Minister, Zainab Ahmed, Nigeria, five other West African countries reject ‘Eco’ as ECOWAS single currency, FG rejects calls for tax reduction, tax relief for donors to intervention funds, Nigerian economy going into recession, might contract by -8.9% - Finance Minister, Nigeria to spend $33.20 billion in 2021 up 17.2%, will spend 25% of budget on debt servicing - Finance Ministry, COVID -19: FG accesses $750m loans from World Bank for states

Earlier this week, the Minister of Finance, Budget & National Planning, Zainab Ahmed attended the 26th Nigerian Economic Summit and in her presentation highlighted some of the steps and investments the government is making to bring the economy out of a recession. Some of the points she highlighted were; stimulating the economy by preventing business collapse through ensuring liquidity, retaining and create jobs through support to labour intensive sectors such as agriculture, undertake growth-enhancing and job-creating infrastructural investments in roads, rails, solar power and communications technologies, promoting manufacturing and local production across all levels as well as advocating the use of made in Nigeria goods & services. She also highlighted focus on pro-poor spending as a strategy to mitigate the impact of covid-19 on poor households.

We recall that during the weekend, the National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession. Following the 6.10% contraction recorded in Q2 2020, the economy further contracted though at a decelerating rate of 3.62% in Q3 2020. We reckon that prior to the covid-19 crisis, economic growth had began to slow with Q1 2020 GDP growth of 1.87% trailing prior 5-quarter average of 2.29% (excluding Q1 2020). The economy has largely survived on an oil-led recovery which we consider cyclical with other core sectors lagging and reeling from the fallout of the impacts of the 2016/17 recession.

In our view, the government needs to be proactive and strategic about policies it intends to adopt to resuscitate the economy. The focus on social welfare, fiat-led interventions in agriculture, emphasis on infrastructure development and advocacy for local manufacturing is reminiscent of prior strategies that can’t be really be considered successful. In our opinion, the economy is in dire need of influx of investments and adequate skill pool to spearhead resource allocation, which we believe can be provided by the private sector. Thus, the public sector should in our view invest in tackling structural issues around ease of business operations (borrowing costs, regulatory & licensing bureacracies/inconsistencies, public agency corruption & FX policies etc.) as well as strengthening regulatory & legal frameworks while the private sector drives the investments for accelerated growth in manufacturing, infrastructural development, agriculture and other core sectors.

In our view, supporting a free market-led economy (given the more organised nature of the private sector than the public sector) would see a return of foreign direct investments into the Nigerian economy while local entrepreneurs would be motivated to take more risks to develop businesses. The outlook for oil prices remain weak and production levels may remain below historical levels as OPEC attempts to keep price stable. Thus, the possibility of a cyclical recovery is limited, only proactive measures to correct long term structural issues would restore the economy on the path of accelerated inclusive growth.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Understanding T.I.N.A. in the Nigerian financial system

As investors face an environment where uncertainty persists, the alternative left will be to park their excess funds in a safe place until Covid-19 passes.

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This week, I want to talk about T.I.N.A….(no not the girl)

T.I.N.A. is an acronym for There Is No Alternative. It is used to describe a situation where the markets have excess liquidity and have no outlet to invest, so they invest in low yielding government securities because there is simply no alternative out there.

The financial markets today are awash with liquidity.

In the US for example, the CARES Act 1 cost an estimated $2.3t (11% of US GDP) including $510b to prevent bankruptcies and $349b in Small Business Administration Loan.

All this cash simply increases the liquidity of the financial system. The US Federal Reserve further lowered rates to a band of 0-0.25% in March 2020, the effect? Rates offered by banks on deposits have crashed.

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Thus investors face an environment where the economy is shut because of Covid-19, and uncertainty persists. The only alternative left to the market is to park their excess funds in a safe place until Covid-19 passes, that safe place being US Treasuries and Bonds.

Thus the Fed and US Treasury can offer the low yielding paper to the market because the market is chasing safety, the investors buy because there is no other safe alternative out there, safety first.

It’s the same in Nigeria, the economy has contracted due to the COVID-19 mandated shut down and also exchange rate and land border closures.

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These issues have strained the economy and have been amplified by falling economic output. As a result, investors are very risk-averse and are not willing to expose their capital to risk, thus they are seeking the safety of the sovereign paper.

(READ MORE: The economy may end up weaker if inflation rate is not controlled – CBN report)

The Central Bank of Nigeria (CBN) faced with a glut of liquidity has done what any prudent banker will do, it has dropped the fees it pays to lenders when it borrows money from them.

Thus the Nigeria Treasury bill rate which is the cost of the CBN borrowing at the short end of the market, (less than 365 days) has fallen.

Take the latest auction of Treasury Bills dates 11/11/2020, the rate now being offered by the CBN for 91day and 364-day paper is 0.0350% and .300% respectfully.

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The low rates to my mind is not a surprise, but consider that the CBN offered to borrow N19b from the market, but received subscriptions from the markets to place N99b, this at 0.0350%.

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Why are investors flooding the Sovereign Debt market with money? Because there is no alternative viz a viz risk and reward.

The Nigerian Stock Exchange All Share Index for instance has fallen from a recent high of 42, 624 in January 2018 to 32, 990 as of the Week ending Friday 20th, 2020.

In essence, the Nigerian investors prefer to book negative real return by holding risk free government paper than take any investment risk by exposing their capital to commercial lending.

(READ MORE: Uber, JP Morgan Chase, Moderna gain, COVID-19 vaccine triggers U.S Stocks Up)

Again this is a normal consequence when there is uncertainty in the markets but the lack for a better word “greed” in the markets has offered the CBN a rare chance to drop rates even in an inflationary environment.

The consequences of T.I.N.A. in the Nigerian financial system is clear.

Low rates will discourage savings, already the Pension Fund Administrators have a decision to make if they will continue to hold a full 8% of their portfolio in a negative-yielding but safe investments. T.I.N.A. also supports the Central Bank of Nigeria’s strategy to force banks to lend to the real sectors.

By dropping the risk-free rates in the economy, the CBN is making a point that there is no more free lunch, rather yield will have to be generated from creating risk assets and earning a return.

This sounds good on paper but the investing environment in Nigeria is yet unchanged positively, new taxes are being proposed, land borders are still shut, wages are still low and falling due to inflation.

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In general, the Nigerian consumer is in a weak state with very low buying power, as evidenced by the sachetization of the consumer space. It will take a brave investor to commit funds, but then again, fortune, they say, favors the brave.

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