Global audit and advisory firm, PWC has released its economic forecast for Nigeria for 2015 and 2016. The firm based its final assessments on three major scenarios that it thought could pan out this year in Nigeria.
- The price bottoms out of $50/bbl in Q2 2015 before recovering to $60/bbl by Q4 2015, averaging $55/bbl over the year as a whole.
- Oil price recovers to a new equilibrium level of $70/bbl in 2016.
- Political stability is maintained as the new administration take office.
- The re-emergence of Iran oil production in Q2 2015 sees the oil price hit low point of $35/bbl, slowly recovering to average $45/bbl in 2015.
- A slow recovery takes hold and a new equilibrium level of $60/bbl is reached in 2016, consistent with the most bearish forecasts from analysis.
- Political stability is maintained.
- Oil price follows the same profile as Scenario 2: severely undershooting the 2015 budget benchmark, hitting a low point of $35/bbl and averaging $45/bbl in 2015, with a slow recovery in 2016.
- In addition, a severe political or security shock occurs, which could result from a resurgence of violence in the Niger Delta; or insurgency attacks in Southern provinces from Boko Haram.
- The firm looked at these scenarios and projected what could happen should either of them should materialise.
The firm in all scenarios expects GDP to continue to grow even if oil prices fall to $35/bbl and average just $45/bbl this year.
They believe the rapid growth of the Agricultural and Services sectors will be key to growth in Nigeria unlike the oil sector.
Despite this good news, they also highlight that a deterioration of the political and security landscape could unnerve investors and tip the country into recession. If a ‘medium’ political shock occurs against the backdrop of a severe oil price scenario, Nigeria’s economy could see zero growth or even contract by in 2015 and again in 2016.
On exchange rate, the report concludes that if oil prices continues to stabilise, then the CBN’s recent adjustment of the exchange rate regime will be sufficient to ease pressure on the Naira in 2015.
However, if oil prices deteriorate further, then they expect that a further c.10% devaluation of the Naira will be necessary in 2015.
They went on to say that if deterioration of oil prices is combined with capital flight from a political or security shock, then depreciation could even drop by a whopping one-third. This scenario will effectively match the extent of the devaluation expected by the futures market at the height of the pre-election volatility in February.
PWC also says Nigeria’s heavy reliance on imports will see inflation accelerate as the Naira depreciates.
They projected inflation rate to be at least 3 percentage points higher than in 2014. In fact, it said that in scenario 3, the central bank is likely to see consumer prices rise by 20% in 2015 and 2016.
Government oil revenues
The report suggest that gross government oil revenues are likely to fall in each of the scenarios mentioned. The report projects oil revenue would drop from their 2013 levels by $21billion under scenario 1. Oil revenues will also drop .
If recent oil production trends continue, gross government oil revenues will fall dramatically from their 2013 level: by $21bn alone in Scenario 1 (equivalent to a 50% decline). In this case, a c.$ 5bn revenue shortfall is likely to emerge in 2015 compared to the outgoing administration’s Budget calculations.
This financing hole could widen to c.$10bn in Scenario 2, where significant debt issuance and cuts to recurrent expenditure will be needed. State governments could struggle to borrow on financial markets or pay their workers. Some highly-indebted states may miss planned interest payments on their debt.
In scenario 3, we assume that oil production would fall by 15% through bunkering and other supply disruptions. Gross oil revenues would fall to a third of their 2013 level. Combined with difficulties administering tax collection from unstable parts of the country, we would expect the federal government to fall over three months behind on paying employee wages and government bond yields on US$-debt could approach 20%.
Get the report here