Reviews & Outlooks | |
Reviews & Outlooks | |
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Monday,
May 18, 2020 / 11:06 AM / By Fitch Ratings / Header Image Credit: World Finance
Nigeria's adherence to oil production cuts under the
OPEC+ agreement will lead to deeper economic contraction and fiscal deficits
and compound pressures on external finances from the slump in oil prices, says
Fitch Ratings. Increased recourse to concessional multilateral loans will ease
near-term liquidity pressures, but the risk of a disruptive macroeconomic
adjustment will persist.
We assume that Nigeria will comply fully with the
production caps under the OPEC+ agreement, and have reduced our forecast oil
output to 1.88 million barrels per day (mbpd, including condensates) in 2020
and 1.87mbpd in 2021, compared with our earlier forecast of 2.1mbpd for both
years. We have adjusted our GDP forecasts, and now expect Nigeria's economy to
contract by 3% in 2020, before a recovery to 3% growth in 2021. Despite the
OPEC+ deal, our oil price forecasts remain unchanged, at USD35/barrel for Brent
on average in 2020 and USD45/barrel in 2021.
The contraction in exports and remittance inflows
means the current account will remain in deficit, despite a sharp drop in
imports. We project the current account, which had been in surplus for much of
the last 20 years, to record a deficit equivalent to 3.8% of GDP in 2020 and
2.5% in 2021.
External liquidity pressures will be aggravated by
outflows of foreign portfolio investment. The IMF estimates that portfolio
holdings of non-resident investors in Nigeria, which amounted to USD34.3
billion at end-2019, fell by 46% in 1Q20. This includes a USD7 billion decline
in foreign holdings of open-market operation bills issued by the Central Bank
of Nigeria (CBN). Nigeria's foreign-currency reserves have dropped by just USD5
billion over the first four months of the year despite only limited
depreciation in the naira's key exchange rates. This reflects moves by the CBN
to tighten foreign-currency access. This has contained capital outflows
temporarily, although the build-up of pent-up foreign-currency demand may increase
the risk of a disruptive future exchange-rate adjustment.
We expect outflows to materialise later in the year,
which, alongside a significant current-account deficit and continued CBN
resistance to overhauling the exchange-rate framework, will drive a fall in
international reserves from USD38.6 billion at end-2019 to USD23.3 billion by
end-2020. This level would still cover three months of current-account
payments, broadly in line with the median for 'B' rated sovereigns. However, at
this level, reserves would offer little in the way of a buffer against external
vulnerabilities, given large funding needs and an overvalued exchange rate.
Fitch highlighted an intensification of external
liquidity pressures as a negative rating sensitivity when we downgraded
Nigeria's sovereign rating in April, to 'B' with a Negative Outlook from 'B+' with a Negative Outlook. Nevertheless, greater recourse to multilateral
borrowing will help to ease the strain Nigeria faces on this front, and our
updated forecast for end-2020 international reserves is higher than it was in
April.
Our forecasts assume the full disbursement of the
USD5.4 billion in multilateral loans sought by the government, in line with its
revised borrowing strategy. This includes emergency financing of USD3.4 billion
approved by the IMF in late April, marking the first time that Nigeria has
received IMF funding at least since the 1980s. Nigeria could also benefit from
temporary suspension of bilateral debt service under the G20 initiative
announced in April, but this would provide small relief, with only around
USD165 million in bilateral debt service coming due in May-December. If secured,
multilateral loans would cover around 21% of the general government deficit in
2020, under our forecasts.
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