THUR 10 FEB, 2022-theGBJournal- The Nigerian economy has recovered substantially from the recession induced by the COVID-19 pandemic, and some analysts has forecast further growth from an improvement in FX liquidity on the back of a higher oil price.
But Renaissance Capital (RenCap) analysts are not so sure. They expect all of the growth projections for the country to be undermined by an uncertain outlook for oil production in 2022. The danger of this explains their recent small upward revision of the 2022 growth forecast for Nigeria to 2.9%, at an oil price of $80/bl, vs 2.8% previously at $60/bl.
RenCap is also forecasting a flat growth of 2.8% in 2023, as they see no significant upside catalysts, and expect a lengthy settling in of the new administration, which will place a dampener on growth.
RenCap believes the outlook for oil production is uncertain. This is because it depends on new investment in the sector and oil producers’ effectiveness in fighting decline rates, which are a function of the underinvestment over the past couple of years.
Nigeria’s total liquids production (crude and condensates) fell by 650kb/d since the onset of the pandemic in March 2020, to 1.47mnb/d in December 2021.
‘’The good news is that 2022 is off to a good start,’’ RenCap said in their insight to Africa Oil exporters’ fortune in 2022 seen by theGBJournal.
Total liquids production increased by 210kb/d in January to 1.68mnb/d, which was in line with the OPEC quota, for the first time since July 2021. We see total liquids production at 1.7- 1.8mnb/d, on average, in 2022, moderately up from 1.6mnb/d in 2021E.
The emerging and frontier markets investment bank does not see growth as well in Agriculture, Nigeria’s biggest economic sector. The sector is currently undermined by insecurity. The sector, which accounts for almost one-quarter of GDP, has not grown by more than 3% since 2018.
‘’As we do not expect the security situation to improve in the short term, we do not see the sector’s growth quickening in 2022. If anything, the risk is to the downside, from an increase in skirmishes related to the elections.’’
According to RenCap; the upside risk for growth is the start of operations at the Dangote oil refinery in 3Q22, as stated by the chairman of Dangote Industries Limited, Aliko Dangote, in January at a briefing at the plant site in Lagos. This implies an increase in activity in the oil refining sector – which has been on the decline for 11 consecutive quarters – and by implication the manufacturing sector, which is positive for growth.
The high oil price has its positives however. On the Nigeria’s external sector, at $80/bl, Nigeria’s CA surplus will increase to 1.2% of GDP in 2022, on our estimate, from 0.8% in 2021E.
This will further bolster FX reserves, which increased by $5.1bn to $40.5bn in 2021 on the back of the IMF’s SDR allocation of $3.4bn, eurobond proceeds of $4bn, and oil export earnings that increased by 22% YoY to $28.9bn in 9M21, on the back of a stronger oil price.
However, the IMF believes Nigeria’s gross FX reserves remain below the adequacy levels the Fund recommends, which it attributes to slow FX reforms and uncertainties around repatriation that are deterring new capital inflows.’’
The high oil price is also positive for exports. And the prospect of the Dangote refinery commencing operations in 2H22, which implies FX demand for Nigeria’s biggest import, fuel, will fall, increases the likelihood of the central bank under a Buhari administration maintaining an overvalued currency.
At $80/bl, RenCap forecast an FX rate of NGN465/$1 at YE22, vs our previous forecast of NGN482/$1 (assuming $60/bl). We think a change in administration in 2023 could bring with it a change in FX policy.
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