Nigeria fiscal risks increase as oil nears break-even price

Nigeria’s fiscal risks have become elevated as the retreat of oil prices is bringing them closer to the break-even point at which the Federal and State government budgets become untenable.

“Nigeria’s low levels of accumulated oil windfall savings imply that its oil-price vulnerability kicks in at a much higher threshold than the official oil price benchmark suggests,” said Standard Chartered analysts led by Samir Gadio, head of the bank’s Africa Strategy and FICC Research, in a recent report.

The 2014 Nigerian budget is based on a benchmark oil price of $77.5/ barrel; however any price cushion is eroded from the unrealistic production assumption of 2.3 million barrels per day, as output has been running close to the 1.9m bpd mark.

Nigeria’s benchmark Bonny light crude oil traded at $97.9 per barrel on September 12, down 14 percent from $111.9 per barrel in May, according to data from the Central Bank (CBN).

The Federation Account Allocation Committee (FAAC),

allocation to the Federal, States and Local Governments fell by 13.4 percent to N654.6 billion in July, down from N755.95 billion in June.

“The lower allocation reflects the decline in crude oil receipts as oil prices fall below $105pb,” said Bismarck Rewane, CEO of research firm Financial Derivatives Company (FDC) in a September 03 presentation.

“Revenues continue to dwindle, adding to the fiscal pressures, as production also remained stubbornly flat,” Rewane said.

Nigeria is Africa’s top oil producer but exports less than potential output of around 2.5 million b/d, due to consistent sabotage of facilities, leakages and limited new investment in the sector.

The country is also heavily dependent on oil, which accounts for around 95 percent of export dollar earnings, according to CBN data, and up to 80 percent of consolidated government revenue.

A slide in oil prices will likely manifest in stress on the currency, say analysts.

“Based on previous experience, Nigerian FX, rates and external assets tend to come under pressure when the oil price slides to, or below the $95-100/bbl levels. When the oil price fell to $ 90/bbl in June 2012, this was associated with a considerable sell-off in the naira (NGN) and Nigerian fixed-income and equity instruments,” Gadio said.

The exchange rate has remained firm recently with interbank USD-NGN trading in a tight 161-163 range since early July, as the CBN moved to defend the currency.

The CBN’s FX reserves have however remained stuck for a month at the $39.5 billion levels (Sept 12).

Investors are watching oil prices and the direction of U.S Fed interest rate policy, as officials gauge progress toward their goals of full employment and stable inflation needed to increase rates for the first time since 2006, in a two-day meeting ending today (Sept 17 ).

Any rates increase will be seen as bearish for oil prices.

OPEC Secretary-General Abdalla El-Badri said yesterday that the group may cut output targets by 500,000 barrels a day to 29.5 million barrels a day next year, in a bid to support prices.

For Nigeria, the low levels of fiscal savings magnify the risks posed by a slide in oil prices. The latest official figures show ECA and sovereign wealth fund (SWF) balances of around $4bn and $1.55bn.

“There is a disconnection between the modest federal government fiscal deficits in recent years and the oil price benchmarks in the budget on one hand, and the limited accumulation of oil savings on the other hand,” said Gadio.

“Given elevated oil prices since 2011, one would have expected Nigeria to accumulate large fiscal savings.”

Businessday