Fitch, an international rating, agency has stated that reduction in Nigeria’s oil supply into the market will affect growth, and impact on the nation’s external finances.
In its revised outlook, the rating agency stated that it expects the Nigeria’s economy to contract by 3% in 2020.
The nation’s gross domestic growth often come strong when both oil supply and global average price are on the rise.
According to Fitch, Nigeria’s adherence to oil production cuts under the OPEC+ agreement will lead to deeper economic contraction and fiscal deficits.
The combination of these would then have compound pressures on external finances from the slump in oil prices, says Fitch Ratings.
The rating agency stated that increased recourse to concessional multilateral loans will ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment will persist.
“We assume that Nigeria will comply fully with the production caps under the OPEC+ agreement.
“..And have reduced our forecast oil output to 1.88 million barrels per day (mbpd, including condensates) in 2020 and 1.87mbpd in 2021, compared with our earlier forecast of 2.1mbpd for both years”, the rating agency explained.
Fitch stated that it has adjusted its GDP forecasts, and now expect Nigeria’s economy to contract by 3% in 2020, before a recovery to 3% growth in 2021.
Fitch explained that despite the OPEC+ deal, our oil price forecasts remain unchanged, at USD35/barrel for Brent on average in 2020 and USD$45/barrel in 2021.
“The contraction in exports and remittance inflows means the current account will remain in deficit, despite a sharp drop in imports.
“We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8% of GDP in 2020 and 2.5% in 2021”, Fitch said.
The firm stated that external liquidity pressures will be aggravated by outflows of foreign portfolio investment.
It noted that the IMF estimates that portfolio holdings of non-resident investors in Nigeria, which amounted to USD34.3 billion at end-2019, fell by 46% in 1Q20.
This includes a USD$7 billion decline in foreign holdings of open-market operation bills issued by the Central Bank of Nigeria (CBN).
Also, the rating agency recognised that Nigeria’s foreign-currency reserves have dropped by just USD5 billion over the first four months of the year despite only limited depreciation in the naira’s key exchange rates.
Fitch held that this reflects moves by the CBN to tighten foreign-currency access.
This has contained capital outflows temporarily, although the build-up of pent-up foreign-currency demand may increase the risk of a disruptive future exchange-rate adjustment.
“We expect outflows to materialise later in the year, which, alongside a significant current-account deficit and continued CBN resistance to overhauling the exchange-rate framework, will drive a fall in international reserves from USD38.6 billion at end-2019 to USD23.3 billion by end-2020.
“This level would still cover three months of current-account payments, broadly in line with the median for ‘B’ rated sovereigns.
“However, at this level, reserves would offer little in the way of a buffer against external vulnerabilities, given large funding needs and an overvalued exchange rate”, Fitch detailed.
Fitch highlighted an intensification of external liquidity pressures as a negative rating sensitivity when we downgraded Nigeria’s sovereign rating in April, to ‘B’ with a Negative Outlook from ‘B+’ with a negative outlook.
Nevertheless, greater recourse to multilateral borrowing will help to ease the strain Nigeria faces on this front, and Fitch updated forecast for end-2020 international reserves is higher than it was in April.
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“Our forecasts assume the full disbursement of the USD$5.4 billion in multilateral loans sought by the government, in line with its revised borrowing strategy.
“This includes emergency financing of USD$3.4 billion approved by the IMF in late April, marking the first time that Nigeria has received IMF funding at least since the 1980s”, Fitch stated.
However, the rating agency stated that Nigeria could also benefit from temporary suspension of bilateral debt service under the G20 initiative announced in April.
“This would provide small relief, with only around USD$165 million in bilateral debt service coming due in May-December.
“If secured, multilateral loans would cover around 21% of the general government deficit in 2020, under our forecasts”, Fitch stated.
Oil supply cut will hurt Nigeria’s economy – Fitch ratings