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Page added on December 9, 2014
Will this country be the next oil domino?
Nigeria started 2014 as a darling of investors seeking opportunities in ever more far-flung frontiers, but now the African economy could take a body blow from the oil price decline.
“In a country plagued by deep regional and religious divisions, oil revenue is literally the glue that binds the fractious elites together,” RBC Capital said in a note last week, adding that Nigeria is likely the OPEC country with the most immediate risk for civil unrest amid oil price declines. “Nigeria has experienced coups in previous low price environments due in part to drying up patronage funds.”
It’s a major shift from earlier this year when many major European and U.S. multinational companies said they were putting the country at the top of their list of frontier markets where they were considering investments. Nigeria overtook South Africa as Africa’s largest economy this year, and investors were eyeing its robust long-term growth prospects, underpinned by the combination of natural resources, an impending demographic dividend and an underpenetrated consumer market.
The country’s stock market surged more than 55 percent from the beginning of 2013 through its July peak, but shares have fallen around 23 percent since then as oil prices began a precipitous multi-month slide.
Since this summer, Brent has fallen from above $115 per barrel to around $66.05 in Asian trade Tuesday, with many oil analysts predicting prices will continue to slide.
Vulnerable amid overreliance
“Nigeria’s overreliance on oil for fiscal and foreign-exchange earnings has left the economy very vulnerable following the sharp decline in oil prices,” Barclays said in a note last week.
Despite Nigeria’s economy being considered one of sub-Saharan Africa’s most diversified, oil and gas contributed around 95 percent of export revenue and around 70 percent of fiscal revenue, Barclays noted.
Nigeria may lose over $700 million in average annual oil revenue for every dollar decline in prices, the bank estimates, adding it believes the country will swing to a current account deficit next year from a surplus this year.
It expects Nigeria’s currency, the naira, to weaken further, with the U.S. dollar likely fetching more than 190 naira in 2015, compared with around 180 naira currently, hurt both by the weaker oil price and a likely escalation of violence in the country.
6 Comments on "Will this country be the next oil domino?"
Davy on Tue, 9th Dec 2014 6:53 am
Nigeria is too big to fail country because of its high economic value and quality of oil. The country is also a major global supplier. Throw into that mix Venezuela and you have a truly dangerous systematic risk situation. This is a situation the corns are dismissive of. The den of thieves in DC are even trying to exploit this situation like it is going to increase their relative power position. The reality is a crushing oil supply shock if both these countries destabilize.
paulo1 on Tue, 9th Dec 2014 8:06 am
Too big to fail doesn’t mean it won’t fail. If it starts to crumble who will step in to quell unrest? The Chinese? They haven’t had a go at trying this for awhile. I can hear it now. “We aren’t in Tibet anymore, Dorothy”.
I think Venezuela is a done cooked goose, Davy. Yemen is one step ahead. Nigeria is in the pen beside the slaughter house. The ME? That sucker is ready to blow.
2015 looks very ugly and life changing if you want an opinion.
regards
Davy on Tue, 9th Dec 2014 8:38 am
Yea, Paulo, the systematic risk embedded in these two countries in enormous. This is also the danger with the current conflict with Russia but I think cooler heads will prevail especially among the Europeans.
When and if Venezuela and Nigeria come apart the word better be ready to cooperate and focus because this unravel will be a shit storm. It does not take much to damage oil production locally. Contrary to popular perception the so called oil glut is quite small with significant potential disruptions in many areas. There disruptions could cause a violent swing in price resulting in significant economic damage.
The question is timing. How long will this take before the combination of economics, social tension, and oil production destruction translate into a global contagion from these two failed states in the making. All these dangers when global production is being disrupted elsewhere from lower prices.
This is a real time bomb the corns are dismissive of. I would call it corn delusion and denial. Paradoxically this may be what is needed to initiate a crisis before it is too late to adjust and mitigate that crisis. Timing is the key and the factor because time is running out for a plan B mitigation and adjustment crisis response.
Davy on Tue, 9th Dec 2014 8:42 am
Seat belts anyone?
http://www.bloomberg.com/news/2014-12-09/u-s-index-futures-fall-on-concern-fed-to-alter-stance-on-rates.html
http://www.bloomberg.com/news/2014-12-08/russia-pain-spreads-to-stock-and-bond-markets-as-ruble-plunges.html
paulo1 on Tue, 9th Dec 2014 9:31 am
The oil glut is small. If the economic fundamentals were healthy prices would rebound before long. The volatility in the markets as a whole reflects the ‘disease’ modern economy has become. It is like a bad shaking fever.
Davy on Wed, 10th Dec 2014 6:17 pm
Guys, the government finally has a plan B:
http://www.zerohedge.com/news/2014-12-10/why-us-treasury-quietly-ordering-surival-kits-us-bankers