Nigeria: Coronavirus Exacerbates Economy’s Vulnerability To External Shocks

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The Nigerian Ministry of Health has confirmed the country’s first case of coronavirus (COVID-19) in Lagos from an Italian national who works in Nigeria and returned to Lagos from Milan on 25 February. Nigeria is the third African country (and the first in West Africa) to confirm a case of coronavirus, after Egypt and Algeria.

The biggest concern for Nigeria comes from the oil price decline as fears of the coronavirus outbreak and its implications for crude demand continue to depress commodity prices. Brent has lost c20% YTD and is now trading at US$51 per barrel, 15% lower than Nigeria’s 2020 budget benchmark of US$60 per barrel. This represents a risk to revenue, nearly half of which is sourced from oil proceeds. Related risks include the potential for economic disruption and further output cuts from OPEC+.

Chart: Oil vs. non-oil growth – crude price decline is a major worry for Nigeria

Nigeria: Coronavirus Exacerbates Economy’s Vulnerability To External Shocks - Brand Spur

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Lower oil prices and the likelihood of lower demand are bad news for the performance of the oil sector and the overall economy. Q4 19 GDP grew by 2.6% yoy, the highest quarterly growth rate since Q3 15. It was driven by the continued expansion of the oil sector, which recorded a 6.4% yoy increase in the quarter, fueled by an increase in oil production (2.00mn b/d vs. 1.91mn b/d in Q4 18), due to there being fewer disruptions to production and to the takeoff of Total’s Egina project in early 2019, which outweighed the effect of the lower prices. However, production contracted from Q3, slowing from 2.04mb/d to 2.00mb/d as Nigeria adhered strictly to its OPEC+ supply quota during the quarter.

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Our view is that faster GDP growth was already unlikely in the near term, given the impact of recent policies (the land border closure, the recent increase in VAT and the proposed hike in electricity tariffs) and the elevated rate of inflation (12.1%), which have constrained consumption. These factors, combined with the possibility of a full-blown pandemic as the Nigerian healthcare system appears ill-prepared to counter the spread of the disease, all set the stage for economic disruption.

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