Global Shocks Alters Nigeria’s Short Term Outlook – 16 March, 2020
The breakdown in OPEC+ negotiations and further escalation of the COVID-19 have further amplified the downside risk for Nigeria. Accordingly, we see a need to reassess the economic cost of the continuous global shock and prolonged rift in the OPEC+ coalition on Nigeria’s fiscal and external balances, domestic growth and stability in addition to assuming a more stringent crude oil price.
In structuring our bull, base and bear case we assumed three key scenarios. For bull case, we assumed a quick resolution of the oil price war (oil price averaging $52.28/barrel) and containment of Covid-19 pandemic without major escalation beyond Q2 2020. On our base case, we assumed protracted oil price war (oil price averaging $45.17/barrel) and the Covid-19 is successfully contained without major escalation beyond Q2. On our bear case, we assess a situation in which COVID-19 escalates beyond Q2 2020, amidst protracted price war with oil price averaging $38.06/barrel. While we reckon that the OPEC+ rift and COVID-19 are fluid, and could reverse quickly, the scenarios informed our view of the outturn in the event of a reversal. Below are the key revisions across key macroeconomic variables under coverage on our base case:
We believe the ongoing global shocks could extend Nigeria’s current account deficit to eight consecutive quarters, with 2020 deficit of $21.0 billion, exceeding 2019 level of $11.9 billion.
Given the expected lower oil inflow and limited avenue for CBN to shore up the reserve, we believe the reserve could decline further to $26.73 billion at the end of the year, with Eurobond issuance of $3.30 billion providing some support to $30 billion excluding the effect of administrative measures which could be undertaken by the CBN.
On our forecast for FGN oil revenue, we reckon that oil revenue to the FGN could decline 37% YoY to N1.2 trillion, which coupled with downward adjustments to forecast Non-oil revenue informed FGN revenue estimate of N3.68 trillion (-11% YoY). Adjusting for a revised budget implementation of 78% informed our forecast budget deficit of N3.87 trillion (+8% YoY). Also, we believe the impact will reverberate across the federating units, with our model suggesting decline in revenue to the states and local governments by 12% YoY to N5.37 trillion.
On growth, we believe the key sectors at risk are the manufacturing, construction and trade, which combined accounted for 29% of GDP in 2019. In all, we have cut our GDP growth forecast for 2020, and now look for the economy to decelerate 23bps to 2.03%.
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