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Huge Debt Service Cost in Nigeria, Others, Worries Moody’s

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Moody's
  • Huge Debt Service Cost in Nigeria, Others, Worries Moody’s

The elevated public debt-service cost in Nigeria and some other countries in Africa calls for concern, Moody’s Investors Service stated in a report at the weekend.

The region’s debt-servicing cost on weighted-average basis increased to almost to 12.3 per cent of revenue in 2017 from seven per cent in 2013, and was expected to hover at around 13per cent in the medium term, one of the leading global rating agencies revealed.

Moody’s noted that while this largely reflects a sharp fall in revenue and increasing borrowing costs for oil exporters, particularly Nigeria, interest costs relative to revenue were escalating across the region.

Also, Moody’s stated that the outlook for sovereign ratings in Nigeria and other countries in sub-Saharan Africa, were negative for the coming 12-18 months, driven by the region’s subdued and fragile growth recovery, which also weighs on the prospects for fiscal consolidation and debt stabilisation.

It stated this in a report titled: “Sovereigns — sub-Saharan Africa, 2018 outlook negative amid subdued growth, elevated debt and political risks.”

“Our negative outlook for sub-Saharan African sovereigns reflects the region’s subdued growth recovery, fiscal challenges and heightened political risks,” Moody’s Vice President — Senior Analyst and the report’s co-author, Zuzana Brixiova said.

“Higher and more stable global growth will provide limited uplift to Africa’s growth because commodity prices are still low and there are domestic structural bottlenecks.

“Risks stemming from government balance sheet pressures and liquidity stress as well as external imbalances remain elevated, while domestic political tensions increase policy uncertainty and impede reforms.”

Moody’s expects growth in sub-Saharan Africa to accelerate to 3.5 per cent in 2018 from an estimated 2.6 per cent in 2017, supported by the strengthening global economy and a modest rise in commodity prices.

However, it noted that the recovery remains fragile, uneven and sub-par and barely above population growth. Falling productivity, reflecting relatively low investment and the challenging business environment, will also weigh on longer-term trends.

“In 2018, most Moody’s-rated sovereigns in the region are expected to stabilise their fiscal deficits, but at higher levels than were seen before the commodity price shock. The region is thus unlikely to see a decisive reversal in elevated debt levels given the countries’ consolidation challenges, increased interest costs and subdued growth.

“Debt accumulation is likely to slow in 2018 and beyond due to improved (but still relatively low) commodity prices and some fiscal consolidation, but a return to 2013 debt-to-GDP levels will be challenging at a time of modest growth in the region.

“Currency risks will remain heightened in countries with large shares of foreign currency public debt. Reserve buffers will provide only limited mitigation. As Sub-Saharan African countries approach the peak of maturing international debt in the early 2020s, refinancing risks will continue to rise,” it noted.

Government liquidity stress – a key driver of Moody’s past rating actions in the region, according to the report, remained heightened especially among commodity-dependent sovereigns. It continues to be driven by elevated fiscal deficits and challenging funding conditions, where greater reliance on domestic financing has increased borrowing costs.

It, however, noted that income levels have deteriorated in a number of countries in the region, increasing pressure on governments to extend subsidies, or constraining the government’s ability to remove subsidies as intended.

The report noted that high levels of urbanisation and sizeable young populations, if matched with skilled labour force and job creation, would accelerate industrialisation in Africa.

“It would also help raise productivity via innovation and economies of scale, particularly in middle-income countries in southern Africa. An emerging middle class would also strengthen aggregate domestic demand. Seizing the opportunities provided by these demographic trends (youth, urbanization, emergence of middle class) is not assured and hinges on delivering on broader structural reform agenda,” it added.

According to the agency, deteriorating wealth levels across the region would increase pressure on governments to implement populist measures, such as the 2017 decision to extend free higher education in South Africa. Moreover, it stated that a gradually expanding and more educated and globally interconnected middle class would increase calls for greater accountability and more prosperous, equitable and well governed economies.

“However, social tensions cannot be easily assuaged through either fiscal stimulus or redistributive spending given governments’ limited resources amid fiscal tightening. Droughts and rising food prices in eastern and southern Africa are often sources of unrest. Separately, long-serving political leaders amplify succession risk in Uganda and Rwanda.”

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.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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