While many may ascribe the Nigeria’s current terse economic situation to the coronavirus impact globally, there are fears that oil price crash might just be the underlying cause of the country’s present economic predicament; BENJAMIN UMUTEME reports.
With a population of over 200 million people, Nigeria is battling challenges on many fronts especially with a global economic slowdown that is fallout of the coronavirus outbreak.
The effect of the covid-19 pandemic world seem to be bringing many countries to their knees, with most countries globally reeling from its effect that has left about 43,269 deaths from 872,696 since the disease started in Wuhan, China.
Not many globally thought it would get to the four corners of the world when people in Wuhan, province of China reported an infection in November, but by December, it had rapidly spread in the province leaving in its wake 3,169 deaths and 67,891 confirmed cases.
According to reports, delayed and controversial response by the Wuhan and Hubei authorities failed to contain the outbreak in the early stage which led to criticism from the public and the media. By January 29, the virus spread to all provinces of mainland China. By February 8, over 724 died from the coronavirus infection-associated pneumonia and 34,878 were confirmed to be infected. In Hubei alone, there were 24,953 cases of infections and 699 related deaths.
And it did follow almost a similar pattern in Europe and North America with the authorities unwilling to promptly take measures to curb the spread of the virus until it started its ravaging effect with recorded confirmed cases of infection from COVID-19 nearing the one million mark.
Due to the sheer size of its manufacturing sector, which is seen as a hub that feeds the economy of many nation’s globally, the decision by Chinese authorities to lockdown the country to contain the spread of the disease exposed the world to the level of its dependence on production from China’s manufacturing sector.
As the coronavirus spread into Europe and North America, it had become obvious that world was dealing with a dealt virus whose cure had not been discovered.
Covid-19 impact
As production gradually ground to a halt in various developed economies, the global stock market was affected and countries that depended on imports from Asia, Europe, and China saw their manufacturing sector slowing down and in some cases coming to a halt.
From, aviation to manufacturing, shipping, entertainment and sport, no sector have left without a black eye as it has been one postponement after another leaving to the loss of billions of dollars in revenue. Even footballers in Europe have had to take pay cuts to help their clubs weather through the covid-19 storm.
For instance, the International Air Transport Association (IATA) hinted that many airlines were on the brinks of collapse if there is no support from their home governments.
Putting its losses globally to $252 billion from an initial $113 billion the IATA noted that this will come from passengers’ revenue slump globally.
According to the global airline body, for the aviation industry to survive the coronavirus pandemic crisis would depend on government’s support for airlines and other operators.
According to IATA, supports can come from direct financial support to passenger and cargo carriers to compensate for reduced revenues and liquidity attributable to travel restrictions imposed as a result of covid-19.
In Nigeria, local airlines are shutting down scheduled services over massive slump in passenger traffic and inability to cover the cost of operation.
Though, some of the airlines are citing solidarity with the government’s efforts to contain the spread of coronavirus pandemic; business has not been sustainable with about 30 per cent load factor recorded from Tuesday, Wednesday and Thursday operations last week.
As at midnight on Friday last week, Air Peace operated its last flights, just as the likes of Dana and Aero Contractors have stopped operations a day earlier (Thursday). Arik Air also followed suit the next day.
The Chief Operating Officer of Air Peace, Toyin Olajide, said it was left with no option than to suspend operations temporarily till April 20, as according to them passenger traffic had slumped drastically in the last three weeks, as a result of the pandemic, “so it is unwise to continue raking in avoidable costs that the airline could not afford.”
Olajide said, “Continuation of flight operations in the present circumstances we find ourselves as airlines, could lead to the total collapse of any airline. Hence, there is the need to quickly stem the rising financial burden and costs of operations.
“While the suspension is on, we are, however, willing to do special flights both for the government and our people. Normal scheduled flight operations shall resume on April 20, 2020,” she said.
Even for ‘pure water’ producers, meeting demand has been a very big challenge. According to a distributor with LIA Table Water, popular ‘pure water’ in Jikwoyi, they don’t have enough nylon, so they have resorted to supply based on demand. Even then, not all demands are met.
The distributor, who did not want his name in print told Blueprint Weekend that “for the past two weeks we have not gotten supplies from Lagos. And that has greatly affected our operation.”
The implication, our correspondent learnt is the rise in the price of ‘pure water’ from 6 bags for N500 to four bags for the same amount (N500). This has led to increase in price as a single one now sells for N20.
In Africa, where most countries are import-dependent, it has been tales of lamentation die to the negative impact of the novel coronavirus on their economy.
Stock market loses N3.757trn in two months
Even in Nigeria’s equities market, trading has been in the red since February.
Nigerian investors in equities lost N3.757 trillion in the last two months as widespread of coronavirus continue to take tolls on stock markets across the globe.
On Tuesday, the market indicators recorded further depreciation, dropping by 0.14 per cent.
Specifically, the All-Share Index which opened at 21,330.79 lost 30.32 points or 0.14 per cent to close at 21,300.47.
Similarly, the market capitalisation dipped N16 billion or 0.14 per cent to close at N11.100 trillion compared with N11.116 trillion posted on Monday.
The downturn was impacted by losses recorded in medium and large capitalised stocks, amongst which are; Zenith Bank, UACN, Guaranty Trust Bank, Lafarge Africa and Access Bank.
For analysts at Afrinvest Limited said, “We expect the bearish sentiment to continue; however, there exists bargain hunting opportunities in the equities market.”
Also, the Chief Operating Officer, InvestData Ltd., Mr. Ambrose Omordion, said that market outlook would remain unstable during the lockdown period and beyond due to high volatility in developed and developing markets.
