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Fitch: Nigeria FX Move Could Lift Growth, but Implementation Key

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Fitch Ratings

HONG KONG/LONDON, June 17 (Fitch) Nigeria’s planned shift to a more flexible foreign-exchange regime could aid the sovereign’s adjustment to lower oil prices and support growth, although implementation may present challenges, Fitch Ratings says.

Establishing the new framework’s credibility will be key to its effectiveness in attracting portfolio flows and FDI to make up for lower oil export receipts. The Central Bank of Nigeria (CBN) on Thursday issued revised guidelines for a single, “market-driven” inter-bank FX market, open to authorised dealers and other entities.

The central bank first indicated that it planned to move to a more flexible exchange rate at its most recent Monetary Policy Committee meeting in May. The CBN’s previous policy of restricting access to the official FX market and supporting the naira, rather than risk the inflationary impact of devaluation, has been negative for Nigeria’s sovereign credit profile.

Defending the naira has lowered reserves and increased external vulnerabilities, while a shortage of hard currency has weighed on the non-oil economy. The change of policy is consistent with our view that the CBN would struggle to defend the naira indefinitely. But a backlog of unmet dollar demand (estimates range from USD4bn to USD9bn) has built up and any inability to clear a significant portion of that backlog early in the transition would hinder the effectiveness of the new framework.

The CBN will introduce a new non-deliverable forward to try to limit exchange-rate volatility under the new system, by moving some of the dollar demand to the futures market and away from the spot market. Even so, the CBN will probably have to deploy a large portion of its international reserves during the first week(s) of implementation. It also reserves the right to intervene by buying and selling FX to smooth market movements, although it has made no specific announcements about trading bands or break points that might lead to intervention.

Nigeria’s unorthodox FX policy has made raising external financing more difficult. Allowing the market to determine the value of the naira could ease this, although we think much potential FDI may remain on the sidelines until a clearer picture emerges of how the new system is functioning. Foreign investment in the domestic bond market is very low and not likely to increase in the near term.

High demand for FXafter a devaluation may also limit the benefit to the current account from recovering oil prices. An increase in FX liquidity would support a potential recovery in growth in 2H16. Nigeria’s GDP contracted 0.36% yoy in the first three months of this year, and we think this contraction has probably continued in 2Q16 due to hard currency shortages, and unrest in the Niger Delta lowering oil production.

Naira devaluation could lead to a further spike in CPI inflation, which rose to a six-year high of 15.6% in May. But we think the inflation pass-through from the official rate is limited and a fall in the parallel rate would be deflationary, which along with the increasing availability of hard currency could lower inflation.

We will assess the implications of Nigeria’s new exchange rate policy on its economy and external finances as part of our next review of the country’s ‘BB-‘/Negative sovereign rating.

Our base case for Nigerian banks is that regulatory total capital ratios will not decline significantly under the new regime. Any impact will be offset by still strong profitability and high levels of internal capital generation. The new FX regime crucially also provides access to US dollars for the banks to meet their internal and external obligations.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Markets

Communities in Delta State Shut OML30 Operates by Heritage Energy Operational Services Ltd

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Oil

The OML30 operated by Heritage Energy Operational Services Limited in Delta State has been shut down by the host communities for failing to meet its obligations to the 112 host communities.

The host communities, led by its Management Committee/President Generals, had accused the company of gross indifference and failure in its obligations to the host communities despite several meetings and calls to ensure a peaceful resolution.

The station with a production capacity of 80,000 barrels per day and eight flow stations operates within the Ughelli area of Delta State.

The host communities specifically accused HEOSL of failure to pay the GMOU fund for the last two years despite mediation by the Delta State Government on May 18, 2020.

Also, the host communities accused HEOSL of ‘total stoppage of scholarship award and payment to host communities since 2016’.

The Chairman, Dr Harrison Oboghor and Secretary, Mr Ibuje Joseph that led the OML30 host communities explained to journalists on Monday that the host communities had resolved not to backpedal until all their demands were met.

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Crude Oil Recovers from 4 Percent Decline as Joe Biden Wins

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Oil Prices Recover from 4 Percent Decline as Joe Biden Wins

Crude oil prices rose with other financial markets on Monday following a 4 percent decline on Friday.

This was after Joe Biden, the former Vice-President and now the President-elect won the race to the White House.

Global benchmark oil, Brent crude oil, gained $1.06 or 2.7 percent to $40.51 per barrel on Monday while the U.S West Texas Intermediate crude oil gained $1.07 or 2.9 percent to $38.21 per barrel.

On Friday, Brent crude oil declined by 4 percent as global uncertainty surged amid unclear US election and a series of negative comments from President Trump. However, on Saturday when it became clear that Joe Biden has won, global financial markets rebounded in anticipation of additional stimulus given Biden’s position on economic growth and recovery.

Trading this morning has a risk-on flavor, reflecting increasing confidence that Joe Biden will occupy the White House, but the Republican Party will retain control of the Senate,” Michael McCarthy, chief market strategist at CMC Markets in Sydney.

“The outcome is ideal from a market point of view. Neither party controls the Congress, so both trade wars and higher taxes are largely off the agenda.”

The president-elect and his team are now working on mitigating the risk of COVID-19, grow the world’s largest economy by protecting small businesses and the middle class that is the backbone of the American economy.

There will be some repercussions further down the road,” said OCBC’s economist Howie Lee, raising the possibility of lockdowns in the United States under Biden.

“Either you’re crimping energy demand or consumption behavior.”

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Nigeria, Other OPEC Members Oil Revenue to Hit 18 Year Low in 2020

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oil-rig

Revenue of OPEC Members to Drop to 18 Year Low in 2020

The United States Energy Information Administration (EIA) has predicted that the oil revenue of members of the Organisation of the Petroleum Exporting Countries (OPEC) will decline to 18-year low in 2020.

EIA said their combined oil export revenue will plunge to its lowest level since 2002. It proceeded to put a value to the projection by saying members of the oil cartel would earn around $323 billion in net oil export in 2020.

If realised, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues,” it said.

The oil expert based its projection on weak global oil demand and low oil prices because of COVID-19.

It said this coupled with production cuts by OPEC members in recent months will impact net revenue of the cartel in 2020.

It said, “OPEC earned an estimated $595bn in net oil export revenues in 2019, less than half of the estimated record high of $1.2tn, which was earned in 2012.

“Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programmes, and support public services.”

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