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The Central Bank of Nigeria held a consultative round table on Wednesday morning tagged “Going for growth 2.0”.
The roundtable comes a few days after “Black Monday”, a global fall in the price of equities after Russia and Saudi Arabia started an oil price war. In the US, the main financial indexes were down by more than 7%. In New York, initial losses caused trading to be suspended.
The Nigerian Stock Exchange was no exception as the close of trading on Monday saw 39 losers and only one gainer. According to a stockbroker who spoke to NewsWireNGR, on Tuesday and Wednesday, the Stock Exchange shed 4.92% and 3.35% respectively.
It means the market shed N1.4 Trillion in three days. The decline is expected to continue as investors continue to dump their shares.
On Thursday, many reports indicate that the Dollar was trading at N401, up from N365 last week, despite the Central Bank maintaining a price of N306 on its website. At the CBN roundtable, CBN and other government officials say they expect the decline to continue.
Coronavirus sparks oil price war between Saudi Arabia and Russia
Coronavirus has had effects many observers would not have predicted. It is affecting the global supply chain, as many manufacturing companies have suppliers in China.
The global pandemic also caused a drop in the oil consumption of Asia, and OPEC held a meeting last week to figure out a response to reducing global demand. While Saudi Arabia proposed production cuts, Russia opposed the plan.
With the meeting failing to reach a resolution, matters escalated quickly, as Saudi Arabia cut crude prices to $35 per barrel. Over the weekend, Russia responded, showing its intent to also lower prices.
A weekend of price wars between both countries led to Black Monday, a global plunge in the price of global stocks. For Nigeria, a country under considerable fiscal strain, the implications will be larger.
Nigeria’s oil dependent economy hard hit by price slashes
Nigeria’s national budget is based on an $57 benchmark price for a barrel of oil. With foreign reserves at $41 billion, the CBN has spent the better part of the last few years defending the price of the Naira at N306 to the Dollar.
There have been many questions about a possible devaluation but the CBN has insisted that there will be no currency float as long as reserves remain above $30bn. But the Central Bank certainly did not prepare for a dip in oil prices.
The minister of finance, Zainab Ahmed, at the consultative roundtable said: “We were not prepared for prices to get to $30”. She also touched on the need for Nigeria to increase non-oil income, a sentiment which Nigerian government officials have said for years.
“These are strong headwinds. There is no doubt that the global oil crash and Coronavirus has put a strain on the national budget.” Zainab Ahmed added.
One of the sectors which will be affected by Coronavirus is the manufacturing sector. While Nigeria’s manufacturing sector has always struggled, many of the items used by this sector are sourced from Asia. With inflation rate already at 12.13% in February, the inflation rate will definitely go up.
Strong headwinds may last up to six months
The GMB of the Nigeria’s petroleum corporation, NNPC, Mele Kyari believes that the strong headwinds will last for up to six months.
“Potentially we haven’t seen the bottom (of global oil prices). But if we haven’t seen it (the bottom of oil prices), it is a huge challenge and it creates a cycle of problems for us and it is difficult to manage. It implies a huge deficit and it will radiate across all sectors, especially the financial sector.“
All sectors are expected to suffer, but the financial sector is already feeling the heat. A stockbroker who spoke to NewsWireNGR agrees that Kyari’s position is consistent with reality.
Kyari’s position is consistent with NSE sector indices which show that the Banking sector was down 2.96%, making it the sector which shed the most on Monday.
Although many Nigerian banks have taken a long position on the dollar as a hedge, they are in for some rough months.
It will be little consolation that the economic crisis looks to be global. But closer to home, if oil prices continue to fall, it might force oil companies to stop production. According to SBM intelligence, “There is also the risk that as oil prices remain low, some of our oil wells may be shut as they become increasingly unprofitable. New investments could be frozen as a result”
Despite these, one question which the current crises raises is: what happens to the government’s plan to borrow $22.7bn which was approved by the National Assembly?
The SBM intelligence report also reports these worries in the light of the fact that “the Nigerian federal government is hedging the repayment of those loans on oil sales.”
In the end, the real dangers are the risk of a monetary crisis, a rise in inflation and the government’s inability to fund its proposed development programs.