Renewed oil price descent swings trade balance deeper into deficit

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Tuesday, January 26, 2016 11:16 AM / ARM Research

 

We continue with our review of key economic indices by taking a look at the balance of trade over 2015 and delineating our expectations for same over 2016. 

 

Similar to H1 15, the impact of oil price contraction continued to underpin weakness in crude oil receipts, and by extension overall exports, despite higher volume growth. Higher export volumes reflected rising  sales to North America (+10% YoY), Europe (+6% YoY), Asia (+13% YoY) and Africa (+50% YoY) which offset weakness in South America (-2% YoY) and Oceania (-100% YoY).

 

On the flipside, the declining oil price underpinned a 20% YoY contraction in oil imports to $2.4 billion which helped offset the impact of a 2.1% YoY expansion in non-oil imports to $10.2billion leading overall imports lower (-2.9% YoY to $12.5 billion). Thus, in a reverse from the surplus recorded in Q2 15 ($873 million), Nigeria recorded a $1.9 billion trade deficit over Q3 15 bringing cumulative trade deficit over the first 9 months of 2015 to $1.8 billion.

 

Overall, the story of the trade account, where Nigeria is on track to record a negative annual balance for the first time since 1998, largely reflects the impact of the bearish oil price trajectory which offset gains from the first moderation in imports in three years.

 

Going forward, developments across key crude export markets and deadbeat oil price outlook point to a restrained export picture over 2016. Our conclusion is premised on the continued clogging of European oil market—a traditional destination for Nigerian crude—as cost considerations and new lease of life after sanctions pave the way for greater market penetration by USA and Iran. On the other hand, the counterbalancing impact of lower oil prices and CBN’s FX restrictions should leave imports subdued in the coming months.   

 

The Impact of Oil Price

 

 

In line with patterns over H1 15, developments in the trade balance continue to reflect the impact of oil price contraction on exports.

 

Over Q3 15, extended dip in the average oil price (-51% YoY) induced further shrinkage in oil exports (-50% YoY to $10.1 billion) which, assisted by contraction in non-oil exports (-33% YoY to $549 million), drove overall exports 49% lower YoY to $10.7 billion. On the flipside, the declining oil price underpinned a 20% YoY contraction in oil imports to $2.4 billion which helped offset the impact of a 2.1% YoY expansion in non-oil imports to $10.2billion leading overall imports lower (-2.9% YoY to $12.5 billion). Thus, in a reverse from the surplus recorded in Q2 15 ($873 million), Nigeria recorded a $1.9 billion trade deficit over Q3 15 bringing cumulative trade deficit over the first 9 months of  2015 to $1.8 billion.

 

Figure 1: Oil Price and Trade Surplus



 

Price plunge masks gains from broad-based volume growth on oil exports

 

 

Over 2015, the strength of the price plunge on exports is magnified by examining developments in oil export volumes over the period. Across all markets, with the exception of South America (-2% YoY) and Oceania (-100% YoY), Nigeria recorded higher exports: North America (+10% YoY), Europe (+6% YoY), Asia (+13% YoY) and Africa (+50% YoY) resulting in overall crude export volumes rising 10% YoY to 569 million barrels over the first three quarters. Nonetheless, the steep price drop overrode the volume gains and drove a 46% YoY contraction in oil exports over 9M 2015.  

 

Moderation in export volumes to South America reflect impact of deepening economic recession in Brazil and continuing squabbles at the state owned oil company PetroBras whose management has been embroiled in the much discussed corruption scandal. Complicating the situation is an ongoing tussle with unions at PetroBras over planned asset sales which resulted in several strikes over the period. Extending recent trends, Oceania continued to record nil crude imports, which as we noted in our H2 2015 NSR reflects complete import dependence for gasoline following closures of all but four refineries. 

 

In contrast to those outcomes, Bonny-Light exports to North America rose 10% YoY to 17.6million barrels over the first three quarters of 2015, having declined 46% per annum on average since 2010 due to rising US shale production.

 

Unsurprisingly, the recovery in exports to that destination reflects declining US oil production, a fall-out of the sliding price and rig counts. Similarly a further rise in Europe-destined exports entrenched its position as Nigeria’s biggest export region.

 

The increased off-take was bolstered by a triumvirate of declining shipping costs to the Mediterranean (where sizable European refining capacity exists), shrinking European imports of Russian crude and gradual economic recovery.  

