BLOODY WEEKS: Coronavirus costs investors N1 trillion, triggers devaluation fears

The rampaging Coronavirus (COVID-19) may have cost Nigerian investors a whopping N1 trillion in the last 6 weeks. The virus, which originally broke out in China, has spread across the globe with Nigeria reporting its first case two weeks ago.

Over 100,000 cases have been reported with over 3,000 deaths, representing a 3% mortality rate.

The virus is yet to be designated as a global pandemic by the World Health Organization. Despite this, global markets have fallen sharply as investors fly to the safety of gold and risk-free bonds.

Economic Impact

Last week, Nigeria’s Minister of Finance, Zainab Ahmed, lamented the effect of the sprawling virus on Nigeria’s 2020 budget. Nigeria’s oil benchmark for 2020 is $57 per barrel of crude compared to current Brent crude oil prices of $45 per barrel, stoking fears of a widening budget deficit.

According to Zainab“The current crude oil price of $53 a barrel is below the budget benchmark. So what we are doing is studying the situation. We are committed to doing a midterm review. We are concerned about the current drop in oil price because it’s now below our budget. We will do a mid-term review, and if the impact is so much, we will need to do an adjustment in the budget, working together with the National Assembly.”

Assuming prices remain the same, a midterm review could result in a reduction of total revenue expected from crude in 2020.

At the current price of $45, Nigeria’s budget deficit could widen to as much as $10 per share and could cost Nigeria as much as $20 million per day, assuming a daily crude oil output of 2 million barrels per day. Nigeria exports about 85% of crude oil production. The Federal Government relies on crude oil for as much as 50% of its accruable revenue, most of which is used to fund budgetary spending on capital and recurrent expenditure.

Brent Crude crashed to $36 as on Sunday, March 8th, 2020 its lowest since 2016.

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It gets worse

According to Wale Okunrinboye, Head of Research at Sigma Pensions, Nigeria faces a perfect nightmare. “If oil averages $45 per barrel in 2020 and Nigeria does not take action to restrain import demand growth as we saw in 2019, then we could see the current account deficit go towards $20-25b. While the fiscal deficit will blow beyond the 3% statutory limit.”

Data from the CBN reports that Nigeria’s current account deficit was at $9.17 billion (as of September 2019) when the average crude oil price was $65 per barrel of crude.

Stock market reels

The Nigerian stock market is down 2.1% year to date, following a turbulent February that reversed all the gains made in January. Since February, when Coronavirus gained global notoriety, the Nigerian Stock market has lost a whopping N1.16 trillion in market capitalization.

The stock market capitalization closed January at about N14.85 trillion and ended the week of March 5th, 2019 at N13.69 trillion.

Investors continued to dump stocks despite stronger than expected results from the biggest companies on the exchange, as fear of a global contagion spooked them. In the US, the Dow Industrial Average Index closed down 970 points, or 3.6%, marking its fifth-worst single-day point drop on record, according to CNN.

European stocks fell by nearly 4% at the end of last week, as investors panicked over the spread of the virus in Italy and other major cities in Europe.

To make matters worse, the Chinese also reported during the week that their exports fell in the first two months of 2020 by as much as 17.2%, blaming this on the coronavirus outbreak that began in the East Asian country.

The outbreak has caused massive disruptions to supply chains around the world as transport restrictions continue to be imposed by government, airlines and shipping companies.

OPEC War

Division in the oil cartel, OPEC, has also exacerbated the fear of a possible devaluation in Nigeria. Saudi-led OPEC and Russia disagreed on output cuts during the week, with both countries now declaring an all-out price war that could see nations like Nigeria suffer its consequences.

Saudi Arabia’s Aramco declared during the week that it was going to crash prices to stimulate demand for its oil across the globe. The Russians, angry at the seeming exploitation of the situation by shale oil producers in the US, made a-turn and are asking for a halt in output cuts.

The Russian Strategy instead is to run the Americans out of the market by pushing for a drop in crude oil prices as Shale oil becomes unprofitable with prices falling below $30 per barrel.

For countries like Nigeria, this means a fragmented crude oil market where price determination and output advantages are no longer within our control. Nigeria already relies heavily on crude oil export to India, but could now face stiffer competition from other OPEC and OPEC+ countries like Russia.

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Devaluation Fear

With Nigeria’s oil exports under threat, foreign exchange earnings could be jeopardized, further worsening Nigeria’s current account deficit of $9 billion.

According to Ugodre, Nairametrics Founder, “Several factors could impede the CBN’s ability to continue to defend the naira, but none other than oil is more important. If oil prices continue to drop, further affecting Nigeria’s external reserve position, then the CBN will have no choice but to consider a devaluation.”

Nigeria maintains several exchange rates, with its official rates being N305/$1.
Ugodre explains that the government “could first consider merging exchange rate to the quasi-market driven I&E window of N360/$1 before a full swing devaluation.”

Government revenues and officially benchmarked prices are quoted at N305/$1, an indirect subsidy that feeds into cost inputs for sectors heavily reliant on foreign exchange.
Nigerians may have avoided the Coronavirus, but as Western nations face a possible epidemic, Nigeria remains at risk of an economic contagion which may perhaps be far worse than imagined.

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