Standard Bank Report Predicts Increase in Reserves Buoyed By Domestic Oil Refinery Operation

*Says growth potential beset by worsening FX crisis, inflation, insecurity, others 

*Forecasts naira to officially weaken to N1,171/$ by December

*Says manufacturing may be further constrained by FX shortages 

James Emejo in Abuja

A new report has predicted an increase in Nigeria’s current account surplus to about 1.8 per cent of Gross Domestic Product (GDP) in 2024, compared to an estimated 1.0 per cent in 2023.
According to the African Markets Revealed (AMR) report for January 2024, which was published by Standard Bank, oil production is expected to grow sufficiently to supply the Dangote Refinery with feedstock as well as impel higher oil export volumes.
Essentially, a current account surplus means that a country has more exports and incoming payments than imports and outgoing payments to other countries. It is generally seen as a positive development because the current account surplus adds to a country’s reserves.

The report, however, highlighted downside risk to the prediction due to the continued oil price weakness following the slowing global growth.
It said, “We forecast downward pressure for goods importation from two fronts.
“Firstly, increased oil refining from the Dangote Refinery and Nigerian National Petroleum Company Limited (NNPCL) would likely lower demand for imported petroleum products.

“Secondly, non-petrochemical goods imports (71.2 per cent of the total import bill in Q2 2023) could be hindered by poor FX liquidity and naira weakness.”
The report pointed out that despite the country’s growth prospects for the year, downside risks, including the worsening FX liquidity challenges, high inflation, increased insecurity, and lower crude oil production might diminish expectations.
It stated that the Nigerian economy was forecast to grow by 3.4 per cent, year on year in real terms in 2024, relative to an estimated 2.6 per cent for the preceding year.

Standard Bank hinged its optimism on anticipation for the oil sector to deliver 11.8 per cent year-on-year growth in the review period, higher crude oil production, as well as the non-oil sector’s growth improving slightly to 2.9 per cent from a 2023 growth estimate of 2.8 per cent.
However, structural issues regarding liquidity and worsening insecurity stood in the way of actualising the country’s growth potential, the bank stated.
Standard Bank said crude oil production, including condensates, was expected to increase significantly to 1.59 million barrels per day (mbpd) in 2024, from an estimated 1.43 mbpd in 2023.

It said the anticipated increase might result from primarily the cumulative impact of the government’s ongoing anti-crude oil theft and vandalism efforts, coupled with new production streams.
The Standard Bank report also warned that the manufacturing sector might witness a continuation of headwinds, particularly FX volatility and liquidity challenges, elevated consumer price levels, and rising interest rates during the year.
However, it stated that the commencement of operations at the Dangote refinery should boost oil refining, a sub-sector within manufacturing.
The report predicted the refinery to make up one per cent of manufacturing gross value added, thereby driving growth in the sector to 2.4 per cent year on year in 2024, from an estimated 1.4 per cent in 2023.

It also forecasted the agricultural sector to grow faster in 2024.
It said, “We expect output to increase by 2.2 per cent year on year in real terms (2023: 1.0 per cent year on year), supported by low base effects from previous periods of lower-than-average productivity due to poor weather conditions in food-producing regions.”
In the medium-term outlook, the report predicted higher economic growth for the country, noting, however, that reforms remained a hurdle to achieving desired results.

On the FX outlook, the bank predicted that the naira would weaken to N1, 171 against the US dollar by December this year.
It said, “We see the USD/NGN pair at 1,171 by Dec 24 in the official market. The CBN is likely to keep gradually clearing its foreign currency obligations with funds from the FGN and NNPC capital raises, shifting FX liabilities away from the CBN, which would liberate FX reserves to support the market and foster investor confidence.

“Until confidence in CBN reserves returns to the market, we forecast only a gradual improvement in foreign private sector inflows.
“Under the new administration, the CBN has undertaken a series of FX reforms to rectify past policy errors. Key reforms include the elimination of multiple FX windows, the termination of the RT200 rebate and Naira4Dollar scheme, the removal of FX restrictions on 43 prohibited imported goods, and the ongoing clearance of outstanding FX obligations.”

It stated that FX reserves declined by 11.2 per cent or $4.17 billion to $32.91 billion in 2023, with inflows still limited amid outflows to finance external obligations.
Specifically, the report stated that while the federal government received $2.25 billion of the $3 billion loan from AFREXIM, “We doubt that it can securitise $7 billion dividend receipts from the Nigerian Liquefied Natural Gas company (NLNG) for the desired five-year period.
“We infer this from the decline in NLNG dividends to the NNPC in recent years, with averages falling from $1.7 billion during 2007- 2014, to $798.5 million during 2015-2022.”

To boost FX supply, the Tinubu administration announced plans for big-ticket capital raises, including a $1.50 billion World Bank budget support facility, a $3 billion loan from AFREXIM collateralised by future NNPC oil receipts, and a $7 billion securitisation of the Federal Government of Nigeria’s (FGN) dividend receipts from the NLNG.
The report, among other things, predicted the government’s current account surplus to reach 1.8 per cent of GDP in 2024, up from an estimated 1.0 per cent of GDP in 2023.

It stated that oil production should grow sufficiently to supply Dangote refinery with feedstock as well as impel higher oil export volumes.
Standard Bank said in the report, “However, a key downside risk here would be continued oil price weakness due to slowing global growth. We forecast downward pressure for goods importation from two fronts.
“Firstly, increased oil refining from the Dangote refinery and Nigerian National Petroleum Company Limited (NNPCL) would likely lower demand for imported petroleum products.

“Secondly, non-petrochemical goods imports (71.2 per cent of the total import bill in Q2 2023) could be hindered by poor FX liquidity and naira weakness. Services imports, accounting for 25 per cent of total imports, declined 14 per cent year on year in H1 2023. We foresee a further decline here, with higher traveling costs dampening demand due to persistent naira depreciation as well as longer, and, therefore, far more costly, travel routes caused by the conflicts in Sudan and Niger.”