Fitch, an international rating, agency has stated that reduction in Nigeria’s oil supply into the market will affect growth, and impact on the nation’s external finances.
In its revised outlook, the rating agency stated that it expects the Nigeria’s economy to contract by 3% in 2020.
The nation’s gross domestic growth often come strong when both oil supply and global average price are on the rise.
According to Fitch, Nigeria’s adherence to oil production cuts under the OPEC+ agreement will lead to deeper economic contraction and fiscal deficits.
The combination of these would then have compound pressures on external finances from the slump in oil prices, says Fitch Ratings.
The rating agency stated that increased recourse to concessional multilateral loans will ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment will persist.
The rating agency explained: “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.”
Fitch stated that it has adjusted its GDP forecasts, and now expect Nigeria’s economy to contract by 3% in 2020, before a recovery to 3% growth in 2021.
Fitch explained that despite the OPEC+ deal, our oil price forecasts remain unchanged, at USD35/barrel for Brent on average in 2020 and USD$45/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”, Fitch said.
The firm stated that external liquidity pressures will be aggravated by outflows of foreign portfolio investment.
It noted that 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 USD$7 billion decline in foreign holdings of open-market operation bills issued by the Central Bank of Nigeria (CBN).
Also, the rating agency recognised that 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.
Fitch held that 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.