May 16, 2012 / Damina Advisors
 

Falling oil prices to exacerbate fiscal tensions, reduce Forex reserves and push Naira past 160/$1.
 

Global oil prices are likely to continue to fall as Europe grapples with its economic and monetary problems, and China seeks to re-balance its economy towards domestic consumption.
 

With average monthly oil prices sliding towards $90/ barrel as other exogenous risks such as an Iran strike die down, (with the new less hawkish Kadima-Likud Israeli government), Nigeria remains particularly vulnerable to an oncoming oil price shock.
 

While the 2012 budget set the oil revenue benchmark at $72/ barrel, with the country’s Excess Crude Account taking in whatever comes in over the benchmark, a fall in oil prices from the recent highs of over $120/ barrel to say $90/ barrel will imply a loss of almost 1 billion in revenues for Nigeria and a diminution in Forex inflows. At average monthly prices of $90/barrel monthly oil revenues will fall to just over $3bn.
 

When Nigerian oil revenues hit around $3bn, Forex reserves will cover just about three months of import cover (just in line with IMF stipulations), but risk exposing the Naira to further depreciation of another 5% – 10%, implying a US:Naira rate of between 163/$1 and $166/$1 in coming months.
 

A Euro-CFA depreciation (devaluation) as a way out of the Franco-German Fiscalpakt may also give the Nigerian Central Bank even more reason to depreciate the Naira fearing a loss of trade competitiveness between Nigeria and its CFA zone neighbours.