Senior Research Analyst
at FXTM
Another recent escalation in the trade
dispute between the US and China has punished crude Oil prices and set off
warning signals for Oil-producing countries like Nigeria.
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At the same time, Nigeria’s GDP slowed
down to 1.94 percent in the second quarter from 2.1 percent in the first
quarter, following the trend seen in several economies such as Germany and the
UK.
It is becoming quite clear that as long
as oil dependence remains one of Nigeria’s biggest risks, this will continue
weighing heavily on the economy for the rest of 2019. While the GDP data should
nudge the Central Bank of Nigeria (CBN)
to cut interest rates for the second time this year in September in an effort
to stimulate growth, this is a temporary fix to a bigger problem
What trade disputes mean for Nigeria’s economy
Persistent trade disputes between the
world’s two largest economies is set to fuel fears over a global slowdown or
even recession. Oil prices declined on the basis that a decelerating global
growth may result in lower demand for the commodity Nigeria relies on for 90%
of its export earnings.
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In the context of a trade dispute,
tariffs are like bombs exploding on trading relationships, supply deals and
eventually on company profits. Trade tensions also remain a direct threat to
Nigeria's economy. The risk factors are escalating along with the probability
that the world may see an economic slowdown in the short-to-medium term.
Under the current circumstances, there
are three main challenges Nigeria must navigate. They are China's slowdown,
lower oil prices, and the need for fast and adaptive monetary policy to handle
local and external shocks.
Will China impact Nigeria’s growth prospects?
China's growth slowed to 6.2% in the
second quarter, its weakest expansion in three decades. Most recently, China's
backing in the form of loans reached $16 billion and its vested interest is
seen as a key support for the current production level of 1.85 million barrels
per day.
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However, Nigeria aims to reach three
million barrels per day and needs more investment from China, which may prove
to be more difficult going forward if China's economy continues to decline. The
high level of debt to China is also proving to be a weight on fiscal revenues
because Nigeria spent 50% of its 2018 government revenues on debt repayment.
Indeed, the IMF has urged Nigeria to
curb its large appetite for Chinese loans as the country struggles with a €70
billion debt burden. That’s up from €62 billion in 2017, representing a
year-on-year rise of 12.25 percent.
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Lower oil prices remain a threat to Nigeria’s recovery
The prospect of high debt levels to
China amid lower oil prices is something that must not be overlooked. At the
time of writing, Oil benchmarks come under continuous pressure from demand-side
concerns, including recession fears stemming from trade disputes.
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The money from Oil sales is the
lifeblood of the Nigerian economy. In the worst-case scenario, if Oil prices
start drifting lower there could be unwelcome consequences such as even slower
GDP growth, job losses, sovereign debt defaults, less money in the fiscal
budget for development, and constrained consumer spending.
Reduced crude Oil sales would affect
government revenues and reserves, meaning the capacity to fund projects will be
weakened. Stock markets together with investor sentiment domestically and
externally would be impacted and possibly even trigger capital outflows.
Can Monetary policy handle downside shocks?
One would have expected economic
momentum to pick up from Q1 after CBN cut interest rates in March and forced
lenders to dish out more credit in a bid to boost growth.
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While lower rates have the potential to
keep the economy running, the answer to Nigeria’s woes can be found in
diversification. The level of progress the nation has made in breaking away
from the shackles of oil reliance remains a question for many with even the
International Monetary Fund urging the nation to diversify revenues.
Another concern is friction over a
recent UK court decision allowing a natural gas company to take over nine
billion USD worth of Nigerian sovereign assets in London. The government has
refused to accept the ruling and plans to appeal but the CBN may still need to
step in to defend the Naira.
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There is still some light at the end of
the tunnel for the Nigerian economy if the right steps are taking in breaking
away from oil reliance to other sustainable sources of economic growth.
However, if Oil prices continue to send warning signals to Nigeria’s economic
policy makers by trading sideways or declining, fiscal measures combined with
monetary policy easing measures may become urgently needed to accelerate
economic diversification.
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