A Week in Nigeria: 14 March

Highlights from Reuters coverage of Nigeria over the last seven days

Finance Minister Zainab Ahmed told journalists in Abuja that the budget would have to be cut

In this week’s round-up: finance minister says budget needs to be cut, stocks hit four year low, and central bank says market fundamentals currently don’t support naira devaluation.

• Nigeria’s economy dominated the news this week. Specifically, we saw the impact of the coronavirus pandemic and the failure of Saudi Arabia and Russia to reach an oil production cut agreement. The week began with an announcement by Finance Minister Zainab Ahmed that Nigeria, Africa’s top oil producer, will cut the size of its record $35 billion budget for 2020 because of a sharp decline in the price of crude oil. Crude oil sales make up around 90% of the country’s foreign exchange earnings. The 2020 budget, passed in December, was calculated assuming crude production of 2.18 million barrels a day at a price of $57 per barrel. But oil prices have dropped to around $33 a barrel in recent days. “There will be reduced revenue on the budget and it will mean cutting the size of the budget,” finance minister Zainab Ahmed told reporters at the presidential offices in the capital, Abuja, after a meeting with President Muhammadu Buhari. She added that she would be part of a committee, also including the minister of state for petroleum, the head of state oil company NNPC and the central bank governor, that would determine the size of the budget cut in the coming days. Nigeria is still struggling to shake off a 2016 recession, which was caused by the oil price collapse of late 2014, with economic growth currently at around 2%. We previously reported on the extent to which the West African giant’s deep trade ties with China was having an impact on Nigeria’s economy — and why the problems were likely to deepen.

• Nigerian stocks sank to a more than four-year low, while bond yield spreads widened as jittery investors fretted over the possibility of a naira devaluation. JP Morgan said on Wednesday it expected Nigeria to devalue its currency by around 10% to 400 naira per dollar by the end of June. Meanwhile naira differentials between the one-year naira forwards and futures widened as investors raced to hedge currency risk. The two-month forward contract priced the naira above 400 to the dollar. The currency was priced much weaker at 468 in one year’s time, compared with the official rate of 306.95 supported by the central bank. On the spot market, the naira was quoted at 368 on thin liquidity. Nigeria operates a multiple exchange rate regime which it has used to manage pressure on the currency. The impact of the oil price plunge spread across asset classes in Nigeria, causing investors to widen spreads on the bond market, sell stocks and weaken the naira currency. Charles Robertson, global chief economist at Renaissance Capital, said the oil price plunge makes Nigeria’s debt-to-revenue ratio look worse, which does not help its credit profile — another reason for a currency depreciation. In comments that proved to be prescient, he said: “I don’t think they are going to rush to move the currency. It is possible that Russia and Saudi do a deal in weeks and the oil price can rebound and then Nigeria can hold off from a shift in 2020.” Nigeria’s central bank governor Godwin Emefiele, who supports a strong currency, backed by President Muhammadu Buhari, has been burning through its reserve of $36 billion, which is now down 16% from a year ago, to prop up the naira. Ratings agency Fitch has said that Nigeria’s B+ rating, which has a negative outlook, could face problems if a prolonged attempt to defend the country’s currency peg ate heavily into its international reserves.
• JPMorgan said it expected Nigeria to devalue its currency by around 10% against the dollar by the end of June and predicted an even bigger move if oil prices fell below the $30–40 range. When oil prices plunged in 2014, Nigeria opted to defended its currency peg and restricted FX supply over adjusting the exchange rate. JPMorgan’s Ayomide Mejabi wrote in a note to clients that he expected the Central Bank of Nigeria would react differently this time round compared to the 2014–2016 oil price shock. “In our view, the CBN probably will not repeat mistakes made during the 2014–2017 FX crisis, when it reacted to the sharp oil price decline by restricting FX supply, and defending an exchange rate peg,” Mejabi wrote. “This time around we expect the central bank to allow a modest FX adjustment, in the hope that it will be sufficient to stop portfolio outflows.” Mejabi said he expected the central bank to devalue the naira by around 10% to 400 to the U.S. dollar by the end of the second quarter compared to 366.3 currently with declining FX reserves already at levels last seen in the early stages of the 2014 oil price collapse adding to the momentum. Data in February showed that Nigeria’s foreign exchange reserves slipped by more than $1.6 billion to $36.38 billion. “With non-resident holding of domestic debt estimated at around $8.0 billion and amid expectations of accelerated outflows in coming weeks, FX reserves could fall to around US$30bn fairly quickly,” Mejabi predicted.
• The central bank issued a statement late on Thursday in which it said “market fundamentals” did not support a devaluation of the naira at the moment. “The size of Nigeria’s foreign exchange reserves remains robust and comfortable,” it said, adding that the bank “remains able and willing to meet all genuine demand for foreign exchange for legitimate transactions”. The bank, in its statement, said the coronavirus outbreak that began in China and spread to other countries had reduced the inflow of dollars into Nigeria. Following that announcement, we reported on how oil’s $30 price drop had led to pegged currencies in energy-exporting emerging markets coming under pressure in forward markets.