- …Projects 4 % ($15 bn) deficit of GDP in 2020
By JULIUS ALAGBE
Experts have estimated that Nigeria will record current account deficits first time in 20 years due to the economic impact of coronavirus on activities and earnings. Fitch ratings and Institute of International Finance (IIF) stated that current account deficit would hit about 4% of the gross domestic products in 2020.
However, experts stated that the project marks the first time that the country would record current account deficit in the last 20 years. Nigeria’s economy is facing multiple economic stress tests from various angles due to waves of coronavirus pandemic and economic lockdown.
Fitch Ratings, IIF have respectively predicted 3.8% and 3.4% current accounts deficit- the excess of imported goods and services over exported goods and services- to the gross domestic product (GDP). Specifically, Fitch stated that the current account, which had been in surplus for much of the last 20 years, will record a deficit equivalent to 3.8% of GDP in 2020 and 2.5% in 2021.
Following the same line of argument, the IIF said despite substantial import compression, it projects a current account deficit of $14.7 billion or 3.4% of GDP this year. In the wake of coronavirus pandemic and then the economic lockdown, Federal Government indicated the need to close the gap in revenue with borrowing.
Both oil and non-oil revenues are expected to under-performed the budget in 2020 due to economic lockdown across the world. Analysts said the pressure on foreign receipts would impact the nation’s current account balance as well as gross domestic performance significantly.
Economic growth has been slashed, with budget deficits growing, thus widening the nation’s debt stocks. The performance of Nigeria’s economy historically depends on stability in oil prices and the level of volume of production. Drop-in price and oil supply mean lower revenues for the government to finance the fiscal spending plan for 2020.
Explaining further, in its macroeconomic note, the IIF said that significant external pressure will reduce Nigeria’s export by 40%. The Institute stated this as it observed that external pressure is rising markedly for the country. To reflate global prices of oil, the members of the Organisation of Petroleum Exporting Countries were requested to cut supply.
Fitch, however, stated that oil supply cut will hurt the economy. Revenues from oil account for more than 90% of the nation’s foreign receipts, though the economy is well-diversified non-oil receipts remain low. With oil price hovering below the initial budget benchmark, and now supply cut, budget deficit have widened to about N5.4 trillion, according to Afrinvest.
In the report, IIF explained that the dramatic decline in oil prices since the beginning of the year—together with production limits under the OPEC+ agreement—will reduce goods exports by more than 40% in 2020.
“Despite significant import compression, we expect the current account deficit to remain sizeable”, IIF remarked.
Also, Fitch noted that Nigeria’s adherence to oil production cuts under the OPEC+ agreement will lead to deeper economic contraction and fiscal deficits.
“The combination of these would then have compound pressures on external finances from the slump in oil prices”, Fitch explained.
IIF, however, stated that large non-resident inflows observed in the first half of 2019 have reversed, and capital flow dynamics are not expected to improve anytime soon in the context of global risk-off behaviour.
“While external support—including $3.4 billion under the IMF’s Rapid Financing Instrument – will reduce pressures, we still project significant reserve losses in 2020”, the Institute held.
Nigeria’s current account balance stood at $17 billion surplus or 3.6% of the gross domestic product in 2019. However, the Institute stated that the shift from a $3.9 billion surplus was primarily driven by a smaller goods surplus.
“We expect this surplus to turn into a deficit in 2020 as lower oil prices and production cuts reduce exports dramatically”, the Institute forecasted.
Explaining further in the report, Fitch stated that the contraction in exports and remittance inflows means the current account will remain in deficit, despite a sharp drop in imports.
Also, the rating firm projects that the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8% of GDP in 2020 and 2.5% in 202. In the same tone, IIF said despite substantial import compression, it projects a current account deficit of $14.7 billion or 3.4% of GDP this year.
The Institute highlighted that a sharp decline in goods imports and services debits mean a lower breakeven oil price of roughly $70/bbl.
“However, we expect the average crude oil price in 2020 to be around $35/bbl.
The Institute documented in previous research that Nigeria experienced substantial inflows of short-term portfolio debt in the first half of 2019. This was large as a result of foreign purchases of central bank (CBN) bills.
“We expressed concern not only about the increasing cost of this type of financing but also the possibility of capital outflows”, IIF stated in the report.
However, the report revealed that these short term debts materialized in the second half of 2019 to the tune of $6.6 billion. The Institute projects that non-resident flows to Nigeria will be markedly weaker this year—at $8.5 billion compared to $17.7 billion last year—leading to substantial reserve losses.
Over the first three months of this year, gross foreign reserves declined by $3.3 billion, bringing the total to $35.3 billion at the end of March. Furthermore, the Institute said it expects weak inflows to continue until the global risk-off sentiment subsides.
According to the Institute, Nigeria’s external financing needs will be significantly higher in 2020 compared to the previous year, as non-Eurobond amortization is rising. It explained that while this is not a concern over the near term, increased issuance of Eurobonds in recent years will lead to even higher financing needs after 2025.
IIF stated that both external public debt, which is about $28 billion or around 6% of GDP at the end of 2019 and total public debt of 19% of GDP is very low in comparison to other Sub Saharan African countries—and the overall Emerging Markets universe.
However, given extremely low non-oil revenues, repayment of any amount of debt could be a challenge, the Institute said. The report further said that low oil prices not only contribute to a sharp decline in merchandise exports but also widen the fiscal deficit.
This is on the explanation that oil revenue accounts for more than 50% of total revenue in most years and is strongly correlated to the Naira-value of oil exports.
“For 2020, we expect the fiscal deficit to reach close to 5% of GDP”, the Institute estimated.
While expenditures are rising in GDP-terms as well, revenue collection weakness dominates, with non-oil revenue remaining persistently low. The Institute stated that as the deficit has increasingly been financed externally, global risk-off behaviour and capital outflows will impact the government’s ability to run fiscal deficits.
In addition to the extremely limited room for fiscal stimulus, monetary policy room is restricted by Nigeria’s multiple exchange rate regime, it added. The report stated that considering the significant external stress, together with the risk of local COVID-19 outbreak, the country will need to rely on external support.
In addition to the recently approved $3.4 billion in IMF RFI funding, Nigeria will also receive roughly $3.6 billion from the World Bank, African Development Bank, Afreximbank, and Islamic Development Bank. Nevertheless, the Institute believes that reserve losses will remain substantial in 2020—around $8 billion or around 25% of the current stock.
“If oil prices do not recover and foreign investors not reengage materially, large financing needs over 2020-22 may force Nigeria to address fundamental imbalances. One option is to impose capital controls to prevent significant outflows, but this would only delay the inevitable. A better path forward would be a multi-year IMF program.
“Exchange rate liberalization would allow for substantial current account adjustment, while IMF engagement would improve market sentiment and enable Nigeria to easily roll-over of existing debt. Thus, we believe a program of $15-20 billion over 2020-22 could be sufficient to relieve pressure on reserves”, the Institute stated.