 

On the other hand, higher Indian purchases of Nigerian crude largely explain the increased exports to Asia. Gains on this front in part reflect 25% YoY cutback in India's oil imports from Iran to 220kbpd, despite increasing prospects of sanctions being lifted. However, the gains to Nigeria also embodied Indian refineries’ increased imports of light-sweet crude, which is high yielding in gasoline, following removal of diesel subsidies which drove higher preference for gasoline cars in India. Elsewhere gains in crude shipments to the rest of Africa could be attributed to South Africa where continuing electricity challenges in the face of low oil prices, spurred higher demand for energy from the latter. 

 

Figure 2: Breakdown of Nigeria’s oil exports by region


 

Feed-through from tamer oil prices on PMS and restrictive measures drive imports lower

 

 

Whilst the developments in exports are largely a linear function of the downward movement in oil prices, the emerging patterns on the import side show signs of a pushback in import demand from Nigeria’s economic managers with assistance from the tamer oil price. Disaggregating NBS data over the first three quarters isolates weakness across petroleum imports (-26% YoY), transport equipment & parts (-32% YoY), industrial supplies (-6% YoY) and Consumer durables (-17% YoY) as underpins for import contraction. The weakness across these items offset increases in Food & Beverage (+2% YoY) and Capital Goods (+3% YoY) in driving a 10% YoY moderation in total imports over 9M 2015. 

 

On petroleum imports, cutback was largely price driven as the plunging crude oil price underpinned a drop in refined gasoline prices amid broadly flat YoY import quotas. Elsewhere, moderation in transport equipment & parts reflects weakness across all sub-segments: vehicle imports (-52% YoY), industrial and non-industrial equipments (-23% YoY) and parts & accessories (-20% YoY). In that light, the cutback in car imports appear to reflect continued implementation of raised tariffs on new automobiles with Toyota noting a 67% YoY decline in new car imports to 15,031. Across other segments, cumulative impact of naira weakness and CBN proscription of FX access to certain items drove declines across consumer durable goods.  Evidence of the import curtailment posture of the FX policy was also visible in industrial supplies, which accounts for 26% on average of imports, where breakdowns provided show the key driver was a 6% YoY decline in its processed import supplies.  

 

Figure 3: Attribution analysis on import growth



Overall, the story of the trade account, where Nigeria is on track to record a negative annual balance for the first time since 1998, largely reflects the impact of the bearish oil price trajectory which offset gains from the first moderation in imports in three years.

 

Figure 4: External trade data



 

Intensifying competition on export markets and price weakness to keep trade deficit

 

 

Going into 2016, our bearish outlook for oil prices and developments across major exporters point to a deadbeat outlook for exports. At the centre of the dour volume picture is the increased prospects for removal of Iranian sanctions and the phasing out of restrictions on US oil exports. Whilst the direction of US exports would be determined by the Brent-WTI spread, geographical shipping costs point to Europe as the likely destination for American crude. In addition, returning Iranian oil should compete for market share in Europe which previously accounted for 25% of Iranian oil. Furthermore, ahead of the sanctions termination, Iran is considering offering 90-day credit and free shipping, in addition to discounts on crude prices, to Indian refiners. This poses serious downside risk to Bonny-light purchases from a key export destination for Nigeria. Elsewhere, sustained economic weakness in Brazil, political gridlock over impeachment proceedings and continuing union debacle at PetroBras continue to crimp outlook for overall export growth.

 

On the import side, the sliding oil price acts as an automatic stabilizer, with the counter impact on oil imports. Furthermore, CBN FX restrictions should continue to drive import moderation over 2016 which should weigh across import components. Farther out, the ongoing trade deficit underscores the need for export diversification. Any potential move in that regard recently received a boost following CBN’s conditional cut in CRR with the proviso that banks channel such funds to employment generating activities including the agriculture, infrastructure, solid minerals and the real sectors. On the fiscal side, the increased allocation to capital expenditure to 30% of total budget should help in reducing the infrastructure deficit and ultimately drive investment in sectors other than the oil sector, ultimately making Nigeria less dependent on oil exports which are the main driver of exports (95%).

 

Nonetheless, the impact of these policies will be long term, which the President hinted at in his budget presentation. Given the neglect of other sectors overtime, the odds of a quick fix appear unlikely. In conclusion, our outlook for trade balance in 2016 remains negative.  

 

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