The Casualty Effect of Sustained $68 per barrel on the Economy

Tuesday, January 09, 2018 5:59PM /Proshare Research   

On Tuesday 9^th of January 2018, oil prices touched $68/barrel, sustaining its earlier upward trajectory. Establishing a 32% increase on a year-on-year basis, thus it provides us an opportunity to weigh in the possible effect of a $68/ barrel on the economy.  

Budget
Presently, the price of crude has risen by 51.1% compared to the budget benchmark of $45/barrel.  The dynamic will bolster government revenue accretion, especially foreign revenue. 

It is expected that buffering in oil receipt will also temper down existing risk aversion borne by government on future external funding. 

This present scenario provides space for the fiscal side, in-terms of revenue mobilization and reduction in the cost of external debt.

Debt
Certainly, the rise in oil price will reduce risk aversion especially with regards to sourcing external funds. The interest rate charge on government instrument will dip reducing pressure on recurrent expenditure. 

Moreover, the increase in oil price further support government debt reshuffling with regards to foreign debt to domestic debt ratio. 

The pressure for bridge funds, persistent stretching of the money market and decelerate the quantum of debts will reduce. 

On fuel/Diesels
The increase in   oil price will seep into the cost of production, creating a bandwagon effect on the price of the product.  Moreover, the lack of domestic production, further inflame the cost.  

On consumer prices/ confidence
It is expected that the recent dynamic will force a trickle-down effect on both energy and transportation cost.  Such will have a negative impact on the active income of consumers due to rising cost of transactionary demand. 

Regardless, the market is not fully de-regularized, government position and policy on the short run will largely determine consumer confidence 

Reserves
The rise in oil price has a direct relationship with reserves at such having a positive effect on reserve, due to improve oil receipt.  The effect is not farfetched as   reserves have already hit $40 billion, with oil at $65 such uptrend in reserves will be sustained.  



Economy
 The effect on the economy is multifaceted

·  Banks: Oil prices affect the balance-sheet of banks direct or indirectly, especially those who have huge loan impairment in the oil sector. The uplift in oil prices will improve the quality of their asset and reduce the value of loan impairment in their balance sheet. Eventually reducing the non-performing loan ratio 

· States: The recent increase in oil price will further boost the finances of states; expectedly such development will improve the living standards of civil servants of such states. 

·  External trade: Although the value of imported   oil and mineral is   expected to increase due to rising cost of fuel and diesel, regardless such will be neutralized by the uplift in the value of exports. 

·   Equities market: The rise in oil price is as a leg-wind for the equity market as do ensure improved profitability especially in the oil and banking sector.  In fact oil price do have a strong correlation with equity market because it does bolster autonomous inflow.   

·   Out-put:  persistent upward trajectory in oil price will further out put in the present horizon. That has been highlighted in the previous 3^rd quarter report. 

·  Supply of Dollar: the increase in oil receipt as result of increased oil price will help to improve dollar supply. Moreover, oil companies will have more quantum of Dollar to sell at the foreign exchange market; which will help firms to purchase capital goods. 

Table 1: Economic Dashboard 


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