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Recession: Moody’s Warns of Dire Economic Consequences For Nigeria

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Global rating agency, Moody’s, yesterday, warned of a further contraction of the Nigeria, while it disclosed that the declining value of the naira would engender a marginal increase in Nigeria’s external debt to 5.2 per cent of Gross Domestic Product, GDP, by end of 2016 from 3.3 per cent in 2015.

This came as expert blamed the long awaited passage of the Petroleum Industry Bill, PIB, and lack of good governance to reasons for poor returns expected to cushion the effect of the downturn in the price of crude at the international market.

Moody’s, in a Global Credit Research report released in Dubai, cautioned that while the Federal Government of Nigeria should comfortably meet its financing gap over the next 12 to 18 months, increasing liquidity pressures, rising inflation and stagnant growth pose key challenges.

In the report titled, ‘Government of Nigeria: FAQ on Credit Impications of Naira Depreciation, Low Oil Price and Broader Economic Challenges,’ Moody’s said, “The Government of Nigeria (B1 stable) continues to face low oil prices, volatile oil production, a spike in inflation that has eroded purchasing power, foreign exchange scarcity and an economy that has entered technical recession.

“Moody’s projects stagnation in real GDP in 2016 and only subdued growth at 2.5 per cent in 2017.”

The rating agency projected a deficit of around 3.7 per cent of GDP in 2016 for Nigeria, compared to a deficit of 3.8 per cent deficit in 2015. Commenting on the development, Aurelien Mali, Vice President and Senior Credit Officer at Moody’s, said, “We expect that Nigeria will contain pressures on its public finances in the short term.

“However, there is greater doubt about the severity of the impact of these challenges, particularly on government liquidity and economic growth, over the medium term.”

Moody’s, however, noted that it views the recent devaluation of the naira as credit positive, stating that the new system should enable the naira to better absorb external shocks over time, while dollar availability should gradually increase.

“Moreover, the fiscal benefit of the depreciation and the current oil price, which is above the budgeted oil price, exceeds the loss in oil output,” it said.

Moody’s disclosed, however, that the depreciation implies a material loss in purchasing power given import-price inflation, adding that it expects inflation to accelerate to 18 per cent by year’s end, before falling to an average of 12.5 per cent in 2017, based on the recent two percentage point hike in the Central Bank’s policy rate to 14 per cent.

Moody’s said, “States and local governments will benefit from the naira depreciation, offsetting the negative impact on oil production from the recent attacks in the Niger Delta. Moody’s expects authorities to reduce spending if revenues under perform.

“Moody’s notes that attacks on pipelines and key energy infrastructure in the Niger Delta have cut oil production to historic lows. If oil production stagnates at its current, or lower level during the rest of the year, the expansionary spending envisioned by the current budget will be at risk, which would hurt growth.

“However, the Central Bank of Nigeria has sent strong signals to the market that it will prioritize stemming inflation over promoting growth, as well as supporting the return of foreign capital.”

Meanwhile, a renowned Petroleum Economist and President, Nigerian Association for Energy Economics, NAEE, Professor Wumi Iledare, has attributed non-passage of Petroleum Industry Bill, PIB, poor governance among others as reasons for the country’s recession.
According to the University don, “The uncertainty in the Petroleum industry, has brought about zero activities in the petroleum industry, which has in turn resulted to zero revenues that should have supported the economy in a time as this.

“There is no money because of the low crude price, production level is down; and there is no activity ongoing in the oil and gas business. It is a recipe of disaster.”

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.

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Crude Oil

Brent Crude Oil Extends Gain to $86.66 a Barrel Amid Tight Supply

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Tight global oil supply pushed Brent crude oil, against which Nigeria oil is priced, to a multi-year high of $86.66 per barrel on Monday at 3:30 pm Nigerian time.

Oil price was lifted by rising fuel demand in the United States and tight global supply as economies recover from pandemic-induced slumps.

The global energy supply crunch continues to show its teeth, as oil prices extend their upward march this week, a result of traders pricing in the ongoing rise in fuel demand – which amid limited supply response is depleting global stockpiles,” said Louise Dickson, senior oil markets analyst at Rystad Energy.

Goldman Sachs on the other hand is predicting a further increase in Brent crude oil to $90 a barrel, citing a strong rebound in global oil demand due to switching from gas to oil. This the bank estimated may contribute about 1 million barrels per day to global oil demand.

The investment bank said it expects oil demand to reach around 100 million barrels per day as consumption in Asia increases after the devastating effect of COVID-19.

