Faltering oil prices, FDI set naira, 2020 budget on risky paths
• Capital importation drops by $1.8b •Foreign reserves fall to $36.18b
• Fear over Saudi plans to flood the market with more oil
The country’s ability to attract sustainable foreign direct investments has remained weak as the bulk of imported capital continues to be dominated by portfolio investments, otherwise known as ‘hot money’.
With oil prices below the budget benchmark, there are concerns about the quality of investment attracted to the economy, especially when investors are becoming jittery about the stability of the naira and the country’s capacity to service its debts.
Hot money, as it is called, is frequently transferred among financial institutions in an attempt to maximise interest or capital gain and could easily be pulled out by the investor, depending on the perception of the business environment.
Specifically, hot money investments are targeted at bonds and money market instruments. They constitute a major part of foreign investment inflow, which also exerts pressure on the naira and national reserves every time the investor’s perception of the economy is negative. The move leads to capital flight.
Specifically, the total value of capital importation into Nigeria stood at $3.8 billion in the fourth quarter of 2019, representing a decline of 32.42 per cent when compared to the third quarter of 2019, and a 77.67 per cent increase when compared to the fourth quarter of 2018.
In Q3 2019, Nigeria recorded a capital importation volume of $5.62 billion. Similarly, the total value of capital importation in 2019 stood at $23.99 billion, compared to $16.81 billion in 2018, representing a growth of 42.69 per cent between the two periods.
Indeed, the largest amount of capital importation by type was received through the Foreign Portfolio Investment (FPI), followed by Other Investment and Foreign Direct Investment (FDI).
By sector, investment in shares dominated with the highest amount of capital imported in Q4 2019.
The United Kingdom emerged as the country of origin with the highest amount of capital imported while Lagos is the destination with the highest amount of capital importation.
Although the Federal Government had on Monday announced plans to cut its 2020 budget, analysts believe that capex implementation will suffer in the near term, should fiscal borrowings fall short.
According to the analysts, a low oil price environment means a faster rate of decline in the foreign exchange reserves if the CBN continues its interventionist policy in the market to keep rates stable.
Similarly, the case for devaluation rests on a thin line between economics and politics. Whilst it is probably economically viable to devalue the naira, devaluation is considered a negative action in the political sphere.
Furthermore, concerns about oil prices heightened yesterday with Saudi Arabia’s plans to increase its crude oil production from below 10 million bpd currently to 12.3 million bpd next month.
By the action, the oil market is expected to witness another round of glut, as Russia also refused to take part in deeper cuts proposed by OPEC.
The Lagos Chamber of Commerce and Industry (LCCI), through its Director-General, Muda Yusuf, said the fall in oil price had implications for the level of fiscal deficit in the budget. Essentially, it will make the budget implementation to be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund the capital project will be severely constricted.
Already, oil revenue accounts for about 85 per cent of the country’s foreign exchange earnings and is the major driver of accretion to the foreign reserves. The slump in oil price and the associated adverse expectations would put fresh pressures on the reserves. It was at an all-time low of $36.18 billion as of Monday, March 9, 2020.
Former President of the Nigerian Association of Petroleum Explorationists (NAPE), who is the Managing Director of Degeconek Limited, Abiodun Adesanya, noted that the development opened up another opportunity for the country to remove subsidy on petroleum.
According to him, the development could create a recession in the country and the devastating impact would affect companies and the global economy.
To Adesanya, the current development is difficult to predict as the realities may last for months and affect the economy irreparably since there has not been a solution to the outbreak of coronavirus.
A professor of Economics, Babcock University, Segun Ajibola, raised concern over the nation’s economic outlook, and by extension, the global economy.
He said the current development would affect the nation’s bilateral trade, foreign reserves, and foreign exchange, and widen the deficit in the national budget.
To him, talking about a review of the budget barely two months after the year is worrisome and heightens the possibility of the country falling into recession.
A former president of the Nigeria Association for Energy Economics (NAEE), Prof. Wunmi Iledare, urged the country to review the 2020 budget and limit irrelevant spending under concurrent expenditure.
He also charged the government to be transparent with respect to petroleum product subsidies at low crude prices, warning that the budget must not be based on the volatile oil market.
“I challenge Nigerian leaders to use what they have and diversify for sustainable economic growth. Low oil price is not necessarily bad except for a petroleum-dependent economy with skewed lifestyles of some. Oil is better for the economy as a source to power the economy than as a source of revenue for unsustainable lifestyles,” he said.