Nigeria’s economy may experience another recession in 2020 financial analysts tell Naija247news.com
The coronavirus outbreak will thrust economies around the world into “deep freeze,” one analyst told CNBC Monday, with some unprecedented lockdown measures likely to remain in place for months.
An intensifying health crisis has meant countries around the globe have effectively had to shut down, with draconian measures placing massive restrictions on the daily lives of hundreds of millions of people.
To date, more than 723,000 people have contracted COVID-19 worldwide, with 34,018 deaths, according to data compiled by Johns Hopkins University.
“I think, right now, the key issue is to try and do something that’s basically never been done before in the world,” Matthew Oxenford, lead U.K. analyst at the Economist Intelligence Unit (EIU), told CNBC’s “Squawk Box Europe” Monday.
That is to “put most economies on life support — into some sort of deep freeze — that they can come out of in three, probably more like six, months,” he added.
Accprding to Experts are calling dramatically lower crude prices as major OPEC and non-OPEC producers prepare for an all-out price war, in a sudden U-turn from previous attempts to support the oil market as the new coronavirus hammers global demand.
″$20 oil in 2020 is coming,” Ali Khedery, formerly Exxon’s senior Middle East advisor and now CEO of U.S.-based strategy firm Dragoman Ventures, wrote Sunday on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19.”
The comment came as oil prices are down 30% for the year and a day after Saudi Arabia announced massive discounts to its official selling prices for April. Plunging price forecasts are also coming amid reports of a possible increase in production by the OPEC kingpin from its current 9.7 million barrels per day (bpd) to more than 10 million bpd.
Africa’s largest economy slid into recession in the second quarter of 2016 as a slump in crude prices from $112 a barrel in 2014 to below $50, hammered the OPEC member’s public finances and battered the naira currency price of oil fell from highs of about. Crude sales make up two-thirds of government revenue.
Even though, the west African country had reported an economic growth of 2.55 per cent in the fourth quarter of 2019 on an annualized basis, which is the highest quarterly growth rate for Nigeria since the recession of 2016-2017, the Statistics office of Nigeria had unveiled On Monday, the 24th of February 2020.
Meanwhile, railing against Nigeria’s policy to rely heavily on oil sectors as the nation’s non-oil sector grew by 2.26 per cent last year, an Africa economist at Capital Economics, John Ashbourne said followed by the reveal of the report on Monday (February 24th),
“Today’s figures still doesn’t show any sign that President Buhari is succeeding in rebalancing Nigeria’s economy.
The pickup in growth was caused by an easing in the contraction of wholesale and retail trade and a boom in the banking sector.
Covid-19 Threats on 2020 Budget of 10.6 trillion naira
With fears and panic across Nigeria after President Buhari ordered a 14 days lockdown of key economic states and coronavirus cases jump to 111.
Nigeria has reduced its budget by 1.5 trillion naira ($4.90 billion) as the global spread of the coronavirus takes a massive toll on Africa’s largest economy and one of the continent’s biggest oil producers, the finance minister said on Wednesday.
Roughly 90% of the Nigerian government’s foreign exchange earnings come from sales of oil, prices of which have taken a beating amid lower Chinese demand and a price war between Saudi Arabia and Russia
Nigerian President Muhammadu Buhari signed the country’s 10.6 trillion naira ($29 billion) spending plan into law this year based on an crude price projection of $57 a barrel and targeted oil earnings of 2.64 trillion naira. Brent crude prices are down about 22% this year.
Africa’s largest oil producer relies on earnings from the black commodity for about 50% to 60% of its income and more than 90% of its export revenues.
The International Monetary Fund slashed the West African nation’s economic growth projection to 2% from 2.5% because of a decline in oil prices.
Nigeria confirmed its first coronavirus case last week, wiping some 300 billion naira ($980 million) off the value of the local stock market. If the virus spreads, and workers and shoppers stay home, much-needed revenue from a higher VAT rate passed last year will evaporate.
Economies across Sub-Saharan Africa, with just a handful of cases, are all at risk. Angola exports the bulk of its oil to China, while Kenya relies on Beijing for billions in infrastructure funding.
Kevin Daly of asset manager Aberdeen Standard Investments, who holds Nigerian debt, said China’s broken supply chain, and the hit to oil, represent a double whammy.
“We have seen the IMF (International Monetary Fund) revise growth down from 2.5% to 2%, but I think it will be closer to 1%,” he said.