While not our base-case, such persistence would pose upside risk to our $90/bbl year-end Brent price forecast,” Goldman said in a research note dated Oct. 24.

Earlier this month, the Organization of the Petroleum Exporting Countries, Russia and their allies, known as OPEC+ agreed to continue increasing oil supply by 400,000 bpd a month until April 2022 despite calls for an increase in global oil supplies.

The decision bolstered the price of Brent crude oil above $84 per barrel and expected to push the price even further to $90 a barrel. Low global oil supply amid rising demand for crude oil will continue to support oil prices in the near term.

Despite the recent power cuts and impacts to industrial activity in China, oil demand is likely instead supported by switching to diesel powered generators and diesel engines in LNG trucks, as well as by a ramp up in coal production,” Goldman Sachs stated.

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U.S. and Ghana Inaugurate New $64.7 Million Energy Infrastructure Investment at Pokuase

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U.S. Ambassador to Ghana Stephanie Sullivan joined the President of Ghana H.E. Nana Akufo-Addo and other Ghana government officials to formally inaugurate the Pokuase Bulk Supply Point (BSP) in Accra today.  The U.S. Millennium Challenge Corporation (MCC) funded the $64.7 million (GH₵ 391.9 million) electrical infrastructure project under the Ghana Power Compact.

“The Pokuase Bulk Supply Point represents sustainable infrastructure investment by the United States with Ghana that will benefit hundreds of thousands of Ghanaians now and into the future,” remarked Ambassador Sullivan at the inaugural event. “It will help deliver more reliable power to the people, places, and businesses of Accra that drive increased economic activity benefitting families, businesses, and communities.”

This represents a flagship investment under the Millennium Challenge Corporation’s Ghana Power Compact.  The Pokuase BSP will reduce outages in the power system, help stabilize voltages, and improve the quality and reliability of power supplied to the northern parts of the capital city of Accra.  It will also reduce technical losses in the power transmission and distribution system, contributing to the financial viability of the Electricity Company of Ghana (ECG) and the Ghana Grid Company (GRIDCo) in the long term.  The Pokuase BSP is now the largest-capacity BSP in Ghana at 580 megavolt amperes (MVA) and will directly benefit 350,000 utility customers.

The Government of Ghana implemented the project through the Millennium Development Authority (MiDA).  MiDA formally handed over the new power substation to ECG and GRIDCo in today’s ceremony.

The Pokuase BSP is the first major construction project to be completed under the Ghana Power Compact. The $316 million compact is helping the Government of Ghana improve the power sector through investments that will provide more reliable and affordable electricity to Ghana’s businesses and households. The compact is also funding a BSP at Kasoa and two primary substations at Kanda and Legon, in addition to other power sector investments, energy efficiency programs, and women’s empowerment programs within the power sector. The compact program will officially close on June 6, 2022.

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Crude Oil

Oil Falls Slightly as China Steps in to Curb Rising Coal Prices

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Crude oil - Investors King

Global oil prices moderated slightly on Wednesday following the Chinese government’s decision to curb high coal prices and ensure coal mines function at maximum capacity.

Brent crude, against which Nigerian oil is priced, dropped to $83.98 per barrel at 11:00 am Nigerian time. While the U.S. West Texas Intermediate (WTI) crude fell by 80 cents or 1 percent to $81.20 a barrel.

“China is planning to take steps to combat the steep rises in the domestic coal market … which could put considerable pressure on the coal price there and reverse the fuel switch to oil,” Commerzbank said.

Prices for Chinese coal and other commodities slumped in early trade, which in turn pulled oil down from an uptick earlier in the day.

China’s National Development and Reform Commission said on Tuesday it would bring coal prices back to a reasonable range and crack down on any irregularities that disturb market order or malicious speculation on thermal coal futures. read more

Oil markets in general remain supported on the back of a global coal and gas crunch, which has driven a switch to diesel and fuel oil for power generation.

But the market on Wednesday was also pressured by data from the American Petroleum Institute industry group which showed U.S. crude stocks rose by 3.3 million barrels for the week ended Oct. 15, according to market sources.

That was well above nine analysts’ forecasts for a rise of 1.9 million barrels in crude stocks, in a Reuters poll.

However, U.S. gasoline and distillate inventories, which include diesel, heating oil and jet fuel, fell much more than analysts had expected, pointing to strong demand.

Data from the U.S. Energy Information Administration is due later on Wednesday.

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