Crude oil price volatility has been a source of concern for the Nigerian government but crude oil prices falling below its benchmark price could have dire consequences on local investors as some foresee continued selloffs by foreign investors due to weaker economic fundamentals in the country.
Oil dependent Nigeria has already seen its economic growth decline from 2.1 percent in the first quarter of the year to 1.9 percent in Q2 2019. “With crude oil falling below its benchmark price, there is high tendency to see the foreign external reserves decline, as weaker oil prices negatively affect foreign exchange earnings for the country,” said Obinna Uzoma, Chief Economist at EUA Intelligence.
According to data compiled from Central Bank of Nigeria (CBN), the foreign reserves has declined by $3billion since August, averaging a monthly decline of around $1.5b in August and September this year.
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“You have to expect investor’s seeing the trend with what is going on with the external reserves and all the conversation around a possible devaluation to be de-risking their portfolio and going to safe-haven assets rather than stay invested in the equity market here,” Uzoma added.
The Nigerian government in its 2019 budget set targets for average crude oil during the year at $60 and daily crude oil production at 2.3mbpd.
As at market close on Friday, crude oil price was trading around $58 (which is below the benchmark price) and crude oil daily production in Nigeria is around 1.9mbpd (also below the budgetary estimate).
Concerned investors are now wondering what the impact will be on the government’s finances and the economy.
With most investors pessimistic on the equity market, the deepened selloffs this year has caused the Nigerian market to be among the worst performing indices in the world. As at market close on Friday, the Nigerian Stock Exchange All Share Index had declined by 14.14 percent since the beginning of the year.
“While I don’t think the decline in crude oil prices has a direct impact on corporate earnings, it is obvious what the impact on lower crude oil prices on the economy will be. The last severe decline Nigeria suffered sent it into a recession. The government heavily relies on crude oil revenue for more than half of its budget. Lower crude oil prices will send the government back to selling more treasury bills to fund the budget deficit. If the government gets desperate, treasury yields will go up and that is bad for the stock market. That’s why I think you are seeing the equity selloffs in the past few days,” Uzoma told BusinessDay.
The NSE All Share Index (ASI) declined on Friday by 0.36 percent to drop to 26,987 points as bearish market sentiment continued to dominate trading during the last trading day of the week.
