Oil Crisis: Compliance With OPEC Deal ‘ll Lead To Economic Decline, Fiscal Deficits, Says Fitch

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  • Warns GDP Growth to Contract by 3 Percent

Global credit rating agency, Fitch Ratings Inc, has warned that Nigeria stands to grapple with deeper economic decline and fiscal deficits if she complies with existing oil production cut deal as outlined by members of theĀ  Organisation of Petroleum Exporting Countries, OPEC and non-OPEC member countries .

Fitch Rating agencyĀ  alsoĀ  projected thatĀ  this development would further compound pressures on external finances as a result of the slump in oil prices.

Recall that OPEC member countries as well as non-OPEC members including the United States, Russia and Mexico hadĀ  agreed in April to cut output by 9.7 million barrels per day in May and June, representing about 10 percent of global supply.

Following this agreement, Nigeria is expected to cut production by 417,000 BPD to 1.41 million BPD in May and June, in addition to condensate production of between 360,000 and 460,000 BPD, according to the Minister of State for Petroleum Resources, Chief Timipre Sylva.

However, accordingĀ  to Fitch rating, Nigeria’s compliance with the OPEC+ deal will triggerĀ  a rippling and tumbling effects on theĀ  country’s economy.

ā€œWe 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 2.1 million BPD for both years.

“We have adjusted our GDP forecasts, and now expect Nigeria’s economy to contract by three percent in 2020, before a recovery to three 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 2021ā€, the agency stated.

The rating agency also added that the country’s foreign exchange reserves would fall to $23.3bn by the end of 2020 from $38.6bn in December 2019. It said the increased recourse to concessional multilateral loans would ease near-term liquidity pressures, but the risk of a disruptive macro-economic adjustment would persist.

Recall also that the International Monetary Fund(IMF)Ā  had projected last month that the Nigerian economy would shrink by 3.4 percent this year, falling into its second recession in five years.

On its part, Fitch said Nigeria’s foreign-currency reserves had dropped by $5bn over the first four months of the year despite only limited depreciation in the naira’s key exchange rates.

It said: ā€œThis 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.

ā€œWe expect outflows to materialize 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 $38.6bn at end-2019 to $23.3bn at end-2020.ā€

The agency noted that the contraction in the country’s exports and remittance inflows meant the current account would remain in deficit, despite a sharp drop in imports.

ā€œWe 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,ā€ it said.

The agency further added that external liquidity pressures would be aggravated by outflows of foreign portfolio investment. It noted that the IMF estimated that portfolio holdings of non-resident investors in Nigeria, which amounted to $34.3bn at end-2019, would fall by 46 percent in the first quarter of 2020.

This includes a $7bn decline in foreign holdings of open-market operation bills issued by the Central Bank of Nigeria, according to Fitch. Fitch said this level would still cover three months of current-account payments, broadly in line with the median for ā€˜B’ rated sovereigns.

ā€œHowever, 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,ā€ Fitch added.

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

ā€œIf secured, multilateral loans would cover around 21 percent of the general government deficit in 2020, under our forecasts,ā€ it added.

By Babajide Okeowo (content Editor
By Babajide Okeowo (content Editorhttps://newdiplomatng.com/
With a career spanning over a decade spent across the Business, Political and Entertainment beats of prominent media organizations in Nigeria, Babajide Okeowo has carved a niche for himself as a Journalist of repute. As a newsroom guru, he has penned several weighty narratives and designed content that speak to a news medium's values, vision and mission while ensuring that the content resonate pretty well with a variety of critical audiences across Nigeria and beyond. A consummate storyteller whose coverage of the business industry is valuable, Okeowo is blessed with a vast analytical mind and data interpretation skills. In his spare time, he interprets data for a Leading American University while also volunteering for a Non-Governmental Organization on Mindset Transformation. Okeowo is the Content Editor of The New Diplomat.

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