Economy & Politics
Another crushing recession ‘is coming’
Brace up; The effect of the oil price war between Saudi Arabia and Russia as well as Covid-19 virus is expected to throw Nigeria into another recession by the end of 2020.
The effect of the oil price war between Saudi Arabia and Russia as well as the global health pandemic caused by the Covid-19 virus is expected to throw Nigeria into another recession by the end of 2020.
This is based on an analyst report published by Rennaissance Capital (Rencap) and seen by Nairametrics. According to the research report titled SSA Revising our Forecast, Sub Saharan African countries including Nigeria are expected to face significant economic downturn as the impact of the coronavirus ravages the entire world. The report, however, singles out Nigeria and Angola, two of the largest oil producers as the worst hit by the oil crisis.
On the impact of oil prices: According to Rencap, the fall in oil prices below $30 will negatively impact Nigeria’s export earnings. Nigeria has been talking about diversifying away from oil but it has been slow to effect this pivot. It is once again vulnerable.
The collapse in oil prices could be devastating for Nigeria because oil accounts for 90% export revenue and 60% of the federal government’s revenue. This is exacerbated by the global demand shock caused by COVID-19, which largely explains why Nigeria is sitting on 30 or more unsold April-loading cargoes of crude oil.
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On Recession Fears: The analysts also predicted the Nigerian economy will once again fall into a recession as the impact of the crash in oil prices reverberates across the economy. Nigeria relies heavily on oil to drive economic growth thus, just like it happened in 2016, oil prices are likely to trigger another bout of recession in the country.
Oil may only account for 9% of GDP, but petrodollars are to the non-oil economy what diesel is to Nigeria’s multitude of generators. It is an important facilitator of economic activity. A sharp decrease in oil revenue implies a significant deceleration of GDP growth. Given how fragile the economy is, we expect it to fall back into recession in 2020.
Crushing Recession: While Nigeria remains out of recession and has experienced paltry but stable growth in recent quarters, some sectors of the economy still remain in recession. If another recession does happen in 2020, it could be as crushing if not worse than what was experienced in 2016.
The consumer was still in recession – as indicated by its proxy, wholesale and retail trade, which has contracted in the last three quarters. It is in part due to the fragility of the economy coupled with the double hit from the lower oil price and COVID-19, that we are significantly cutting our growth forecast for Nigeria to -0.4% and 1% in 2020 and 2021, respectively, from 2.3% in 2020 and 2021 previously.
More devaluation: Apart from a likely recession, the fall in oil prices is also likely to trigger multiple devaluations for the economy. Just recently the CBN devalued the currency from N307 to N360 while BDC exchange rate went from N360/$1 to N380/$1. The analysts predicted there will be more devaluations and that the exchange rate could fall further to N450/$1.
READ MORE: Finance Minister: Nigeria to go into recession if …
Two welcome outcomes of the current crisis are that it has spurred the authorities into quick action. On 20 March they 1) collapsed the multiple FX rates; and 2) devalued the naira at the investors and exporters (I&E) window to NGN380/$1, from NGN365/$1 previously. The central bank rate has been adjusted to NGN360/$1, from NGN306/$1. As expected, the devaluation fell short of its fair value (NGN410/$1, by our estimate). The currency of another oil exporter, the Kazakh tenge (KZT), which in past years has been a lead indicator for the naira, suggests the NGN/$1 rate should be closer to 450, than to 400.
What this means: Nigeria fell to a crushing recession in 2016 also triggered by a fall in oil prices. Unlike that episode, the violence at the creeks also distributed oil production worsening Nigeria’s situation. This time around, the Coronavirus pandemic is dealing a similar double blow on the economy making it likely that we could face another recession.
- For business, the impact could yet again be devastating to their revenues and bottom lines.
- Input prices will skyrocket increasing their cost of doing business and competitiveness. Despite this, they might find it difficult to increase sales.
- On-going projects will need to be reviewed and some if not many will go bust.
- The purchasing power of Nigerians will be severely impacted as their GDP Per Capita is reduced. Before the devaluation, the minimum wage was $83, it is now about $76 and could fall further if the analyst prediction comes through.
- Job losses could also mount significantly as small businesses and manufacturing firms cut jobs to adjust to the new reality.
Economy & Politics
Output cut: Nigeria leads in OPEC non-compliance with 50 unsold cargoes of crude
Nigeria and Iraq were reported not to have kept to their commitment to the huge production cut deal that had promised to reduce output by 9.7 million barrels of crude oil per day.
As opinions continue to differ on whether OPEC will extend its current oil output cut beyond June, available information has shown that not all members of the oil cartel complied fully with their agreed quotas for the month of May. This is despite the fact that the oil output by OPEC member countries reached its lowest in almost 20 years.
Available data from oilprice.com showed that OPEC members cut their output by 5.91 million barrels per day from the April level, producing 24.77 million barrels per day. This figure also showed a 4.48 million barrel per day of the agreed output cut, thereby representing a 74% compliance level.
