The Danger of a Single Product

THIS YEAR WE GO BUY BENZ

“How can 2020 possibly go wrong?”

That was the question that formed on everyone's lips, in one context or the other, as at 31st December 2019. Not only was it going to be a new year, it was also the start of a new decade. So, what in the world could pose an inherent security risk to the bag?

Alas, as the world prepared for a most productive year, a new strain of the coronavirus had also hit the gym. And so, on January 11, Chinese state owned media declared the first death from COVID — 19, a new disease from the large family of viruses called “coronavirus”, beginning from the Huanan Seafood wholesale market in Wuhan, China. All of this notwithstanding that scientists believe the COVID — 19 virus must have started spreading since November, and that there was a possible cover up by the Chinese government.

CRUDE OIL AS A COMMODITY

China loves crude oil like a fat kid loves Burger, and I am not even kidding -)=. In the first nine months of 2019, the country’s crude oil imports stood at an astronomic 369.04 million tonnes (or 9.87 million barrels/day). In November 2019, it even imported 11.9 million barrels of oil in one single day, breaking a record oil import of 10.77 million barrels set by the United States in June 2005.

So as the Hubei province ordered an unprecedented and complete closure of 15 cities in order to rein in COVID —19, the country’s oil appetite was naturally affected. Take note that China's seemingly insatiable demand for crude oil is used to power over 250 million cars, frequent in-country and international air travels, large scale petrochemical refineries and all sorts of industries for steel making, metal smelting, apparels, and so on, all of which have now been grounded in the face of little to no economic activity.

Meanwhile, COVID — 19 has spread to almost all countries in the world, and has been declared by the WHO as a global pandemic, bringing along with it rude disruptions not just in healthcare systems, but also in the global economic system across various value chains from supply to demand.

OPEC+ DISAGREES

Desperate to avoid the dark days of 2014/16 in which three major factors including: increasing oil supply from US and Canadian shale oil companies, weaker than expected energy demand from Asian and European countries like China and Germany, and a refusal to cut oil production by Saudi Arabia all led oil prices to fall from a peak of $115/barrel in June 2014 to under $35/barrel at the end of February 2016, the Declaration of Cooperation or OPEC+ — the three year alliance of the OPEC and non-OPEC members — met for it 8th session in Vienna in light of slowing oil demand due the new coronavirus disease.

Because oil is a commodity that is as much affected by global demand and supply, it was widely expected that OPEC+ would agree on massive oil supply cuts of up to 1.5 million barrels/day beginning from April 2020 till the end of the year, after the oil cuts had already been agreed at the Organization’s 178th (Extraordinary) Meeting. However, Russia — a member of OPEC+ and the world's third largest oil producer — disagreed to the cuts, stating that personally cutting oil production of 300,000 barrels/day would be ‘techically challenging’ and that cutting oil output at this period ceased to make sense as the deep impacts of the coronavirus on oil demand still remained unclear.

The Russian roulette rattled the three year OPEC and non-OPEC alliance, and Saudi Arabia — and its gulf alliance — expressed their disappointment in no unclear terms. Saudi Arabia threatened to flood the market with oil, and it did, flooding the market with excess crude oil of as low as $25/barrel, specifically targeting big refiners of Russian oil in Europe and Asia.

Thus, in the face of excess oil supply amidst record low demand, Brent crude oil prices currently stand at around a measly $27.56/barrel. The current global oil surplus is expected to be in the range of 4 million to 10 million barrels from February to May 2020, equal to 4 -10% of global demand, with more extreme global oil surplus expected in 2020.

BREAD AND BUTTER, NIGERIA AND OIL

Crude oil accounts for around 65% of Nigeria's total earnings, over 83% total exports, and 90% of Nigeria's foreign exchange earnings. Indeed, this is the crucial metric in understanding the current economic scenario at play, as dwindling value of oil on the international scale offers real consequences to Nigeria's fortunes, across different levels.

The 2020 budget is a N10.3 trillion package with a myriad of assumptions that have now fallen apart. Oil revenue for the fiscal year was projected at N2.64 trillion on a crude oil benchmark price of $57/barrel. The current oil price is less than half that projection.

Thus, it goes without saying that we're looking at massive revenue shortfalls on the back of the dwindling price of our major revenue earner. Asides this, dollars, which is the OPEC's trade currency and is the foreign exchange gotten from oil sales faces a decline, even in light of Nigeria’s massive dollar needs for imports, international travel, medical tourism, foreign education, among others.

IMPORTS, FX, NAIRA

Nigeria sells one but buys five, literally. The country exports largely crude oil — from which it gains majority of its revenue and foreign exchange (or dollars), but it imports largely everything else, including its Petroleum needs refined from the crude oil it initially sold (Bruh :(. So what happens is a situation where the success or failure in oil sales accounts for the reality in almost every other economic transaction.

Per figures from the CBN, total direct remittances in foreign exchange transactions in Nigeria stand at just over $2 billion, as at January 2020. But with Nigeria currently making only half of its projected FX inflows, you can don't need a soothsayer to warn about the FX deficit (or dollar crunch). What's more? Nigeria's gross foreign reserves — which serves a financial firefighting tool to protect the Naira and provide adequate liquidity in the FX system — currently stands at just over $38 billion, the lowest level since November 2012, and all of which is not nearly enough to buy much needed dollars and recapitalize the forex system in this moment of crisis. Note that Nigeria weathered the financial crises of 2008 with foreign reserves of over $68 billion.

Thus, in the face of growing dollar needs and lesser dollar possession, the only logical position will be to readjust downwards the value of the Naira vis-à-vis the dollar, or as we know it, devalue.

CBN'S MOVES, DEVALUATION

On Thursday, March 12, the CBN stated that “market fundamentals do not support devaluation at this point". The Apex bank stated among other strong reasons, that “although the outbreak of the coronavirus had led to global economic slowdown, fall in the price of crude oil and less inflow of dollars into Nigeria, the associated public health concerns have also led to factory closures in China, substantial drop in imports, widespread travel restrictions around the world and cancellation of many conferences, sporting events, business travels and FX orders”. Thus, in effect it effectively viewed the crisis not just as a demand one but as well as a supply one. In fact, as not just a monetary problem but as well as a fiscal problem. It would later go on to announce a range of fiscal policy measures to combat the economic effects of COVID — 19.

However, the CBN would later make a U-turn from its earlier position. Courtesy news that first filtered in through social media, the CBN subsequently unified FX rates and devalued (or readjusted the Naira:

Omotola Abimbola @Tola_Abimbola

Think we can call it a devaluation now.

Thus, official rate of the Naira to the dollar now stands at N360, with unification rates for sellers in both the Import & Export Window and Bureau De Change at N380/dollar.

WHICH WAY NIGERIA

The CBN has readjusted the exchange rates and the selling rates to accommodate for the unforseen exigencies currently being experienced in the face of the COVID —19 pandemic.

However, Nigeria's structural, fundamental problems still remain. We do not offer much of anything else internationally, except the sale of crude oil. And in any case, we're far too exposed to the dollar, leaving us in a financial crises once anything happens to our cash cow — crude oil.

Any realistic economic prognosis going forward must be towards practically and seamlessly weaning Nigeria off the dollars, and diversifying our export offerings (and productivity) asides crude oil. Until then, our national economic strategy will be anchored on the phrase — Oluwa intercede.