Afrinvest Weekly Update | Declining Crude Oil Production amidst the Battle for the Soul of the Naira… Is Nigeria Turning the Corner Soon?

An Extraction of the Afrinvest Weekly Economic & Market Report for April 13th, 2024

Source: OPEC MOMR, Afrinvest Research

This week, we spotlight the April 2024 edition of the OPEC Monthly Oil Market Report (MOMR) and CBN’s new circular on the usage of foreign currency (FCY) as collateral for Naira loans as both have the potential to impact Nigeria’s quest for a near term fiscal reinvigoration and exchange rate stability. To start with, the OPEC MOMR published on Thursday revealed that Nigeria’s daily average crude oil production (excluding condensate) declined by 91,000bpd to 1.23mbpd in March, marking its second consecutive monthly decline since reaching a 24-month peak of 1.43mbpd in January. Comparatively, OPEC’s total daily average output has remained on the increase since the start of the year, reaching 26.61mbpd in March from 26.38 and 26.60mbpd in January and February respectively. Examining output levels from other African peers in the review period, we noticed that Libya’s daily average production rose by 133,000bpd and 63,000bpd to 1.17mbpd and 1.24mbpd in February and March, sequentially. Similarly, Algeria’s daily average output which fell by 1,000bpd in February, rebounded in March to January’s level of 907,000bpd.

Looking from the perspective of the potential opportunity cost of the declining crude oil output to Nigeria, our analysis indicates a baseline value loss of $238.8m (c.₦394.0bn at ₦1,650/$) and $214.4m (c. ₦287.2bn at ₦1,340/$) in February and March respectively, given that OPEC reference crude oil price averaged $81.22 and $84.13 per barrel in February and March as against $80.04 per barrel in January. Connecting this to the FG’s optimistic oil & gas revenue and output projections for 2024 – ₦8.0tn and 1.78mbpd – we posit that Nigeria’s quest for a near-term “turning the corner experience” from macroeconomic challenges is hanging in the air, should the declining oil output trajectory continue. Interestingly, oil revenue accounts for more than 40.0% of FG’s revenue in the last decade (2024 projection: 43.9%) and it is also the largest source of net dollar inflows ($387.7bn) between 2014 and 2022. We advise that the FG double down on efforts to secure oil assets (short-term fix) and encourage new long-term investments in the upstream and other segments of the oil & gas value chain in other to optimise the economic benefits of having large hydrocarbon reserves.

Source: CBN, NBS, Afrinvest Research

In another development, the CBN in its letter to DMBs earlier on Monday titled “The use of foreign currency denominated collaterals for Naira loans” announced the prohibition of the use of FCY as collaterals for Naira loans except where the FCY collateral is FGN issued Eurobonds or guarantees of foreign banks (including standby letter of credit). For subsisting facilities in this category, the apex bank granted a 90-day window to the DMBs to wind down their exposure or face punitive measures – a 150.0% risk-weighted Capital Adequacy Ratio (CAR) computation on the facility (this would significantly draw down on the available liquidity at the disposal of the affected bank, thereby resulting into asset-to-liability mismatch and earnings loss).

In our view, the new policy directive (like many of the recent ones) is one of Cardoso’s masterstrokes towards reviving the soul of the Naira and achieving price stability in the near term. Although there is no specific data to ascertain the share of the over ₦30.0tn loans and advances in the Nigerian banking industry affected by the policy, we believe the attendant knee-jack reaction to the policy from both DMBs and facility holders would further support the strengthening of the Naira in the near term through improved appetite for Naira assets and dampened interest for FCY speculation. Recall that recent policy actions by the Cardoso-led CBN – e.g., the capping of banks' Net Open Position (NOP) at 20.0% short and 0.0% long, the resumption of OMO sales at higher rates, the streamlining of the number of BDCs (through higher minimum capital base), the signaling effect of improved policy communication and clearing of over $5.0bn verifiable FX backlogs as well as the resumption of FX sales to authorized dealers – have all supported the Naira to recover by over 20.0% against the USD in the last 30 days.

But beyond the short-term gains that the coordinated policy rollout of the CBN would deliver, we maintain that concerted fiscal and monetary policy actions that would enhance cheap and sustainable FX inflow channels – crude oil production, remittance, foreign direct investments (FDIs) and non-oil exports – as well as exploring of new frontiers such as the talent asset industry (notably arts, entertainment, and sports) would be critical to Nigeria’s quest of turning the corner on a sustainable basis.