The dramatic and fast-moving consequences of the coronavirus
(COVID-19) outbreak threatens an otherwise resilient outlook for Nigeria’s
economy, following GDP results for Q4 showing an expansion of 2.55%.
The growth was the highest seen since 2015 and above the
International Monetary Fund’s (IMF) 2.1% forecast.
The economy is supported by the Central Bank of Nigeria’s
(CBN) policies to boost credit growth like hiking the loan-to-deposit ratio and
other monetary policy tools.
On top of that, oil production increased to two million
barrels per day amid recovering global oil prices.
However, since then, risks to the economy have multiplied.
Like many other economies at the time of writing, Nigeria is
vulnerable to the spread of the COVID-19 virus in economic and health terms
because one of its main trading partners is the epidemic’s epicentre; China.
For the time being, the sizable manufacturing sector in
China has been slowed by large-scale workforce disruptions and it is expected
that GDP growth for the quarter will be pressured amid a fall in business
confidence.
While it is too early to tell the precise extent of the
slowdown, the impact on the supply chain and trading with China’s trading
partners is already evident.
Nigeria’s crude oil exports to China fell in February amid
weaker oil prices as the outlook for global oil demand weakens.
Nigeria’s Q1 GDP remains exposed to external uncertainties
in the form of weaker oil prices, the coronavirus COVID-10 outbreak, slowing
growth in China and the global economy.
Focusing on the global coronavirus outbreak, so far there
are over 83,000 confirmed cases with over 2800 deaths.
The World Health Organisation (WHO) has identified Nigeria
as one of its top 13 priority countries because of the direct links and travel
volume to-and-from China.
It is positive that Nigeria’s authorities are taking
measures to stop the virus from spreading, but the risks remain.
Since the onset of the virus outbreak early in the year, oil
prices have slipped over 15% amid demand-side concerns, the USD has appreciated
against G10 and emerging market currencies against a background of risk
aversion and Gold has jumped to fresh seven-year highs.
If it continues to spread, the virus outbreak and subsequent
slump in demand from China present major risks to the Nigerian economy.
Crude oil revenues account for less than 10% of GDP but
remain the biggest source of foreign exchange for the nation, 90% of export
sales over 50% of government revenues.
Falling oil prices would reduce foreign exchange reserves
and ultimately complicate the CBN’s efforts to defend the naira, meaning
potentially heightened pressures on inflation and consumption with an eventual
impact on growth.
Lower oil prices also impact the 2020 budget which was based
on 2.18 million bpd at an oil price benchmark of $57 per barrel.
Moreover, China is one of Nigeria’s biggest trading partners
with total trade flows in Q3 2019 worth over $3.2 billion.
It is important for the economy for the virus outbreak to be
brought under control because if trade flows decline on the back of slowing
growth in China, the impacts are likely to be felt in Nigeria.
The situation may prompt a greater focus on monetary and
fiscal policy to shield the economy from external risks.
The CBN meets in March but the economy remains under
inflationary pressure so it is unlikely we’ll see an interest rate cut.
Instead, the central bank may implement more unconventional tools to stimulate
the economy.
Finally, it is even more clear that diversification is the
key to reducing Nigeria’s reliance on oil revenues and reducing the risks to
growth.
On the upside, there is still a possibility that the virus
outbreak will be brought under control, meaning a return to full power for
China and Asia and a relief to health authorities and policymakers in Nigeria
and other countries.
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