By Lukman Otunuga,
is FXTM Senior Research Analyst.
It is hard to believe that oil prices have depreciated over 17% since the start of 2020.
The coronavirus outbreak in China triggered shockwaves across the globe and rekindled fears over slowing global growth. As of today, oil remains one of the biggest casualties of the virus outbreak based on the fact
that China is the world’s largest energy consumer. Severely depressed oil prices will certainly pose negative consequences for emerging market crude exporters like Nigeria.
The country remains in the process of diversifying away from the chains of oil reliance but still remains dependent on oil in the short to medium term. A sizeable chunk of Nigeria’s export earnings and government revenues are sourced from oil sales. So essentially, lower oil prices could throw a proverbial wrench in the works for Nigeria’s economy and threaten its fragile recovery.
It does not end here. Nigeria’s foreign exchange reserves decreased to $38.1 billion in January from $38.6 billion in December. Reserves risk falling lower as oil depreciates which could complicate the Central Bank of Nigeria’ (CBN) efforts to defend the naira against domestic and external risks. A depreciating naira has the potential to fuel inflationary pressures, which ultimately places the CBN in a tricky position – to cut interest rates or utilize other tools in the monetary policy arsenal.
Most importantly, falling oil prices may question the government’s ability to implement the 2020 budget which has set the benchmark for oil at $57 with revenue targets of N2.64 trillion.
Although Oil prices have increased by over 2.5% following reports of an effective treatment for coronavirus, the commodity is not out of the woods yet. It is worth keeping in mind that concerns over the coronavirus outbreak remain a major market theme. With uncertainty still in the air as confirmed virus cases and death toll rise, risk aversion
could make an unwelcome return – ultimately hitting oil prices and emerging market energy producers.
