Strategy Note /

Nigeria: Government and CBN scramble to raise market spirits

  • Country battles with Covid-19 outbreak, as cases rise to 12; oil price slump adds to anxiety

  • Government slashes budget by NGN1.5tn, reduces benchmark oil price to US$30; CBN announces NGN1.1tn intervention fund

  • Authorities also cut petrol price by NGN20 to NGN125, effective immediately, and introduce new pricing guidelines

Nkemdilim Nwadialor
Nkemdilim Nwadialor

Equity Research Analyst, Financials

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
19 March 2020
Published byTellimer Research

Nigeria is battling with the shockwaves of the coronavirus outbreak ‒ there have been nine new cases over the past couple of days, taking the total number of confirmed cases to 12 ‒ and significantly lower income from oil production, as oil prices hit record lows due to the decline in demand from China and the price war between Saudi Arabia and Russia. 

On the back of this and the downturn in the global economy, the authorities have introduced a package of new policy measures to stabilise the economy, to support and improve liquidity for critical industries, such as manufacturing and health care, and to stimulate growth. 

For consumer companies, the situation as it stands is somewhat positive, as the lower fuel prices could translate into lower energy costs, but might be negative for banks, as the lower earnings for oil companies could lead to defaults on certain credit lines and weaken asset quality.

Budget slashed

The government has announced a revision of the 2020 budget, cutting it by NGN1.5tn (14% of the old budget), as part of a raft of measures to respond to the impact of coronavirus on the economy. 

The previous 2020 budget, of NGN10.6tn, which factored in a deficit of 1.52% of estimated GDP, was approved in late December 2019, at a benchmark Brent oil price of US$57 per barrel; Brent is now at cUS$28. 

The revised budget is expected to be implemented as a 25% cut on recurrent expenditure across all federal government agencies, while the capital budget could drop by 20%. A key contributor to the NGN1.5tn reduction is a saving of NGN457bn on fuel imports.

Premium motor spirit price cut

The government has also approved a reduction in the price of premium motor spirit (PMS) or ‘petrol’, from NGN145 per litre to NGN125 per litre (for the month of March), which is expected to take effect immediately. 

The order from the government to the Nigerian National Petroleum Corporation (NNPC) to implement the reduction comes in the context of the crash in crude oil prices globally of c60% YTD. This has translated into a 16% reduction in local pump prices. 

Chart: Average Brent crude price over past 12 months

Source: Bloomberg 

It is important to note that the current stock of petrol products was imported in January and February, at an average retail price of NGN135. This price reduction will therefore cost the NNPC cNGN10 per litre.

Implications for the government

At an average price US$60/barrel price, the PMS pricing template of the Petroleum Products Pricing Regulatory Agency (PPPRA) shows that petrol should be priced at cNGN175 per litre. At the approved retail price of NGN145 per litre, the government provides a subsidy of NGN30 per litre, which, at an average daily consumption of 60mn litres, would translate to NGN657bn (0.5% of GDP) for a full year, which is 46% below the NGN450bn (0.3% of GDP) earmarked to cover subsidy expenses in the 2020 budget.

At the current Brent price of US$28, the expected open market price of petrol using the PPRA template is cNGN83-NGN85, with an average landing cost of cNGN65, while the NNPC ex-coastal price for PMS is NGN99.44 per litre, and the ex-depot price is now NGN113 per litre. This means that the current open market price of NGN83 represents a 28% surplus for the government. This NGN18 surplus could translate to cNGN1.08bn daily which, for the remaining three quarters of 2020, could amount to NGN300bn or 0.2% of GDP.

On the downside, this could lead to a decrease in GDP as, historically, the oil sector has outperformed other sectors, growing by 4.5% in 2019 versus 2.2% for overall GDP.

Implications for households and business 

As Nigeria’s inflation (currently, 12.2%) has been rising for the past six months, a 16% reduction in petrol ‒ which is used for both transportation and energy (powering generators) ‒ would be an overall positive for households and businesses, the largest consumers of petrol in the market. 

New pricing guidelines

The NNPC has also announced that a new pricing mechanism based on market fundamentals will be employed going forward that will provide guidance for the expected open market price at the beginning of every month, starting 1 April 1.

This could lead to a more transparent pricing model, stimulate investment in the downstream sector and encourage resumption of imports by oil marketing companies (OMCs), translating to more job creation, as previously dormant depots could resume activities.

CBN intervention fund announced

The Central Bank of Nigeria (CBN) has also disclosed that an intervention fund of NGN1.1tn will be established to provide support to critical sectors of the economy. Of these funds, NGN1tn has been earmarked for the local manufacturing sector through import substitution, with the balance of NGN100bn used to support the health-care sector through the pandemic, supporting it in its collaboration with global partners to develop a vaccine for the virus. The CBN has also directed banks to increase their support to the pharmaceutical and health-care industries within this period.

Also, on Monday, the CBN announced six policy measures to address the economic impact of the Covid-19 pandemic.

Zenith Bank cuts foreign-spending limit on naira cards

Meanwhile, Zenith Bank (Buy; TP NGN37) earlier this week sent a notice to its customers limiting international transactions on their naira cards to just US$1,000 a month, which is one-third of the previous level; total transactions will be set a maximum of US$12,000 yearly, which is US$38,000 less than the US$50,000 limit set by the CBN in August.

The bank has advised customers with significant foreign transactions to create dollar debit accounts. However, these dollar accounts will have to be funded by bank transfers and not cash deposits, creating extra hurdles for customers who are not eligible for FX allocations.

This and anecdotal evidence of behaviour around FX in the market, which started well before concerns around coronavirus and oil prices emerged, beg the question of whether is a currency devaluation on the horizon (Guaranty Bank management alluded to this their earnings call), but the central bank denies this.

On the currency market, the naira depreciated somewhat this week, with the exchange rate on the parallel market rising by NGN6 to NGN10, from its historical rate of NGN360/US$1 exchanged at the investor and exporter window.

For more details on our view on the potential impact of Covid-19 and lower oil prices on Nigerian banks, see our report here.