Monday, March 5, 2018 /4:47 PM / Vetiva Research
Nigeria’s current account balance rose 65% q/q in Q4’17 to ₦1.8 trillion, hitting its highest value since the oil price crash (Q3’14: ₦2.9 trillion). The widening current account surplus came on the back of a 9% q/q rise in exports to ₦3.9 trillion and a 15% q/q decline in imports to ₦2.1 trillion. It is interesting to note that Nigeria’s crude oil exports – still the largest chunk of total exports at 83% – have almost recovered to pre-oil price crash levels as the subsequent currency depreciation and a recovery in production volumes have compensated for the fall in price.
The decline in Q4’17 imports was as a result of lower petroleum product imports during the period. We note that imports of mineral fuels halved from ₦724 billion to ₦395 billion between Q3’17 and Q4’17, reducing the weight of petroleum products in Nigeria’s import bill to 18% (2017 average: 28%). This reduction reflects the shortage of petroleum products (particularly premium motor spirit) at the end of 2017.
Source: NBS, Vetiva Research
Nigeria recorded a current account surplus of ₦4.0 trillion in 2017, better than the ₦0.3 trillion deficits recorded in 2016 and ₦2.9 trillion surplus recorded in 2015. This is still less than half of 2014 current account surplus of ₦8.9 trillion. 2017 Current account as a % GDP equaled 3.5%.
Strong Import Cover coloured by petrodollar dependency
Nigeria’s external reserves have improved in recent quarters, and this is reflected in recent Import Cover statistics. Import Cover rose from 8.9 months in 2016 to 14.8 months at the end of 2017. The rule of thumb is that an Import Cover of 3 months is adequate, putting Nigeria in a relatively favourable position.
However, using net external reserves (deducting foreign debt), Nigeria’s Import Cover falls to 9.0 in 2017. Although this Import Cover remains healthy, the challenge for Nigeria is reducing the vulnerability of external reserves to oil earnings.
Source: CBN, Bloomberg, NBS, Vetiva Research
Nigeria needs more African trade
Nigeria’s trade with the rest of Africa is diminishing. The proportion of both exports (12.0%) and imports (3.6%) attributed to Africa in 2017 was the lowest in the last five years. We note efforts to address this in recent time; from the more ambitious initiatives such as the common ECOWAS currency proposal, to the recent launch of a single aviation market and amendments to trade agreements.
However, it is likely that official intra-Africa trade statistics are significantly underestimated by high levels of smuggling on the continent. For example, NBS data indicate that just 2% of Nigeria’s agriculture exports are to African countries, but it is likely that a lot more is smuggled out of the country. Thus, efforts to tackle smuggling may prove more fruitful in improving Nigeria’s regional trade profile.
Port efficiency the key variable
Nigeria’s seaports are the key variable in its international trade activities. Over 99% of trading activity takes place through the seaports, and Apapa port alone accounts for 97% of exports and 47% of imports. This means that Nigeria’s port capacity and efficiency would be a critical determinant of its international trade success. Despite efforts to revamp domestic ports – most notably by the Presidential Enabling Business Environment Council – challenges abound, and the Apapa port, in particular, continues to confound policy-makers and users of the port.
Oil sales to sweeten 2018 Current Account
2018 current account balance is likely to be supported by a full-year recovery in Nigeria’s crude oil production and stronger oil prices through the year. We do not consider the OPEC output cap to be a significant production constraint (see our note – “Nigeria Economic Commentary: How Much Crude Oil Can Nigeria Produce in 2018?”). Likewise, we do not see damaging militant activity as likely in the next 12 months as we anticipate the government pulling out all the stops to prevent the severe socio-economic impact of heightened militant activity ahead of the 2019 Elections. Whilst strengthening consumer wallets may buoy imports, fuel imports are likely to remain weaker than normal under the current retail pricing regime. Thus, we foresee a wider current account surplus in 2018.