Uncertainty Shadows Nigerian Economic Recovery as Oil Price Drops
Uncertainty mounts over Nigeria’s economic recovery as oil price dropped to $37.4 per barrel amidst fear of second wave of coronavirus persists among top countries.
Weak global economic conditions due to COVID-19 have hurt oil demand and price for most of 2020, analysts at Afrinvest said.
According to Afrinvest, this has come at a huge cost to the Nigerian economy which is dependent on the oil & gas sector for most of government revenues and over 90.0% of total exports.
“While oil price has recovered from the over 20-year record low of $15.0/bbl. in early April, the second wave of COVID-19 is dashing hopes of a stronger performance”, Afrinvest explained.
The investment firm expects oil demand to further weaken, prompting the reduction in oil price to $37.4/bbl. this week, 18.7% lower than the peak of $46.0/bbl. amid COVID-19 in August, 2020.
The second wave of COVID-19 in Europe – the second most affected region in the world – has prompted lockdown and other restrictions in the largest economies of the region including the UK, France and Germany.
Afrinvest stated that the US which remains the epicentre of COVID-19 never really survived the first wave and daily case count have recently reached record levels.
With delayed talks on additional fiscal stimulus in the US, lack of a vaccine and sustained COVID-19 restrictions, the recovery in the global economy which began in Q3:2020 is expected to lose momentum, the firm explained.
It stressed that this would hurt commodity dependent countries like Nigeria, especially given the threat of oversupply in the oil sector and the delicate pact holding it steady for now.
In the review, Afrinvest reiterates that Nigeria’s external sector remains fragile, with the country recording negative current account balances for eight successive quarters, the worst in history.
In Q2:2020, the current account balance declined to -$3.2 billion from -$5.6 billion based on quarterly data, supported by a faster reduction in services deficit to -$2.5 billion from -$7.9 billion in Q1:2020 due to less demand for international travel amid COVID-19.
Analysts said the deficit in the income account also moderated sharply to the weakest level on record at -$838.9m from -$2.5 billion in Q1:2020 following FX illiquidity.
Meanwhile, the historically surplus components of the current account faced pressures.
Goods trade deficit at -$3.7 billion from -$1.3bn in Q1:2020 reached the highest level on record based on quarterly data as export (-52.7% q/q) contracted faster than imports (-31.6% q/q).
Macroeconomic data shows that current transfers declined 36.4% quarter on quarter to $3.9 billion as workers’ remittances fell 40.1% to $3.4 billion.
This is the weakest level on record following the outbreak of COVID-19 and strict lockdowns in regions with huge Nigerian in diaspora such as Europe and America.
Afrinvest recognised that there was respite in the financial account at $4.1 billion from -$8.0 billion in Q1:2020, mainly due to the rapid financing instrument of $3.4 billon obtained from the IMF.
In Q2:2020, analysts stated that there was little activity with respect to portfolio investment as investors looking to exit remained stuck in the market due to FX illiquidity compared to Q1:2020 which was characterised by huge capital outflows.
The recent weakness in oil price means that the external sector imbalance would persist in the interim, Afrinvest stated.
While Organisation for the Petroleum Exporting Countries (OPEC+) is expected to retain current cuts until Q1:2021 against the initial decision to reduce cuts by 2.0mb/d, Afrinvest said this is unlikely to support oil price to new highs.
The resumption of international travel and a relatively healthy demand for imports also indicate that trade deficit would remain large, the firm added.
It said the benefit obtained from external loans in Q2:2020 is unlikely to be present as local borrowing conditions are more attractive while foreign investors continue to shun the market.
Afrinvest said these suggest further exchange rate pressures, with a strong case for another devaluation at the Investors and Exporters window.
Read Also: Nigeria’s Stable Outlook: We Are Less Optimistic than Fitch -Afrinvest
The sustained mispricing in the FX market with a parallel market premium of ₦76.0/$ over the NAFEX rate at the I&E window indicate that the earlier adjustment is weak in the face of current external sector challenges and elevated downside risks.
Uncertainty Shadows Nigerian Economic Recovery as Oil Price Drops
