As if Nigerian monetary and fiscal authorities don’t have enough to worry about, the falling price of crude oil presents a fresh threat.
Brent oil fell to as low as $56 per barrel as at 4:00pm Nigerian time Wednesday, as the US-China trade spat threatened to expand into a currency war and investors despaired about the damage to crude demand.
That has big implications not only for the Federal Government’s budget but for the naira.
Diaspora remittances may be the largest source of dollar inflows into Africa’s largest oil producer, but oil exports still account for a significant chunk of total inflows.
A persistent current account deficit and lower foreign portfolio inflows have already sent the naira tumbling this year, albeit marginally, but an unprecedented oil price rout could deal the biggest blow yet.
In July, the naira weakened by 26 basis points to N361.68 per US dollar at the Investors and Exporters (I&E) window, which is a market-reflective rate.
The pressure has continued into August, sources say, with the currency trading closer to N363 per dollar for the better part of the month, the lowest level since the presidential elections that ushered in Muhammadu Buhari for a second four-year term in February.
The Central Bank of Nigeria (CBN) carried out an unexpected open market operation (OMO) auction Wednesday, in what traders perceived as an effort by the apex bank to keep the exchange rate stable. The naira closed at N362.83 Wednesday, according to FMDQ data. The CBN typically carries out OMO auctions on Thursdays.
An unplanned OMO auction is not the only thing the CBN has done differently to prop the naira. The apex bank has also been forced to step up intervention in the I&E window, with spot and forward sales totalling US$538 million in July, also the highest monthly intervention by the CBN in 2019.
The impact of the interventions took a toll on external reserves which fell by 0.37 to US$44.9 billion – 7.05 months of import cover. It has since fallen further to $44.8 billion since the start of August.
If the oil price continues its free fall, the country’s external reserves position will weaken, as the CBN has signalled its commitment to keeping the exchange rate stable.
Emerging-market (EM) currencies have already erased 2019 gains with the MSCI currency gauge dropping 0.5 percent this year, reversing yearly gains of as much as 2.2 percent just a week ago.
“The market reaction will likely be a prolonged period of weakness both in EM currencies and EM equities as investors adjust to lower GDP and earnings growth projections,” Per Hammarlund, chief emerging-markets strategist at SEB AB, said.
A decline in oil prices also means more pain for Nigerian stocks, which are down some 12 percent year to date, the worst performance of the biggest economies in Africa from South Africa to Egypt. Nigerian shares fell 0.4 percent on average Wednesday.
Perhaps the biggest implication of the oil price rout is that it casts a cloud over the implementation of Nigeria’s N8.9 trillion 2019 budget.
“Nigeria must watch the oil market with bated breath and hope the US/China trade war is resolved as quickly as possible,” said Johnson Chukwu, a fund manager and chief executive officer at Lagos-based advisory firm, Cowry Assets.
“If the war escalates and oil stays below the budget benchmark for too long, it’s a threat to the implementation of the 2019 budget,” Chukwu added.
The Federal Government’s N3.73 trillion projected oil revenue for 2019 is predicated on an oil price of $60 per barrel, $4 above Wednesday’s price of $56.
“Clearly, the decline in oil prices is a big source of worry in fiscal terms, because it may leave us with no option but to overshoot borrowing,” said Wale Okunrinboye, head of research at pension funds manager, Sigma Pensions.
Oil has now officially entered bear territory, as prices are down 20 percent since attaining a peak last April.
It gets even worse. Crude oil prices could sink to as low as $30 a barrel if China decides to buy Iranian crude oil in retaliation to the latest US tariff measures, according to Bank of America Merrill Lynch.
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 weak growth.
“Within six months if we don’t see an improvement in oil prices it means that foreign investors will begin to get worried and we might see a massive outflow of funds from our fixed income instruments or investment,” Gbolahan Ologunro, an equity research analyst at Lagos-based investment firm, CSL Stockbrokers Ltd, told BusinessDay.
To ascertain whether oil prices will stay lower for longer, much will rely on how quickly the US and China can resolve their on-going spat.
The trade war between the world’s two largest economies has fanned fears of a global economic slowdown, which would then translate to lower oil demand and lower revenue for countries like Nigeria where oil accounts for a large chunk of budgetary inflows.
“Oil prices below $60 will have an impact not just on Nigeria’s fiscal numbers but also on external sectors account. It means our current account balance will swing into a deficit once again in 2019 which will further lead to capital outflow pressures from foreign investors,” Abimbola Omotola, analyst at Chapel Hill Denham Management Limited, said.
Francisco Blanch at Bank of America Merrill Lynch wrote in a research note this week that oil is “at the edge of a cliff”.
He said growth in global oil consumption has slowed to about 600,000 bpd in the past six months compared with an average of 1.5 million bpd over the past four years.
“In our view, global oil demand has been trapped for some time between the negative effects of protectionism on industry and the mildly positive effects of populism on consumer sentiment,” Blanch wrote.
LOLADE AKINMURELE & DIPO OLADEHINDE
