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Nigeria’s recession buffer weak as Coronavirus drives oil near $47/bbl

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Trading floor of the Nigerian Stock Exchange. PHOTO: FEMI ADEBESIN-KUTI

External reserves dip by $2.07billion, ECA down as govt faces revenue pressure
• Rising insecurity threatens investment, diversification

With the impact of the coronavirus taking a toll on oil demand and the economy in general, the fear of another recession appears to be imminent as oil price dropped to $53.71 per barrel, amidst falling external reserves and excess crude account (ECA).

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Indeed, oil prices are trading below the Federal Government’s benchmark at $57/barrel for the 2020 budget, thus posing a threat to the 2020 budget, which was signed by the President Muhammadu Buhari in December, on the assumption of oil production of 2.18 million barrels per day (bpd).
 
Similarly, Nigeria’s latest Excess Crude Account balance, according to a statement from the Office of Accountant General of the Federation, was put at $71.81million, while movement in reserves showed that the country’s reserves stood at $36.46billion, down by $2.07billion from $38.53billion in which it opened the year.
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With an earlier projection by Citigroup that Brent Crude may slide to as low as $47/barrel in the wake of the coronavirus that is yet to be contained.
 
The Federal Government has been exploring various means of generating revenue to buffer the effect of unstable oil prices through increment in value-added tax (VAT) review of extant legislation among others.
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Brent oil price yesterday, dropped to $53.80 at about 3:41 pm GMT, while Nigeria’s Bonny Light stood at $56.15.
Members of the Organised Private sector (OPS) equally expressed concerns about growing insecurity in the country, saying an unsafe environment poses a major risk to investment, even as Nigeria recorded no improvement in the global security perception.
  
Yesterday also, analysts at SBM Intelligence said the Nigerian economy is at risk of a recession, as the outbreak has resulted in a drop in crude oil prices.
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In a report titled, “The potential effects of coronavirus on the Nigerian economy,” the research company said Nigeria’s trade with China would also be affected.
 
“As global oil prices trend lower at $57/ per barrel as of mid-February, the subsistence of the coronavirus will continue to dampen appetite, which will put a lid on oil prices well into March.
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“If oil demand continues to fall with no OPEC intervention in the form of production cuts, tightening supply, a country like Nigeria will be negatively impacted by the downward price trend.
 
“The country risks another recession if the oil price continues to fall and other production and sales activities between China and Nigeria remain weak.
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“Recall in 2015, when the global crude oil price fell, and there was a significant reduction in crude oil production as well as insufficient foreign exchange (forex) to fund imports due to the shortfall in oil exports invariably diminishing the forex reserves.
  
“All these were contributing factors to the Nigeria recession in 2016. It will be of no surprise if the Chinese CONVID’19 oil price shake leads to another recession, due to the over-reliance on proceeds from the oil sector as the biggest foreign exchange earner,” SBM Intelligence analysts note.
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Also, Citi slashed its forecasts for commodity prices across the board, with crude oil getting the steepest downgrade, the investment bank said in a note, as carried by Bloomberg.
  
According to the Lagos Chamber of Commerce and Industry (LCCI), the economy is not growing fast enough to create opportunities for the citizens.
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The chamber noted that the economy is still vulnerable to external shocks notably fluctuations in global oil prices.
  
“This partly explains why two global credit agencies – Moody and Fitch, recently downgraded our economic outlook from stable to negative on the back of slow fiscal growth and increasing vulnerability to exogenous shocks. We, therefore, urge the government, as a matter of urgency to intensify diversification efforts and embrace structural reforms to attract private investment in stimulating economic growth.
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“The reality is that there are profound revenue challenges at all levels of government, which is why the excess crude account has come under pressure.”

“It is difficult to sustain the excess crude account in the face of such pressures. There is a strong temptation to draw down on the savings, which the excess crude account represents.

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“One key factor is the weak oil prices and ballooning expenditure, especially recurrent spending. This naturally affects the fiscal stability of the various tiers and levels of government,” the Director-General LCCI, Dr Muda Yusuf, added.
  
Yusuf said these shocks would remain as long as Nigeria remained critically dependent on crude oil both for revenue and foreign exchange earnings.
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On its part, the Manufacturers Association of Nigeria (MAN), said manufacturing contribution to gross domestic product (GDP) rather remained stagnant at 8.74% in the last quarter of 2019, adding that the development clearly depicts that the manufacturing is still struggling.
   
“This is not too good for an economy that will soon be exposed to the vagaries of the AfCFTA that would commence effectively July 2020. It also reemphasizes the need for Government to consciously continue to address the perennial issues hindering the optimum performance of the real sector of the economy to guarantee improved performance and sustained growth,” MAN President, Mansur Ahmed, said.
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Besides, the OPEC+ group of producers are said to be considering deepening the cuts by another 500,000 bpd, due to depressed oil demand amid the virus outbreak.
  
Citigroup now sees Brent Crude averaging $54 a barrel in quarter one (Q1), down by a massive $15 from the previous forecast of $69. The forecast for WTI Crude prices was slashed to $50/barrel this quarter, also down by $15 from a previous estimate of $65/barrel.
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The bank also cut its estimates for the following two quarters this year, expecting the impact of the coronavirus outbreak to be longer and to linger across the global oil market until the fourth quarter.
  
Citi sees Q2 Brent crude prices at $50, down from a previous forecast of $68 a barrel. Third-quarter Brent Crude prices are now expected at $53, down from $63 a barrel. For Q4, Citigroup revised up its forecast to $58 from $57 a barrel.
  
“With this in mind the market will keep a close eye on OPEC this week for signs of price support through additional measures to curb supply,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday.  
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