Nigeria and Iraq were reported not to have kept to their commitment to the huge production cut deal that had promised to reduce output by 9.7 million barrels of crude oil per day.
Iraq was able to achieve just 38% compliance of its agreed output cut for the month of May, while Nigeria, which achieved a much lower compliance of the agreed output cut, recorded 19% compliance of what was agreed. Saudi Arabia showed the highest compliance, recording 96% of the agreed output cut.
Some have attributed the noncompliance of some members of OPEC to the agreed output cut, to the contractual obligations and commitment to buyers, given the short timeframe between when the agreement for the output cut was made and its implementation.
Meanwhile oil exports from Angola and Congo remained steady at high prices on Friday, while Nigerian oil fared lower amid huge inventory of unsold cargoes.
Nigeria continues to face some difficulty in the oil market, primarily due to sluggish demand from Europe; it has around 50 unsold cargoes of crude oil yet to be sold for the months of June and July.
Meanwhile, India has become one of the few buyers for the Nigerian oil. Indian oil firms bought about 5-6 million barrels of Nigerian crude oil last week and has bought about 2 million barrels as at Thursday this week.
Business News
President Muhammadu Buhari reshuffles NNPC’s board of directors
Note that the former board included the late Chief of Staff to the President, Abba Kyari as a member. Stakeholders have since expected the President to reconstitute a new board to take over.
President Muhammadu Buhari has approved the reconstitution of the board of the Nigerian National Petroleum Corporation (NNPC) after the expiration of the tenure of the current board.
The newly constituted board members are expected to serve for a tenure of three years, effective immediately. They will take over from the last board, whose 3-year tenure officially ended in 2019. Information about this development is contained in a State House press release that was published on the official twitter handle of the Nigerian Presidency on Saturday morning.
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STATE HOUSE PRESS RELEASE
PRESIDENT BUHARI RECONSTITUTES NNPC BOARD
President @MBuhari has approved the reconstitution of the Board of the Nigerian National Petroleum Corporation (@NNPCgroup), after the expiration of the term of the board members appointed in 2016.
— Presidency Nigeria (@NGRPresident) May 30, 2020
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The newly constituted NNPC board is made up of six members from each of the geo-political zones in the country. The members include the following individuals:
- Mallam Mohammed Lawal, representing the North West
- Dr Tajudeen Umar from North East
- Adamu Mahmood Attah from North Central
- Senator Magnus Abe from the South-South
- Dr Stephen Dike from the South East, and
- Chief Pius Akinyelure from the South West geo-political
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Of the six members, three are returning members on the board – Chief Pius Akinyelure, Mallam Mohammed Lawal, and Dr Tajudeen Umar from North East.
Note that the constitution of the new board is considered a welcome development, as it balances the representation of the six geo-political zones on the board. The previous constitution of the board was faulted for not being “balanced”.
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Note that the former board included the late Chief of Staff to the President, Abba Kyari as a member. Stakeholders have since expected the President to reconstitute a new board to take over.
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Coronavirus
CBN extends timeframe for submission of banks’ audited financial statements
“Therefore, the deadline for submission has been extended by three months. For the avoidance of doubt, all Other Financial Institutions are required to submit the 2019 Audited Financial Statements on or before July 31, 2020.”
In recognition of the effect of the economic lockdown across major cities in the country due to the Coronavirus pandemic, the Central Bank of Nigeria (CBN), has announced the extension of the timeframe for the submission of 2019 audited financial statements of banks and other financial institutions (OFIs).
This was disclosed in a letter to OFIs that was signed by CBN’s Director of Other Financial Institutions Supervision Department, Nkiru Asiegbu, as seen by Nairametrics.
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In the letter, which was dated April 30th, 2020, the CBN extended the timeframe for submission of its audited financial statement by 3 months to July 31st, 2020, as against the initial timeframe of April 31st, 2020.
The decision by the apex bank is in recognition of the fact that the lockdown of most of the cities in the country and movement restrictions have seriously affected the operations of the external auditors and all other financial institutions across the country. Part of the letter said:
“Pursuant to the provisions of section 27 (1) (a) of BOFIA, all the banks and OFIs are required to forward the audited financial statements of each financial year to the CBN for approval before the end of the fourth month following the year to which they relate. Accordingly, the 2019 Audited Financial Statements should have reached the CBN on or before April 30, 2020.
“However, we have observed that the lockdown of most cities in the country due to the coronavirus pandemic has restricted the engagement of External Auditors and the daily operations of all OFIs across the country.
“Therefore, the deadline for submission has been extended by three months. For the avoidance of doubt, all Other Financial Institutions are required to submit the 2019 Audited Financial Statements on or before July 31, 2020.”
The CBN also threatened to sanction defaulters as they would monitor the compliance to the extended date.
