By Dipo Olowookere
The Gross Domestic Product (GDP) growth forecast for Nigeria in 2020 has been revised downward to 1.5 percent from 2.2 percent by Standard and Poors (S&P).
In a press statement issued on Thursday, the rating agency also announced lowering its long-term foreign and local currency sovereign credit ratings on Nigeria to ‘B-’ from ‘B’.
In addition, the renowned company said it has affirmed its ‘B’ short-term sovereign credit ratings on Nigeria, while downgrading its long-term Nigeria national scale rating to ‘ngBBB’ from ‘ngA-’ and affirming the ‘ngA-2’ short-term Nigeria national scale rating.
S&P explained that the economic growth projection was reduced to 1.5 percent “since the effects of lower oil revenue will filter through to the non-oil real sector” of the country.
“We forecast real GDP will expand by a modest 2 percent over 2020-2023.
“In per capita terms, this translates into economic contraction over our forecast horizon through 2023. Nigeria’s per capita GDP remains below that of several peers, with income levels below $2,000 in 2020,” it said in the statement.
Early this month, the Organisation for the Oil Producing Exporting Countries (OPEC) failed to agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus.
Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires next Tuesday.
These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and Saudi Arabia may engage in a price war to try and maintain market share and market relevance.
Oil markets are now heading into a period of severe supply-demand imbalance in second-quarter 2020.
Given that Nigeria’s reliance on oil revenue is still high, over 85 percent of goods exports and about half of fiscal revenues, lower oil prices in 2020 will significantly hurt its external and fiscal positions, S&P said.
“We estimate the economy will grow about 1.5 percent in 2020 (our previous estimate was 2.2 percent) and average 2.0 percent in 2020-2023.
“Our forecast for a sharp decline in oil prices, and consequent lower export revenues, are likely to result in the current account deficit increasing to 3.3 percent of GDP this year before moderating over the medium term and averaging -1.1 percent in 2020-2023,” the agency said.
S&P had said in February 2020 that the Brent oil prices were expected to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021.
However, based on recent development, it has now projected price of the Brent oil at $30/bbl in 2020, $50/bbl in 2021, and $55/bbl from 2022.
In the 2020 budget, Nigeria pegged the crude oil benchmark at $57/bbl, but the COVID-19 pandemic forced a downward review recently to $30/bbl, with the size of the budget cut by N1.5 trillion from just over N10 trillion.
In its statement yesterday, S&P said on the fiscal side, lower oil-related revenue will keep general government in Nigeria (federal and state government combined) fiscal deficits elevated at about 5 percent of GDP this year, delaying planned gradual consolidation, before averaging 4.2 percent in 2020-2023.
The federal government has and will continue to make efforts to increase non-oil revenue, including the increase in value-added tax to 7.5 percent from 5.0 percent, reducing fuel subsidies, and raising electricity tariffs among other administrative measures, it said.
“In addition, adjustments to the exchange rate should also yield the federal government higher Naira revenues. Nevertheless, these measures are not expected to be enough to compensate for the forecast reduction in oil revenue. In addition, COVID-19-related spending is likely to affect expenditure,” the statement said.
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