Through 2019, global financial markets and commodity prices responded heavily to major events, such as the U.S.- China trade war, BREXIT and Middle East tensions. However, 2020 has kicked-off with a different twist, as the outbreak of the novel Coronavirus (COVID-19) has triggered panic across the global economy. According to New York Time’s Coronavirus Map, the virus has been spotted in at least 65 countries. By official count, over 89,700 people are already infected and at least 3,056 (about 3% death rate) people have died (with only 144 of dead reported outside mainland China). Notably, Brent oil price has taken a substantial hit, dropping 21.9% YTD, to $51.5/b as Chinese demand tumbles.
For Nigeria, this implies that oil production proceeds will come under intense pressure, given the lower pricing. This will put the CBN’s resolve to defend the local currency to the test, as weaker forex earnings worsen the stock of the external reserves, which comes majorly from oil sales. Yet, a huge drop in crude oil prices has moderated the landing costs of imported petrol significantly from N161.7/litre as at 31s t Dec 2019 to N123.9/litre currently. With the expected market open price now at N143.3/litre, below the regulated N145.0/litre, this reduces the burden of under-recovery being paid to the NNPC for the time being.
Bearing the above in mind, the effect of declining oil prices is tilted more to the downside for Nigeria, as oil earnings is still a major tool used in driving the economy. As the coronavirus becomes increasingly pandemic, with a reported case in Lagos, oil prices may be pressured for longer and OPEC may be forced to make further cuts. Either way, the shock is likely to weaken Nigeria’s revenue projection (vs. budgeted oil benchmark at $57/b) for 2020 and push the CBN closer to the inevitable, due to net capital outflow. In view of this reality, we are revising our oil price projection from the initial $60-$65/b range lower as efforts to contain the spread of the virus continues. Accordingly, the stock market may take a further beating as investors run to safety. Also, the increasing pressure on oil prices may weaken the FGN’s position ahead of the proposed $3.0bn Eurobond issuance, as the market demands a premium for the global risk.
United Capital Research