The political risk associated with an election year, lower than $50 per barrel oil prices, fiscal unsustainability, exchange rate risk, and a neglect of the non-oil sector all feature on a list of risks facing Africa’s largest oil producer this year.
Renewed militant hostilities in the oil-rich Niger Delta, a poor outturn in capital expenditure, as a result of low government revenues, and security risks also add to a list of eight risks identified by ten analysts in a BusinessDay survey.
“The country is likely to face some economic and political risks with regards to oil production, low value for money in government spending, global oil prices, weak non-oil sector performance and heightened risk of fiscal unsustainability, as budget deficits and sovereign debts rise and debt service obligation deteriorates,” said Opeyemi Agbaje CEO, RTC Advisory Services Limited.
“Pressure on inflation, interest and exchange rates due to monetary expansion are also potential risks,” Agbaje added.
Political risks rank first for Rafiq Raji, chief economist at Africa- focused macro research & investment consultancy firm, Macroafricaintel.
“The political cycle is starting earlier than usual and that is a major risk in itself,” Raji said.
“President Buhari’s late signal to run in the next presidential elections has heralded negative shocks like increased violence, fuel scarcity and ethnic tensions which could heighten this year and dampen economic activity.”
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Oil revenue-dependent Nigeria has been hammered by a lengthy collapse in oil prices that snowballed into a two-decade low oil price of $28 per barrel in January 2016, and the pain inflicted by militant attacks in the Niger-delta, which sent production levels to a near decade-low of 1.2 million barrels.
The oil price and production slump tipped the economy into its first full-year contraction in 25 years and triggered acute dollar shortages that sent foreign investors packing and stifled businesses.
However, the economy managed to limp off the recession, though badly bruised, on the back of a rebound in oil prices, following an agreement reached by OPEC members in 2016 to shave some 1.2 mbpd off the market to nip a growing supply glut in the bud and relaxed hostilities in the Niger-Delta.
As the country’s oil fortunes improve, the International Monetary Fund (IMF) projects the economy to expand 2.1 percent in 2018, after posting back to back growth in the second and third quarters of 2017 that marked the end of five straight quarters of contraction.
A barrel of Brent oil sold for $67.21 as of Wednesday, January 3, according to data obtained from the Bloomberg terminal. That’s a 17.7 percent increase compared to the same period last year ($56.8) and an 80 percent leap from $37.28 per barrel in January 2016.
“Despite the improvement in key macroeconomic indicators such as GDP, PMI and foreign reserves, I am sceptical of the second half of the year when I consider OPEC’s production cut sustainability and the chances of a resumption in militant attacks in the Niger-Delta, which would cost us an arm and a leg,” said Dolapo Ashiru, managing director, Mega Capital Financial Service Limited.
Kyari Bukar, chairman of the Nigerian Economic Summit Group shares similar fears on the impact of possible lower petrodollars and is quick to point out that election cycle means the economy could become an orphan in 2018 as attention shifts to politics ahead of the presidential elections in 2019. This in itself is also a major risk to the economy.
“When you look at the major drivers of the economic rebound, oil is at the centre of it all and that implies that if prices crashed below $45 per barrel or production levels slide, we would have a big problem in our hands,” Bukar said by phone.
“A downward spiral in oil revenue automatically triggers exchange rate risks which have been tempered in the last five months,” Bukar added.
Bukar’s thoughts are re-echoed by Tope Osanyingbemi, a branch deputy manager at tier-one lender, Guaranty Trust Bank, but the latter also identifies security risks.
“Terrorist activity by Boko Haram is another threat to the country as this can discourage foreign investors’ appetite to invest in the country, given they would prefer to invest in other countries which are more stable and secure,” Osanyingbemi said.
“There has been improvement in the Nigeria economy comparing 2017 to its previous year, the foreign exchange rate among other aspects of the economy grew as the current Central Bank of Nigeria’s reserves can sustain the country up to the middle of 2018,” Osanyingbemi observed.
He added “more attention should be placed on infrastructural development. This will result to low cost of production and as a result encourage less importation of products and also reduce the dependency on oil production.”
Tajudeen Ibrahim, head of Research, Chapel Hill Denham identifies “Budget implementation in terms of capital expenditure deficit, mild currency risk, and crude oil prices,” as major risks to the economy.
“We have seen a somewhat elevated oil price recently, but something can happen that may drive the prices lower,” Ibrahim said.
Sharing his outlook for oil prices this year, Emmanuel Afimia, an energy analyst, said “There are two major events that may shape the global oil and gas industry in 2018: the divestment of Norway’s $1 trillion Sovereign Wealth Fund (SWF) from the oil and gas industry, and Saudi Aramco’s IPO in 2018,” Afimia said.
“These decisions by these two major oil producing countries were made in order to prevent them from the negative effect of a fall in oil price and the Nigerian government needs to quicken the pace of diversification, so that the economy can rely on other sectors of the economy if the global oil price experiences a decline in 2018,” Afimia added.
OPEC and its allies are heading into the second year of supply cuts to wipe out the global oil glut, while rising US output is threatening those efforts. Geo-political tensions also add a wild card to the market mix this year.
“Reduction in global oil price which can be influenced by another glut, as well as reduction in the level of oil production, if the Niger Delta militants go back to their creeks are the major risks the country is likely to face in 2018,” Ayodeji Ebo, managing director of Lagos-based financial advisers, Afrinvest Securities said by phone.
“That would lead to shortage in inflow of dollars and as a result will affect the foreign exchange rate,” Ebo said of the impact of a decline in oil prices and Nigeria’s production.
A debilitating dollar scarcity that choked businesses and denied foreign portfolio investors any opportunity to repatriate dollars has ebbed in Nigeria since the introduction of the Investor and Exporters window last April.
The country’s external reserves which have grown some 35 percent to $39 billion in the past five months has boosted investor confidence and restored relative liquidity to the market, once known for misguided capital controls and low dollar supply.
However, Luqman Agboola, head of energy and infrastructure, Sofidam capital believes unemployment risks rising further due the oil led growth that the economy is experiencing.
“The major challenge for oil and gas is that it’s technologically intensive and not labour intensive to absorb our increasing unemployed youths,” Agboola said by email.
“Infrastructure will be very key in 2018 as the government have made so much noise about increasing and improving major infrastructure round the country, the budget of 2017 will run till March or April and also if the 2018 budget is passed on time, the both of them can run simultaneously which will increase the funding of infrastructure.”
LOLADE AKINMURELE, DIPO OLADEHINDE, ENDURANCE OKAFOR & BUNMI BAILEY
