Sunday, April 12, 2020 / 02:30PM / OpEd by Jeff Broth /
Header Image Source: Pixabay
The Nigerian economy recorded a GDP growth rate of 2.55% in Q4 2019, with inflation at 12.20% as at February 2020 and an interest rate of 13.50%. The country is struggling with high unemployment, currently measured at 23.10% and expected to rise towards 31.4% in 2021. In December 2019, Nigeria's exports increased by 48% year-on-year (December 2019), largely due to massive increases in the shipment of manufactured products.
This sector rose by 1180%, followed by crude oil in a distant second at just 14.5%. However, the value of Nigeria's mineral fuels, oils, and distillation products was measured at $58.73 billion in 2018, eclipsing the nearest export category of ships, boats, and other floating structures by a multiple of almost 40.
COVID-19 fears aside, market news for the Nigerian economy is bleak. Nigeria's economy has been hard-hit by the price war between the superpowers of the oil industry, Russia and Saudi Arabia. As Africa's largest producer of crude oil, what happens between Russia and Saudi Arabia is of grave import. Nigeria's oil production capacity is approximately 2.5 million barrels per day, making it the #1 producer in all of Africa, and the #6 producer of crude oil in all the world. Ironically, Nigeria's claim to fame is actually its gas supply where it has substantial reserves.
According to Shell.com, the Nigerian National Petroleum Corporation (NNPC) has discovered an estimated 202 trillion ft.Â³ of gas reserves in Nigeria, in addition to 600 TCF (trillion cubic feet) of unproven gas reserves. Data indicates that Nigeria is only producing/developing about a quarter of these reserves.
While oil prices have risen slightly heading into April 2020, they are still historically low. The price of WTI crude oil - the US benchmark - is hovering around $28 per barrel, while the price of Brent crude oil - the global benchmark - is currently trading around $34 per barrel. What is interesting in Nigeria's case is that the government budget was set up with a benchmark oil price in mind.
Given that the overwhelming majority of Nigeria's export potential is derived from crude oil production, a substantial drop in prices has a devastating impact on the country's fortunes, the industry, and the well-being of the 202 million people currently living in Nigeria. Unfortunately, the double impact brought upon by the coronavirus and the price war between Russia and Saudi Arabia is having a crushing impact on the Nigerian economy. The benchmark price that the government earmarked for crude oil was $57 per barrel, but now oil is priced at least $20 +/- lower than that, with extreme volatility characterizing the pricing mechanism.
This means that the Buhari government has many important balancing acts to perform. Multiple coronavirus deaths have been reported, and it is particularly alarming that high-level government officials are in the crosshairs. That the price of oil has plunged to multi-decade levels does not help state coffers. Increasing demands on government are crippling the public healthcare system, and other infrastructure networks across the country.
Nigeria has closed down all its airports and sealed off all its borders. Nobody comes in and nobody goes out. The shuttering of widespread economic enterprise has devastated the economy in Nigeria, and globally, resulting in a weakened currency, slack demand and slack supply. The airports at Abuja and Lagos are closed, people are working from home, or remotely, and public gatherings have been deemed public hazards.
The government of Nigeria is a federal system whereby individual states can take charge of their own affairs, with overarching support from the federal government. Like so many other countries encouraged by the use of untested elixirs, Nigerians too have rushed to buy chloroquine, hoping that this malaria medication will stave off the coronavirus. A country with rising levels of impoverished people can ill afford to tackle a sweeping pandemic with never-before-seen levels of virulence.
Nigeria has suffered through multiple outbreaks over the years, including polio, Lassa fever, hantavirus, and the deadly Ebola virus. However, the rapid spread of coronavirus is unlike anything the country is prepared for, and the healthcare system is desperately in need of PPE, ventilators, trained medical staff, isolation wards, and the like. Nigeria cannot afford a pandemic of this magnitude, and it acted swiftly by sealing off the borders in an attempt to pre-emptively strike this virus before it has time to infect people in the country. Various measures have been encouraged such as frequent hand washing and isolation. More importantly, the Nigerian economy has awakened to a new age of digital payments processing whereby cash exchanges have been replaced by digital currency, online money transfers and the like.
Perhaps the most important focus for Nigeria is the economy, and specifically crude oil. Traders are not bullish; they are exceptionally bearish, with put options on crude oil across the board. Whether it's derivatives trading instruments on crude, or simply hedging with short-selling of oil futures, the writing appears to be on the wall. Even if Russia is able to work something out with Saudi Arabia, (they likely will) there is not enough global demand to buy up the crude oil that is currently available on the market.
Oil tankers are being used as storage facilities for crude oil, with no hopes of unloading copious amounts of product, given weak demand. The supply is available, but nobody is buying. For a country like Nigeria which is effectively a single-track economy (crude oil) this is a harbinger of doom. Some of suggested that oil prices could drop to levels never before seen, but even if they don't, the Nigerian government will be underwater at any price below $57 per barrel. Time will tell.