Nigeria’s economic projections threatened by fresh global crisis

44 Views Comment Off

A steep fall in crude oil prices on Thursday as investors panicked over a possible slowdown in the global economy has raised fears that Nigeria’s economic projections may be at risk. A resurgent economic crisis in the global economy on Thursday saw light, sweet crude futures for September delivery falling 5.8 percent to $86.63 a barrel on the New York Mercantile Exchange.

Though Brent crude which prices trade largely in line with Nigeria’s sweet light crude still traded at about $107 per barrel on Friday, analysts fear any further fall in crude oil prices will put at risk Nigeria’s revenue projections in the 2010 budget, as well as the foreign reserves. Nigeria’s foreign reserves, which currently stand at about $32 billion, has been under pressure in recent months, despite high crude oil prices.

Though analysts are not agreed on the direction of crude prices, the prediction is that it is likely to be weaker, especially if the US economy weakens further. The US is the largest user of crude oil in the world with consumption of between 8.5 million barrels and nine million barrels a day. A weaker economy in the US will weaken demand for gasoline, which will lead to lower crude oil prices, analysts say.

Analysts already say US energy demand was down 3.6 percent in July 2011, compared with a similar period in July 2010.

“I do not think we need to panic at this point” Bismark Rewane, Managing Director, Financial Derivatives Company said.

Nigeria’s 2011 budget crude oil benchmark is $75 per barrel.

“However, there is no doubt the drop in crude oil prices will change Nigeria’s revenue profile and increase the pressure on foreign reserves. It is now dependent on the government to spend as efficiently as we can”, Rewane said.

Already, panic has hit investors in the Nigerian stock market as the All Share Index (ASI) which measure average changes in the prices of listed equities, witnessed one of its biggest one day drops, slipping 1.46 percent in Friday’s trading. The Friday drop in the market brought the market’s one week loss to 1.80 percent and year to date loss at 6.79 percent.

A Bloomberg report also notes that the Bloomberg NSE Banking Index which tracks the performance of the 10 most capitalised banks, hit a 10 month low on Friday. According to Bloomberg, the Index of the 10 most capitalised banks “ fell for a ninth day, the longest streak since March 8, dropping 4.6 percent to 326.24 by 12:45 p.m. in Lagos.”

The report notes that “ a close at this level will be its lowest since October 8, 2010.” Zenith Bank Plc, Nigeria’s biggest lender by market value, lost the maximum daily limit of 5 percent to 13.59 naira.

“There is a global pessimism towards equities that is overwhelming the positive trend in Nigerian banks,” Adesoji Solanke, a Lagos-based analyst with Renaissance Capital, said.

But analysts have also linked the steep fall in the market to the dominant position now controlled by foreign investors in the Nigerian stock market. BusinessDay recently reported that Foreign investors now control 60 to 70 percent of the markets trading volume, increasing its correlation with developments in the global markets.

Tunde Oyenkunle, Managing Director GTI Securities said the steep fall in the market on Friday, was a reflection of the “global downturn.”

“Some of the foreign investors are selling down their investments. The trend is likely to continue next week if the crisis in the international market continues.”, Oyenkunle added.

The fall in the Nigerian stock market mirrored the trend in world stock markets, which also fell for the eighth straight session on Friday, to the lowest since late 2010, with more losses feared if policymakers do not come to the rescue soon, to stabilise the euro zone’s debt crisis and prevent the U.S. economy from sliding back into recession media reports said.

Analyst say factors fueling the current bearish outlook include fears of double-dip recession, the end of the US Federal Reserve’s second round of stimulus, a lack of faith in Washington’s deficit-cutting plan and Europe’s sovereign debt crisis.

Chief Editor
Author: Chief Editor

Nigerian Community,News, Events and more

In : Finance

About the author

Nigerian Community,News, Events and more

Related Articles