Fitch Ratings Agency yesterday, 18th of May 2020 said the country’s adherence to oil production cuts under the Organisation of Petroleum Exporting Countries (OPEC+) agreement will deepen economic recession in Nigeria. Fitch Ratings also projected a year-on-year (YoY) decline in external reserves by 32 percent to $23.3 Billion in December 2020 from $38.6 Billion in December 2019.

OPEC and the other oil-producing countries had agreed to cut oil production to 10 million barrels a day, about 23 percent of their production levels in May and June. The ratings agency further noted that foreign investors withdrew N16 billion from Treasury Bills and stock market in the first quarter of the year (Q1’20) citing IMF. The agency, in its latest report on the economy stated: “Nigeria’s adherence to oil production cuts under the OPEC+ agreement will lead to deeper economic contraction and fiscal deficits and compound pressures on external finances from the slump in oil prices.

Increased recourse to concessional multilateral loans will ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment will persist. “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 barrels per day (mbpd, including condensates) in 2020 and 1.87mbpd in 2021, compared with our earlier forecast of 2.1mbpd for both years.

“We have adjusted our Gross Domestic Product (GDP) forecasts, and now expect Nigeria’s economy to contract by 3.0 percent in 2020, before a recovery to 3.0 percent 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. “The contraction in exports and remittance inflows means the current account will remain in deficit, despite a sharp drop in imports.

“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 percent of GDP in 2020 and 2.5 percent in 2021.” External reserves to decline “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 $38.6 Billion at end-2019 to $23.3 Billion by end-2020.

This level would still cover three months of current-account payments, broadly in line with the median for ‘B’ rated sovereigns. However, at this level, reserves would offer little in the way of a buffer against external vulnerabilities, given large funding needs and an overvalued exchange rate.

“Fitch highlighted an intensification of external liquidity pressures as a negative rating sensitivity when we downgraded Nigeria’s sovereign rating in April, to ‘B’ with a Negative Outlook from ‘B+’ with a Negative Outlook. Nevertheless, greater recourse to multilateral borrowing will help to ease the strain Nigeria faces on this front, and our updated forecast for end-2020 international reserves is higher than it was in April.”

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