nigeria currency

When elephants fight, it is the grass that suffers

Investor sentiments on the Nigerian economy have improved in the past week. Nigerian stocks reached a three-week high on Friday. The stock market rose to 27,830 points, up 0.73%. But it seems it’s just a brief relief.

Brief Relief

The time taken to appoint ministers had caused jitters amongst investors and threatened growth prospects. Most investors, especially foreign ones, had been waiting to see the composition of President Muhammed Buhari’s cabinet and the policy direction for his second term.

Buhari assigned portfolios to ministers on Wednesday, retaining 14 from his past administration while appointing 29 new ministers. That seemed to have provided some optimism.

Also, another reason stock prices rose is the impressive half-year corporate results, particularly from banks.

The only threat to watch

Nigeria remains heavily reliant on crude oil sales. Oil receipts account for about 90% of foreign exchange and low oil prices helped to push the country into recession in 2016.

Oil prices are once again at a slippery slope.

Oil plunged on Friday after China announced new tariffs on U.S. goods, including crude oil.  China said that it would retaliate if the U.S. moves forward with the additional 10 per cent tariff on $300 billion worth of goods, and on Friday announced plans for new tariffs on $75 billion worth of U.S. imports.

It’s commonly said in Africa: When elephants fight, it is the grass that suffers. 

Nigeria would be one of the scrubs to suffer from the two giants’ – the United States and China – fight so far we continue to rely on a dying oil market.

We have a $60 per barrel budget benchmark for 2019 but the Brent crude oil currently trades at around $54. That means to meet obligations, the government has to borrow to make up the revenue shortfall.

Earlier this year, the Minister of Budget and National Planning, Sen. Udoma Udo Udoma Udoma Udoma said we had nothing to fear, explaining that their “analysis from extensive consultations working with the NNPC shows that it was just a short-term thing [oil dip at the beginning of the year] and that it was going to pick up to an average of 69 to 70 US dollars in the course of 2019.”

Turns out, he could be terribly wrong if there’s no resolution between China and the United States.

What suffers?

The Naira. The central bank would be unable to continue to prop up the value of the currency with our external reserves.

Emiefiele, the CBN Governor, said they could be forced to devalue the Naira if the price of crude falls to between $50 – $45 and if the external reserve drops to between $30 billion and $25 billion (currently ~ $45 billion).

The government also seems to signal a coming currency crisis, which is why they are trying to limit the pressure on the Naira by restricting access to FX for some imported goods. The cbn said it would add more goods to that list in the coming weeks. For now, the excuse is that restricting these goods could boost local production.

The central bank has also become aggressive with the issuance of treasury bills. It made two auction sales in a week as the country seeks to attract more foreign investors and more Dollars.

Who suffers?

Still asking?

Feranmi is a financial writer and SEO consultant. He's part of the team at Chaka.ng - Your Passport to Trade US, Nigerian & International Stock Markets.