Oil price is seen as a driver of international investor sentiment toward the country, more so, it is the most important determinant of the earnings of Nigeria’s Federal Government. Years of oil boom has seen Nigeria strengthen its fiscal position as well as and gain accretion in foreign reserves.
Dwindling global demand for commodities, led by the lingering recession in Europe and a weakening in China, which was once a voracious consumer raw materials, has however caused commodity prices to tumble, exposing the fragilities inherent in emerging economies like Nigeria.
China’s demand, during boom years fuelled global demand for commodities. Currently, China is trying to rebalance its growth away from commodity-intensive investments.
Commodities that impact Nigeria|Source: FDC Research
In addition to the poor commodity exports, a possible interest rate hike by the US Fed, is forcing a sell-off in Emerging Market assets, leading to increased pressure on their currencies.
Nigeria is not alone in its currency battles | Source: FDC Research
Shale oil surplus affecting Nigeria negatively
New shale oil has seen the price leadership of OPEC seriously threatened for the first time in decades. Baker Hughes, one of the world’s largest oilfield services companies, revealed that in the US, 170 new rig activities was added to the already existing 1,760, highlighting the US’ new status as largest oil producer in the world. In Africa meanwhile, rig count fell from 125 in August 2014 to 117 in September. Rig Counts, are the number of drilling rigs actively exploring for, or developing oil or natural gas in the world.
Worldwide rig count for September 2014 was 3,659, up by 228 from 3,431 the previous year, highlighting increasing global supply.
The newfound abundance of oil increases the likelihood for prices to fall further.
NIGERIA FISCAL STRESS
Bank of America Merrill Lynch, in its Fiscal Resilience Stress Test, showed that Nigeria fiscal situation was becoming more stressed as a result of the impact of oil prices on government revenues.
According to BoAML, if oil price declines to $86.4pb, with production standing at 2 million barrels a day, government’s oil revenues will decline by more than 33 percent. Net Federation distributable revenue will also fall by about 33 percent. Nigeria’s fiscal deficit could in turn rise to N2trn or 2.21 percent of GDP. This “reflects the decline in crude oil receipts as oil prices continue to plummet” says the FDC in its monthly economic views report. The fiscal situation could be worse if oil production targets cannot be met because of vandalism and oil theft. FAAC allocation has already declined by 6.55% to N611.7bn in August from N654.6bn in July, according to FDC.
Also, a cut in Nigeria’s oil production quota will be expected as OPEC attempts to support prices from falling further, by reducing the output of member countries. According to OPEC, nigeria’s current output stands at 1.9mbpd, amidst a Federal government budget of 2.36mbpd
Nigeria’s dependence on commodities for foreign exchange has been highlighted, and is still being considered as one of the weak links for the otherwise strong and buoyant economy. Of three SSA economies being analysed by BoAML, was becoming of the three SSA economies – Nigeria, Ghana, and Kenya
“Our scenario analysis shows that a moderate decline in the oil price is manageable but could accelerate the tightening cycle in Nigeria. However, an extreme oil shock highlights the vulnerability of key macro indicators and the inability of the Excess Crude Account to act as a sufficient buffer”, said BoAML earlier.
Source: EIA, Bloomberg
WHAT LIES AHEAD?
Observing the flow of recent events, the changes in the global oil landscape looks more of a structural issue than a passing trend. Previous oil price fluctuations have come on the back of volatility, crises in the Middle East, and artificial price manipulations by OPEC. This time, the game has changed. For the first time in a long time, oil prices are threatening to fall beyond the fiscal break-even point of global players like Saudi Arabia, the now ousted ‘oil king of the world’. This trend will mean a far worse outcome for commodity-dependent economy like Nigeria.
One of the more certain outcomes of the looming ‘oil situation’ is that it will serve to reveal the managerial prowess of energy exporters such as Nigeria during the boom years. The current bust in oil prices will reveal the economies that strengthened their fiscal buffers, or undertook reforms with excesses in oil earnings. Nigeria’s current external reserves, stands at about $39.5bn as at September, comparing with $49.7bn for South Africa. Reserves were depleted as a result of draw-downs by the CBN to support the naira.
The writer, Edozie Ifebi is a research analyst with Businessday
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