July 09, 2021 / 05:33 PM / By CSL Research/ Header Image Credit: CSL Research
Nigeria's external position improved in the first quarter of the year, as the CBN's published Balance of Payment (BoP) report indicated that the current account deficit moderated to US$1.75bn (1.7% of GDP) from US$5.26 (5.0% of GDP) in Q4 2020. Analysis of the breakdown showed that the trade deficit was 4.0% of GDP from 5.4% in the prior quarter. The deficit was driven by weakened export earnings, which declined by 8.7%q/q. This is concerning as the export value was lower than the pandemic level when global trade almost came to a halt. While the crude oil price is at a 2-year high of US$74.43bbl, the OPEC+ agreement continues to place a cap on oil earnings, as oil production (excluding condensate) settled at 1.4mb/d in Q1.
On the flip side, foreign outflows reduced, as imports declined by 18.7%q/q. For us, this depicts two things; (1) domestic consumption (c.60% of GDP) is yet to recover to pre-pandemic levels and (2) intensified FX control by the CBN. Also, remittances (+5.6%q/q) are gradually recovering, reflecting the improved wellbeing of Nigerians in the diaspora and the likely impact of CBN's Naira 4 Dollar Scheme. On the financing front, despite the macroeconomic headwinds and regulatory uncertainty, foreign portfolio inflow improved to US$2.4bn from a negative position of US$0.4bn in Q4 2020. This perhaps indicates foreign investors are taking advantage of the carry trade opportunity in the market.
Looking ahead, we expect oil export to improve, supported by increasing crude oil prices and improved crude oil production, as OPEC production cuts are poised to reduce. Also, we expect the re-opening of the borders and the implementation of the African Continental Free Trade Area agreement (AfCFTA) to support non-oil exports. Besides, the commencement of operations at Dangote's refinery scheduled for this year will reduce both crude exports and fuel imports, with a modest net impact on the balance of payments, emanating largely from savings on freight cost. Based on these factors, we estimate a decline in the current account deficit to 1.2% of the GDP for 2021. To correct this external imbalance, we see a likely devaluation of the NGN by 6%-9% by year-end.