Oil output cut will deepen Nigeria’s economic recession – Fitch

Nigeria’s adherence to oil production cuts under the OPEC+ agreement will lead to deeper economic contraction and fiscal deficits and compound pressures on external finances from the slump in oil prices, Fitch Ratings has said.

The global credit ratings agency said on Monday that increased recourse to concessional multilateral loans would ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment would persist.

The Organisation of Petroleum Exporting Countries and its allies, led by Russia, who are known as OPEC+, agreed in April to cut output by 9.7 million barrels per day for May and June, a record reduction.

It said, “We assume that Nigeria will comply fully with the production caps under the OPEC+ agreement, and have reduced our forecast oil output to 1.88 million bpd (including condensates) in 2020 and 1.87 million bpd in 2021, compared with our earlier forecast of 2.1mbpd for both years.

“We have adjusted our GDP forecasts, and now expect Nigeria’s economy to contract by 3 percent in 2020, before a recovery to 3 percent growth in 2021. Despite the OPEC+ deal, our oil price forecasts remain unchanged, at $35/barrel for Brent on average in 2020 and $45/barrel in 2021.”

Fitch said the contraction in exports and remittance inflows meant the current account would remain in deficit, despite a sharp drop in imports.

“We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8 percent of GDP in 2020 and 2.5 percent in 2021,” it added.

The agency said external liquidity pressures would be aggravated by outflows of foreign portfolio investment.

It noted that the International Monetary Fund estimated that portfolio holdings of non-resident investors in Nigeria, which amounted to $34.3 billion at end-2019, fell by 46 percent in the first quarter of 2020.

This includes a $7 billion decline in foreign holdings of open-market operation bills issued by the Central Bank of Nigeria, according to Fitch.

It said Nigeria’s foreign-currency reserves had dropped by just $5 billion over the first four months of the year despite only limited depreciation in the naira’s key exchange rates.

Fitch said, “This reflects moves by the CBN to tighten foreign-currency access. This has contained capital outflows temporarily, although the build-up of pent-up foreign-currency demand may increase the risk of a disruptive future exchange-rate adjustment.

“We expect outflows to materialise later in the year, which, alongside a significant current-account deficit and continued CBN resistance to overhauling the exchange-rate framework, will drive a fall in international reserves from $38.6 billion at end-2019 to $23.3 billion by end-2020.”

It said this level would still cover three months of current-account payments, broadly in line with the median for ‘B’ rated sovereigns.

“However, at this level, reserves would offer little in the way of a buffer against external vulnerabilities, given large funding needs and an overvalued exchange rate,” Fitch added.

The agency said Nigeria could benefit from temporary suspension of bilateral debt service under the G20 initiative announced in April, but that this would provide small relief, with only around $165 million in bilateral debt service coming due in May-December.