Macro Forum: The Street View
Lagos State official carrying disinfecting machines
Low oil prices exposes fiscal vulnerabilities in addressing COVID-19
Nigeria felt the impact of COVID-19 even before it confirmed its initial case in late February as slowing global demand and the inability to stabilise prices via production cuts depressed oil prices. With oil prices way below the original 2020 budget benchmark price of $57, fiscal revenues could be at least 40% down year on year. Nigeria’s ability to respond to the global pandemic and the associated global downturn has become even more daunting.
Containment strategy challenging for a mostly informal workforce
As confirmed cases rose, the Government implemented social distancing policies to contain/flatten the curve of the epidemic; including closing borders, stopping international flights, banning all gatherings and shutting down schools/universities. On 30th March, a 14-day lock down was instituted in Lagos and Ogun States and Abuja, the key international gateway cities that account for over 75% of the confirmed cases. COVID-19 has spread to 19 of Nigeria’s 36 states most of whom are adopting of social distancing policies.
Containment and social distancing policies are necessary given a healthcare infrastructure that can’t manage a full blown epidemic. Despite this, the sustainability of the lockdown is questionable. This reflects (1) the high levels of unemployment/under employment estimated at over 55% of working age population, (2) the near 90m people living on less than $2/day; and (3) the high proportion of workforce in the informal sector dependent daily/weekly wages with no savings to tide over the lockdown.
There has been some intervention by the federal Government via direct transfers to a reported 2.6m people across the country and food distribution by regional Governments to about 0.5m vulnerable households. Ironically implementing these social programs resulted in chaotic crowds that totally negated the principle of social distancing.
Crowded and unsanitary living conditions in slums render social distancing impracticable and possibly ineffective. Hence, it is unlikely that the lockdown can be sustained for much longer without social upheaval. Already there have been sporadic violent incidents in suburbs of Lagos and Ogun.
The COVID-19 healthcare response and impact
Federal and state Governments have ramped up COVID-19 response facilities and have been commended by WHO for the pro-activeness of the testing, isolation, tracing and monitoring of the confirmed cases and their contacts. Though widely noted that the rate of testing is still quite insignificant, the numbers of the critically ill patients presenting in hospitals remains low.
Limited Capacity for Fiscal Stimulus
Depressed external conditions (capital flight by foreign portfolio investors, weaker diaspora remittances, pressure on external reserves and currency) and deteriorating fiscal conditions (from drop in oil prices, lower tax revenues, widening deficit and debt sustainability pressures) will increase economic misery in 2020.
The economy is now widely expected to contract, unemployment will rise and inflationary pressures will worsen from the increase in VAT from 5% to 7.5% that came into force in February as well as the imported inflation from the adoption of the single exchange rate and the weakening of the NGN on NAFEX by 6.67%.
The central bank announced monetary stimulus which are targeted at productive and impacted sectors, including healthcare as well as regulatory forbearance to facilitate loan restructurings.
While revenue was reduced 40% reflect drop in oil revenues, costs only reduced by 3%. Hence, the fiscal deficit and borrowing are set to mushroom.
Taking advantage of the crisis to implement key reforms
One positive, is the plan to seek low interest loans from multilateral agencies to fund its deficit, which will give an impetus to the Government’s economic reform plans. Long planned oil subsidy removal, full deregulation of the downstream oil industry and adoption of single exchange rates have been recently announced as well as plans to privatise the refineries.
Impact on Actis Portfolio
Social distancing policies will likely remain in place until the global pandemic is fully under control. We thus expect that there will be more significant medium term impact on travel and hospitality, entertainment and retail subsectors exposed to discretionary spend consistent with other markets.
Our investment in the Four Points Sheraton Hotel in Lagos, a business hotel has seen a shrinkage of it business from traditional overseas and regional business travellers due to the restrictions on travel and gatherings.
New business opportunity has however arisen from corporates seeking to accommodate key workers close to the critical business sites during the lock down. This does not fully compensate for the lost revenues, but is welcome to in order to meet operational cash flow requirements.
Jabi Mall the leading destination mall in Abuja, is closed by the lock down except for essential services that include food grocers, pharmacies and restaurants (for takeout/ deliveries only) all of whom continue to trade relatively well. We expect that it may take six to nine months post COVID-19 for the trade levels and footfall to be restored. Hence, there is active engagement with tenants and lender to address the cash flow challenges that the asset will face.
A more moderate impact expected on consumer sectors for non-discretionary goods and services for example education and non-bank financial services. As an increasing number of businesses are able to operate remotely given wider internet penetration and availability of collaborative tools. There has been a strong demand for data, e-commerce and electronic payment services and this is driving co-location services in data centres.
The Actis owned datacentre, Rack Centre Limited, has experienced some positive impacts with the onset of COVID-19 such as improved debt collection and business enquiries as the importance of business continuity has been elevated.