Naira’s many woes
As the Coronavirus, COVID-19, pandemic continues to take a toll on the Nigerian economy, the Central Bank of Nigeria, CBN, has technically devalued the naira to reflect market conditions as analysts and market operators said they are not surprised.
Information gathered from Investor/Exporter, I&E, window revealed that though the closing price as at 7 pm yesterday was N372.00 per dollar, the peak price for the I & E window stood at N382.00 per dollar.
The I&E window is a special foreign exchange space created by the CBN in the wake of the economic recession in 2016 to make room for the free flow of the forex resources and drive up economic activities across all sectors.
The apex bank also devalued the naira at the I&E window to N380 per dollar from N365 per dollar. The bank’s rate has also been adjusted from N306 per dollar to N360 per dollar. However, the devaluation fell short of the fair value which should be N410 per dollar.
Analysts from Rencap, however, are suggesting that the value of the Naira should be closer to N450 per dollar rather than N400 per dollar.
DOLLAR RESERVES SLUMP
Last week, Foreign reserves in Africa’s biggest oil producer slumped by $350 million, the most on a weekly basis since October. The slide has accelerated since the coronavirus outbreak in China rocked global markets and sent Brent crude prices down to around $55 a barrel.
From June 2019, Nigeria’s reserves have decreased by 17% to $37.4 billion, the lowest in more than two years.
“In 2016 we had reserves as low as $23 billion and we survived,” central bank spokesman, Isaac Okorafor, said after the release of the survey. “We have proved them wrong before and we will do it again.”
But in February, the central bank and FMDQ OTC Securities Exchange, a Lagos-based platform that oversees naira transactions, introduced new naira futures contracts of up to five years. The aim is to attract more foreign investment by helping investors hedge their currency exposure, Tumi Sekoni, an FMDQ managing director, said.
Emefiele may be able rebuild reserves after Buhari asked lawmakers this week to approve a sale of $3.3 billion of bonds.
“The planned Eurobond sale will temporarily ease investors’ concerns, but that will hold only if the level of reserves stays put in the long run,” said Guy Tossou, a portfolio manager with BNP Paribas in London.
“The reserves-accumulation trend is reversing and of course that raises a lot of questions among the portfolio investors,” Tossou said. Still, he doesn’t expect a devaluation until 2022.
Moody’s, which downgraded Nigeria’s outlook in December, has warned that its debt, which has ballooned to 26 trillion naira ($85.5 billion), quadruple the 2008 level, made it particularly vulnerable to external shocks.
Oil Price War deep Cut
Nigeria will pump as much crude as it can and continue to sell it at a deep discount, but may eventually have to shut down some unprofitable fields if the price war rumbles on, Oil Minister has revealed.
“For the time being, discounts will continue as that’s the only way we could react immediately,” Sylva said by phone on Thursday from Nigeria’s capital, Abuja. “We also want to pump everything that we can pump,” he said, “that’s how we are coping with the situation right now.”
OPEC member Nigeria is the largest oil producer in Africa and it pumped 1.776 million barrels of oil per day (bpd) in January 2020, according to OPEC’s secondary sources in its monthly report published this week. Adding condensate production, Nigeria’s total oil output exceeds 2 million bpd.
In its 2020 budget, Nigeria pegged oil production at 2.18m barrel per day, with a price benchmark of $57 per barrel. But in recent weeks, the impact of coronavirus has sent prices tumbling, crashing at $51 per barrel. On Friday, prices crashed further.
Recently released Manufacturing PMI trend should continue in the month of March especially via trade sector where imported goods needed in the domestic supply chain appear to have slowed amid the battle against COVID-19 which poses risk of reduced production volume.
A supply flood and inventory surge
The impending flood of supply, overwhelmed inventories and coronavirus-led demand shock to a commodity that was already seen as relatively depressed in terms of pricing will inevitably slam those prices further — the question only remains as to how much.
Not everyone shares Khedery’s $20 per barrel oil forecast. Goldman Sachs predicted a bottom-out price of $35 per barrel in the event of a price war, or a fall to $40 before a second-quarter average of $42 if nothing changes.
Emirates NBD forecasts Brent prices to average $45 per barrel and WTI at $40 “with troughs in Q2 before a tentative recovery over the rest of the year.”
The West African country is hoping to raise daily production of crude and a light oil called condensate to 2.5 million barrels a day from about 2.2 million currently, Sylva said. Most of Nigeria’s crude is pumped by Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA in partnerships with the state
In response to the slump Nigeria is slashing its annual spending plan, which was based on a crude-price projection of $57 a barrel. International benchmark Brent crude is currently trading closer to $25, after plunging about 60% this year.