Oil price surge boosts hopes of Nigeria’s economic recovery in 2017

Hopes that the Nigerian economy will emerge from recession in 2017 have been boosted as oil prices surged to their highest level since mid-2015 on Monday, after the world’s top crude producers agreed to the first joint output cut since 2001.

The price of a barrel of Brent crude climbed close to $58 in overnight trading, its highest level since July 2015, before edging back a little to above $56.

Nigeria’s 2017 budget, which President Buhari would be presenting on Wednesday, is based on a crude oil benchmark of $42.5 per barrel. Yesterday’s oil price is already $14 above the 2017 budget benchmark. The higher price would be enough to cover up any shortfall in revenues that may arise if Nigeria is not able to boost crude oil product to the budget benchmark of 2.2 mbpd.

Oil accounts for 90% of Nigeria’s foreign exchange earnings and when at full production, it accounts for 70% of Nigeria’s revenues. The surge in prices, if sustained, would boost dollar inflows into the country and help reduce the pressure on the naira, though it would also put pressure on fuel prices, which are currently capped at N145 per litre.
“The original OPEC deal pointed to a fairly lumpy 3 percent cut (in production), so this suggests there is a bit more upside for oil prices,” said Neil Williams, chief economist at fund manager Hermes.

There was particular surprise as Saudi Arabia, the world’s number one producer, said it may cut its output even more than it had first suggested at an Organisation of Petroleum Exporting Countries meeting just over a week ago.
Energy shares jumped, helping to lift the Dow Jones industrial average and S&P 500 to record intraday highs in early trading, extending their recent string of records.

“This market has gone up without taking a breather and will enter a cautious trading day as it awaits the Fed,” said Peter Cardillo, chief market economist at First Standard Financial in New York.

Benchmark U.S. bond yields topped 2.5 percent for the first time since October 2014, with analysts saying the OPEC agreement boosted reflation expectations.

“We have the Fed decision coming up on Wednesday, and people are unsure whether they should buy the dip here,” said interest rate strategist Gennadiy Goldberg of TD Securities in New York.

Analysts are already expecting that the US Fed may raise interest rates to 0.7% to ward off inflation expectations.
David Oppedahl, senior business economist, at Federal Reserve Bank, Chicago, said interest rate is expected to increase this week. Receiving a group of Nigerian journalists who visited his office, he said the Fed’s benchmark interest rate in 2017 is expected to rise to 1% while it would be getting up to 3% in 2019.

Oppedahl said the outlook is that the U.S economy will expand through to 2019, adding that the shrinking slack in the economy will help inflation rate gradually rise toward 2%.

Responding to the development, Eronmosele Aziba, investment research, Afrinvest Securities limited, said an expected impact from a hike in rates is a reversal in capital inflows into emerging markets and Nigeria is not excluded.

More specifically, some of the potential impact on Nigeria includes, reduction in the already weakened capital inflows into the Nigerian markets, weakening of the domestic currency against the dollar, which will increase government’s foreign debt servicing cost and further strain, the already thinned government foreign revenue.

Aziba also said taht the sovereign rating of the country could be pressured, in the event of a default and this will impede the government’s ability to source for foreign denominated loans. The reverse capital outflows is also likely to result in a weaker performance of the Equities market, as foreign participation will reduce.

“Despite these, we believe that investors have somewhat already priced in expectation of a rates hike in their investment decisions, hence the impact of a rates hike may be lessened”, Eronmosele said in an emailed response to BusinessDay.

Robertson Charles, Renaissance Capital’s Global Chief Economist, does not see any impact of the expected U.S interest rate hike on Nigeria, saying in an emailed response “foreign investors are not involved in Nigeria owing to exchange rate problems – so the country is isolated from global markets at present”.

David Denis, senior, Chair, and professor of business administration, University of Pittsburgh, USA, explained that, “It is always difficult to predict the economic impact of Fed actions. In general, he added that the Fed keeps rates low when they believe that low rates are necessary to stimulate the economy through corporate investment. They raise rates when they start to get worried that the economy might get overheated and, therefore, inflate prices too much. If that happened, inflation would harm economic growth so the Fed might raise rates in order to avoid inflation. In theory, therefore, the Fed changes rates to try and keep the economy on an even keel. It is difficult to do, however, so sometimes you will see some short-run effects.”

 

Hope Moses-Ashike with agency report