By Adedapo Adesanya
Nigeria’s decision to take off 417,000 barrels per day from its crude oil production quota will lead to deeper economic contraction and higher fiscal deficits, says Fitch Ratings.
The rating agency also added that the decision will further compound pressures on the country’s external finances resulting from the slump in oil prices, the nation’s main source of foreign earnings.
In a statement released on Monday, the credit rating company noted that Nigeria’s adherence to oil production cuts under the agreement signed in April by members of the Organisation of the Petroleum Exporting Countries and their allies (OPEC+) will affect growth and external finances this year.
“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 1.87 mbpd in 2021, compared with our earlier forecast of 2.1 mbpd for both years,” it said.
The agency also added that it had adjusted Nigeria’s gross domestic product forecast for the year, expecting a slump of 3 percent which should recover in 2021.
“We have adjusted our GDP forecasts, and now expect Nigeria’s economy to contract by 3 percent in 2020, before a recovery to 3 percent growth in 2021,” it stated.
Fitch said that it expects Nigeria’s increased recourse to concessional multilateral loans to ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment will persist.
Nigeria had requested for loans from the World Bank, the International Monetary Fund, and the African Development Bank amounting to $5.4 billion.
It said that despite the OPEC+ deal, its oil price forecasts remain unchanged, at $35 per barrel for Brent on average in 2020 and projected a $45 per barrel increase in 2021.
Fitch said that Nigeria’s foreign-currency reserves had dropped by $5 billion over the first four months of the year despite only limited depreciation in the Naira’s key exchange rates.
It said, “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 $38.6 billion at end-2019 to $23.3 billion at end-2020.”
It further said 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 percent of GDP in 2020 and 2.5 percent in 2021.
“External liquidity pressures will be aggravated by outflows of foreign portfolio investment.” It stated.
Fitch highlighted an intensification of external liquidity pressures as a negative rating sensitivity when it 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 which according to Fitch, if secured, would cover around 21 percent of the general government deficit in 2020.
Modupe Gbadeyanka