Nigeria has been grouped alongside Algeria, Iraq, Libya and Venezuela as members of the Organisation of Petroleum Exporting Countries (OPEC) ‘fragile five’, according to RBC Capital Markets Ltd.
The countries are said to be OPECs most vulnerable nations who are exposed to risks of worsening political and economic turmoil as oil prices plunge to six year lows.
“While promises of reform from newly elected President Muhammadu Buhari have bought Nigeria time, the grace period won’t last indefinitely,” according to RBC Capital Markets LLC analysts, Christopher Louney and Helima Croft.
The naira has weakened 7.8 percent against the dollar this year, pushing inflation beyond the Central Bank’s upper target of 9 percent.
The Central Bank of Nigeria (CBN) reserves may start to fall again after a recent uptick, as the naira is most likely to continue tracking lower oil prices.
The CBNs gross dollar reserves stood at $31.6 billion on August 18, 2015, down 8.8 percent from $34.4 billion on December 31st 2014, data from the CBN shows.
Oil prices have slumped as a global surplus remain almost nine months after OPEC unveiled its plan to squeeze rivals led by U.S. shale drillers.
American production has however remained resilient, while the lower oil prices resulting from unabated supplies have affected Nigeria’s growth prospects.
Oil proceeds account for 70 percent of Nigeria’s Federal Governments revenue and 95 percent of exports.
This has meant a squeeze in the government’s ability to fund capital expenditure (capex), with most public construction projects cancelled or mothballed.
Growth in the first quarter of 2015, slowed to about 4 percent, from on an annual basis, compared with 5.9 percent a quarter earlier, as the oil sector shrunk by 8.2 percent, the National Bureau of Statistics said.
Crude-oil futures fell as much as 1.1 percent on Wednesday in New York, and traded down 0.5 percent at $42.39 a barrel as of 7:46 a.m. local time. That’s less than half the price a year ago.
Nigeria which accounts for 6 percent of OPECs production has been unable to increase production sufficiently to offset the fall in oil prices as output remains close to 1.98 million, data compiled by Bloomberg show.
Nigeria needs $119 per barrel to balance its budget according to the International Monetary Fund (IMF).
The loss of government revenue has meant workers not being paid salaries in most Nigerian subnationals or states, which has the prospect of increasing political and social instability.
Renaissance Capital Sub Sahara Africa analyst, Yvonne Mhango, says interest rates and government wages have the highest correlations with consumer confidence in Nigeria, which has remained weak.
“We think this is explained by the fact that tight liquidity and high interest rates inhibit access to credit, particularly for those traders and distributors of consumer goods that partly depend on credit to facilitate their businesses.
“We attribute the government wage correlation with consumer confidence to the fact that they collectively reflect wages of one-third of the c.11mn formal workforce,” Mhango said in a July 31 note.
Libya’s risks of further political chaos are among the highest in the organisation, matched only by Iraq, according to RBC.
Threats have also intensified in Algeria, as it faces “a looming leadership transition,” spurring the country last week to suggest an emergency OPEC meeting.
The economies of both North African nations tipped into a current account deficits last year after more than a decade of surpluses.
PATRICK ATUANYA and wire reports
