Senior Research Analyst at FXTM
A
darker mood awaits the largest economy in Africa as Oil descends to levels to
not seen in more than two decades below $15. Over the past few months, the
story defining Oil’s steep depreciation revolved around the coronavirus chaos,
fears over falling demand, slowing global growth and oversupply concerns. With the grim outlook for Oil growing grimmer
by the day amid demand destruction and slowing growth from the world’s largest
energy consumer, Oil producing countries like Nigeria are under threat.
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“The spectre of a recession will hang over the Nigerian economy for
a long as crude oil remains the primary source of revenue.”
The
statement above holds, especially when factoring in how Nigeria depends on
crude sales for half of government revenues and 90% of foreign exchange
earnings. According to the International Monetary Fund (IMF), Africa’s largest
economy is forecast to shrink by 3.4% in 2020 with the recession lasting until
2021. It does not end here.
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One of
the country’s benchmark grades, Bonny Light, fell to about $12 last week which
was below the cost of producing Oil in Nigeria while demand from Asia has
dropped significantly amid the global lockdown. Another challenge Nigeria faces
may be where to store the excess capacity of Oil due the limited onshore
storage space.
However,
there is some light at the end of the tunnel as Nigeria plans to raise as much
as $6.9 billion from global lenders to help counter the negative impacts of the
coronavirus to the economy. Such a move may create fiscal space to enable
effective methods in supporting the economy and health challenges presented by
the coronavirus.
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Investors
will direct their attention towards the pending inflation figures for March
which may shape monetary policy speculation this quarter. The annual inflation
rate in Nigeria rose for the sixth straight month to 12.2% in February and is
forecast to jump 12.5% last month. Signs of rising inflationary pressures are
likely to complicate the Central Bank of Nigeria’s efforts to ease monetary
anytime soon.
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