Nigeria is set to get out of its current economic recession in 2017 on the back of higher crude oil prices and increase in production.
This would mean a slow-down in job losses, lower inflation rate, increase in consumption and improvement in the fortunes of businesses operating in the country.
Optimism that Nigeria will get out of recession in 2017 has been boosted by the expectation that crude oil prices would average US$55 per barrel during the year, following an agreement by the Organisation of Petroleum Exporting Countries (OPEC) to cut crude oil output, starting January 1.
Nigeria is exempted from adhering to the agreement and analysts expect that this would result in the country increasing average crude oil production from 1.6 mbpd in 2016 to an average of 2.0 mbpd in 2017.
“Although oil prices may bump against increased U.S. shale production, a stronger dollar and easing of geo-political tensions in Libya and Nigeria, and it may tame prices from rising just as high,” said Dolapo Oni, head of research at Ecobank, by phone.
“However, crude oil is expected to trade no less than $45 in 2017 which is positive for public revenues and the economy, given that the budget is predicated on $42.5 per barrel,” Oni added.
As at the close of trading on Friday, Brent Crude from March delivery closed at US$56.85 per barrel, which represents an average of 50 percent gain this year, the highest annual price gain made by crude oil since 2009, though it is still about half of the US$100 per barrel achieved in 2014.
Kyari Bukar, chairman of private sector think-thank, Nigeria Economic Summit Group (NESG) thinks getting out of recession in 2017 would rely on more factors than an increase in oil prices.
“We should see signs of economic recovery in 2017,” Bukar said. “But at $56 per barrel, oil prices are still about 50 percent lower than 2014 prices, so we also need to unshackle other sources of dollars like foreign portfolio inflows and diaspora remittances.”
“But these sources can only be stimulated when there is renewed confidence in the official foreign exchange market and if the spread between it and the parallel market significantly narrows,” Bukar said.
Tiffany Odugwe, a research analyst at investment bank, Cardinal Stone Partners, says much would rely on maintaining peace in the Niger-Delta region, where militant attacks crimped oil production in 2016.
“Provisions were made for Niger-Delta amnesty in the 2017 budget and there is optimism that this would help achieve some calm in that area,” Odugwe said by phone. “This, as well as the renewed oil price rally means an economic recovery in 2017 is not far-fetched after all.”
A poll conducted by Reuters among energy analysts, forecasts that crude oil prices will gradually rise towards US$60 per barrel by the end of 2017 with any further upside capped by a possible resurgence in crude oil production in the US, a stronger dollar and possible “cheating” by both OPEC and non-OPEC producers on the agreed output cuts.
But doubts that OPEC members may not adhere to agreed cuts have been erased when Oman, an OPEC member, notified some of its term customers that it is going to cut term allocations by five percent in March, according to media reports. Earlier, Saudia Arabia, which is making the biggest cuts, also notified some of its customers of its intention to cut supply this year.
With OPEC looking likely to stick to crude oil production cuts, Nigeria is set to witness a significant boom in crude oil revenues, far above its budgeted expectations in 2017. President Buhari’s 2017 budget is based on a crude oil price benchmark of US$42.5 per barrel and so, an average crude oil price of US$55 per barrel in 2017 would deliver extra revenue of US$13.5 per barrel, which will be positive for the government’s revenue outlook and expenditure plans in 2017.
At an average price of US$55 per barrel, analysts at Financial Derivatives Company (FDC) forecast that export earnings will rise by 33 percent to US$46.2 billion in 2017 from an average of US$34.7 billion in 2016. This would translate to extra crude oil earnings of US$11.7 billion in 2017. But revenues accruable to the Federal Government are expected at US$14.8 billion (N4.5 trillion), which would be more than twice the N1.98 trillion projected as oil revenues in the 2017 budget.
Based on an average crude oil price of US$55 per barrel and an average crude oil production of 2.0 mbpd, Nigeria’s projected crude oil revenue of N4.5 trillion would represent 92% of 2017 revenue projections of N4.9 trillion and would be enough to finance 62% of the country’s N7.3 trillion 2017 expenditure plan.
Analysts at FDC forecast that a significant increase in oil revenues would result in a cut in the 2017 projected fiscal deficit by more than half from US$19.5 billion in 2016 to US$9.1 billion in 2017. This would reduce the country’s need to borrow heavily in the domestic debt markets, the frequency of which in 2016 largely crowded out private sector borrowers.
“In 2017, GDP is expected to grow at 1% as a recovery from the current recession” the analysts at FDC forecast.
Ayo Teriba, the CEO Economic Associates agrees that an average crude oil price of US$55 would be good for the Nigerian economy in 2017.
“Average oil price of US$55 and daily output of 2mbpd in 2017, after recessionary US$45/1.7 million barrels combo in 2016, should see an improvement in foreign exchange supply and government revenues to 2015 levels, stem the decline in GDP and restore moderate growth, and stabilize the exchange rate in 2017” said Teriba.
Analysts at FBNQuest are even more optimistic that the Nigerian economy would be able to achieve a growth rate of 2% in 2017 based on the higher crude oil price projected in 2017.
“The pick-up in the oil price, following the OPEC agreement in Vienna and the pledge to production restraint by some leading non-OPEC players, led by Russia, has been timely, giving the authorities a little room for maneuvre. We see GDP growth of 2% in 2017” analysts at FBNQuest stated in a note to investors on Friday.
The year 2016 was a particularly difficult one for the Nigerian economy after the country witnessed three quarters of continuous negative growth. As at the third quarter ended September 2016, the Nigerian economy had contracted by 2.24 percent. The economy is forecast to have contracted by 1.7% in 2016 plagued mainly by acute foreign exchange scarcity, investor flight and poor power supply.
However, economist have also called on the government to reach some level of peace agreement with militants in the Niger Delta to ensure it fully takes advantage of the rise in crude oil price with a higher level of production. They also urge a quick and smooth passage of the 2017 budget to ensure that economic activities take-off early in the year.
