Robust Oil Receipts to Reduce Nigeria’s Current Account Deficit
After a weak start to the year, Nigeria is expected to earn more from oil exports as experts predict a slowdown in the nation’s current account deficit. Nigeria’s economy depends largely on inflow from oil exports FG Gets Over 80% of FX Earnings from Oil, Gas Exports to boosts the economic balance sheet.
However, poor production volume trending behind the Organisation of Exporting Countries and allies’ quota has caused fiscal slippage as Nigeria earns lower than expected from crude exports due to technical issues.
In the second quarter of 2021, the largest economy in Africa was flattered by 5.01% gross domestic product growth due to low base effect in 2020 when economic performance result was rather poor on account of a pandemic outbreak.
Federal Government earnings which depend largely on receipts from oil exports underperformed in the first five months in 2021 by about 50%, data from Budget Office shows.
Coincidently, Nigeria plans to spend heavily on infrastructural development, resulting in massive and persistent borrowings from local and international capital markets.
In recent times, the Nigerian government has made a request to the oil cartel to adjust its quota as NNPC Chief Mele Kyari indicates at the Gastech conference in Dubai last week that the nation’s oil assets issues have been fixed.
After raising about N 2 trillion in the fixed income market in the first half of 2021, Debt Management Office also made Eurobond call value at $4 billion in September of the same year.
DMO Chief, Patience Oniha, said at a virtual meeting before the Eurobond raise that Nigeria’s total public debt hits N35.5 trillion in June 2021.
In a report, Fitch Solutions projects that the Nigerian current account deficit will narrow from an estimated 3.2% of GDP in 2020 to 2.4% in 2021 on the back of a robust rise in oil exports.
Nigeria’s services and primary income balances will remain in deficit as services exports remain subdued and payments to external service providers and investors rise, the firm added.
“We forecast the current account deficit to narrow further in 2022 to 2.0% of GDP, as constraints on oil output ease, thus facilitating a further strengthening of goods exports”.
This is a revision from the firm’s previous forecast of a 2021 current account deficit of 1.7% of GDP and follows the publication of Q1-2021 trade data, which indicated weaker exports and stronger imports than we had previously anticipated.
Fitch analysts explained that after a weak start, growth in the value of oil exports will gather momentum over the coming quarters amid rising global demand for commodities, which will see goods exports rise from an estimated 6.7% of GDP in 2020 to 12.6% in 2021.
The firm’s Oil & Gas team expects the value of Nigeria’s oil exports which accounts for 88.7% of exports in 2020 will grow by 57.2% in 2021.
It noted that the recovery will be almost entirely the result of higher oil prices – the team forecasts the average price of Brent crude to rise to US$72.0 per barrel compared with US$43.2 per barrel in 2020.
This offset the negative impact of continuing production restrictions under OPEC+ and constraints on the output caused by ageing oil infrastructure and limited investment in new capacity.
The global rebound will also cause an uptick in demand for Nigeria’s non-oil exports, such as ships and boats (6.2% of exports), grains and fruit (1.0%), and cocoa (1.0%), the report noted.
Fitch now expects that rising exports, combined with a relatively modest rebound in imports, will see Nigeria’s trade deficit narrows to 1.1% of GDP in 2021 from an estimated 3.1% in 2020.
It maintains that demand for imported consumer and capital goods is likely to continue to rise on the back of moderate recoveries in private consumption and fixed investment, expected to grow by 1.7% and 2.1% respectively in 2021.
Fitch analysts however indicate an expectation that goods imports to rise from an estimated 9.8% of GDP to 13.7% in 202. Good imports grew by 5.2% year on year in April based on the latest data available.
“While we think that demand for imports will remain steady in the coming months, it will be tempered by continued restrictions on a wide range of imported items and the weak naira exchange rate, which was devalued in Q2-2021 and which we expect will be further devalued in the second half of 2021”, it added.
Nigeria’s services deficit is projected to widen from an estimated 3.0%ofGDP in 2020 to 4.4%in 2021 as the economic recovery causes demand for imported services to rise, while services exports remain subdued.
The report noted that the business and leisure travel sector, in particular, faces a prolonged period of difficulty given Nigeria’s low vaccination rates, which will deter visitors and restrict international flights in the coming months.
Fitch tourism team does not expect visitor arrivals to reach 2019 levels until 2025. It added that rising payments to external service providers and investors are likely to lead to the primary income account deficit widening from an estimated 1.1% of GDP in 2020 to 1.4% in 2021.
Although, it said the overall impact of the current account will be softened by an uptick in remittance inflows. Again, Fitch analysts expect Nigeria’s current account deficit to narrow to 2.0% of GDP in 2022.
“While import growth will continue to tick up on the back of strengthening domestic demand, we expect this to be partially offset by robust oil exports, with the positive impact of still buoyant prices augmented by increasing production as OPEC+ production restrictions are phased out.
“The passage of the petroleum industry bill approved by the legislature on July 1 will provide tailwinds to oil output and thus Nigeria’s overall goods exports. We expect that Nigeria will be able to continue financing these deficits”, the report explains.
Inflows of both direct and portfolio investment will see the financial account strengthen relative to 2020 levels as sentiment towards emerging markets improves, the Nigerian government continues to make incremental progress on reforms and an expected interest rate hike by the Central Bank of Nigeria improves the country’s interest rate differential with developed markets, the report explains.
Robust Oil Receipts to Reduce Nigeria’s Current Account Deficit
