Fitch: Weak Oil Receipts, Low Capital Inflow Increasing Pressure on Nigeria’s Foreign Reserves

Emmanuel Addeh

Weak oil receipts and low capital inflow into Nigeria will continue to mount pressure on Nigeria’s foreign reserves in the coming months, a new report by Fitch Solutions on the currency crises across Africa, has revealed.

But any hope that Nigeria’s current dollar crunch could subside remains forlorn as its July crude oil production remained below expectation, berthing at a meagre 1.083 million barrels per day for the month.

July’s production figure, sourced from the just-released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), followed the trend in the country’s abysmally low drilling capacity in at least the last 10 months.

For the month under review, whereas the country’s production allocation by the Organisation of Petroleum Exporting Countries (OPEC) was roughly 1.8 million (1.799) barrels per day, it meant that Nigeria could not produce as much as 717,000 bpd or 22.22 million barrels during the month.

While the rest of the oil-producing world and oil majors continue to enjoy high oil prices, Nigeria’s case has been different, even though it currently needs every dollar it can possibly get, as pressure on the economy, due to the near non-availability of the greenback continues to mount.

In the report titled: “Sub-Saharan Africa Monthly Outlook: Currency Roundup, Broad Depreciatory Trend With Few Outliers,” Fitch stated that although the local currency remained relatively stable in the first half of 2022, the second half will most likely experience a weaker naira.

“The naira remained stable over H1, 2022, at an average of N416.83/USD, as the Central Bank of Nigeria (CBN) continued to intervene in the exchange rate.

“However, low capital inflows and weak oil receipts despite high crude prices have increased pressure on foreign reserves. As a result, the currency started to weaken in June, by 1.2 per cent, and we believe that the CBN will allow the naira to depreciate slightly over H2, 2022, to N430.00/USD by end-2022, ”the report stated.

Nigeria has blamed massive oil theft, outright sabotage, deteriorating upstream infrastructure and inability to restart oil wells shut down in the country in the wake of the Covid-19 pandemic for its inability to meet its OPEC production quota.

Fitch noted that the short-term outlook for most currencies in Sub-Saharan Africa will remain bearish, predicting that the Nigerian naira will continue to depreciate but at a slighter rate in the coming quarters.

“We think that larger adjustments are unlikely ahead of the February 2023 elections, as the authorities seek to maintain broad currency stability.

“We expect that the naira will depreciate further after the election, falling to N450.00/USD by end-2023, although the pace of currency devaluation will depend on who becomes the next president,” the firm, which operates in over 200 countries, stressed.

On the last day of business last week, the exchange rate between the naira and the US dollar closed at N428.12/$1 at the Investors and Exporters (I&E) window, where forex is traded officially.

This is compared to N429.2/$1 recorded in the previous trading session while in the same vein, the exchange rate at the black market appreciated to close at N665/$1 compared to N670/$1 recorded previously.

Nigeria’s external reserves also rose for the first time in over two weeks, gaining marginally by 0.01 per cent to stand at $39.07 billion. The reserve level had depreciated for eleven consecutive days.

Put side by side other currencies on the continent, for Angola, another oil-producing country, Fitch stated that the kwanza, the country’s currency, has appreciated by 27.9 per cent in the year to date (YTD) to a spot rate of AOA434.9/USD on July 26.

The report stated that the increase in the value of Angola’s local currency, reflected the sharp rally in the prices of oil, which made up over 90 per cent of Angola’s goods exports in H1, 2022, as well as improving investor sentiment due to strengthening fiscal and external metrics.

However, it added that in 2023, it expects the kwanza to weaken by 7.3 per cent to an average of AOA4S99.00/USD due to declining domestic oil production and global oil prices — but will remain stronger compared to 2020 and 2021.

In Zambia, it said that the kwacha has appreciated by just 2.6 per cent YTD to a spot rate of ZMwW16.27/USD on July 26, due to both a rally in global prices of copper (Zambia’s main export) until mid-April 2022 as well as improving investor confidence.

“While copper prices have slipped since May due to an economic slowdown in China (the world’s largest copper importer), the Bank of Zambia will likely continue to intervene to support the currency as it seeks to bring inflation back within its 6.0-8.0 per cent target range,” it said.

The Kenyan shilling, it said, has weakened to a spot rate of KES118.90/USD as of July 26, 4.8 per cent weaker in the YTD, due to deteriorating terms of trade in H1, 2022 and global risk-off sentiment caused by the Russia-Ukraine conflict.

“We expect that these factors, along with risks related to Kenya’s August 2022 general elections, will cause the shilling to depreciate further to KES119.90/USD by end-2022, averaging KES116.80/USD in 2022,” Fitch said.

For the South African rand, while there was previously anticipated moderate appreciation this year, Fitch stressed that the rand will depreciate by 6.2 per cent to an average of ZAR15.75/USD over 2022.

In Ghana, the cedi, it said, has depreciated to a spot rate of GHS8.27/USD on July 26, weakening by 25.3 per cent in the YTD, reflecting growing investor concerns about Ghana’s fiscal metrics and a stronger US dollar.