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.
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.
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.