Nigerian economy to remain vulnerable to crude oil prices

PIC 16.  DR NGOZI OKONJO IWEALA AFTER BEING SCREENED BY SENATE IN ABUJA     ON WEDNESDAY (6/7/11).15 July 2013, Lagos – The continued dominance of Nigeria’s total exports by petroleum products, will make the country remain highly exposed to the risks in global oil market, a report has warned.

The report also insisted that the development in the United States’ shale oil and gas industry would in the long-run lead to deterioration in the country’s earnings from crude oil.

The Ecobank Group, which stated this in a report titled: ‘Nigeria – Our Insight’, urged the federal government to diversify the economy and to adopt fiscal discipline.

The report argued that in the short-term, Nigeria’s outlook would be subject to a number of risks despite the federal government’s recent plans to accelerate its reform programme.

Although the non-oil economy has posted strong growth in recent years, it maintained that the oil sector would continue to dominate government revenues and foreign exchange earnings in the short term, “leaving the country vulnerable to oil price shocks and volatility.”

“Moreover, external demand for Nigeria’s crude oil will be undermined by a combination of factors, notably the US sequestration automatic spending cuts, China’s economic rebalancing policy (which should drive domestic growth via consumption rather than investment and exports), and the US’ shale oil and gas revolution.

“Already, increased US hydrocarbons self-sufficiency has led to Nigeria’s crude oil exports to the US dropping to 34 per cent of total exports from 45 per cent in 2006. While we do not expect this development to lead to the collapse of Nigeria’s oil sector, the country’s long-term oil export prospects will become increasingly undermined as US shale oil and gas production gain momentum,” it warned.

However, the report declared that although encouragingly, the government had increased its efforts to seek other export markets (particularly Asia), there is also a need for it to maintain fiscal discipline to safeguard macroeconomic stability, diversify the economy, improve public financial management, and increase foreign reserves.

Additionally, it stated that in the domestic front, the key risks stemmed from the country’s high security threat, which it argued had hampered investment expansion, continued power outages, “which remain a major constraint to doing business in the country, and from ongoing investor uncertainty associated with the review of the upstream fiscal regime under the Petroleum Industry Bill.”

It added: “The country also faces huge infrastructure deficits. While progress is likely in some areas, overall, these challenges will continue to be the main difficulties that the economy will face over the short to medium term.

“However, Nigeria’s debt situation will remain vulnerable to any unexpected large drop in oil prices or other macroeconomic shock to the economy; this could lead to renewed debt distress. This factor will continue to weigh on the country’s sovereign credit rating. Amid this and other factors, Nigeria’s sovereign foreign currency long-term credit ratings remain below investment grade, albeit with a stable outlook. The outlook for Nigeria’s ratings compares more favourably than that of South Africa, which has a negative outlook.”

Commenting on the outlook for the naira, the report stressed that the downward pressure would remain on the naira.

– Obinna Chima, This Day.

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