Higher oil prices, forex market stability raise prospect of Nigeria’s economy

Nigerias-economy20 April 2014, Lagos – Still basking in the euphoria of the rebased Gross Domestic Product (GDP) which placed it at the forefront of the economies on the African continent, there are indications that the Nigerian economy is in for a big haul in the second quarter of the year.

This is because a combination of fresh developments in the international oil market, coupled with the favourable inflation rate and stabilised foreign exchange market has raised the prospect of prosperity in the Nigerian economy in the new quarter of the year.

At the weekend, price of Bonny Light, a high grade of Nigerian crude oil, hit the $109.7 mark, a development which economic analysts described as a good omen for the economy considering the fact that the approved budget oil benchmark for the 2014 budget is $77.5.

With a maximum crude oil production capacity of 2.5 million barrels per day, Nigeria ranks as Africa’s largest producer of oil and the sixth largest oil producing country in the world. Nigeria appears to have a greater potential for gas than oil.

Other grades of Nigerian crude oil are Qua Iboe crude oil, Brass River crude oil, and Forcados crude oil. The Bonny Light is in high demand specifically by American and European refineries. It is therefore a major source of income generation.

International analysts who believe Nigeria is set to build its economy in the midst of the ongoing tension in Ukraine said, “The tensions in Ukraine are the main driver for oil prices at the moment.” “Oil prices have been quick to dismiss macroeconomics lately,” Michael Poulsen, an analyst at Global Risk Management in Middelfart, Denmark, said. “The tensions in Ukraine are the main driver for oil prices at the moment.

Analysts also believe the recent stabilisation of the foreign reserves which has picked up will continue to make the Nigerian economy irresistible to both institutional and portfolio investors. The foreign reserves at the weekend were put at $37. 9 billion.

Another indication of the financial stability is the current moderation of the foreign exchange market. A random analysis of the intervention of the Central Bank of Nigeria in the month of April showed moderation in the amount of dollars supplied to the market.

For instance, total amount of dollars sold at the twice weekly Retail Dutch Auction System in April 16 was $250.85 million. On April 14, the figure was slightly higher at $375.8 million. Earlier before then, the apex bank sold $278.9 million on April 9. For the April 7 trading, total amount sold was $322 million and on April 2, $268.2 million was the amount sold.
It is believed that the moderation in the quantity of dollars demanded was one of the factors that led to the gradual accretion of foreign exchange reserves in recent times.

The development is also coming on the heels of the favourable inflation figures released by the National Bureau of Statistics last week which stood at 7.8 per cent for the month of March.
In support of the improvement in the nation’s economy is last week’s report of Moody’s, a rating agency which endorsed the Nigeria’s rebased GDP of $510 billion, with the belief that it would surge to $4.5 trillion by 2050.

Moody’s which has a Ba3 stable rating on Nigeria said that the rebasing exercise was supportive of assessing the nation’s sovereign credit profile, although it does not change the government’s nominal stock of outstanding debt, nor its revenue generation capacity to service that debt.
“With a population of 170 million and oil reserves estimated at around 37.2 trillion barrels (or roughly 28 per cent of total African reserves), Nigeria is likely to number among the world’s 15 largest economies by 2050 when GDP is projected to exceed $4.5 trillion in purchasing power parity terms,” said Aurelien Mali, VP-Senior Analyst, Moody’s.

“From a credit standpoint, the revised GDP estimates allow a better understanding of the Nigerian economy and its underlying resilience.”

The rebasing of Nigeria’s GDP follows similar rebasing exercises by more than a dozen other African countries over the past decade, resulting in a range of revisions of national output, from an 11 per cent reduction in the case of Botswana (A2 stable) to a 66 per cent increase in the case of the Democratic Republic of the Congo (B3 stable).

Moody’s notes that in Nigeria’s case, the GDP revision is more spectacular as it means the country has now overtaken South Africa to become the largest economy in Africa, with its ranking among global economies jumping from 36th to 28th, with an economy almost as large as that of the Netherlands.

Another rating agency, Fitch Ratings had assigned a stable outlook to Nigeria’s long-term foreign and local currency Issuer Default Ratings (IDR).
The positive ratings, according to market watchers are a fair reflection of improvement in the nation’s economic fundamentals.
Global rating agency, Fitch had, in a statement a fortnight ago, affirmed Nigeria’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-’ and ‘BB’, respectively. The agency also maintained that Nigeria’s outlook remains stable.

Fitch in a statement also affirmed the issue ratings on the country’s senior unsecured foreign and local currency bonds at ‘BB-’ and ‘BB’, respectively.
In addition, the agency also placed Nigeria’s short-term foreign currency IDR at ‘B’ and Country Ceiling at ‘BB-’.

The ratings, according to economic analysts represent the current position of the Nigerian economy, which they said had improved tremendously.

Managing Director of Financial Derivatives Company Limited, Mr. Bismarck Rewane, had said, “One will agree with Fitch Rating that the economic outlook look stable pre-election. There is no reason to downgrade the outlook. The reserve depletion has slowed down and in fact there were some accretion although it has started to deplete again; oil prices are held up and the fundamental economic variables are good especially if the policy continues to move in the right direction.”
According to Rewane, “There is every justification for the stable outlook. What Nigeria should be looking for is an improvement in the outlook from stable to favourable.”

He believes Nigeria has strong potentials which could be tapped for the improvement of the economy.
“Our potentials remain strong. There is no doubt about that but people don’t live on potentials, people live on actuals. To actualise these potentials, government needs to remove the constraints,” he said.


– Festus Akanbi, This Day

About the Author