Global Shocks Alters Nigeria’s Short Term Outlook – 16 March, 2020

The breakdown in OPEC+ negotiations and further escalation of the COVID-19 have further amplified the downside risk for Nigeria. Accordingly, we see a need to reassess the economic cost of the continuous global shock and prolonged rift in the OPEC+ coalition on Nigeria’s fiscal and external balances, domestic growth and stability in addition to assuming a more stringent crude oil price.

In structuring our bull, base and bear case we assumed three key scenarios. For bull case, we assumed a quick resolution of the oil price war (oil price averaging $52.28/barrel) and containment of Covid-19 pandemic without major escalation beyond Q2 2020. On our base case, we assumed protracted oil price war (oil price averaging $45.17/barrel) and the Covid-19 is successfully contained without major escalation beyond Q2. On our bear case, we assess a situation in which COVID-19 escalates beyond Q2 2020, amidst protracted price war with oil price averaging $38.06/barrel. While we reckon that the OPEC+ rift and COVID-19 are fluid, and could reverse quickly, the scenarios informed our view of the outturn in the event of a reversal. Below are the key revisions across key macroeconomic variables under coverage on our base case:

• We believe the ongoing global shocks could extend Nigeria’s current account deficit to eight consecutive quarters, with 2020 deficit of $21.0 billion, exceeding 2019 level of $11.9 billion.
• Given the expected lower oil inflow and limited avenue for CBN to shore up the reserve, we believe the reserve could decline further to $26.73 billion at the end of the year, with Eurobond issuance of $3.30 billion providing some support to $30 billion excluding the effect of administrative measures which could be undertaken by the CBN.
• On our forecast for FGN oil revenue, we reckon that oil revenue to the FGN could decline 37% YoY to N1.2 trillion, which coupled with downward adjustments to forecast Non-oil revenue informed FGN revenue estimate of N3.68 trillion (-11% YoY). Adjusting for a revised budget implementation of 78% informed our forecast budget deficit of N3.87 trillion (+8% YoY). Also, we believe the impact will reverberate across the federating units, with our model suggesting decline in revenue to the states and local governments by 12% YoY to N5.37 trillion.
• On growth, we believe the key sectors at risk are the manufacturing, construction and trade, which combined accounted for 29% of GDP in 2019. In all, we have cut our GDP growth forecast for 2020, and now look for the economy to decelerate 23bps to 2.03%.