Oil prices touched new lows Thursday, adding to a list of growing headaches for Africa’s largest oil producer.
Brent Crude, the benchmark for Nigerian oil, fell to $50.9 per barrel as at 11 am Thursday, according to Bloomberg data. That’s the lowest since July 2017 and the lowest level this year.
That has all sorts of implications for Nigeria whose government had planned its budget for 2020 working with an oil price estimate of $57 per barrel.
Falling oil prices will affect Nigeria’s dollar earnings and put pressure on the exchange rate. That could force a currency devaluation, trigger a banking crisis and push the CBN to raise interest rates to attract foreign portfolio inflows even if that makes the cost of credit more expensive for local businesses.
An oil price of below $50 per barrel is one of the preconditions given by the CBN, along with external reserves of below $30 billion, to trigger a rethink on the exchange rate.
Some economists have foreclosed a devaluation this year but they will be cautiously watching the impact the coronavirus outbreak is having on oil prices.
Lower oil prices could also increase the federal budget deficit and pave the way for the government to borrow more to fund its recurrent expenditure-heavy budget while infrastructure spending and the economy bear the brunt.
“Nigeria is vulnerable to another recession,” said Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry, a private sector advocacy group with over 2,000 member companies.
“We will continue to catch a cold when oil sneezes because we have made little progress in diversifying the economy despite 2016’s warnings,” Yusuf said.
“We need to take efforts to diversify the economy more seriously and implement policies that help us get private capital because it’s the way to go,” he said.
Nigeria has been here before. In 2016, oil prices bottomed, pushing the economy into a first recession in 25 years. The government promised to diversify the economy and reduce its dependence on oil. But official data show that not much progress has been made with oil exports as a percentage of total exports still accounting for a dominant share.
In the first nine months of 2019, crude oil exports as a percentage of exports came to 76 percent, according to the National Bureau of Statistics.
“A $51 oil price is uncomforting for Nigeria’s fiscal revenues and macro stability and is a scenario we did not plan for,” said Bismarck Rewane, a leading economist and CEO of economic advisory firm, Financial Derivatives Company.
“The bigger problem is what happens when OPEC asks Nigeria to cut oil output at the meeting in March,” Rewane told BusinessDay.
Thanks to a near 5 percent surge in oil in 2019, the Nigerian economy grew at its fastest pace in three years, according to GDP data by the NBS.
Oil prices are taking a hit from the spread of coronavirus, a pandemic that erupted in China, the world’s largest consumer of crude oil.
The number of new coronavirus infections outside the country now exceeds new Chinese cases.
The spread of the virus to large economies including South Korea, Japan and Italy has raised concerns that growth in fuel demand will be limited. Consultants Facts Global Energy forecasts oil demand would grow by 60,000 barrels per day in 2020, a level it called “practically zero”, due to the outbreak.
U.S. West Texas Intermediate fell more than 5.8 percent to a session low of $45.88, its lowest level since Jan. 2019, before paring some of its losses.
WTI is down more than 12 percent for the week, and is 29 percent below its 52-week high level.
While lower oil prices can be good for consumers at the pump, it can be a warning sign for the global economy, since softer demand can mean a slowdown in economic growth.
As oil continues to slide, all eyes are now on next week’s OPEC+ meeting, where the cartel and its allies will convene in Vienna from March 5-6.
LOLADE AKINMURELE
