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Nigeria’s Economy Risks Shutdown as COVID-19 Spreads

-By Gideon Osaka

The impact of the spread of the Coronavirus on the global oil sector has been particularly severe than on any other industry, Valuechain can report.
Factories shutdown, cancelled vacations, movement restrictions and disrupted supply chains all mean reduced demand for fuel. The combined drop in petroleum consumption in the affected countries like China, Japan, India, France, Italy and Germany, among others, is what is currently forcing a slowdown in global demand for crude oil.

The International Energy Agency (IEA) in its latest forecast has warned that global oil demand will decline in 2020 as the impact of the COVID-19 spreads around the world, constricting travel and broader economic activity. That would be the first full-year decline in more than a decade – because of the deep contraction in China, which accounted for more than 80 percent of global oil demand growth in 2019.

Mallam Mele Kyari, NNPC GMD

The emergence of the novel Coronavirus in China in December and further weakening of global crude oil demand has resulted in the fall in global crude oil prices.

The Organisation for Petroleum Exporting Countries (OPEC) and non-OPEC countries met in February and recommended a 600,000 barrels per day (bpd) reduction in output effective from 1 April so as to stabilise the oil prices. However, Russia is unwilling to participate in thje production cuts.

Saudi Arabia pushed for reducing output by about 1.5 million bpd over and above the existing cuts to stabilise the falling oil prices when the group again met on 5 March to evaluate the full impact of Covid-19 on global demand and decide a production policy for the second quarter and the rest of the year.

However, Russia rejected the proposal, as it apparently wants to wait and see the impact of Covid-19 on global crude demand, before taking any necessary action. As a result, global crude prices fell by more than 30% and resulted in the collapse of OPEC+ alliance.

The failed output cut deal later ignited a fight for international oil market share between Saudi Arabia and Russia, two of the world’s top crude exporters. This market price ‘war’ was catastrophic to the international oil prices leading to unimaginable crash in price, the lows last seen almost a decade ago.

Goldman Sachs has since come out with a dire warning: $20 a barrel oil.

“As a result, we are cutting our 2Q and 3Q20 Brent price forecasts to $30/bbl with possible dips in prices to $20/bbl,”

Goldman Sachs oil strategist, Damien Courvalin, said in a note to clients as reported by CNN.

Nigeria, a major exporter of crude oil, has been unfortunately caught in the midst of the unfolding consequences of Covid-19 and the oil war between Saudi Arabia and Russia.

The country has every cause to be concerned as the global spread of the coronavirus, and the continuous drop in the price of crude oil in the international market would take a heavy toll on the nation’s economy as oil and gas account for over 90 per cent of Nigeria’s foreign exchange earnings and more than 60 per cent of its earnings.

India, Spain, Netherlands, France and many Asian countries who are major trade partners and buyers of Nigeria’s crude oil have recorded cases of the coronavirus and the disease has impacted negatively on their economies.

Godwin Emefiele, Central Bank of Nigeria Governor

Consequently, Nigeria is beginning to feel the effect of these major external shocks. According to Africa Confidential, three-quarters of Nigeria’s oil production earmarked for export in April has remained unsold.

The International Energy Agency (IEA) which slashed its oil demand outlook by 1.1 million bpd due to the coronavirus outbreak and its impact on economies, said in its March report that it expects demand for Nigeria’s oil to wane while future deals will close at a price much lower than Nigeria’s crude oil benchmark.

To confirm analysts and expert predictions of the impact of the virus on the oil and gas sector in Nigeria, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, recently said the country was having difficulties finding buyers for about 50 cargoes of its crude oil and 12 Liquefied Natural Gas (LNG) cargoes.

He warned of serious economic challenges as a result of the falling crude oil prices and called on government at all levels and the organised private sector to brace up for the new low regime.

He said: “Due to the coronavirus pandemic, Nigeria has about 50 cargoes of crude oil that have not found landing.

“This implies that there are no off-takers for them for now due to drop in demand.
“Today, I can share with you that there are over 12 stranded LNG cargoes in the market globally.

“It has never happened before. LNG cargoes that are stranded with no hope of being purchased because there is abrupt collapse in demand associated with the outbreak of coronavirus.”

