The outbreak of the coronavirus which has plunged oil price to its lowest in the year is expected to still weigh on investors’ sentiment this week as the Nigerian government has reported over a hundred contacts to the country’s first case, a 44-year-old Italian man who flew into Lagos from Milan Feb. 25 and was not quarantined until after 48 hours.
Following the spread of the deadly coronavirus to Lagos, Nigeria’s commercial hub and biggest city, investors went risk off and financial markets slumped, Friday, as the equities and bond markets witnessed record sell-offs.
Analysts expect the outlook for the market would depend on how resilient the oil market would prove to be and the national response in controlling the virus outbreak.
“Broad market sentiment would still be negative but we are not likely to see a steep decline on Monday if there are no further complications regarding the index virus case,” said Gbolahan Ologunro, equity analyst at Lagos-based CSL Stockbrokers Ltd.
Oil price fell to $49.67 as at 7:54pm on Sunday, from about $50 per barrel on Friday, while the number of people who had contact with Nigeria’s index coronavirus case keeps rising, hitting over 100 as at Sunday.
After Nigeria’s health minister confirmed the index case, banking stocks fell by the most in over four years on Friday as equities hit their lowest level in the year.
Thirteen banking stocks declined while one remained flat, pushing the sector’s index lower by 6.52 percent lower compared to 7.01 percent decline on January 15, 2016.
Meanwhile, the broader market lost 2.21 percent Friday, the biggest daily loss in nine months.
Flour Mills and Vitafoam gained while a record number of six stocks shed 10 percent, the maximum allowable in a day. Each of the top 10 decliners lost a minimum of 9.8 percent.
The bond market was not spared as average yields on government bonds rose by 5 basis points to 9.2176 percent on Friday compared to 9.17 percent in the previous day’s trade, according to data from FMDQ.
“The stock and bond sell-off is as a result of the knee-jerk reaction by foreign investors to the arrival of the coronavirus disease in Nigeria,” said Wale Okunrinboye, head of investment research at Sigma Pensions Ltd.
“The worry now is what happens if the sell-off shifts to the currency market as it could see the naira devalued in seconds,” one fx dealer told BusinessDay.
The naira weakened against the dollar to N365.25 per dollar Friday from N365.22 Thursday at the Investors and Exporters window.
The last thing Nigeria needs is the economic growth scare it is getting from the coronavirus outbreak.
The IMF already downgraded Nigeria’s economic growth forecasts to 2 percent from 2.5 percent in 2020 and if not properly handled the disease scare could pave the way for steeper downgrades in the short term.
Nigerian authorities are taking measures to stop the virus spreading, but the risks remain.
“If it continues to spread, the virus outbreak and subsequent slump in demand from China present major risks to the Nigerian economy,” Lukman Otunuga, a research analyst at FXTM, said in a note to investors Friday.
Crude oil sector accounts for less than 10 percent of GDP but remains the biggest source of foreign exchange for the nation, over 70 percent of export sales and half of government revenues.
“Falling oil prices would reduce foreign exchange reserves and ultimately complicate the CBN’s efforts to defend the naira, meaning potentially heightened pressures on inflation and consumption with an eventual impact on growth,” Otunuga said.
Lower oil prices will also impact the 2020 budget which was based on 2.18 million bpd production at an oil price benchmark of $57 per barrel.
According to Otunuga, the situation may prompt a greater focus on monetary and fiscal policy to shield the economy from external risks.
“The CBN meets in March but the economy remains under inflationary pressure so it is unlikely we’ll see an interest rate cut. Instead, the central bank may implement more unconventional tools to stimulate the economy,” he said.
It’s not all doom and gloom for Nigeria.
There is still a possibility that the virus outbreak will be brought under control, meaning a return to full power for Chinese and Asian growth and a relief to health authorities and policymakers in Nigeria and other countries.
Nigeria’s health authorities have experience managing infectious-disease outbreaks after their successful handling of the Ebola outbreak in West Africa in 2014-15, in which more than 11,000 people died. Twenty cases of that disease were confirmed in Nigeria, of which there were eight fatalities.
The government is working to ensure an outbreak in Nigeria is “controlled and contained quickly”, the ministry said. A Coronavirus Preparedness Group, led by the Nigeria Centre for Disease Control, has activated its national Emergency Operations Centre and will work closely with Lagos health authorities to respond to the case, it said.
So far, there are over 83,000 confirmed cases with over 2,800 deaths. The World Health Organisation (WHO) has identified Nigeria as one of its top 13 priority countries because of the direct links and travel volume to and from China.
Since the onset of the virus outbreak early in the year, oil prices have slipped over 15 percent amid demand-side concerns, the USD has appreciated against G10 and emerging market currencies against a background of risk aversion, and gold has jumped to fresh seven-year highs.
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