Fitch Ratings, a global credit ratings agency, has revealed that Nigeria’s conformity with the oil production cut deal led by the Organisation of Petroleum Exporting Countries will lead to extensive economic contraction and fiscal deficits.
The agency also stated that development would compound pressures on external finances as a result of the slump in oil prices.
The ratings agency stated on Monday 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 macroeconomic adjustment would persist.
OPEC and its partners, led by Russia, a group called OPEC+, agreed in April to cut output by 9.7 million barrels per day in May and June, representing about 10 per cent of global supply.
The Minister of State for Petroleum Resources, Mr Timipre Sylva stated that 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.
“We 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 per cent in 2020, before a recovery to three per cent 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 2021,” Fitch stated.
Last month the International Monetary Fund (IMF) projected that the Nigerian economy would shrink by 3.4 per cent this year, falling into its second recession in five years.
The rating agency revealed that 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.
“This 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.
“We expect outflows to materialise 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,” it stated.
Fitch stated that the decline in Nigeria’s exports and remittance inflows implied the current account balance would be negative regardless of steep imports fall.
“We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8 per cent of GDP in 2020 and 2.5 per cent in 2021,” Fitch added.
