Culled—Proshare
November 15, 2018/FDC
Brent oil prices are down 31.8% from a peak of $86.29 in October. Evidently, the Iranian sanctions had a redundant effect/impact on crude prices, as Brent prices have endured a 7-day losing streak since the effective date of the sanctions (November 4). Signs of waning demand and growing supply have weighed on the bullish outlook of this Black Gold.
Shale production surge negative for Nigeria
The 20% increase in shale oil production to 11.6mbpd over the last 12 months has also dealt a major blow to the market optimism of most oil exporting economies such as Nigeria. The African giant being a highly commodity dependent economy is poised to be affected by these recent developments. Crude oil revenue accounts for 84% of its export revenue and over 60% of its fiscal inflows. Consequently, Nigeria remains at the peril of swings in the global oil market.
Are fiscal consolidation efforts under threat?
Despite Nigeria being more production than price sensitive, a bearish crude oil price will weigh on government’s fiscal consolidation efforts, as well as the economy’s external reserves accretion. The recent improvement in Nigeria’s fiscal balance can be largely attributed to a combination of factors. The current administration’s near austerity approach to governance has seen both spending cuts and intensified revenue deepening.
The Nigerian government increased its tax revenue by 42% to N2.52trn in H1’18 alone, representing 75% of the total target for the year. This was buoyed by higher than expected Brent oil price, which has averaged $73.07pb so far, 43.3% higher than the government’s benchmark of $51pb in 2018 and 21.8% more than 2019 benchmark.3 The government also announced a 4.3% decline in its 2019 annual budget of N8.76trn compared to N9.12trn in 2018.
These strategic moves will narrow Nigeria’s fiscal deficit going forward, improving Nigeria’s debt servicing-to-revenue ratio – currently at over 60%. Either way, the Nigerian economy will maintain these safety nets in the short-term. However, growth might remain muted in the near-term owing to the current contractionary monetary policy approach.
Oil price rally, hit or miss?
The oil price rally in 2018 also saw Nigeria’s external reserves climb up to $47.87bn in May, before retreating to $41.74 by mid-November. However, this remains robust (10.39 months import cover) despite massive capital flow pressures as Nigeria prepares for its 6th general elections since its return to civilian rule in 1999.
This could see Nigeria’s external reserves decline below the $40bn mark before the February 16 general elections. The concerted efforts by the Central Bank of Nigeria (CBN) to uphold investor confidence in the face of growing uncertainty will remain the most potent downside risk to external reserves accretion.
Outlook
At the global front, the declining trend in crude oil prices from weak demand forecast will necessitate a consensus for further supply cuts among the OPEC and some non-OPEC members. The trickledown impact of this move will negatively impact Nigeria. For instance, the current MTEF proposes an oil output of 2.3mbpd, 28% higher than Nigeria’s OPEC quota (of 1.8mbpd). This is a key concern considering the fact that local refineries lack the productive capacity to absorb the 0.5mbpd excess over the current quota. A downward review will worsen external reserves accretion and threaten exchange rate stability.
Additionally, IMF’s Regional Economic Outlook for the October 2018 alludes to the fact that the oil price rebound has been key to the boost in fiscal revenue of oil producing countries in Sub-Saharan Africa. However, Nigeria’s hesitation to adjust domestic fuel prices in line with rising oil prices will be a major fiscal risk, increasing leakages in an ailing/ recovering economy.