For weeks now Nigeria has been engaged in an usual battle to find enough buyers for its oil, and now global storage for crude oil is filling up with the harsh reality coming back home soon to hit homes, businesses and jobs as government finances collapse in Africa’s most populous nation.
Tens and probably hundreds of millions of barrels of Nigeria’s flagship crude grade Bonny Light are held up inside ocean-going vessels in international waters around the world and buyers, when they come, are offering as low as $12 a barrel in the physical market, cheaper than a basket of tomatoes.
You must now sell a dozen barrels of Nigerian crude oil to buy one entry–level Samsung phone, a pointer to the dystopian reality that declining crude oil prices present for all economic actors in Nigeria, including the federal, state and local governments and the private sector as well as the jobs they hold.
State governors would by now be dreading what will happen when next their finance commissioners gather in Abuja for the usual federal accounts allocation commonly called FAAC.
The fiscal outlook for Nigeria is so bad that economists were warning last night that governments in the country will fail, jobs will be wiped out even in the private sector and the misery will increase in homes across Nigeria.
For the very first time in history, the benchmark US oil prices crashed into negative territory as evaporation of demand caused by the coronavirus pandemic leaves the world awash with oil and not enough storage to hold the oil no one wants to buy. Yesterday, US oil producers in the Texas belt were offering buyers cash for them to take the oil off their hands.
The internationally traded Brent crude had its own losses muted by comparison, with the commodity sliding 7.4 percent to $26 a barrel at intrasession lows.
Despite a national pretence at diversification, crude oil sale still drives the Nigerian economy and Nigerians are going to pay a steep price from this month for years of ruinous economic policies including wasteful subsidies on electricity and petrol, defunding healthcare, artificially propping up the naira on the back of foreign currency earnings and a gutless fight against corruption.
The next Federal Accounts Allocation Committee (FAAC), a gathering of state commissioners of finance with the federal minister of finance to share national income promises fireworks as the long-foretold rainy day when oil income will run dry is upon Nigeria.
Already the clouds are darkening. The Federal Government is raiding the Stabilisation Fund, a part of Nigeria’s Sovereign Wealth Fund (SWF), saved when oil incomes exceed budgeted revenue, kept as rainy-day fund to meet FAAC allocations to states which would be used to pay civil servants, build roads and schools.
To keep the states and indeed Nigeria functioning, the sub-national governments need to share no less than N600bn every month during the monthly FAAC allocations. This month, there are indications that the country may not generate as much in revenue and it will be worse in the months following.
Due to the coronavirus pandemic, Nigeria has implemented a lockdown across its commercial capital, Lagos, its fastest-developing industrial cluster in Ogun, and the nation’s capital Abuja, grinding to a halt commercial activity. This will crimp tax earnings for this period from companies including the value added tax.
International Oil Companies who pay the bulk of Nigeria’s oil earnings are collectively slashing an estimated $35bn in their capital expenditure for 2020. This implies that national economies would be starved of long-term investments that allow businesses generate revenue for many years by adding or improving production facilities, boosting operational efficiency and increasing labour productivity.
“If these oil majors could suffer substantial income reduction, despite their strong structures and efficiencies, then governments, world over, who are less efficient are likely to suffer more,” said Ayodele Oni, energy lawyer and partner at Lagos-based Bloomfield law firm.
Crude oil now selling for less than its cost of production does not offer Nigeria respite. Oil production cost averages between $15-$17 a barrel in onshore, according to the NNPC. However, 40 percent of Nigeria’s crude oil production now happens at offshore fields where a larger capital outlay is required.
Several cargoes of Nigerian April loading are yet to find buyers and even after slashing the prices, Nigeria can still not find buyers for its oil.
One unfolding real-time effect of lower oil price is a US dollar shortage that’s already manifesting on the parallel forex markets with the informal dollar dealers who often operate just in front or across the road from airports and top hotels in the business districts of Lagos and Abuja.
One currency trader told BusinessDay dollars are literally no longer available even on the black market due to “excessive demand”.
Much of that demand is down to Bureau De Change operators no longer selling dollars while speculators attempt to hedge against potential naira losses in the event of further devaluation.
Last week, Nigeria’s currency weakened marginally to N386.13k per dollar at the Investors and Exporters (I&E) forex window.
A larger foreign exchange (FX) reserves position usually boosts investors’ confidence in Nigerian equities and the external reserves provide security for foreign investors who may be worried about the difficulty of exiting the market at will.
Nigeria’s foreign exchange reserve, which serves as a buffer against external shocks, depleted to $33.8 billion, according to CBN data, as foreign portfolio investors dump Nigerian assets over uncertainties seen in the short-medium term.
Nigeria’s real estate sector was largely affected by the commodity price crisis of 2015/2016 which sent oil prices below $30 in early 2016. The sector is yet to recover from the 12-quarter recession it entered due to the meltdown.
While the coronavirus outbreak may be bringing back the trend of 2016, industry analysts expect the hospitality, retail and commercial real estate segments that are highly exposed to international tourism to be most affected.