The NNPC boss said that in the face of the pandemic, countries like Saudi Arabia were giving discount of eight dollars and Iraq five dollars respectively, to their off-takers in some locations, meaning that when crude oil sold at $30 per barrel, Saudi Arabia was selling at $22 per barrel and Iraq at $25 per barrel.

Kyari noted that due to the uncertainties of the global crude oil market, countries that produce at the cheapest price would remain in the market, while jurisdictions with high cost of crude oil production would not be able to cope with the competing prices.

These alone, places Nigeria at a disadvantage, as the country would struggle to find buyers for its crude oil output and would have to settle for low prices, when it eventually gets buyers.
This situation, if it persists, would cause a major strain on the country’s finances and its budget, especially as the country relies heavily on crude oil sales to finance the 2020 budget.

The International Monetary Fund (IMF) had late February, slashed its economic growth forecast for Nigeria citing falling oil prices as it urged the country, Africa’s biggest crude oil producer to diversify its oil-reliant economy.

The fund has now cut its forecast for Nigerian gross domestic product (GDP) growth this year from 2.5 percent to 2 percent “to reflect the impact of lower international oil prices…Under current policies, the outlook is challenging,” the IMF said.

President Muhammadu Buhari signed the country’s N10.6 trillion budget into law this year based on a crude price projection of $57 barrel, and targeted oil earnings of N2.64 trillion.

Brent crude prices have plummeted recently to below $30 a barrel. With oil accounting for as much as 70 percent of total government revenue and 90 percent of export earnings, and with the 2020 budget based on an oil price of $57 per barrel, the government was quick to scramble a review of the budget.

Minister of Finance, Zainab Ahmed has lamented the effect of the sprawling virus on Nigeria’s 2020 budget stating that the government was concerned about the current drop in oil prices because it’s now below the budget benchmark.

“We will do a mid-term review, and if the impact is so much, we will need to do an adjustment in the budget, working together with the National Assembly,” the minister said recently.

As at the time of filling this report, the new reviewed benchmark was lowered to $30 per barrel, a slash that some economist in the country are still doubting the sustainability.

The outlook is no doubt dire. Simply put, the coronavirus and the attendant low oil price will mean less money is available for much-needed investment in infrastructure.
With the decline in crude oil price, the ability of the country to meet its N2.64 trillion oil revenue target has been curtailed, while the country’s budget deficit is expected to rise.

The 2020 federal budget was based on $57 per barrel oil benchmark and 2.18 million barrels per day oil production and an exchange rate of N305 per dollar.

However, the price of crude has plunged below $40 per barrel, which is below the 57 dollars per barrel budget benchmark.

The inability of the country to meet its revenue target, means the country would also face serious constraints in its ability to pay workers’ salaries, as well as carry out most of the projects listed in the budget.
Another implication of the COVID-19 disease on the country is that reserves may soon reach the $30-billion threshold set by Governor of the Central Bank of Nigeria Godwin Emefiele for the country to consider a devaluation.

There is a legitimate fear that the dive in oil prices is piling pressure on Nigeria to devalue the naira as dwindling export revenue depletes foreign-exchange reserves, curbing the central bank’s ability to support the currency. It is widely believed that the apex bank may soon start adjusting currency policy.

Emefiele had last month said no adjustment of the naira was planned and that the bank would continue to sustain the value of the currency, even though its dollar reserve was shrinking. The naira has come under pressure as importers demand dollars to feed Nigeria’s consumers and as market sentiment worsens by fears that the coronavirus outbreak would hit Chinese demand, one of Nigeria’s major trading partners, and dampen growth.

Analysts at SMB Intelligence wonder how the Nigerian government would be able to raise the $22.7 billion loan, which the Senate approved, and House of Representatives put on hold recently against the background of plummeting oil prices.

“This question is important because Nigeria’s Federal Government is hedging the repayment of those loans on oil sales. Even the financing for the Ajaokuta-Kaduna-Kano gas pipeline is hedged against assets that may soon be non-performing.

There is also the risk that as oil prices remain low, some of our oil wells may be shut as they become increasingly unprofitable. New investments (including the much-touted Mambila Power Project) could probably be frozen as a result,” they noted.

And that is the dilemma for Nigeria. With falling prices, lower oil sales and steeping government revenues, the near future looks very rough.