Nigeria doesn’t have the buffers it did in 2008 to shrug off an oil-induced global recession, leaving the economy more vulnerable to a fiscal and monetary crisis this time around.
“The buffers we have today are nowhere near 2008 which means we are more vulnerable to an economic meltdown that could be worse than 2016’s recession,” said Bismarck Rewane, a leading Nigerian economist and CEO of consulting firm, Financial Derivatives Ltd.
“The steps the government must take to calm the markets this time will be much more profound since sufficient buffers don’t exist,” Rewane who is also a member of the Presidential economic advisory council said.
Nigeria survived the 2008 global recession thanks to sufficient buffers in the form of external reserves worth $62 billion and excess crude savings of $20 billion.
In 2008, Nigeria also owed $3.7 billion in external debt and inflation rate was 11.58 percent. The exchange rate was also N117 per dollar.
The same indicators are almost unrecognisable today. External debt for one has surged 627 percent to $26.9 billion as at September 2019, according to data by the Debt Management Office (DMO).
External reserves have nearly halved to $36 billion and excess crude savings are 90 percent depleted to below $2 billion (including the funds under management by the NSIA).
Total government earnings have also slumped three-fold to $17.9 billion, according to Central Bank of Nigeria (CBN) data.
Inflation rate is also higher today at 12.13 percent while the exchange rate has weakened to N306 or N366 depending on which market is being tracked whether it’s the CBN official window or the Investors and Exporters window.
The stock market’s valuation is also down from $48 billion in 2008 to $42 billion as at March 9, 2020.
“The indicators clearly show we are not anywhere prepared for an oil dip of this magnitude,” said Kyari Bukar, former chairman of private sector advocacy group, Nigerian Economic Summit Group (NESG).
“If Nigeria’s fiscal position wasn’t already precarious enough, this makes it ever more pronounced,” Bukar added.
Nigeria’s fiscal weakness and external vulnerabilities were the deciding factors when the International Monetary Fund (IMF) downgraded the country’s economic growth forecast to 2 percent from 2.5 percent in February.
“External vulnerabilities are increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals,” said Amine Mati, a Senior Resident Representative and Mission Chief for Nigeria at the IMF.
“Under current policies, the outlook is challenging. Inflation is expected to pick up, while deteriorating terms of trade and capital outflows will weaken the country’s external position,” the IMF said even before the coronavirus outbreak and Saudi Arabia’s oil price war sent crude tumbling to historic lows.
Oil’s drastic dip has sparked the biggest stock market sell-off since the financial crisis in 2008. Shares around the world faced one of their worst day Monday with the dramatic falls leading to the day being dubbed “Black Monday”.
London’s index of top shares ended the day almost 8 percent lower, with some £125bn wiped off the value of major UK firms.
Similar falls took place across the US, Europe and Asia as a row between Russia and Saudi Arabia saw oil prices plunge.
Nigerian stocks also fell by the most in 25 months Monday while Yields on the country’s 2049 Eurobonds climbed 143 basis points to 10.18 percent, the highest on record, while the naira depreciated by 13bps to 366.71/US$ at the I & E window but remained flat at 360/US$ in the parallel market.
Nigerian President Muhammadu Buhari set up a committee Monday that featured the minister of finance as well as the Central Bank governor Monday to look into the impact of the coronavirus outbreak and oil downturn on the economy.
Further clarifications on the decision made by the committee will be communicated in the coming days, according to Zainab Ahmed, the minister of finance.
Nigeria must come up with a strategy to deal with the imminent financial crisis at a time when investors are betting on a naira devaluation.
The central bank’s reserves have decreased by 20 percent in the past two years to the lowest since November 2017, and may soon reach the $30 billion threshold set by CBN Governor Godwin Emefiele for the country to consider a devaluation, Jason Daw and Phoenix Kalen, strategists at Paris-based SocGen, wrote in note on Monday. The central bank may start adjusting currency policy before it reaches that point, they said.
Naira fundamentals are on an unsustainable trajectory and under current external conditions, especially lower oil prices, the risk of a devaluation is “very elevated,” the SocGen strategists wrote. “The combination of a current-account deficit — previously due to strong imports but now being compounded by weak exports — portfolio outflows and lower oil prices will continue to deplete FX reserves and pressure the naira.”
Afrinvest advices a gradual adjustment of the currency that would better help the economy adjust to the current shocks and support government revenues.
The analysts say a 12-month forward rate suggests a currency value of N408.94/$ and “using the long-term Real Effective Exchange Rate or REER equilibrium of Nigeria, we forecast a similar 10.0%-15.0% adjustment,” they said in a note to clients Monday.
Meanwhile, currencies of global oil producers dropped to uncomfortable lows.
The Russian Rubble fell 8.24 percent against to trade against the green back at 74.2937 a unit.
Big oil producer, Venezuela saw its inflation-stricken Bolivar Sober sell for 0.04 percent higher at 73,132.6172 to one dollar.
United States dollar also climbed 0.13 percent against the Saudi Riyal to trade at 3.7581.
Similarly, Brazil’s Real weakened Monday to sell higher at 4.7608, while Kuwait’s Dinar depreciated marginally against the dollars to 3.2788.
US dollar also gained 0.5 percent on the Egyptian pound to sell for 15.7150 a unit, as oil producers watched Saudi Arabia sell its oil at a discount in a bid to force Russia back to the negotiation table for the cartel’s biggest production cut since 2008.
Most oil producers saw their currencies fall, the Angolan Kwanza to 488.0425 while the Iraqi Dinar remained flat at 1,182.8718.
“For Nigeria, pressure on the currency amid slower dollar inflow would be on the front burner as the ability of the Central Bank of Nigeria to support the naira with its dwindling foreign exchange reserve comes into question,” one economist who did not want to be quoted said.
The buffer has declined since the start of the year to only about $6bn above the apex bank’s minimum threshold.
Last month, Bloomberg polled more than a dozen analysts, fund managers and economists in Nigeria and abroad who said a devaluation of the naira is imminent at most by 2021.
LOLADE AKINMURELE, OLUFIKAYO OWOEYE & SEGUN ADAMS
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