Global oil prices could fall to as low as $45 per barrel if tensions between the United States and China worsen. If this happens, it could throw the implementation of Nigeria’s 2019 federal budget into disarray as the country relies on oil for two-thirds of its revenue and nearly all of foreign exchange earnings.
Oil prices have been going downhill in recent weeks as investors become increasingly concerned about slowing demand. Appetite for oil is at risk of a further slump if the US and China fail to the resolve trade differences, which will cause the global economy to weaken even more. The two world superpowers account for about 34 percent of the global crude oil.
Risk for 2019 budget
The government had benchmarked the budget on $60 a barrel based on production of 2.30 million barrels of oil per day. If oil prices fall lower than the budget benchmark, the economy will go into shocks that will see the Central Bank of Nigeria apply emergency measures to keep the economy stable.
Global oil prices could fall to as low as $45 per barrel if tensions between the US and China worsen, Rainer Michael Preiss, executive director at Taurus Wealth Advisors, told CNBC.
When oil prices found a floor around $40 in the first quarter of 2016, the Nigerian economy slid into a recession and the CBN began restricting scarce forex for what it considers important items and began to artificially prop the naira to maintain exchange rate stability. The long-term effect of these controls is an economy with a weak growth.
“The escalating US-China trade war has not left Nigeria unscathed. It may reduce the demand for crude oil and consequently lead to a decline in the price of crude oil,” said analysts at Lagos-based FSDH Merchant Bank.
Nigeria’s economic growth slowed in the first quarter of 2019 after the oil sector, the country’s biggest foreign-exchange earner, contracted.
Gross domestic product in Africa’s largest oil producer expanded by 2.01 percent in the three months through March from a year earlier, according to the National Bureau of Statistics (NBS). That compares with 2.4 percent expansion in the fourth quarter of 2018.
“If oil price falls below $50 a barrel, Nigeria will not be able to balance its books. We have to contend with negative volume variance. For instance, first quarter production averaged 1.96 million barrels, and it is 300 million below the target 2.26 million barrels per day,” said Johnson Chukwu, managing director and CEO, Cowry Assets Management Ltd.
In the 2019 budget, oil was projected to sell at an average price of $60 and national production was projected to grow to 2.3 million barrels. The proposed Federal Government budget estimates N6.97 trillion revenue for the 2019 fiscal year. The oil sector is expected to contribute around N3.73 trillion, while N710 billion will come from the proceeds of government equity in Joint Ventures.
Analysts say the US-China trade war could lead to a recession.
“The escalating global tension raises the risk of a recession,” said Bismarck Rewane, an economist and CEO of financial advisory firm, Financial Derivatives Ltd.
“If there’s a recession, oil demand will reduce and prices will fall, to that extent the Nigerian economy is adversely impacted,” Rewane told BusinessDay in May.
Opportunities for Nigeria’s non-oil sector
However, the trade war that saw the US slap 25 percent tariff on $200 billion of Chinese goods is a blessing in disguise to other countries such as Mexico, Japan, and Brazil because the economic heavyweights have turned to them for commodities such as soya beans, beverages, and rubber. Nigeria could also benefit.
“These other countries are perhaps the major gainers in the US-China trade war as they have been able to increase their trade activities. If Nigeria had the capacity to produce the volume that met international standards and at competitive prices, it may have been able to partake in the opportunity that the US-China trade war presented,” analysts at FSDH Merchant Bank said.
Lack of proper legislation, insecurity in the north of the country, high cost of operations, non-standardisation of products and poor seedlings have continued to undermine cash crop production in Nigeria.
There is the need to boost activities in the Nigerian manufacturing and export-oriented sectors to meet international standards, but a recent report by the National Bureau of Statistics (NBS) shows that the growth in this sector has been epileptic, according to analysts at FSDH.
Audu Ogbeh, Minister of Agriculture and Rural Development while highlighting the opportunities in Nigeria’s agricultural sector during the BusinessDay’s Agribusiness conference held in Lagos said that China’s government is now making a demand for Nigeria’s soybeans and sorghum.
“As a result of the trade war between the US/China, the Chinese are requesting for 2,000 tons of soybeans and sorghum,” Ogbeh said at the event.
Nigeria is a natural habitat for many varieties of sorghum and the world’s second largest producer and supplier of the crop, churning out 11 million metric tons per annum while demand is put at 12.5 million MT, leaving a gap of 1.5 million MT, according to data obtained from the Federal Ministry Agriculture.
Similarly, Nigeria is the largest producer of soybeans in sub-Saharan Africa with a production of 750,000 metric tons per annum.
Like shea nuts, sorghum and soybeans have the potentials to be a huge export earner for the country, but years of low investment, lack of government support and natural vagaries have limited these huge potentials.
“This will open up opportunities for our export to China because the major export to China from the US are agricultural commodities,” Muda Yusuf , director general, Lagos Chamber of Commerce and Industry (LCCI) said in a telephone response to BusinessDay questions.
“Since China is now taking a retaliation action in terms of trade against the US, it is likely to affect more of agricultural export from US to China. This would create a gap in the Chinese market for agricultural imports, and this will create opportunities for a country like Nigeria to take advantage to fill the gap that is being created,”Analysts at FSDH Merchant Bank said.
Data from NBS shows Nigeria’s non oil export of N604.44 billion accounts for 13.3 percent of Nigeria’s total export in 2019 of N4.54 trillion.
Concerns for CEOs
As the United States and China trade war heats up, many business leaders have revised their growth estimates sharply downward and organizations have turned inward in search of revenue growth rather than outward towards new market alliance.
According to the second largest professional services firm in the world PwC, the United States and China trade are reshaping CEO’s operating models and growth strategies as a near majority (45 per cent) of respondents reported they are “extremely concerned” about “trade conflict” and are adjusting their supply chain and sourcing strategies while 25 per cent are shifting their growth strategies to other territories.
“Amid all the external turmoil, CEO’s are looking inward for growth, with 77 per cent of CEO’s surveyed saying that their organizations are planning to reap operational efficiencies to drive revenue improvement,” George Stylianides, PwC’s Global Risk Consulting leader said.
Trade war?
U.S. President Donald Trump previously said he would make a decision about whether to impose further tariffs on China after meeting Chinese President Xi Jinping at the G-20 meeting in Japan later this month.
Washington has so far slapped 25percent tariffs on $250 billion of Chinese goods, with Trump threatening to apply the same elevated levy on the remaining imports from China worth around $300 billion. In retaliation, Beijing raised tariffs on billions of dollars worth of American products.
Tensions between the U.S. and China have also extended beyond trade. Washington placed Huawei on a blacklist that restricts American companies from doing business with the Chinese tech giant, while China threatened to cut off its supply of rare earths to the U.S.
Those developments have hurt sentiment among businesses and consumers, and are blamed for contributing too much of the economic slowdown globally.
BALA AUGIE, STEPHEN ONYEKWELU & DIPO OLADEHINDE
