Sigma Pensions: Nigeria’s External Balance to Improve as oil Export Receipts Normalise

Nume Ekeghe

Sigma Pensions has predicted that the improved oil output would upturn Nigeria’s external balance through 2022.

In the report titled, “Nigeria 2022 Outlook: Consolidating on Recovery but Persisting Large Imbalances Present Headwinds,” the firm noted that it expect the investment landscape in 2022 to be shaped by normalisation in global economic growth and tighter global monetary policy.

Also, it added that OPEC+ would complete crude oil market rebalancing to stay rangebound.

It forecasts that Nigeria’s growth will stabilise, “but twin deficits will persist as well as a wider FX market premiums due to limited USD supply and import demand suppression and higher fuel prices to reignite inflationary pressures.”

“We expect the oil sector to exit recession in 2022 as Nigeria’s crude production rebounds from the 1.6mbpd low base in 2021 towards a range of 1.8-1.85mbpd and as most OPEC+ curbs are removed by May 2022. Given our price and production expectations, we expect Nigeria’s external balance to improve as oil export receipts normalize to trend levels amid persisting import demand suppression on account of the CBN’s currency policy, ” it stated.

On the economic front, it stated: “We expect Nigeria’s economic growth to stabilize around 3.4 per cent in 2022, reflecting improvements across Telecoms, trade, manufacturing, and oil.”

The firmadded that a large fiscal borrowing plan and higher political risk premiums is expected ahead of the 2023 general elections.

It added: “In 2022, the large fiscal borrowing requirements amid less liquid financial system conditions relative to the last two years suggests ample scope for heightened market expectations about higher interest rates.”

“Furthermore, likely stronger USD demand will convince the CBN of the need to tighten monetary conditions as with the trend across global central banks to manage FX reserve depletion. Against this backdrop, we think the current bearish trends in the fixed income will likely persist over 2022.

“For equity markets, we see bearish trends dominating market sentiments as the fixed income optionality becomes available to investors after a two-year hiatus and as political risk premiums on Naira risk assets heighten ahead of the 2023 general elections.”

Nevertheless, it noted that their expectations are that the domestic institutional investor support in bellwether names to continue to curtail downside to the overall market.

It further stated: “Despite the emergence of new variants of the COVID-19 virus, we view higher vaccine coverage and the existence of drugs as supportive of further normalization in global economic activity in 2022. Rising inflation expectations from a mix of supply bottlenecks and stimulus fueled demand is likely to drive a withdrawal of global monetary stimulus and incite interest rate hikes which will underpin higher USD interest rates.

“We expect OPEC+ to complete its phased increments in oil output over H1 2022 which should drive a reset in crude oil prices towards USD65-70/bbl. For Nigeria, despite supportive oil prices, we continue to view the subsisting external and fiscal imbalances as underpinning the need for policy reforms.”