It’s almost like 2016 all over again in Nigeria. That’s after oil prices have plummeted below the Federal Government’s budget benchmark for the first time in three years, with focus again shifting to what President Muhammadu Buhari can do to make Africa’s largest economy less susceptible to oil price shocks.
The price of a barrel of Brent crude, Nigeria’s benchmark grade, has traded below the Federal Government’s $60 budget price peg for three straight days. The price settled at $57 per barrel on Friday, $3 short of the budget peg.
Nigerian oil grades have suffered their slowest sales of the year in August, traders said, as US exports of competing light, sweet grades flood traditional markets in Europe and Asia.
The Federal Government relies on oil sales for two-thirds of revenue and has failed to meet its income targets in the past three years mainly due to lower-than-expected crude volumes.
“It is disappointing that Nigeria’s fortune remains heavily tied to the price of crude oil,” said Ayo Teriba, a leading Nigerian economist and CEO of advisory firm, Economic Associates.
According to Teriba, that’s despite having opportunities to soften the impact of a decline in crude oil prices on the economy.
“We have $60bn in dollar-denominated equity sitting idle in JV assets that can be securitised and investors will jump at it, given the current liquidity glut,” Teriba said.
“We had this option before the oil price collapse in 2016 and long before the naira meltdown. We can’t have that much money and be scampering around whenever oil prices fall,” he said.
“Hopefully, this provides a timely reminder for President Buhari to act so that even if oil prices fall to $20, the economy and the naira are not in severe trouble,” he added.
Nearly 80 percent of economists polled by BusinessDay at the start of the year said that Nigeria risks another economic recession were oil prices to fall below $40 per barrel.
It took the same thing to tip Nigeria into recession in 2016, albeit this time production volumes have been quite stable in relative terms.
Critics say the lack of outside-the-box thinking to raise equity is one of the many shortcomings of the Buhari government.
President Buhari has continued to stall in implementing key market reforms like ditching expensive fuel subsidies to free up government resources for investments in critical sectors, such as health and education, even as only slow progress has been made in doing away with FX and electricity subsidies that have curbed investments.
Three straight years of negative per capita GDP in Nigeria and one of the world’s worst performing stocks have not been enough to force Buhari, who was re-elected for a second four-year term in February, to action.
After five months of delay, Buhari passed to the National Assembly a 43-man ministerial nominees list that was heavy on politicians but light on technocrats.
The ministerial nominees have all been confirmed by the National Assembly.
“The choice of ministers perhaps signalled the 76-year-old’s unwillingness to implement market reforms,” a fund manager in South Africa, who is underweight Nigerian equities, told BusinessDay.
Another major reform waiting to happen is passage of the petroleum industry legislation needed to drive investment in oil exploration and production.
The reforms being considered include selling part of the state’s controlling stakes in joint ventures (JVs) or converting them into incorporated JVs entities, which would enable them to raise funding from financial markets.
There are also plans to introduce royalties and taxes for the first time on deep-water exploration – a proposal that has faced stiff opposition from international oil companies including Exxon, Royal Dutch Shell plc, Chevron Corp., Total SA and Eni SpA, the state’s joint-venture partners.
Nigeria will be hoping crude oil prices rebound soon enough to avert a monetary and fiscal crisis, once again underscoring the fragility of Africa’s largest economy.
On the fiscal side, lower oil prices will affect revenue projections in the 2019 budget and create a bigger budget deficit. This is at a time when the government’s debt-to-revenue ratio of 60 percent means there’s little room for borrowing to plug revenue leakages like was done the past three years.
On the monetary side, there is also a general expectation that the CBN would change its dovish stance on interest rates and be inclined to hike rates this year to attract foreign portfolio inflows and ease the rising pressure on the naira.
After long months of hovering between N360 and N362, one US dollar exchanged for N363 naira at the market-reflective Investors and Exporters window for most of last week, its weakest level since the presidential elections in February.
The marginal decline has proved enough to draw the worry of foreign investors who are curious about what happens to the exchange rate in the near term if oil spends considerable time below the $60 mark.
“One of the talking points from clients is trying to get a better feel of what we believe could happen between September and February 2020 and this speaks directly to the exchange rate,” Akinbamidele Akintola, equity sales manager for Africa at Stanbic IBTC, said.
Total government maturities in that period amount to $14 billion and foreign investors account for about 40 percent. It means the Central Bank of Nigeria (CBN) could have to part with as much as $5 billion if all that money were to flow out. That would push the external reserves below $40 billion from the current $44.7 billion, the lowest since January 2018.
“We think the CBN can survive this pressure even though the risk that FX rates could move very marginally exists,” Akintola said.
“The US Federal Reserve looking to cut rates further would probably ensure capital to flow back to EM markets. However, if the oil price was to fall to $40 per barrel given the US/China tensions, things could change very quickly for us,” he said.
Investors have showed reluctance to invest in Nigerian equities since Buhari’s re-election in February, with the smart money opting instead for government debt.
Total offshore holdings in Nigeria rose to $27 billion in June from $26.8 billion in May. Most of the increase came from fixed income securities which were up to $20.7 billion.
Offshore holdings in equities have, however, plummeted by $4.5 billion, from a peak of $10.8 billion in February to $6.3 billion in June, according to recent CBN data.
“If oil prices remain on the downward spiral, the demand for government debt will wane drastically,” the South Africa-based fund manager said.
LOLADE AKINMURELE
