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A global credit ratings agency, Fitch Ratings, has said Nigeria’s compliance with the oil production cut deal led by the Organisation of Petroleum Exporting Countries will lead to deeper economic contraction and fiscal deficits.

It also said the development would compound pressures on external finances as a result of the slump in oil prices.

The ratings agency stated on Monday that the country’s foreign exchange reserves would fall to $23.3bn by the end of 2020 from $38.6bn in December 2019.

It said the increased recourse to concessional multilateral loans would ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment would persist.

OPEC and its partners, led by Russia, a group called OPEC+, agreed in April to cut output by 9.7 million barrels per day in May and June, representing about 10 per cent of global supply.

Nigeria is expected to cut production by 417,000 bpd to 1.41 million bpd in May and June, in addition to condensate production of between 360,000 and 460,000 bpd, according to the Minister of State for Petroleum Resources, Timipre Sylva.

Fitch said, “We assume that Nigeria will comply fully with the production caps under the OPEC+ agreement, and have reduced our forecast oil output to 1.88 million bpd (including condensates) in 2020 and 1.87 million bpd in 2021, compared with our earlier forecast of 2.1 million bpd for both years.

“We have adjusted our GDP forecasts, and now expect Nigeria’s economy to contract by three per cent in 2020, before a recovery to three per cent growth in 2021.

“Despite the OPEC+ deal, our oil price forecasts remain unchanged at $35/barrel for Brent on average in 2020 and $45/barrel in 2021.”

The International Monetary Fund projected last month that the Nigerian economy would shrink by 3.4 per cent this year, falling into its second recession in five years.

Fitch said Nigeria’s foreign-currency reserves had dropped by $5bn over the first four months of the year despite only limited depreciation in the naira’s key exchange rates.


It said, “This reflects moves by the CBN to tighten foreign-currency access. This has contained capital outflows temporarily, although the build-up of pent-up foreign-currency demand may increase the risk of a disruptive future exchange-rate adjustment.

“We expect outflows to materialise later in the year, which, alongside a significant current-account deficit and continued CBN resistance to overhauling the exchange-rate framework, will drive a fall in international reserves from $38.6bn at end-2019 to $23.3bn at end-2020.”

The agency said the contraction in the country’s exports and remittance inflows meant the current account would remain in deficit, despite a sharp drop in imports.

“We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8 per cent of GDP in 2020 and 2.5 per cent in 2021,” it said.

The agency added that external liquidity pressures would be aggravated by outflows of foreign portfolio investment.

It noted that the IMF estimated that portfolio holdings of non-resident investors in Nigeria, which amounted to $34.3bn at end-2019, would fall by 46 per cent in the first quarter of 2020.

This includes a $7bn decline in foreign holdings of open-market operation bills issued by the Central Bank of Nigeria, according to Fitch.

Fitch said this level would still cover three months of current-account payments, broadly in line with the median for ‘B’ rated sovereigns.

“However, at this level, reserves would offer little in the way of a buffer against external vulnerabilities, given large funding needs and an overvalued exchange rate,” Fitch added.

The agency said Nigeria could benefit from temporary suspension of bilateral debt service under the G20 initiative announced in April, but that this would provide small relief, with only around $165m in bilateral debt service coming due in May-December.

“If secured, multilateral loans would cover around 21 per cent of the general government deficit in 2020, under our forecasts,” it added.

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