Most of the country’s mortgage banks are already getting calls and text messages from customers inquiring on how to defer their payments, while there are fresh concerns on the volume of mortgage defaults the lenders may record in a lower oil price economy.
“We are already receiving calls from customers; they are asking what can be done to the month of March and April because their income has declined,” Eromosele Omozokpia, group head, risk management, First Generation Mortgage Bank, said. “Capacity to repay mortgages which is usually done monthly has diminished.”
According to industry players, a large number of Nigerian mortgagors are in private practice or in the private sector and considering their income is guaranteed based on the number of days at work, their ability to repay March and April mortgage is now in doubt.
“The effect of lower oil price on Nigeria’s economy is going to affect repayment of mortgage,” Olabanjo Obaleye, managing director and chief executive officer, Infinity Trust Mortgage Bank, said.
“Nigeria’s real estate trajectory has risen and fallen with international oil markets,” Oxford Business Group said.
Nigeria’s stock market is not left out of this web as investors are expected not to totally overrule the possibility of sell pressure, given that the macroeconomic space remains fragile.
“With the widespread of COVID-19 inducing a four-year low in global crude oil prices, we believe the dark clouds are gathering,” said Lagos-based Afrinvest in a note to clients.
Analysts at the investment bank expect investors to remain risk-averse towards the equities market in the near term, “although there is headroom for bargain hunting activities due to cheap valuation of stocks and the local bourse relative to peers”, they said.
The strong positive correlation between oil and stocks is because rising oil price leads to strong economic growth in oil-dependent Nigeria and oil export earnings contribute the largest chunk to foreign reserves in the country.
“Until the right reforms happen, the country will have to endure jobless and non-inclusive growth that will be buoyed by oil and not good policies,” Ayodeji Ebo, managing director of Lagos-based investment advisory firm, Afrinvest Securities, told BusinesDay.
Nigeria’s unemployment rate stood at a six-year high of 23 percent in the third quarter of 2018, according to NBS data.
Poverty has more than doubled in the last five years, placing Nigeria ahead of India as the poverty capital of the world despite having less than a third of India’s population, according to a Brookings Institution report.
“We expect sentiments to improve but with less intensity as stock prices find a new level. Also, the influx of first-quarter (Q1) 2020 earnings by listed companies is on the watchlist of investors and will shape interest,” according to United Capital research analysts.
This week, Nigeria’s stock market opened on a negative note failing to sustain new record gains in previous week.
The 0.01 percent decline in the Nigeria Stock Exchange All Share Index (ASI) on Monday, April 20, was caused by equities like Guinness (-9.38 percent), GTBank (-4.33 percent), and Zenith Bank (-5.67 percent), while gains in Nestle (+0.83 percent), MTNN (+3.63 percent) and BUA Cement (+8.48 percent) could not help reroute the market into positive territory.
For Nigeria’s domestic oil companies, an oil price within the range of $30 may bring another round of funding crisis that might bring fears of 2016, a development that might get worse if the country continues to struggle to sell its Bonny light crude with traders reporting 60 unsold cargoes despite the reduction of the official selling prices by the Nigerian National Petroleum Corporation.
Findings by BusinessDay revealed Light crude grades have lost favour with buyers in the face of low oil demand and market overhang that had necessitated prolonged storage.
This development might signal doom for domestic oil companies who took on a lot of debt to buy assets for these operations.
“Domestic oil companies are in a conundrum,” said Lagos-based Alao Abiodun, head of energy research at New Nigeria Foundation. “Many of the loans were hedged at higher oil prices, the current situation will mean adjustment of those loans.”
Domestic companies have had to restructure their loans at least twice since 2014 as revenues no longer match debt repayments, say energy sector analysts. Some sought access to alternative sources of funding to finance operations and acquisitions, but many initiatives have been unsuccessful.
The managing director of one of the tier–one banks in a conference call recently was reluctant to say where the oil and gas loans were hedged at because it seems everyone was caught unawares by the current oil rout.
“Most banks may need to extend the tenors of the facilities to reschedule cash flows,” Charles Akinbobola, an energy analyst at Sofidam Capital, said.
Kelvin Atafiri, who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector, said the lower oil price will definitely affect banks’ loans which might lead to deteriorating assets.
With the assumption of higher oil price in 2020, at least three Nigerian oil and gas companies such as Seplat, Eroton and Green Energy took investment decisions meant to drive business expansion on Nigeria’s onshore oil assets and marginal fields.
Seplat, though, recently announced it has readjusted its commodity risk and is well hedged with 60 percent of 2020 production hedged at a floor price of $45/bbl up to Q3 2020.
The banks’ exposure in terms of loan facilities to the oil sector, according to a recent CBN financial stability report, is about N6.1 trillion.
“The low oil price has made a lot of oil and gas loans not to be performing. This has adverse impacts on the profitability of the Nigerian banks,” FSDH Merchant Bank Limited said in a report titled ‘Nigerian Banking Industry Report: Changing Strategies’.
ISAAC ANYAOGU & DIPO OLADEHINDE
