Nigeria needs to brace for an extended foreign exchange rate crisis as oil markets face a tough year-end, which analysts see as impacting the economy of Africa’s most populous country.
The world’s oil markets are bracing for a tough year-end as Europe enters another lockdown driven by a second wave of the coronavirus pandemic that shutdown global economy and plunged oil prices to nearly zero dollars early in the year.
Biggest fears
The threat of this prolonged second wave could lead to oil surplus in 2021, something the Organisation of the Petroleum Exporting Countries (OPEC) says it fears.
“The earlier signs of economic recovery in some parts of the world are overshadowed by fragile conditions and growing scepticism about the pace of the recovery. In particular, a resurgence of COVID-19 cases across the world and prospects for partial lockdowns in the coming winter months could compound the risks to economic and oil demand recovery,” Reuters quoted OPEC as said in a document.
For Nigeria, who is already losing its European oil market share to the US, another wave of COVID-driven lockdown signifies a threat. West Africa, especially Nigeria, is one of Europe’s main sources of crude and given that very few of cargoes from September have been sold into the region, Nigeria will have to give a great discount to sell off its November cargoes, Olatunde Dodondawa, oil market analyst tells The Africa Report.
“Nigeria needs to keep its market share of the European market. I know that November cargoes have not been sold as at today and also remember that there was a time when crude was sold at negative prices. Sellers, like Nigeria, will have to give as much discount as they can to keep their market share and reduce CIF,” he says.
Just ahead of the second Europe-wide lockdown, Nigeria was already losing its European market share to the US. “Nigeria’s Brass River and Forcados have similar qualities with the US grades and the US crude is cheaper. With this second lockdown, more sales will be lost in both the short term and long term. Nigeria has to think of incentives to attract buyers. Incentives like attractive discounts which may result in loss of revenue to the country,” adds Dodondawa.
Foreign exchange crisis
With a potential drop in oil prices, Nigeria is likely to face a foreign exchange crisis for longer as crude oil, its top revenue source is selling at less than $40 a barrel, says Olumide Adesina, an investment trader and member of the America-based Chartered Financial Analyst (CFA) society.
Forex liquidity squeeze “will continue for as long as oil prices are down and Nigeria fails to diversify its economy,” adds Samuel Segun, South-African based analyst at SBM Intelligence. According to him, “following the first wave of COVID-19, foreign portfolio investors (FPIs) pulled out their investments from Nigeria, causing a further forex squeeze.
If the lockdown affects demand for crude, it would mean reduced forex earnings for Nigeria and an “inability to finance the budget and meet key government obligations,” adds Segun.
The Nigerian government is basing its 2021 benchmark at $40 per barrel, up from $30 from 2020, when the country had to revise the 2020 budget oil benchmark from $57 per barrel to $30. Its production output was also revised from approximately 2.1 million barrels to 1.7 million per day.
Budget proposal
The 2021 N13trn budget proposal for 2021 and presented by President Muhammadu Buhari to the national assembly is based on a $379 exchange rate and an oil benchmark of $40 barrel per day. The budget proposes an oil production volume of 1.86 million per day and a Gross Domestic Product growth target of 3%, as well as an inflation rate of 11.95%, on the assumption that Nigeria’s economy will grow 3% by 2021.
“We do expect that Nigeria’s economy will recover to the path of growth early in 2021; so the total aggregate revenue that is projected for the 2021 budget is N7.89tn and what is unique about the 2021 budget is that we have brought in the budgets of 60 government-owned enterprises,” Zainab Ahmed, finance minister said of the budget early last month.
But speaking on Thursday 5 November, Ahmed, cautioned that that the resurgence of COVID-19 pandemic in Europe could affect the 2021 budget estimate.
“The actual projection was $40 per barrel and that is the average price that we projected to be for the year. Some of the institutions that are responsible for tracking price of crude oil actually have crude oil price going as far as $50, $52 per barrel. We took the safer path. It seems the second wave of COVID-19 in Europe is affecting us. We are hoping to have clarity as to which direction to take in the next week or two,” she said.
The budget was predicated on $40 per barrel, but at the moment the current price of the crude oil in the market stands at $37.
Nigeria’s persistent economic problems including rising inflation rate, as well as fall in in the Purchasing Managers Index (PMI) caused by dollars’ scarcity as well as depressed in crude oil prices are likely to ‘stifle’ growth in Africa’s biggest economy.
The way Adesina sees it, “until crude oil prices stabilise above $50 amid falling foreign exchange reserves that continue to add pressure on the Naira, Nigeria [will] start down a potential prolonged foreign exchange shortage.”
‘Protracted forex crisis’
A “protracted forex crisis could mean higher food prices, more borrowing to meet budget demands and difficulty in servicing the country’s debts,” in a country with an “ineffective local manufacturing industry, Nigeria has to depend on importing a lot of things including food and healthcare resources”, adds Segun.
Nigeria’s persistent economic problems including rising inflation rate, as well as fall in in the Purchasing Managers Index (PMI) caused by dollars scarcity as well as depressed in crude oil prices are likely to “stifle” growth in Africa’s biggest economy and “could impact the unemployment rate in the coming months,” says Comercio Partners, an Investment Management firm in Lagos.
The PMI for the non-manufacturing sector stood at 46.8 points in October 2020, indicating contraction in non-Manufacturing PMI for the seventh consecutive month, according to data from the Nigerian central bank, while the manufacturing PMI improved slightly in the same month to 49.4 index points from 46.9 index points a month prior, indicating slowing contraction in the manufacturing sector compared with the last five months.
Bottom line
“As a country that depends hugely on foreign exchange from crude sales, Nigeria should brace for tougher times ahead. More important, it should ensure there is peace in the Niger Delta, as it cannot afford attacks on oil installations at the moment or ever. Nigeria should begin to take seriously its agenda for economic diversification and promote a serene environment for foreign investors to play on a level playing field,” says Dodondawa.
– The Africa Report