Agusto & Co: Petroleum Sector Will Grow, Manufacturing Will Suffer in 2024

·      Says Nigeria may be able to refine 1.4m bpd crude oil by 2024

·      Projects modest 3.1% rise in GDP, inflation rate of 26%

·      Forecasts year-end official FX rate of N1100/$

Emmanuel Addeh in Abuja

Ratings agency, Agusto & Co., has projected that Nigeria’s oil sector will likely grow this year, curtailing FX efflux on the back of the recent gradual increase in crude oil production and projection of a 1.4 million barrels per day (bpd) crude refining capacity by December this year.

In its January newsletter, titled, “2024: A Year of Reckoning, Turning Points and Balancing Acts,” the Pan-African research firm raised hopes that in all, it saw a better managed economy under the current administration than in the eight years of Muhammadu Buhari’s government.

It stated, “At a time when crude oil production appeared to be recovering, supported by security measures to combat theft and vandalism, with a 16 per cent increase to an average of 1.3mbpd in 2023, Nigeria’s OPEC-sanctioned quota of 1.5 million barrels per day (mbpd) poses a significant limitation to export earnings. We expect the crude oil production gains observed in 2023 to be sustained in 2024 (1.45 mbpd – 1.5 mbpd).

“Crucially, we expect domestic crude oil refining to receive a significant boost from the Dangote refinery and the re-commencement of operations at the Port Harcourt oil refinery, with expected output of 210,000 bpd by December 2024 in addition to the other state-owned oil refineries.

“In addition, BUA Group’s 250,000bpd refinery and petrochemical plant in Akwa Ibom State is expected to start operations in late 2024. These are expected to push Nigeria’s combined refining capacity to circa 1.4 mbpd of crude oil by the end of the year.”

According to the firm, the sector is poised for exponential growth, as domestically refined crude oil products plummeted by a whopping 92 per cent in the last decade to 6,000 mbpd in 2022.

“This is positive for ending, or significantly reducing the dependency on refined petroleum imports by December 2024 while the sale of products to neighbouring countries, in the medium term, will be positive for exports,” it added.

In 2024, the agency said the impact of the policy-induced shocks, which cascaded through the Nigerian economy in 2023 and severely weakened the macro picture, were expected to linger.

It stated that this was due to, and despite significant progress, at least theoretically in the dismantling of some of the deep-rooted structural and policy impediments that had constrained Nigeria’s economic performance for decades.

Agusto & Co listed some of the constraints as high energy costs, multiple taxations and foreign exchange illiquidity, recently triggering the exit of multinational manufacturers and intensifying the wave of emigration of middle-class Nigerians.

However, a likely increase in FX supply and stability, on the back of improved crude oil production and some foreign currency denominated inflows (loans and securitisation of NLNG dividend), it pointed out, will benefit the manufacturing, trade and other import-dependent activities.

The agency stated, “However, we believe manufacturing output will suffer from the negative effects of the recent divestments in the sector. We anticipate a marginal increase in aggregate consumption, spurred by the expected modest increase in the minimum wage, but this will be weighed down by the sustained impact of higher petrol prices and a weaker naira.”

It said high borrowing costs could trend even higher as a rejuvenated Central Bank of Nigeria (CBN) tightened its policy stance further in response to the need to rein in inflation and attempt to push real returns back to positive territory.

The agency maintained that would heighten credit risks, limit lending to the real sector and weigh on the country’s Gross Domestic Product (GDP) growth prospects.

It said the discontinuation of intervention measures by the CBN as well as the recent escalation of conflict in major food-producing areas in the country’s Middle Belt had cast a shadow of gloom over crop production prospects.

In addition, the escalation of tensions with Niger Republic, which had been a significant source of input for some agribusinesses, Agusto stated, was also likely to continue to adversely affect the sector.

The business information firm stated, “We believe the services sector, particularly telecommunications and financial services will remain the biggest driver of growth in 2024,…we expect less uncertainty and improvements in business confidence. Overall, we forecast a modest increase in GDP growth to 3.1 per cent in 2024,”

Agusto said it expected the rise in the price level to persist in 2024, albeit at a slower pace.

It stated, “We believe that sustained monetary tightening, the reduction in the use of Ways and Means Advances by the federal government, a relatively more stable naira (compared to 2023), base effects and consumer resistance will cause inflation to reach an inflection point by mid-2024, and begin a gradual decline to an average of 26 per cent in 2024.

“We note that growing insecurity in major food producing parts of the country’s Middle Belt and the possibility of a weaker naira and higher petrol prices are major risks to this forecast, as well as the possible escalation of the Israel-Hamas conflict into a regional crisis, which would trigger a spike in oil prices, with consequences for domestic petrol pricing.”

With the CBN’s planned return to orthodox monetary policy activity and a focus on inflation targeting, it projected that the CBN will raise the MPR to circa 19.5 per cent before December 2024, given the need to effectively manage inflation, mop up liquidity and raise interest rates to a level where long-term savers earn positive return, while also being mindful of the FGN’s cost of borrowing.

“As a result, we anticipate a rise in Treasury Bill rates (364-days) to an average of 16 per cent,” it added.

Despite ongoing efforts, Agusto said it expected government spending to still be constrained by the high debt service burden of N8.27 trillion, an upward revision to public-sector salaries and cash transfers to poor households.

While debt sustainability concerns were rife, it projected that fiscal deficit will largely be financed by domestic borrowings, considering the narrow window for external financing, raising the share of domestic debt even higher – currently 63.62 per cent of total debt.

It said it expected the debt burden to increase in 2024, as interest rates were anticipated to rise in response to further tightening by the CBN and increased issuance of domestic debt instruments, as the federal government weaned itself off deficit monetisation.

On the bright side, it said there were no Eurobond repayments in 2024.

The agency stated, “The federal government must target the productive sectors to boost revenue sources, as well as infrastructure that de-risks and galvanises business activity.

“In 2024, we believe that the risk of further depreciation of the naira looms large as external imbalances persist. This is despite expectations of higher export earnings from improved oil production and still high oil prices. However, capital inflows are likely to remain constrained on low investor confidence as FX illiquidity lingers.”

With largely constrained external reserves position, limited crude oil output, a huge FX backlog, Agusto said it expected less volatility than in 2023 and forecast a year-end exchange rate of ₦1100/$ at the official market.

But it stated that a major risk to the forecast was the threat of rapid currency depreciation and the reversion to heavier management of the exchange rate by the CBN to contain it.

It said, “We believe that a strategic balance between economic policies and external factors will determine the trajectory of the Nigerian economy in 2024. The good news is that the Nigerian economy is unlikely to be as poorly managed in the next four years as it was in the previous eight.”