Omordion noted that bouquet of stimulus packages had failed to uplift the market.
“This is because there is no clear road map for implementing these fiscal and monetary measures to ensure that they are devoid of the usual bottlenecks,” he said.
The real threat
A report by investment management firm, Goldman Sachs says the sudden crash in crude oil prices is set to wipe $8.63 billion from the expected earnings accruable to the country in six months if the price war between Saudi Arabia and Russia continues.
Already, Nigeria has lost over $335.7 million after the crude oil price plunged in early March hovering between $30 and $36 per barrel.
This is based on the 2020 budget benchmark of $57 per barrel.
The crude oil sales make about 90 per cent of foreign exchange earnings in Nigeria.
According to the experts, if nothing significant is done to shore up the revenue following the current crash in crude oil prices, another recession is definitely imminent.
“Anybody who is telling you that we are not heading towards another recession is lying. Right now, crude oil supply is in surplus and demand is minimal,” the National Public Relations Officer, Petroleum and Natural Gas Senior Staff Association of Nigeria, Fortune Obi, said.
Obi, however, said there were a number of ways to save the economy from sliding into another recession, noting that the stoppage of petrol subsidy was one of such ways.
He said, “What is good for us as a people now is for us to disengage fully from that particular aspect of subsidising petrol so that when the crude oil market is experiencing a rebound, people will absorb the shock.
“But if we wait until the market rebounds, we will spend more in subsidising the product. This is the best time for the Nigerian government to say ‘enough is enough’ and lay their hands off subsidy. Let market forces drive what the cost of petroleum products should be in the market.”
Obi further called for a full deregulation of the oil sector in order to increase competition, create jobs and boost the economy.
Meanwhile, analysts fear that Nigeria’s real revenue earner, oil, is more likely to get the country into deeper economic trouble than the COVID-19 pandemic. They are apprehensive that with oil price nearing the $20 per barrel mark, Nigeria may just be walking into another recession two years after it came out of one.
The Saudi-Russia price wars started due to Russia to agree to another round if production cuts. With Saudi-Arabia flooring the market with over 7 million barrels daily, there leading to a glut in the market, prices had no option but to fall.
Cuts in exploration spending and cancellation of drilling plans could potentially mean years of delay in new discoveries, reserves replacement and new fields being brought on stream.
Presently, the biggest international oil companies operating in the continent are all cutting spending by an average of 20 per cent globally, which is set to impact exploration and projects in Africa. While ExxonMobil considers several reductions in spending, Shell has already announced a reduction of underlying operating costs by $3 to $4 billion and a reduction of cash capital expenditure of $5 billion. Total’s organic capex is being cut by more than $3 billion, representing 20 per cent of its planned 2020 capex. Chevron is also reducing capital and exploratory spending by 20 per cent, including a $700 million cut in upstream projects and exploration.
These IOCs were expected to take major final investment decisions this year or in the near future on multi-billion dollar projects in Africa. These include Shell’s Bonga South-West project, ExxonMobil’s Bosi, Owowo West and Uge-Orso projects, or Chevron’s Nsiko project. Regardless of how close each of these were to FID, they are very unlikely to get sanctioned this year.
For Nigeria which has had its share of the market depleted due to slowdown in economic activities of its buyers China especially, the crash in oil price further exacerbates the situation.
As it stands now, Nigeria could see production fall by 35 per cent without offshore investment. Even the continent could see production fall by 200,000 bpd through 2025, according to Rystad as the downturn threaten government finances.
“This is really different terrain, and these are very vulnerable economies,” Alex Vines, head of the Africa Programme at British think-tank Chatham House, told Reuters.
Furthermore, global oil demand could fall by more than 20 mb/d, as market forecasts continue to see daily revisions. “Oil demand is breaking away, probably by much more than the 20% we have currently in our books for April/May,” JBC Energy said. The situation is even gloomy for Nigeria as it is presently finding it difficult to sell its products due to the prevailing glut in the market.
However, analysts are worried that reserves may plunge further as prior to the fallout from OPEC’s failure to reach an agreement with Russia on oil production cuts, the country’s foreign exchange reserves were in steady decline.
“Firstly, should Brent crude oil prices average roughly $40pb (per barrel) for the remainder of the year, it would reduce Nigeria’s goods export receipts by roughly $14 billion (as opposed to our February baseline for oil prices to average $62.4 billion in 2020) — this may also be a conservative estimate, as it does not take into account any adverse impact on non-oil exports,” analyst de Hart said.
What’s more, Nigeria may have difficulty accumulating external debt following the fall in oil prices and its impact on the macroeconomic outlook, while the jittery investment environment raises the risk of a capital flight, he highlighted.
For his part, the director-general, Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, said the effect of the drop in oil price could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers.
“Oil revenue currently accounts for about 50 per cent of government revenue and about 85 per cent of foreign exchange earnings. With the current scenario of tumbling oil price, a drastic reduction in the revenue of government may become inevitable in the near time.
“This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy,” Yusuf said.
‘No need for panic’
Meanwhile, with IOCs cutting down on budget and other sundry CAPEX, there is apprehension among oil workers, the General Secretary, Nigeria Union of Petroleum and Natural Gas workers, Afolabi Olawale, said.
“We are praying that the country will not go into another recession. Right now, the issue is about how the economy will survive. The concern of all of us in the union is about how the nation will survive.”
However, the director-general of Budget Office, Ben Akabueze, noted that there was no need for Nigerians to panic in the midst of the challenge.
According to him, the effect of the virus on oil prices calls for concern but should not drive Nigerians into apprehension as measures would be put in place to address the concerns.
