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Nigeria: Recession glares again, on COVID-19

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TUE, MARCH 10 2020-theG&BJournal- COVID-19, which has come with huge uncertainty, has already destabilized global economic operations from reduced production in China to reduced demand for crude oil and disruption of supply chains. All of these have direct impact on Nigeria’s fiscal receipts and foreign exchange funding.
The impact on Nigeria has been anything but sporadic so far, only two confirmed cases so far. But the risk of it intensifying and making policymakers’ job even more difficult is manifest. More countries have announced COVID-19 from imported cases. And all the cases in the country have been associated with a visiting index case.
”That can escalate,” analysts noted.
Recently, the IMF and the Organisation for Economic Corporation and Development slashed global growth by half a percentage point and more, on COVID-19 outbreak, and given how the federal government is hesitating on emergency financial measures, the cramping of global growth means that Nigeria could very well relapse into recession again.
‘’Nigeria is probably the most vulnerable from a macro-economic standpoint as the decline in oil price combined with potentially lower exports (of oil) could potentially tip the country back into recession,’’ EFG Hermes said in a note made available to TheG&BJournal.
The banking sector is of particular interest to EFG Hermes. ‘’Weaker GDP growth could make it more difficult for Nigerian banks to meet their LDR targets resulting in greater CRR deposit requirements, which would be a negative for NIMs.’’
The consumer sector faces a grim prospect too, and companies will come under intense pressure due to the fact that there are more negative variables in Nigeria vs other economies.
In the domestic market, insecurity has adversely impacted agriculture and the COVID-19 epidemic further threatens other economic activities across all sectors – commerce, transportation, hospitality and possibly education.
The stock market has been in a free fall which is likely to accelerate. The naira exchange rate to the dollar can no longer be sustained given adverse impact of COVID-19 on both price of crude oil and the ability of Nigeria to find market for her crude.
The consequential devaluation of the Naira could to lead to labour unrest as domestic prices of goods and services skyrocket in the face of stagnant wages.
‘’Lower oil prices could, indeed, be the trigger for the naira to devalue amidst already dwindling foreign reserves,’’ says EFG Hermes.
The Central Bank of Nigeria (CBN) governor, Godwin Emefiele, said in a recent meeting with investors that a USD45/bbl oil price would be the breaking point for the country’s FX stability.
‘’As such, the market is growing nervous in light of the drop in oil prices, with foreign investors largely shunning away the once-popular carry trade, preventing the economy from one of its key sources of foreign exchange in the past few years,’’ EFG Hermes noted.
Indeed, foreign reserves have been on a sustained decline in the past few months, now likely at sub-USD36bn, raising concerns about the naira’s stability. The government is preparing a USD3.3bn Eurobond issuance to halt the drop, an amount that could buy some time, but would not reverse the currency’s fortunes in case oil prices remained that low. $22.8 billion is earmarked as external financing for the 2020 budget while $500 million is for debt refinancing.
The Senate last week approved a $22.7 billion loan after a heated debate.
‘’But at any rate, how can Nigeria ever repay this loan with the present and future price of crude oil and technological advances in alternative energy?’’ one economist queried.
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