Nigeria’s trade surplus which has been one of its strongest selling points as an emerging economy is now seen succumbing to downward adjustment, as oil prices plunge to their lowest levels in five years.
Oil prices hit a new low this week, closing at $66.51/b on Tuesday, according to Bloomberg data.
“After averaging $23.6bn per quarter between Q2-2013 and Q2-2014, quarterly (oil) exports could decline as much as $8.0bn – $8.5bn if current oil-price dynamics persist”, said Samir Gadio, Head of Fixed Income and Commodities Research at Standard Bank, in an emailed note to BusinessDay.
Nigeria has enjoyed trade surpluses for the past 12 years, on the back of above $100/b oil prices. Over the past few years, prices have averaged $110/b, with the government largely failing to boost buffers during the high price regimes.
Nigeria’s fiscal savings represent less than 1% of GDP, versus around 65% among major oil producers.
Oil accounts for 95 percent of Nigeria’s exports and 75-80 percent of government revenue. With the changing dynamics around oil prices, the country’s trade surplus is expected to thin out.
“Nigeria now faces a negative terms-of-trade shock, given the sharp downturn in the oil price, which has also precipitated the naira sell-off via portfolio outflows, domestic capital flight and a build-up of long USD positions onshore”, Gadio said.
“The trade surplus is likely to narrow sharply in Q4-2014 and 2015”.
According to Yvonne Mhango, Chief Sub-Saharan Economist at Renaissance Capital, in an earlier note, “at a price of $80/b Nigeria’s current account would become negative for the first time in 12 years”.
Also, the lower oil prices will result in a further slowdown in forex inflows, causing overall net FX flows through the Central Bank to deteriorate further. FX supply from oil companies has been insufficient to meet forex demand, further depreciating the exchange rate and forcing the CBN to intervene repeatedly for the past two months.
Demand for forex by importers at the interbank market has increased to about 60 – 70 per cent, up from 30 percent after the CBN restricted access to the RDAS window for selected import transactions
With forex inflows thining, amidst the robust demand, the USD-NGN exchange rate is forecast to reach N190/$ in Q1 2015, before strengthening to N187/$ in Q2 2015, and steadying at N185/$ in Q3 and Q4 2015, as the international oil scene stabilises.
Oil exporters, including the Nigerian National Petroleum Corporation (NNPC), currently face hurting receivables due to the slumping oil price. However, this should be partly offset by a beneficial translation effect back to local currency due to the rise in Dollar-Naira exchange rate, Gadio says.
On the import side of trade, “importers waiting to buy, but who are not eligible to access the RDAS window, (should) take advantage of temporary dips in interbank spot (for example, into sub-180 territory)”, recommends Gadio to importers.
Importers have conventionally left their USD payables unhedged, however, there has been a marked increase in client interest in hedging in recent times.
For participants in international trade wishing to hedge with forward contracts, Gadio forecasts a rise in the local yield curve as the CBN attempts to protect the NGN, which would shift forward outrights up – increasing the cost of hedging with forwards in the near future.
The naira currently trades at N184 per USD with forward outright at around N186.
Edozie Ifebi, Yinka Abraham, Dan Ojabo
